HCA 10-Q Quarter ended June 30, 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 June 30, 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 July 31, 2018
Voting common stock, $.01 par value		346,046,000 shares

HCA HEALTHCARE, INC.

Form 10-Q

June 30, 2018

				Page of Form 10-Q
Part I.		Financial Information
Item 1.		Financial Statements (Unaudited):
		Condensed Consolidated Income Statements — for the quarters and six months ended June  30, 2018 and 2017			2
		Condensed Consolidated Comprehensive Income Statements — for the quarters and six months ended June 30, 2018 and 2017			3
		Condensed Consolidated Balance Sheets — June 30, 2018 and December 31, 2017			4
		Condensed Consolidated Statements of Cash Flows — for the six months ended June  30, 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			27
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			43
Item 4.		Controls and Procedures			43
Part II.		Other Information
Item 1.		Legal Proceedings			43
Item 1A.		Risk Factors			43
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 6.		Exhibits			45
Signatures					46

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HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

Unaudited

(Dollars in millions, except per share amounts)

		Quarter								Six Months
		2018				2017				2018				2017
Revenues		$	11,529			$	10,733			$	22,952			$	21,356
Salaries and benefits			5,274				4,896				10,563				9,797
Supplies			1,917				1,795				3,832				3,592
Other operating expenses			2,118				1,965				4,228				3,895
Equity in earnings of affiliates			(7	)			(13	)			(16	)			(23	)
Depreciation and amortization			562				521				1,115				1,042
Interest expense			436				411				867				830
Gains on sales of facilities			(9	)			(2	)			(414	)			(3	)
			10,291				9,573				20,175				19,130
Income before income taxes			1,238				1,160				2,777				2,226
Provision for income taxes			272				365				529				654
Net income			966				795				2,248				1,572
Net income attributable to noncontrolling interests			146				138				284				256
Net income attributable to HCA Healthcare, Inc.		$	820			$	657			$	1,964			$	1,316
Per share data:
Basic earnings		$	2.35			$	1.79			$	5.62			$	3.58
Diluted earnings		$	2.31			$	1.75			$	5.50			$	3.48
Cash dividends declared		$	0.35			$	—			$	0.70			$	—
Shares used in earnings per share calculations (in millions):
Basic			348.615				365.847				349.726				368.056
Diluted			355.039				375.338				357.388				377.647

See accompanying notes.

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HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

Unaudited

(Dollars in millions)

		Quarter								Six Months
		2018				2017				2018				2017
Net income		$	966			$	795			$	2,248			$	1,572
Other comprehensive income (loss) before taxes:
Foreign currency translation			(76	)			45				(22	)			55
Unrealized (losses) gains on available-for-sale securities			(1	)			2				(6	)			5
Defined benefit plans			—				—				—				—
Pension costs included in salaries and benefits			5				4				10				9
			5				4				10				9
Change in fair value of derivative financial instruments			15				(11	)			50				(8	)
Interest (benefits) costs included in interest expense			(2	)			6				(2	)			13
			13				(5	)			48				5
Other comprehensive (loss) income before taxes			(59	)			46				30				74
Income taxes related to other comprehensive income items			5				19				13				29
Other comprehensive (loss) income			(64	)			27				17				45
Comprehensive income			902				822				2,265				1,617
Comprehensive income attributable to noncontrolling interests			146				138				284				256
Comprehensive income attributable to HCA Healthcare, Inc.		$	756			$	684			$	1,981			$	1,361

See accompanying notes.

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HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(Dollars in millions)

		June 30, 2018				December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	868			$	732
Accounts receivable			6,592				6,501
Inventories			1,636				1,573
Other			1,298				1,171
			10,394				9,977
Property and equipment, at cost			41,142				40,084
Accumulated depreciation			(22,598	)			(22,189	)
			18,544				17,895
Investments of insurance subsidiaries			414				418
Investments in and advances to affiliates			234				199
Goodwill and other intangible assets			7,459				7,394
Other			697				710
		$	37,742			$	36,593
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	2,457			$	2,606
Accrued salaries			1,315				1,369
Other accrued expenses			2,161				1,983
Long-term debt due within one year			1,692				200
			7,625				6,158
Long-term debt, less net debt issuance costs of $151 and $164			31,500				32,858
Professional liability risks			1,283				1,198
Income taxes and other liabilities			1,459				1,374
Stockholders’ deficit:
Common stock $0.01 par; authorized 1,800,000,000 shares; outstanding 346,760,200 shares in 2018 and 350,091,600 shares in 2017			3				4
Accumulated other comprehensive loss			(261	)			(278	)
Retained deficit			(5,731	)			(6,532	)
Stockholders’ deficit attributable to HCA Healthcare, Inc.			(5,989	)			(6,806	)
Noncontrolling interests			1,864				1,811
			(4,125	)			(4,995	)
		$	37,742			$	36,593

See accompanying notes.

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HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

Unaudited

(Dollars in millions)

		2018				2017
Cash flows from operating activities:
Net income		$	2,248			$	1,572
Adjustments to reconcile net income to net cash provided by operating activities:
Increase (decrease) in cash from operating assets and liabilities:
Accounts receivable			(233	)			81
Inventories and other assets			(200	)			(178	)
Accounts payable and accrued expenses			31				(298	)
Depreciation and amortization			1,115				1,042
Income taxes			118				267
Gains on sales of facilities			(414	)			(3	)
Amortization of debt issuance costs			15				16
Share-based compensation			134				140
Other			51				45
Net cash provided by operating activities			2,865				2,684
Cash flows from investing activities:
Purchase of property and equipment			(1,574	)			(1,304	)
Acquisition of hospitals and health care entities			(538	)			(295	)
Disposal of hospitals and health care entities			799				14
Change in investments			23				(11	)
Other			(25	)			5
Net cash used in investing activities			(1,315	)			(1,591	)
Cash flows from financing activities:
Issuances of long-term debt			—				1,502
Net change in revolving bank credit facilities			210				(1,160	)
Repayment of long-term debt			(101	)			(95	)
Distributions to noncontrolling interests			(185	)			(248	)
Payment of debt issuance costs			(2	)			(25	)
Payment of cash dividends			(245	)			—
Repurchases of common stock			(893	)			(966	)
Other			(192	)			(42	)
Net cash used in financing activities			(1,408	)			(1,034	)
Effect of exchange rate changes on cash and cash equivalents			(6	)			—
Change in cash and cash equivalents			136				59
Cash and cash equivalents at beginning of period			732				646
Cash and cash equivalents at end of period		$	868			$	705
Interest payments		$	873			$	834
Income tax payments, net		$	411			$	387

See accompanying notes.

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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 June 30, 2018, these affiliates owned and operated 178 hospitals, 122 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 $83 million and $82 million for the quarters ended June 30, 2018 and 2017, respectively, and $164 million each for the six months ended June 30, 2018 and 2017. Operating results for the quarter and six months ended June 30, 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

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Revenues (continued)

insurance companies) the third-party payers. The payment arrangements with third-party payers for the services 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 and six months ended June 30, 2018 and 2017 are summarized in the following table (dollars in millions):

		Quarter
		2018				Ratio				2017				Ratio
Medicare		$	2,425				21.0	%		$	2,272				21.2	%
Managed Medicare			1,345				11.7				1,158				10.8
Medicaid			357				3.1				376				3.5
Managed Medicaid			586				5.1				527				4.9
Managed care and insurers			5,993				51.9				5,729				53.4
International (managed care and insurers)			295				2.6				269				2.5
Other			528				4.6				402				3.7
Revenues		$	11,529				100.0	%		$	10,733				100.0	%

		Six Months
		2018				Ratio				2017				Ratio
Medicare		$	4,949				21.6	%		$	4,633				21.7	%
Managed Medicare			2,744				12.0				2,341				11.0
Medicaid			638				2.8				670				3.1
Managed Medicaid			1,147				5.0				1,116				5.2
Managed care and insurers			12,055				52.5				11,352				53.2
International (managed care and insurers)			600				2.6				538				2.5
Other			819				3.5				706				3.3
Revenues		$	22,952				100.0	%		$	21,356				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

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Revenues (continued)

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 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 June 30, 2018 and December 31, 2017, estimated implicit price concessions of $5.736 billion and $5.488 billion, respectively, had been recorded as reductions to our accounts receivable balances to enable us to record our revenues and accounts receivable at the estimated amounts we expect to collect.

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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 and six months ended June 30, 2018 and 2017 follows (dollars in millions):

		Quarter								Six Months
		2018				2017				2018				2017
Patient care costs (salaries and benefits, supplies, other operating expenses and depreciation and amortization)		$	9,871			$	9,177			$	19,738			$	18,326
Cost-to-charges ratio (patient care costs as percentage of gross patient charges)			12.6	%			13.0	%			12.5	%			12.9	%
Total uncompensated care		$	6,486			$	5,721			$	12,738			$	11,048
Multiply by the cost-to-charges ratio			12.6	%			13.0	%			12.5	%			12.9	%
Estimated cost of total uncompensated care		$	817			$	743			$	1,592			$	1,425

Total uncompensated care as a percentage of the sum of revenues and total uncompensated care was 36.0% and 34.8% for the quarters ended June 30, 2018 and 2017, respectively, and 35.7% and 34.1% for the six months ended June 30, 2018 and 2017, respectively. The total uncompensated care amounts include charity care of $1.977 billion and $1.173 billion, and the related estimated costs of charity care were $249 million and $152 million for the quarters ended June 30, 2018 and 2017, respectively, and charity care of $3.856 billion and $2.259 billion, and the related estimated costs of charity care were $482 million and $291 million for the six months ended June 30, 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 six months ended June 30, 2018, we paid $360 million to acquire a hospital facility and $178 million to acquire other nonhospital health care entities. During the six months ended June 30, 2017, we paid $189 million to acquire three hospital facilities and $106 million to acquire other nonhospital health care entities.

During the six months ended June 30, 2018, we received proceeds of $758 million and recognized a net pretax gain of $372 million related to the sale of the two hospital facilities in our Oklahoma market. During the

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2 — ACQUISITIONS AND DISPOSITIONS (continued)

six months ended June 30, 2018, we also received proceeds of $41 million and recognized a net pretax gain of $42 million related to sales of real estate and other investments. During the six months ended June 30, 2017, we received proceeds of $14 million and recognized a net pretax gain of $3 million related to sales of real estate and other investments.

NOTE 3 — INCOME TAXES

Our provision for income taxes for the quarters ended June 30, 2018 and 2017, was $272 million and $365 million, respectively, and the effective tax rates were 24.9% and 35.8%, respectively. Our provision for income taxes for the six months ended June 30, 2018 and 2017, was $529 million and $654 million, respectively, and the effective tax rates were 21.2% and 33.2%, respectively. The reductions in the effective tax rates were 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 quarter and six months ended June 30, 2018 included tax benefits, of $122 million and $245 million, respectively, related to the reduction in our effective tax rate related to the impact of the Tax Act. Our provision for income taxes also included tax benefits related to the settlement of employee equity awards of $4 million and $9 million for the quarters ended June 30, 2018 and 2017, respectively, and $96 million and $76 million for the six months ended June 30, 2018 and 2017, respectively. 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 June 30, 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 June 30, 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 $461 million, including accrued interest of $54 million, as of June 30, 2018 ($439 million and $44 million, respectively, as of December 31, 2017). Unrecognized tax benefits of $159 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.

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4 — EARNINGS PER SHARE (continued)

The following table sets forth the computation of basic and diluted earnings per share for the quarters and six months ended June 30, 2018 and 2017 (dollars and shares in millions, except per share amounts):

		Quarter								Six Months
		2018				2017				2018				2017
Net income attributable to HCA Healthcare, Inc.		$	820			$	657			$	1,964			$	1,316
Weighted average common shares outstanding			348.615				365.847				349.726				368.056
Effect of dilutive incremental shares			6.424				9.491				7.662				9.591
Shares used for diluted earnings per share			355.039				375.338				357.388				377.647
Earnings per share:
Basic earnings		$	2.35			$	1.79			$	5.62			$	3.58
Diluted earnings		$	2.31			$	1.75			$	5.50			$	3.48

NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES

A summary of our insurance subsidiaries’ investments at June 30, 2018 and December 31, 2017 follows (dollars in millions):

		June 30, 2018
		Amortized Cost				Unrealized Amounts								Fair Value
						Gains				Losses
Debt securities		$	337			$	5			$	(1	)		$	341
Money market funds and other			118				—				—				118
		$	455			$	5			$	(1	)			459
Amounts classified as current assets															(45	)
Investment carrying value														$	414

		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 June 30, 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).

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES (continued)

Scheduled maturities of investments in debt securities at June 30, 2018 were as follows (dollars in millions):

		Amortized Cost				Fair Value
Due in one year or less		$	24			$	25
Due after one year through five years			50				50
Due after five years through ten years			218				221
Due after ten years			45				45
		$	337			$	341

The average expected maturity of the investments in debt securities at June 30, 2018 was 6.5 years, compared to the average scheduled maturity of 8.4 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.

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 June 30, 2018 (dollars in millions):

		Notional Amount				Maturity Date				Fair Value
Pay-fixed interest rate swaps		$	2,000				December 2021			$	83
Pay-fixed interest rate swaps			500				December 2022				15

During the next 12 months, we estimate $20 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 six months ended June 30, 2018 (dollars in millions):

Derivatives in Cash Flow Hedging Relationships		Amount of Gain Recognized in OCI on Derivatives, Net of Tax				Location of Gain Reclassified from Accumulated OCI into Operations				Amount of Gain Reclassified from Accumulated OCI into Operations
Interest rate swaps		$	39				Interest expense			$	2

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