fSep2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑

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

For the quarterly period ended ~~September 30, 2018~~March 31, 2019

☐

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

For the transition period from ___________ to ___________

Commission file number 001-37550

QUORUM HEALTH CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		47-4725208
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1573 Mallory Lane Brentwood, Tennessee		37027
(Address of principal executive offices)		(Zip code)

(615) 221-1400
(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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


Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐	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 ☑

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


Title of each class	Trading Symbols(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	QHC	New York Stock Exchange

As of ~~November 2, 2018,~~May 6, 2019, there were ~~31,527,641~~31,244,427 shares outstanding of the registrant’s Common Stock.

QUORUM HEALTH CORPORATION

Quarterly Report on Form 10-Q

Table of Contents

			Page
PART I – FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5046
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7965
	Item 4.	Controls and Procedures	7965
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings	8167
	Item 1A.	Risk Factors	8471
	Item 6.	Exhibits	8572
Signatures			8673

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(In Thousands, Except Earnings per Share and Shares)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018

Operating revenues				$	557,847					$	1,731,007
Provision for bad debts					58,545						173,919
Net operating revenues	$	460,507			499,302		$	1,419,959			1,557,088		$	442,805		$	486,820
Operating costs and expenses:
Salaries and benefits		226,237			251,780			705,868			781,691			225,075			247,000
Supplies		48,949			58,657			160,732			186,591			51,385			58,886
Other operating expenses		143,716			145,357			440,910			466,394			136,789			152,738
Depreciation and amortization		16,612			20,735			52,015			63,441			14,639			18,261
Rent		11,661			12,377			35,551			36,631
Electronic health records incentives earned		(31	)		(287	)		(617	)		(4,516	)
Lease costs and rent														11,531			12,532
Electronic health records incentives														26			(141	)
Legal, professional and settlement costs		1,519			2,050			10,349			6,519			685			3,413
Impairment of long-lived assets and goodwill		32,438			5,261			72,198			21,461			8,860			39,760
Loss (gain) on sale of hospitals, net		805			79			8,927			(5,112	)		—			7,815
Loss on closure of hospitals, net		1,111			—			18,195			—			—			13,746
Transaction costs related to the Spin-off		—			173			—			204
Total operating costs and expenses		483,017			496,182			1,504,128			1,553,304			448,990			554,010
Income (loss) from operations		(22,510	)		3,120			(84,169	)		3,784			(6,185	)		(67,190	)
Interest expense, net		32,450			32,216			95,307			90,204			32,266			30,931
Income (loss) before income taxes		(54,960	)		(29,096	)		(179,476	)		(86,420	)		(38,451	)		(98,121	)
Provision for (benefit from) income taxes		(1,074	)		(542	)		(1,162	)		(86	)		155			366
Net income (loss)		(53,886	)		(28,554	)		(178,314	)		(86,334	)		(38,606	)		(98,487	)
Less: Net income (loss) attributable to noncontrolling interests		54			637			1,200			1,048			400			481
Net income (loss) attributable to Quorum Health Corporation	$	(53,940	)	$	(29,191	)	$	(179,514	)	$	(87,382	)	$	(39,006	)	$	(98,968	)

Earnings (loss) per share attributable to Quorum Health Corporation stockholders:
Basic and diluted	$	(1.85	)	$	(1.03	)	$	(6.21	)	$	(3.11	)	$	(1.33	)	$	(3.48	)
Weighted-average shares outstanding:
Basic and diluted		29,215,823			28,245,833			28,891,363			28,068,085			29,438,015			28,454,336

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS)

(In Thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018

Net income (loss)	$	(53,886	)	$	(28,554	)	$	(178,314	)	$	(86,334	)	$	(38,606	)	$	(98,487	)
Amortization and recognition of unrecognized pension cost components, net of income taxes		114			123			39			365			49			114
Comprehensive income (loss)		(53,772	)		(28,431	)		(178,275	)		(85,969	)		(38,557	)		(98,373	)
Less: Comprehensive income (loss) attributable to noncontrolling interests		54			637			1,200			1,048			400			481
Comprehensive income (loss) attributable to Quorum Health Corporation	$	(53,826	)	$	(29,068	)	$	(179,475	)	$	(87,017	)	$	(38,957	)	$	(98,854	)

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Par Value per Share and Shares)

	September 30,			December 31,			March 31,			December 31,
	2018			2017			2019			2018

ASSETS
Current assets:
Cash and cash equivalents	$	6,066		$	5,617		$	1,716		$	3,203
Patient accounts receivable, net of allowance for doubtful accounts of $352,509 at December 31, 2017		318,284			343,145
Patient accounts receivable								326,639			322,608
Inventories		46,964			53,459			43,593			45,646
Prepaid expenses		21,225			21,167			17,919			19,683
Due from third-party payors		64,109			97,202			67,748			63,443
Current assets of hospitals held for sale		—			8,112			2,286			—
Other current assets		58,162			47,440			32,303			36,405
Total current assets		514,810			576,142			492,204			490,988
Property and equipment, at cost		1,284,695			1,405,184
Less: Accumulated depreciation and amortization		(718,309	)		(729,905	)
Total property and equipment, net		566,386			675,279
Property and equipment, net								537,424			559,438
Goodwill		401,073			409,229			398,148			401,073
Intangible assets, net		49,866			64,850			46,577			48,289
Operating lease right-of-use assets								89,638			—
Long-term assets of hospitals held for sale		—			7,734			14,504			—
Other long-term assets		80,994			95,607			68,852			74,306
Total assets	$	1,613,129		$	1,828,841		$	1,647,347		$	1,574,094

LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,544		$	1,855		$	1,721		$	1,697
Current portion of operating lease liabilities								24,670			—
Accounts payable		146,403			171,250			147,084			143,917
Accrued liabilities:
Accrued salaries and benefits		87,287			77,803			83,308			76,908
Accrued interest		22,046			10,466			22,061			10,024
Due to third-party payors		43,934			47,705			45,736			45,852
Current liabilities of hospitals held for sale		—			2,577			1,205			—
Other current liabilities		47,750			43,687			40,272			43,336
Total current liabilities		348,964			355,343			366,057			321,734
Long-term debt		1,185,684			1,212,035			1,194,321			1,191,777
Long-term operating lease liabilities								65,687			—
Deferred income tax liabilities, net		6,670			7,774			6,947			6,736
Long-term liabilities of hospitals held for sale								2,414			—
Other long-term liabilities		129,825			137,954			123,772			126,499
Total liabilities		1,671,143			1,713,106			1,759,198			1,646,746
Redeemable noncontrolling interests		2,279			2,325			2,278			2,278
Equity:
Quorum Health Corporation stockholders' equity (deficit):
Preferred stock, $0.0001 par value per share, 100,000,000 shares authorized, none issued		—			—			—			—
Common stock, $0.0001 par value per share, 300,000,000 shares authorized; 31,527,885 shares issued and outstanding at September 30, 2018, and 30,294,895 shares issued and outstanding at December 31, 2017		3			3
Common stock, $0.0001 par value per share, 300,000,000 shares authorized; 31,294,669 shares issued and outstanding at March 31, 2019, and 31,521,398 shares issued and outstanding at December 31, 2018								3			3
Additional paid-in capital		554,847			549,610			558,498			557,309
Accumulated other comprehensive income (loss)		(1,917	)		(1,956	)		808			759
Accumulated deficit		(627,730	)		(448,216	)		(688,198	)		(648,464	)
Total Quorum Health Corporation stockholders' equity (deficit)		(74,797	)		99,441			(128,889	)		(90,393	)
Nonredeemable noncontrolling interests		14,504			13,969			14,760			15,463
Total equity (deficit)		(60,293	)		113,410			(114,129	)		(74,930	)
Total liabilities and equity	$	1,613,129		$	1,828,841		$	1,647,347		$	1,574,094

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

For the ~~Nine~~Three Months Ended ~~September 30, 2018~~March 31, 2019

(In Thousands, Except Shares)

				Quorum Health Corporation Stockholders' Equity																							Quorum Health Corporation Stockholders' Equity
												Accumulated																							Accumulated
	Redeemable								Additional			Other						Nonredeemable			Total			Redeemable								Additional			Other					Nonredeemable			Total
	Noncontrolling			Common Stock					Paid-in			Comprehensive			Accumulated			Noncontrolling			Equity			Noncontrolling			Common Stock					Paid-in			Comprehensive		Accumulated			Noncontrolling			Equity
	Interests			Shares			Amount		Capital			Income (Loss)			Deficit			Interests			(Deficit)			Interests			Shares			Amount		Capital			Income (Loss)		Deficit			Interests			(Deficit)

Balance at December 31, 2017	$	2,325			30,294,895		$	3	$	549,610		$	(1,956	)	$	(448,216	)	$	13,969		$	113,410
Balance at December 31, 2018																								$	2,278			31,521,398		$	3	$	557,309		$	759	$	(648,464	)	$	15,463		$	(74,930	)
Comprehensive income (loss)		(715	)		—			—		—			39			(179,514	)		1,915			(177,560	)		(74	)		—			—		—			49		(39,006	)		474			(38,483	)
Adoption of ASC Topic 842																									—			—			—		—			—		(728	)		—			(728	)
Stock-based compensation expense		—			1,565,656			—		7,986			—			—			—			7,986			—			5,000			—		1,770			—		—			—			1,770
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(332,666	)		—		(1,979	)		—			—			—			(1,979	)		—			(231,729	)		—		(461	)		—		—			—			(461	)
Cash distributions to noncontrolling investors		(101	)		—			—		—			—			—			(1,380	)		(1,380	)		(46	)		—			—		—			—		—			(1,177	)		(1,177	)
Adjustments to redemption values of redeemable noncontrolling interests		770			—			—		(770	)		—			—			—			(770	)		120			—			—		(120	)		—		—			—			(120	)
Balance at September 30, 2018	$	2,279			31,527,885		$	3	$	554,847		$	(1,917	)	$	(627,730	)	$	14,504		$	(60,293	)
Balance at March 31, 2019																								$	2,278			31,294,669		$	3	$	558,498		$	808	$	(688,198	)	$	14,760		$	(114,129	)

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EQUITY

For the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2018

(In Thousands, Except Shares)

				Quorum Health Corporation Stockholders' Equity																							Quorum Health Corporation Stockholders' Equity
												Accumulated																							Accumulated
	Redeemable								Additional			Other						Nonredeemable						Redeemable								Additional			Other						Nonredeemable
	Noncontrolling			Common Stock					Paid-in			Comprehensive			Accumulated			Noncontrolling			Total			Noncontrolling			Common Stock					Paid-in			Comprehensive			Accumulated			Noncontrolling			Total
	Interests			Shares			Amount		Capital			Income (Loss)			Deficit			Interests			Equity			Interests			Shares			Amount		Capital			Income (Loss)			Deficit			Interests			Equity

Balance at December 31, 2016	$	6,807			29,482,050		$	3	$	537,911		$	(2,760	)	$	(334,026	)	$	14,441		$	215,569
Balance at December 31, 2017																								$	2,325			30,294,895		$	3	$	549,610		$	(1,956	)	$	(448,216	)	$	13,969		$	113,410
Comprehensive income (loss)		(1,158	)		—			—		—			365			(87,382	)		2,206			(84,811	)		(121	)		—			—		—			114			(98,968	)		602			(98,252	)
Stock-based compensation expense		—			985,302			—		7,702			—			—			—			7,702			—			974,148			—		2,464			—			—			—			2,464
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(217,850	)		—		(1,503	)		—			—			—			(1,503	)		—			(106,552	)		—		(634	)		—			—			—			(634	)
Cash distributions to noncontrolling investors		(42	)		—			—		—			—			—			(3,809	)		(3,809	)		(62	)		—			—		—			—			—			(741	)		(741	)
Reclassification of noncontrolling interests		(363	)		—			—		—			—			—			363			363
Redemption of shares from noncontrolling interests		(3,402	)		—			—		2,235			—			—			(77	)		2,158
Adjustments to redemption values of redeemable noncontrolling interests		(264	)		—			—		264			—			—			—			264			174			—			—		(174	)		—			—			—			(174	)
Balance at September 30, 2017	$	1,578			30,249,502		$	3	$	546,609		$	(2,395	)	$	(421,408	)	$	13,124		$	135,933
Balance at March 31, 2018																								$	2,316			31,162,491		$	3	$	551,266		$	(1,842	)	$	(547,184	)	$	13,830		$	16,073

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018

Cash flows from operating activities:
Net income (loss)	$	(53,886	)	$	(28,554	)	$	(178,314	)	$	(86,334	)	$	(38,606	)	$	(98,487	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		16,612			20,735			52,015			63,441			14,639			18,261
Non-cash interest expense, net		1,860			1,793			6,394			3,223			1,939			1,811
Provision for (benefit from) deferred income taxes		(1,129	)		(642	)		(1,104	)		(387	)		90			536
Stock-based compensation expense		2,766			2,374			7,986			7,702			1,770			2,464
Impairment of long-lived assets and goodwill		32,438			5,261			72,198			21,461			8,860			39,760
Loss (gain) on sale of hospitals, net		805			79			8,927			(5,112	)		—			7,815
Non-cash portion of loss on hospital closures		—			—			6,394			—
Non-cash portion of loss (gain) on hospital closures														(567	)		5,305
Changes in reserves for self-insurance claims, net of payments		4,623			4,999			15,003			16,253			4,160			6,025
Changes in reserves for legal, professional and settlement costs, net of payments		—			—			—			(3,651	)
Other non-cash expense (income), net		380			233			387			238			(1,372	)		(49	)
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Patient accounts receivable, net		9,206			9,156			30,280			(21,193	)		(3,986	)		1,429
Due from and due to third-party payors, net		8,344			(3,176	)		29,322			12,231			(4,421	)		1,217
Inventories, prepaid expenses and other current assets		(7,353	)		9,756			(7,582	)		2,024			4,911			1,290
Accounts payable and accrued liabilities		12,108			(12,002	)		2,394			(10,710	)		20,146			9,587
Long-term assets and liabilities, net		1,560			(268	)		(1,365	)		1,603			515			443
Net cash provided by (used in) operating activities		28,334			9,744			42,935			789			8,078			(2,593	)

Cash flows from investing activities:
Capital expenditures for property and equipment		(9,576	)		(11,525	)		(34,895	)		(50,667	)		(8,292	)		(14,528	)
Capital expenditures for software		(483	)		(3,005	)		(1,527	)		(6,174	)		(1,191	)		(513	)
Acquisitions, net of cash acquired		(63	)		(33	)		(121	)		(1,920	)		(455	)		(32	)
Proceeds from the sale of hospitals		—			9,084			39,170			29,240			—			38,663
Other investing activities, net		10			—			259			—			1,729			197
Net cash provided by (used in) investing activities		(10,112	)		(5,479	)		2,886			(29,521	)		(8,209	)		23,787

Cash flows from financing activities:
Borrowings under revolving credit facilities		121,000			131,000			368,000			433,000			152,000			132,000
Repayments under revolving credit facilities		(135,000	)		(136,000	)		(368,000	)		(388,000	)		(150,000	)		(114,000	)
Borrowings of long-term debt		90			175			157			247			161			12
Repayments of long-term debt		(354	)		(4,670	)		(31,801	)		(16,517	)		(1,833	)		(627	)
Payments of debt issuance costs		—			(181	)		(2,268	)		(3,119	)		—			(2,268	)
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		(36	)		(14	)		(1,979	)		(1,503	)		(461	)		(634	)
Cash distributions to noncontrolling investors		(678	)		—			(1,481	)		(3,851	)		(1,223	)		(803	)
Purchases of shares from noncontrolling investors		—			(1,244	)		—			(1,244	)
Net cash provided by (used in) financing activities		(14,978	)		(10,934	)		(37,372	)		19,013			(1,356	)		13,680

Net change in cash, cash equivalents and restricted cash		3,244			(6,669	)		8,449			(9,719	)		(1,487	)		34,874
Cash, cash equivalents and restricted cash at beginning of period		10,822			22,405			5,617			25,455			3,203			5,617
Cash, cash equivalents and restricted cash at end of period	$	14,066		$	15,736		$	14,066		$	15,736		$	1,716		$	40,491

Supplemental cash flow information:
Interest payments, net	$	18,702		$	13,105		$	77,413		$	79,677		$	18,215		$	17,487
Income tax payments, net of refunds		46			311			533			339
Non-cash purchases of property and equipment under capital lease obligations		—			—			—			54
Income tax payments, net														—			146
Non-cash purchases of property and equipment under finance lease obligations														79			—

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 ~~– DESCRIPTION~~- BASIS OF ~~THE BUSINESS~~PRESENTATION AND ~~SPIN-O~~FFSIGNIFICANT ACCOUNTING POLICIES

Description of the Business

On April 29, 2016, Community Health Systems, Inc. (“CHS”) completed the spin-off of 38 hospitals, including their affiliated facilities, and Quorum Health Resources, LLC to form Quorum Health Corporation through the distribution of 100% of the common stock of QHC to CHS stockholders of record as of the close of business on April 22, 2016 (the “Spin-off”). The principal business of Quorum Health Corporation, a Delaware corporation, and its subsidiaries (collectively, “QHC” or the “Company”) is to provide hospital and outpatient healthcare services in its markets across the United States. As of ~~September 30, 2018,~~March 31, 2019, the Company owned or leased a diversified portfolio of 27 hospitals in rural and mid-sized markets, which are located in 14 states and have a total of 2,604 licensed beds. The Company provides outpatient healthcare services through its hospitals and affiliated facilities, including urgent care centers, diagnostic and imaging centers, physician clinics and surgery centers. The Company’s wholly-owned subsidiary, Quorum Health Resources, LLC (“QHR”), provides hospital management advisory and healthcare consulting services to non-affiliated hospitals located throughout the United States. Over 95% of the Company’s net operating revenues are attributable to its hospital operations business.

~~Description of the Spin-off~~

On April 29, 2016, Community Health Systems, Inc. (“CHS”, or “Parent” when referring to the carve-out period prior to April 29, 2016) completed the spin-off of 38 hospitals, including their affiliated facilities, and QHR to form Quorum Health Corporation through the distribution of 100% of the common stock of QHC, issued at a par value of $0.0001 per share, to CHS stockholders of record as of the close of business on April 22, 2016 (the “Record Date”) and cash proceeds to CHS of $1.2 billion (the “Spin-off”). Each CHS stockholder received a distribution of one share of QHC common stock for every four shares of CHS common stock held as of the Record Date plus cash in lieu of fractional shares. Quorum Health Corporation began trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “QHC” on May 2, 2016.

In connection with the Spin-off, QHC issued $400 million in aggregate principal amount of 11.625% Senior Notes due 2023 (the “Senior Notes”) on April 22, 2016, pursuant to an indenture (the “Indenture”) by and between the Company and Regions Bank, as Trustee. The Senior Notes were issued at a discount of $6.9 million, or 1.734%. The gross offering proceeds of the Senior Notes were deposited into a segregated escrow account at the closing of the offering on April 22, 2016. On April 29, 2016, the Company entered into a credit agreement (the “Senior Credit Facility”) consisting of an $880 million senior secured term loan facility (the “Term Loan Facility”), which was issued at a discount of $17.6 million, or 98% of par value, and a $100 million senior secured revolving credit facility (the “Revolving Credit Facility”). In addition, the Company entered into a $125 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”) on April 29, 2016. The net offering proceeds of the Senior Notes were released to QHC from the escrow account on April 29, 2016. The net offering proceeds of the Senior Notes, together with the net borrowings under the Term Loan Facility, were used to pay $1.2 billion of the cash proceeds to CHS, as mentioned above, and to pay the Company’s fees and expenses related to the Spin-off. The cash proceeds paid to CHS were characterized as a one-time, tax-free cash distribution.

In connection with the Spin-off, QHC and CHS entered into a Separation and Distribution Agreement, a Tax Matters Agreement and an Employee Matters Agreement on April 29, 2016, which, collectively, governed or continue to govern the allocation of employees, assets and liabilities that were transferred to QHC from CHS, including but not limited to investments, working capital, property and equipment, employee benefits and deferred tax assets and liabilities. In addition, QHC and CHS entered into various transition services agreements and other ancillary agreements that govern certain relationships and activities of QHC and CHS for five years following the Spin-off. See Note 16 — Related Party Transactions for additional information on the agreements that exist between QHC and CHS after the Spin-off.

In connection with the Spin-off, CHS contributed $530.6 million of additional paid-in capital to QHC and made a $13.5 million cash contribution to QHC, pursuant to the Separation and Distribution Agreement. This contribution consisted of $20.0 million of cash contributed to fund a portion of QHC’s initial working capital, reduced by $6.5 million for the difference in estimated and actual financing transaction fees related to the Spin-off.

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

~~The following table provides a summary of the major transactions to effect the Spin-off of QHC as a newly formed, independent company (dollars in thousands):~~

Additional

Long-Term

Due to

Common Stock

Paid-in

Parent's

Debt

Parent, Net

Shares

Amount

Capital

Equity

Balance at April 29, 2016 (prior to the Spin-off)

$
24,179

$
1,813,836

—

$
—

$
—

$
3,137

Borrowings of long-term debt, net of debt issuance discounts

1,255,464

—

—

—

—

—

Payments of debt issuance costs

(29,146
)

—

—

—

—

—

Cash proceeds paid to Parent

—

(1,217,336
)

—

—

—

—

Transfer of liabilities from Parent

—

(22,292
)

—

—

—

—

Net deferred income tax liability resulting from the Spin-off

—

(46,783
)

—

—

—

—

Non-cash capital contribution from Parent

—

(527,425
)

—

—

530,562

(3,137
)
Distribution of common stock

—

—

27,719,645

3

(3
)

—

Distribution of restricted stock awards

—

—

692,409

—

—

—

Balance at April 29, 2016 (after the Spin-off)

$
1,250,497

$
—

28,412,054

$
3

$
530,559

$
—

~~NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES~~

Basis of Presentation

The condensed consolidated financial statements and accompanying notes of the Company presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”). In the opinion of the Company’s management, the condensed consolidated financial information presented herein includes all adjustments necessary to present fairly the results of operations, financial position and cash flows of the Company for the interim periods presented. Results of operations for interim periods should not be considered indicative of the results of operations expected for the full year ending December 31, ~~2018.~~2019. Certain information and disclosures have been condensed or omitted as presented herein and as permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim period presentation. The Company’s management believes the financial statements and disclosures presented herein are adequate in order to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements and accompanying notes thereto for the year ended December 31, ~~2017,~~2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on March ~~15, 2018~~12, 2019 (the ~~“2017~~“2018 Annual Report on Form 10-K”).

The Company’s financial statements have been prepared under the assumption that it will continue as a going concern. In accordance with Accounting Standard Codification (“ASC”) 205-40, Presentation of Financial Statements — Going Concern, management concluded that there were probable conditions or events that raised substantial doubt about the Company’s ability to continue as a going concern due to the fact that the Company’s maximum Secured Net Leverage Ratio permitted under the CS Agreement is reduced to 4.50 from 5.00 in the first quarter of 2020. The Company is in compliance with its financial covenants as of March 31, 2019 and believes that it is probable that the Company’s current and anticipated future operating results alleviate the substantial doubt about the Company’s ability to continue as a going concern for the one year period following the date these financial statements are issued. Management’s evaluation of the Company’s ability to comply with the Secured Net Leverage Ratio included, but was not limited to, the following factors:

On May 8, 2019, the Company entered into an agreement with R1 RCM to receive end-to-end revenue cycle management services. The Company believes that through its partnership with R1 RCM, it will achieve costs savings and improve net patient revenues through improvements in operational effectiveness and efficiencies;

Subsequent to the end of the first quarter of 2019, the Company completed the sale of Scenic Mountain Medical Center and is evaluating additional divestiture opportunities. The sale or closure of underperforming facilities will continue to generate additional costs savings and the decision to close facilities within the next twelve months is within the control of the Company; and

Management has a plan to achieve cost savings over the next twelve months through a reduction in corporate and other operating costs.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries in which it holds either a direct or indirect ownership of a majority voting interest. Investments in less-than-wholly-owned consolidated subsidiaries of QHC are presented separately in the equity component of the Company’s consolidated balance sheets to distinguish between the interests of QHC and the interests of the noncontrolling investors. Revenues and expenses from these subsidiaries are included in the respective individual line items of the Company’s consolidated statements of income, and net income is presented both in total and separately to

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

distinguish the amounts attributable to the Company and the amounts attributable to the interests of the noncontrolling investors. Noncontrolling interests that are redeemable, or may become redeemable at a fixed or determinable price at the option of the holder or upon the occurrence of an event outside of the control of the Company, are presented in mezzanine equity in the Company’s consolidated balance sheets. Intercompany transactions and accounts of the Company are eliminated in consolidation.

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

~~Reclassifications and Immaterial Restatements~~

~~Certain revisions have been made to prior period balances as follows:~~

Beginning in the fourth quarter of 2017, the Company reclassified and separately presented in its consolidated statements of cash flows the amounts for gross borrowings and repayments of its revolving credit facilities. Both items are included in cash flows from financing activities. Previously, these amounts were netted in the Company’s presentation of its consolidated statements of cash flow. This reclassification is considered immaterial and had no effect on the Company’s consolidated results of operations or financial position.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions.

Revenues and Accounts Receivable

~~Adoption of ASC Topic 606 “Revenue from Contracts with Customers”~~

On January 1, 2018, the Company adopted Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”) using the modified retrospective method to all contracts existing on January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under ASC 605. The key impacts on the Company’s consolidated financial statements include the following:

Prior to the adoption of ASC 606, a significant portion of the Company’s allowance for doubtful accounts related to amounts due from self-pay patients, as well as co-pays and deductibles owed to the Company by patients with insurance. Under ASC 606, the estimated allowance for these patient accounts is generally considered a direct reduction to net operating revenues rather than as a provision for bad debts.

Prior to the adoption of ASC 606, the Company’s presentation and disclosure of net revenue by payor included the portion of the revenue related to co-pays and deductibles as third-party revenues. Under ASC 606, the co-pays and deductibles portions of net revenue are classified as self-pay after insurance.

Revenue Recognition

The Company reports revenues from patient services at its hospitals and affiliated facilities at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient care. These amounts are due from patients, governmental programs and third-party payors such as Medicare, Medicaid, health maintenance organizations, preferred provider organizations, private insurers and others, and include variable consideration for retroactive revenue adjustments due to settlements of audits, reviews and investigations. Generally, the Company bills the patient and third-party payors several days after the services are performed or the patient is discharged. Revenue is recognized as the performance obligations are satisfied. Billings and collections are outsourced to CHS under ~~the~~a transition services ~~agreements~~agreement that ~~were~~was entered into in connection with the Spin-off. See Note 16 — Related Party Transactions for additional information on ~~these agreements.~~this agreement.

Performance obligations are determined based on the nature of the services provided by the Company. Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected (or actual) charges for services anticipated to be provided. The Company believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the inputs needed to satisfy the obligation. Generally, performance obligations satisfied over time relate to patients in the Company’s hospitals receiving inpatient acute care services. The Company measures the performance obligation from admission into the hospital to the point when it is no longer required to provide services to that patient, which is generally at the time of discharge. Revenue for performance obligations satisfied at a point in time is recognized when goods or services are provided and the Company does not believe it is required to provide additional goods or services to the patient.

Because all of its performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC 606-10-50-14(a) and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations referred to above are primarily related to inpatient acute care services

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

at the end of the reporting period. The performance obligations for these contracts are generally completed when the patient is discharged, which generally occurs within days or weeks following the end of the reporting period.

The Company determines the transaction price based on standard billing rates for goods and services provided, reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients and patient responsibility after insurance in accordance with the Company’s policy, and/or implicit price concessions provided to uninsured patients and patient responsibility after insurance. The Company determines its estimates of contractual adjustments and discounts based on contractual agreements, its discount policies and historical experience. The Company determines its estimate of implicit price concessions based on its historical collection experience with this class of patients.

The Company recognizes revenues related to its QHR business when either the performance obligation has been satisfied or over time as the hospital management advisory and healthcare consulting services are provided, and reports these revenues at the amount expected to be collected from the non-affiliated hospital clients of QHR.

Payor Sources

The primary sources of payment for patient healthcare services are third-party payors, including federal and state agencies administering the Medicare and Medicaid programs, other governmental agencies, managed care health plans, commercial insurance companies, workers’ compensation carriers and employers. Self-pay revenues are the portion of patient service revenues derived from patients who do not have health insurance coverage and the patient responsibility portion of services that are not covered by health insurance plans. Non-patient revenues primarily include revenues from QHR’s hospital management advisory and healthcare consulting services business, rental income and hospital cafeteria ~~sales.~~sales.

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The following table provides a summary of net operating revenues by payor source (dollars in thousands):

	Three Months Ended September 30,										Three Months Ended March 31,
	2018					2017					2019					2018
	$ Amount		% of Total			$ Amount		% of Total			$ Amount		% of Total			$ Amount		% of Total

Medicare	$	123,788		26.9	%	$	156,547		31.4	%	$	129,046		29.1	%	$	144,583		29.7	%
Medicaid		97,803		21.2	%		92,563		18.5	%		81,924		18.5	%		85,103		17.5	%
Managed care and commercial plans		185,493		40.3	%		184,390		36.9	%		174,075		39.3	%		185,226		38.0	%
Self-pay and self-pay after insurance		33,647		7.3	%		42,385		8.5	%		37,137		8.4	%		49,684		10.2	%
Non-patient		19,776		4.3	%		23,417		4.7	%		20,623		4.7	%		22,224		4.6	%
Total net operating revenues	$	460,507		100.0	%	$	499,302		100.0	%	$	442,805		100.0	%	$	486,820		100.0	%


	Nine Months Ended September 30,
	2018					2017
	$ Amount		% of Total			$ Amount		% of Total

Medicare	$	398,477		28.1	%	$	468,627		30.1	%
Medicaid		270,047		19.0	%		292,380		18.8	%
Managed care and commercial plans		560,445		39.5	%		583,073		37.4	%
Self-pay and self-pay after insurance		125,619		8.8	%		140,296		9.0	%
Non-patient		65,371		4.6	%		72,712		4.7	%
Total net operating revenues	$	1,419,959		100.0	%	$	1,557,088		100.0	%

Revenues from Medicare Advantage Plans that are included in Medicare revenues in the table above were $32.0 million and $47.0 million for the three months ended September 30, 2018 and 2017, respectively, and $103.4 million and $133.4 million for the nine months ended September 30, 2018 and 2017, respectively.

Contractual Adjustments and Discounts

Agreements with third-party payors typically provide for payments at amounts less than standard billing rates. A summary of the payment arrangements with major third-party payors follows:

•

Medicare: Inpatient acute care services are generally paid at prospectively determined rates per discharge based on clinical, diagnostic and other factors. Certain services are paid based on cost-reimbursement methodologies subject to certain limits. Outpatient services are paid using prospectively determined rates according to ambulatory payment classifications and, for some services, fee schedules. Physician services are paid based upon the Medicare Physician Fee Schedule.

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

Outpatient services are paid using prospectively determined rates according to ambulatory payment classifications and, for some services, fee schedules. Physician services are paid based upon the Medicare Physician Fee Schedule.

Medicaid: Reimbursements for Medicaid services are generally paid at prospectively determined rates per discharge, per occasion of service, or per covered member.

Other: Payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations generally provide for payment using prospectively determined rates per discharge, discounts from standard billing rates and prospectively determined daily rates.

Government programs, including Medicare and Medicaid programs, which represent a large portion of the Company’s operating revenues, are highly complex programs to administer and are subject to interpretation of federal and state-specific reimbursement rates, new legislation and final cost report settlements. As a result of investigations by governmental agencies, various health care organizations have received requests for information and notices regarding alleged noncompliance with those laws and regulations. In some instances, these investigations have resulted in organizations entering into significant settlement agreements or findings of criminal and civil liability. Compliance with such laws and regulations may be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and potential exclusion from the related programs. There can be no assurance that regulatory authorities will not challenge the Company’s compliance with these laws and regulations, and it is not possible to determine the impact (if any) such claims or penalties would have on the Company.

Contractual adjustments, or differences in standard billing rates and the payments derived from contractual terms with governmental and non-governmental third-party payors, are recorded based on management’s best estimates in the period in which services are performed and a payment methodology is established with the patient. Recorded estimates for past contractual adjustments are subject to change, in large part, due to ongoing contract negotiations and regulation changes, which are typical in the U.S. healthcare industry. Revisions to estimates are recorded as contractual adjustments in the periods in which they become known and may be subject to further revisions. In addition, the contracts the Company has with commercial insurance payors may provide for retroactive audit and review of claims. Subsequent changes in estimates for third-party payors that are determined to be the result of an adverse change in a payor’s ability to pay are recorded as bad debt expense. Bad debt expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~was~~were not material and isare included in other operating expenses in the Company’s consolidated statements of income. Billing and collections are outsourced to CHS under ~~certain~~a transition services ~~agreements~~agreement that ~~were~~was put in place by CHS in connection with the Spin-off. The Company’s contractual adjustments are impacted by the timing and ability of CHS to monitor the classification and collection of the Company’s patient accounts receivable. Self-pay and other payor discounts are incentives offered by the Company to uninsured or underinsured patients and other payors to reduce their costs of healthcare services.

Third-Party Program Reimbursements

Cost report settlements under reimbursement programs with Medicare, Medicaid and other managed care plans for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical experience, including an assessment to ensure that it is

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as new information becomes available, or as years are settled or are no longer subject to such audits, reviews, and investigations. Previous program reimbursements and final cost report settlements are included in due from and due to third-party payors in the consolidated balance sheets. Net adjustments arising from a change in the transaction price for estimated cost report settlements favorably ~~(unfavorably)~~ impacted net operating revenues by ~~$(0.5)~~$1.8 million and ~~$2.5~~$0.5 million during the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $(0.4) million and $2.5 million during the nine months ended September 30, 2018 and 2017,~~ respectively.

Currently, several states utilize supplemental payment programs, including disproportionate share programs, for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from CMS and are funded with a combination of federal and state resources, including, in certain instances, taxes, fees or other program expenses (collectively, “provider taxes”) levied on the providers. The receivables and payables associated with these programs are included in due from and due to third-party payors in the ~~Company’s~~ consolidated balance sheets.

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

The following table provides a summary of the components of amounts due from and due to third-party payors, as presented in the consolidated balance sheets (in thousands):

	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018

Amounts due from third-party payors:
Previous program reimbursements and final cost report settlements	$	13,878	$	17,383	$	14,669	$	14,374
State supplemental payment programs		50,231		79,819		53,079		49,069
Total amounts due from third-party payors	$	64,109	$	97,202	$	67,748	$	63,443

Amounts due to third-party payors:
Previous program reimbursements and final cost report settlements	$	32,830	$	33,163	$	34,208	$	32,174
State supplemental payment programs		11,104		14,542		11,528		13,678
Total amounts due to third-party payors	$	43,934	$	47,705	$	45,736	$	45,852

After a state supplemental payment program is approved and fully authorized by the appropriate state legislative or governmental agency, the Company recognizes the revenue and related expenses based on the terms of ~~the~~each program in the period in which amounts are estimable and revenue collection is reasonably assured. The revenues earned by the Company under these programs are included in net operating revenues and the expenses associated with these programs are included in other operating expenses in the ~~Company’s~~ consolidated statements of income.

The following table provides a summary of the portion of Medicaid reimbursements included in the ~~Company’s~~ consolidated statements of income that are attributable to state supplemental payment programs (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018

Medicaid state supplemental payment program revenues	$	57,555	$	46,866	$	158,186	$	138,544	$	47,690	$	48,561
Provider taxes and other expenses		19,131		16,523		55,326		50,646		18,866		19,144
Reimbursements attributable to state supplemental payment programs, net of expenses	$	38,424	$	30,343	$	102,860	$	87,898	$	28,824	$	29,417

The California Department of Health Care Services administers the Hospital Quality Assurance Fee (“HQAF”) program, imposing a fee on certain general and acute care California hospitals. Revenues generated from these fees provide funding for the non-federal supplemental payments to California hospitals that serve California’s Medi-Cal and uninsured patients. Under the HQAF program, the Company recognized ~~$8.7~~$8.1 million of Medicaid revenues and ~~$0.1~~$2.2 million of provider taxes for the three months ended ~~September 30, 2018~~March 31, 2019 and ~~$24.4~~$7.9 million of Medicaid revenues and ~~$4.4~~$2.1 million of provider taxes for the ~~nine~~three months ended ~~September 30,~~March 31, 2018. There were no corresponding amounts recognized in the three and nine months ended September 30, 2017. The revenues and fees for the full year 2017 were recognized in the fourth quarter of 2017 when CMS approved the program.

The Company recognized ~~$7.3~~$2.0 million of Medicaid revenues in the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 related to the sale ~~the Illinois property tax credits. Recognition~~ of the benefit from the Illinois credits was previously recognized as a reduction in other operating expenses. For the three and nine months ended September 30, 2017, the Company recognized $7.8 million from the sale the Illinois property tax credits ~~as a direct reduction to other operating expenses.~~with no corresponding amount recognized in the three months ended March 31, 2018. The ~~Company determined that~~revenues for the ~~Illinois property tax credits operate as a supplemental payment program for uncompensated charity care.~~full year 2018 were recognized in the third quarter of 2018.

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

Self-Pay and Self-Pay After Insurance

Generally, patients who are covered by third-party payors are responsible for related co-pays and deductibles, which vary in amount. The Company also provides services to uninsured patients, and offers those uninsured patients a discount, either by policy or

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

law, from the Company’s standard billing rates. The Company estimates the transaction price for patients with co-pays and deductibles and for uninsured patients based on historical collection experience and current market conditions. The initial estimate of the transaction price is determined by reducing the Company’s standard charges by any contractual adjustments, discounts, and implicit price concessions. Subsequent changes to the estimate of the transaction price, if any, are generally recorded as an adjustment to patient service revenue in the period of the ~~change.~~change.

Charity Care

In the ordinary course of business, the Company provides services to patients who are financially unable to pay for hospital care. The related charges for those patients who are financially unable to pay that otherwise do not qualify for reimbursement from a governmental program are classified as charity care. The Company determines amounts that qualify for charity care primarily based on the patient’s household income relative to the poverty level guidelines established by the federal government. The Company’s policy is to not pursue collections for such amounts; therefore, the related charges are recorded in operating revenues at the standard billing rates and fully offset in contractual ~~adjustments.~~allowances. The Company’s gross amounts of charity care revenues were ~~$7.6~~$5.0 million and ~~$5.7~~$13.3 million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $26.9 million and $25.6 million for the nine months ended September 30, 2018 and 2017,~~ respectively.

Accounts Receivable

Substantially all of the Company’s receivables are related to providing healthcare services to patients at its hospitals and affiliated outpatient facilities.

For self-pay and self-pay after insurance receivables, the Company estimates the implicit price concession by reserving a percentage of all self-pay and self-pay after insurance accounts receivable without regard to aging category. The estimate of the implicit price concession is based on a model that considers historical cash collections, expected recoveries and any anticipated changes in trends. The Company’s ability to estimate the implicit price concessions is not significantly impacted by the aging of accounts receivable, as management believes that substantially all of the risk exists at the point in time such accounts are identified as self-pay. Significant changes in payor mix, CHS’s business office operations, including the CHS shared services centers’ efforts in collecting the Company’s accounts receivables, economic conditions, or trends in federal and state governmental healthcare coverage, among others, could affect the Company’s estimates of implicit price concessions. The Company also continually reviews its overall estimate of implicit price concessions by monitoring historical cash collections as a percentage of trailing net operating revenues, as well as by analyzing current period net operating revenues and admissions by payor classification, aged accounts receivable by payor, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables, and the impact of recent divestitures.

Collections are impacted by the economic ability of patients to pay, the effectiveness of ~~CHS’~~CHS’s billing and collection efforts, including their current policies on collections, and the ability of the Company to further attempt collection efforts. Billings and collections are outsourced to CHS under ~~the~~a transition services ~~agreements~~agreement that ~~were~~was established with the Spin-off. See Note 16 — Related Party Transactions for additional information on ~~these agreements.~~this agreement.

~~The following table provides a summary of the changes in the allowance for doubtful accounts (in thousands):~~

Nine Months Ended

September 30, 2018

Balance at beginning of period

$
352,509

Provision for bad debts

—

Impact of adoption of ASC 606

(352,509
)
Balance at end of period

$
—

The Company has elected the practical expedient allowed under ~~FASB ASC 606-10-32-18~~Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606 and does not adjust the promised amount of consideration from patients and third-party payors for the effects of a significant financing component due to the Company’s expectation that the period between the time the service is provided to a patient and the time that the patient or a third-party payor pays for that service will be one year or less. However, the Company does, in certain instances, enter into payment agreements with patients that allow payments in excess of one year. For those cases, the financing component is not deemed to be significant to the contract.

~~QUORUM HEALTH CORPORATION~~

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~~(Continued)~~

The Company has applied the practical expedient provided by FASB ASC ~~340-40-25-4~~Topic 340 and all incremental customer contract acquisition costs are expensed as incurred, as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration.

Concentration of Credit Risk

The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s hospitals and affiliated outpatient facilities and are insured under third-party payor agreements. Because of the economic diversity of the Company’s markets and non-governmental third-party payors, Medicare ~~represents~~receivables are a significant concentration of credit ~~risk from payors.~~risk. Accounts receivable, net of contractual adjustments, from Medicare were ~~$59.0~~$56.3 million and ~~$66.6~~$58.2 million, or ~~18.5%~~17.2% and ~~18.2%~~18.0% of total patient accounts receivable ~~net~~ as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. Additionally, the Company believes Illinois Medicaid represents a significant concentration of credit risk to the Company due to the fiscal problems in the state of Illinois that ~~can~~ affect the timing and extent of payments due to providers, which are administered by the state of Illinois under the Medicaid program. The Company’s accounts receivable, net of contractual adjustments, from Illinois Medicaid were ~~$21.5~~$24.4 million and ~~$28.8~~$24.5 million, or ~~6.7%~~7.5% and ~~7.9%~~7.6% of total patient accounts receivable ~~net~~ as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The ~~Company’s~~Company also believes

QUORUM HEALTH CORPORATION

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(Continued)

California state supplemental program receivables from Illinois Medicaid were $1.3 million and $22.9 million, or 2.1% and 23.5% of total due from third-party payors, as of September 30, 2018 and December 31, 2017, respectively. The Company also believes California Medicaid representsrepresent a significant concentration of credit risk due to the ~~Company.~~timing and extent of the receivables. The Company’s state supplemental program receivables from California Medicaid were ~~$34.2~~$41.7 million and ~~$48.4~~$37.8 million, or ~~53.3%~~61.6% and ~~49.8%~~59.6% of total due from third-party payors, as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

The Company’s revenues are particularly sensitive to regulatory and economic changes in certain states where the Company generates significant revenues. Accordingly, any changes in the current demographic, economic, competitive or regulatory conditions in certain states in which revenues are significant could have an adverse effect on the Company’s results of operations, financial condition or cash flows. Changes to the Medicaid and other government-managed payor programs in these states, including reductions in reimbursement rates or delays in reimbursement payments under state supplemental payment or other programs, could also have a similar adverse effect.

The following table provides a summary of the states in which the Company generates more than 5% of its total net patient revenues as determined in ~~each~~the most recent period (dollars in thousands):

	Number of	Nine Months Ended September 30,										Number of	Three Months Ended March 31,
	Hospitals at	2018					2017					Hospitals at	2019					2018
	September 30, 2018	$ Amount		% of Total			$ Amount		% of Total			March 31, 2019	$ Amount		% of Total			$ Amount		% of Total

Illinois	8	$	554,909		41.0	%	$	559,068		37.7	%	8	$	165,224		39.1	%	$	187,753		40.4	%
Oregon	1		172,319		12.7	%		155,903		10.5	%	1		58,284		13.8	%		55,517		11.9	%
California	2		136,357		10.1	%		112,260		7.6	%	2		44,164		10.5	%		44,965		9.7	%
Kentucky	3		87,935		6.5	%		85,017		5.7	%	3		29,080		6.9	%		29,290		6.3	%

Other Operating Expenses

The following table provides a summary of the major components of other operating expenses (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017			2018		2017		2019		2018
					��
Purchased services	$	37,955	$	40,716		$	116,537	$	130,155	$	37,842	$	41,080
Taxes and insurance		33,631		24,929			100,313		92,782		33,964		33,055
Medical specialist fees		26,078		27,254			79,459		84,605		26,070		26,948
Transition services agreements		14,101		15,468			43,284		47,736		7,849		15,117
Repairs and maintenance		8,962		10,166			27,659		31,368		9,535		9,637
Utilities		6,559		7,853			18,274		21,245		5,302		6,123
Other miscellaneous operating expenses		16,430		18,971			55,384		58,503		16,227		20,778
Total other operating expenses	$	143,716	$	145,357		$	440,910	$	466,394	$	136,789	$	152,738

~~QUORUM HEALTH CORPORATION~~

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~~(Continued)~~

The Company records costs associated with the transition services agreements and other ancillary agreements with CHS in accordance with the terms of these agreements. These costs, which primarily include the costs of providing information technology, patient billing and collections and payroll services, are included in “Transition services agreements” in the table above.

See Note 16 — Related Party Transactions ~~and Note 17 — Commitments and Contingencies~~ for additional information on the transition services agreements with CHS.

General and Administrative Costs

Substantially all of the Company’s operating costs and expenses are “cost of revenues” items. Operating expenses that could be classified as general and administrative by the Company are costs related to corporate office functions, including, but not limited to tax, treasury, audit, risk management, legal ~~investor relations~~ and human resources. These costs are primarily ~~consist of~~ salaries and benefits expenses associated with these corporate office functions. General and administrative costs of the Company were ~~$14.2~~$12.6 million and ~~$13.8~~$14.9 million during the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $49.1 million and $43.9 million during the nine months ended September 30, 2018 and 2017,~~ respectively. General and administrative costs of the Company include executive severance costs at the corporate office of ~~$1.6~~$1.9 million during the three months ended ~~September 30, 2018 with~~March 31, 2018. There were no ~~corresponding amount~~executive severance costs at the corporate office during the three months ended ~~September 30, 2017, and $6.2 million and $0.6 million during the nine months ended September 30, 2018 and 2017, respectively.~~March 31, 2019.

Electronic Health Records Incentives ~~Earned~~

Pursuant to the Health Information Technology for Economic and Clinical Health Act (“HITECH”), the Company receives incentive payments under the Medicare and Medicaid programs for its eligible hospitals and physician clinics that demonstrate

QUORUM HEALTH CORPORATION

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meaningful use of certified Electronic Health Records (“EHR”) technology. EHR incentive payments are subject to audit and potential recoupment if it is determined that the applicable meaningful use standards were not met. EHR incentive payments are also subject to retrospective adjustment because the cost report data upon which the incentive payments are based is further subject to audit.

The Company incurs both capital expenditures and operating expenses in connection with the implementation of EHR technology initiatives. The amounts and timing of these expenditures does not directly correlate with the timing of the Company’s receipt or recognition of EHR incentive payments as earned. The Company ~~is nearing completion of its full implementation of certified EHR, and therefore, its EHR incentive payments are declining and will ultimately end. The Company~~ recognized EHR incentives ~~earned~~ of less than $0.1 million and ~~$0.3~~$(0.1) million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $0.6 million and $4.5 million for the nine months ended September 30, 2018 and 2017,~~ respectively, which were recorded as a reduction (increase) to operating expenses in the Company’s consolidated statements of income. The Company’s eligible hospital incentive payments have ended as of December 31, 2018. The Company’s eligible physician clinic incentive payments will continue to decline and will end by December 31, 2021.

Legal, Professional and Settlement Costs

Legal, professional and settlement costs in the Company’s consolidated statements of income primarily include legal costs and related settlements, if any, associated with arbitration, ~~costs,~~ regulatory claims, government investigations into reimbursement payments and other litigation matters.

Loss (Gain) on Sale of Hospitals, Net

Loss (gain) on sale of hospitals, net ~~relates to~~is the loss (gain) incurred by the Company’s divestiture of hospitals and outpatient facilities. It is calculated as the difference between the cash proceeds from the sale and the carrying values of the associated net assets sold at the date of sale, less certain incremental direct selling costs.

Loss on Closure of Hospitals, Net

Loss on closure of hospitals, net relates to costs incurred by the Company for closure of hospitals and outpatient facilities, and includes severance, loss on disposal of property and equipment, write-down of assets, legal costs and other costs incurred by the Company related to the ~~closure.~~closure.

~~Transaction Costs Related to the Spin-off~~

Transaction costs related to the Spin-off consists of QHC’s portion of the costs to effect the Spin-off and the costs associated with forming a new company. These costs include audit fees, management advisory and consulting costs, investment advisory costs, legal expenses and other miscellaneous costs.

~~QUORUM HEALTH CORPORATION~~

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~~(Continued)~~

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the provision for (benefit from) income taxes in the consolidated statements of income in the period that includes the enactment date. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent the Company believes that recovery is not likely, a valuation allowance is established. To the extent the Company establishes a valuation allowance or increases this allowance, the related expense is included in the provision for (benefit from) income taxes in the consolidated statements of income. The Company classifies interest and penalties, if any, related to its tax positions as a component of provision for (benefit from) income ~~taxes.~~taxes.

Cash and Cash Equivalents

Cash includes cash on hand and cash with banks. Cash equivalents are short-term, highly liquid investments with a maturity of three months or less from the date acquired that are subject to an insignificant risk of change in value.

Restricted Cash

Restricted cash consists of cash held in escrow accounts to secure the Company’s indemnification obligations under purchase agreements related to the sale of hospitals. The Company expects these obligations will be settled more than twelve months into the future. As a result, the Company’s restricted cash is recorded in other long-term assets in the consolidated balance sheet as of September 30, 2018.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Company’s consolidated balance sheets to the combined total as reported in the Company’s consolidated statements of cash flows (in thousands):

September 30,

December 31,

2018

2017

Cash and cash equivalents

$
6,066

$
5,617

Restricted cash included in other long-term assets

8,000

—

Cash, cash equivalents and restricted cash

$
14,066

$
5,617

Inventories

Inventories, primarily consisting of medical supplies and drugs, are stated at the lower of cost or market on a first-in, first-out basis.

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Other Current Assets

Other current assets consists of the current portion of the receivables from CHS related to professional and general liability and workers’ compensation liability insurance reserves that were indemnified by CHS in connection with the Spin-off, non-patient accounts receivable primarily related to QHR ~~receivables related to EHR incentives~~ and other miscellaneous current assets.

Property and Equipment

Purchases of property and equipment are recorded at cost. Property and equipment acquired in a business combination are recorded at estimated fair value. Routine maintenance and repairs are expensed as incurred. Expenditures that increase capacities or extend useful lives are capitalized. The Company capitalizes interest related to financing of major capital additions with the respective asset. Depreciation is recognized using the straight-line method over the estimated useful life of an asset. The Company depreciates land improvements over 3 to 20 years, buildings and improvements over 5 to 40 years, and equipment and fixtures over 3 to 18 years. The Company also leases certain facilities and equipment under capital lease obligations. These assets are amortized on a straight-line basis over the lesser of the lease term or the remaining useful life of the asset. Property and equipment assets that are held for sale are not depreciated.

15Leases

In February 2016, the FASB issued a new accounting standard, ASC Topic 842, related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASC Topic 842 effective January 1, 2019 using the modified retrospective transition approach as of the period of adoption. The Company’s financial statements prior to January 1, 2019 were not modified for the application of the new lease standard. Upon adoption of ASC Topic 842, the Company recognized $93.7 million of ROU assets and $95.6 million of lease liabilities associated with operating leases. The accounting for capital leases remained substantially unchanged. In addition, the Company recognized a $0.7 million cumulative effect adjustment that increased accumulated deficit in its consolidated balance sheet at January 1, 2019.

The Company determines if an arrangement is a lease at inception of the contract. Operating leases are included in operating lease ROU assets, current portion of operating lease liabilities, and long-term operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current portion of long-term debt, and long-term debt in the consolidated balance sheets.

ROU assets represent the Company’s right to use underlying assets for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company uses the implicit rate when readily determinable.

The Company enters into operating leases for real estate, medical office buildings, other administrative offices, as well as medical and office equipment. The Company’s finance leases consist primarily of the Corporate office and other long-term building leases. The Company’s real estate leases typically have initial lease terms of 5 to 10 years, and equipment leases typically have an initial term of 3 years.

The Company’s real estate leases may include one or more options to renew, with renewals extending the lease term for an additional 5 to 10 years. The exercise of lease renewal options is at the Company’s sole discretion. In general, the Company does not consider renewal options to be reasonably likely to be exercised, therefore renewal options are generally not recognized as part of the ROU assets and lease liabilities. Lease costs for lease payments are recognized on a straight-line basis over the lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. The Company does not record operating leases with an initial term of 12 months or less (“short-term leases”) in the consolidated balance sheets.

Certain of the Company’s lease agreements contain both lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as medical devices, the lease and non-lease components are accounted for as a single lease component. Additionally, for certain equipment leases containing multiple assets, we apply a portfolio approach to account for the assets as one leased asset.

QUORUM HEALTH CORPORATION

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Goodwill

The Company’s hospital operations and QHR’s ~~hospital~~ management advisory and healthcare consulting services operations meet the criteria ~~to be classified as~~for classification and separate reporting units for goodwill. Goodwill was initially determined for QHC’s hospital operations reporting unit based on a relative fair value approach as of September 30, 2013 ~~(CHS’~~(CHS’s goodwill impairment testing date). Additional goodwill was allocated on a similar basis for four hospitals acquired by CHS in 2014 ~~and~~that were included in the group of hospitals spun-off to QHC. For the QHR reporting unit, goodwill was allocated based on the amount recorded by CHS at the time of its acquisition in 2007. All subsequent goodwill generated from hospital, physician practice or other ancillary business acquisitions is recorded at fair value at the time of acquisition.

Intangible Assets

The Company’s intangible assets primarily consist of purchase and development costs of software for internal use and contract-based intangible assets, including physician ~~income~~ guarantee contracts, medical licenses, hospital management contracts, non-compete agreements and certificates of need. There are no expected residual values related to the Company’s intangible assets. Capitalized software costs are generally amortized over three years, except for software costs for significant system conversions, which are amortized over 8 to 10 years. Capitalized software costs that are in the development stage are not amortized until the related projects are complete. Assets ~~for~~related to physician ~~income~~ guarantee contracts, hospital management contracts, non-compete agreements and certificates of need are amortized over the life of the individual contracts. Intangible assets held for sale are not amortized.

Impairment of Long-Lived Assets and Goodwill

Whenever an event occurs or changes in circumstances indicate that the carrying values of certain long-lived assets may be impaired, the Company projects the undiscounted cash flows expected to be generated by these assets. If the projections indicate that the carrying values are not expected to be recovered, such amounts are reduced to their estimated fair value based on a quoted market price, if available, or an estimated fair value based on valuation techniques available in the circumstances.

Goodwill arising from business combinations is not amortized. Goodwill is evaluated for impairment at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying ~~amount,~~value, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. The Company performs its annual testing of impairment for goodwill in the fourth quarter of each year. The fair value of the ~~related~~Company’s reporting units is estimated using both a discounted cash flow model as well as a multiple model based on earnings before interest, taxes, depreciation and amortization. The cash flow forecasts are adjusted by an appropriate discount rate based on the Company’s best estimate of a market participant’s weighted-average cost of capital. Both models are based on the Company’s best estimate of future revenues and operating costs and are reconciled to the Company’s consolidated market capitalization, with consideration of the amount a potential acquirer would be required to pay, in the form of a control premium, in order to gain sufficient ownership to set policies, direct operations and control management decisions of the Company.

See Note 32 — Impairment of Long-Lived Assets and Goodwill for additional information related to impairment recorded in the consolidated statements of income.

Other Long-Term Assets

Other long-term assets consist of the long-term portion of the receivables from CHS related to professional and general liability and workers’ compensation liability insurance reserves that were indemnified by CHS in connection with the Spin-off, as well as deferred compensation plan assets, deposits, investments in unconsolidated subsidiaries ~~restricted cash~~ and other miscellaneous long-term assets.

Other Current Liabilities

Other current liabilities ~~consist~~consists of the current portion of professional and general liability insurance reserves, including the portion indemnified by CHS in connection with the Spin-off, as well as property tax accruals, legal accruals, ~~deferred revenue related to EHR incentives,~~ physician ~~income guarantee liabilities~~guarantees and other miscellaneous current liabilities.

~~QUORUM HEALTH CORPORATION~~

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~~(Continued)~~

Professional and General Liability Insurance and Workers’ Compensation Liability Insurance Reserves

As part of the business of owning and operating hospitals, the Company is subject to legal actions alleging liability on its part. To mitigate a portion of these risks, the Company maintains insurance exceeding a self-insured retention level for these types of claims.

QUORUM HEALTH CORPORATION

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(Continued)

The Company’s self-insurance reserves reflect the current estimate of all outstanding losses, including incurred but not reported losses, based on actuarial calculations as of period end. The loss estimates included in the actuarial calculations may change in the future based on updated facts and circumstances. The Company’s insurance expense includes the actuarially determined estimates of losses for the current year, including claims incurred but not reported, the change in the estimates of losses for prior years based upon actual claims development experience as compared to prior actuarial projections, the insurance premiums for losses in excess of the Company’s self-insured retention levels, the administrative costs of the insurance programs, and interest expense related to the discounted portion of the liability. The Company’s reserves for professional and general liability and workers’ compensation liability claims are based on semi-annual actuarial calculations, which are discounted to present value and consider historical claims data, demographic factors, severity factors and other actuarial assumptions. The reserves for self-insured claims are discounted based on the Company’s risk-free interest rate that corresponds to the period when the self-insured claims are incurred and projected to be ~~paid.~~paid.

See Note 17 — Commitments and Contingencies for information related to the portion of the Company’s insurance reserves for professional and general liability and workers’ compensation liability that are indemnified by CHS.

Self-Insured Employee Health Benefits

The Company is self-insured for substantially all of the medical benefits of its employees. The Company maintains a liability for its current estimate of incurred but not reported employee health claims based on historical claims data provided by third-party administrators. The undiscounted reserve for self-insured employee health benefits was ~~$7.3~~$9.8 million and ~~$8.8~~$10.4 million as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, and is included in accrued salaries and benefits in the ~~Company’s~~ consolidated balance sheets. Expense each period is based on the actual claims received during the period plus the impact of any adjustment to the liability for incurred but not reported employee health claims.

Noncontrolling Interests and Redeemable Noncontrolling Interests

The Company’s consolidated financial statements include all assets, liabilities, revenues and expenses of less than 100% owned entities that it controls. Certain of the Company’s consolidated subsidiaries have noncontrolling physician ownership interests with redemption features that require the Company to deliver cash upon the occurrence of certain events outside of its control, such as the retirement, death, or disability of a physician-owner. The carrying amount of redeemable noncontrolling interests is recognized in the Company’s consolidated balance sheets at the greater of: (1) the initial carrying amount of these investments, increased or decreased for the noncontrolling interests' share of cumulative net income (loss), net of cumulative amounts distributed to the noncontrolling interest partners, if any, or (2) the redemption value of the investments held by the noncontrolling interest partners.

Assets and Liabilities of Hospitals Held for Sale

The Company reports separately from other assets in the consolidated balance sheet those assets that meet the criteria for classification as held for sale. Generally, assets that meet the criteria include those for which the carrying amount will be settled principally through a sale transaction rather than through continuing use. The asset must be available for immediate sale in its present condition, subject to usual or customary terms, and the sale must be probable to occur in the next 12 months. Similarly, the liabilities of a disposal group are classified as held for sale upon meeting these criteria. Immediately following classification as held for sale, the Company remeasures these assets and liabilities and adjusts the value to the lesser of the carrying amount or fair value less costs to sell. ~~Assets~~The assets and liabilities classified as held for sale are no longer depreciated or amortized into expense. The carrying values of assets classified as held for sale are reported net of impairment ~~charges.~~in the consolidated balance sheets.

Stock-Based Compensation

The Company issues restricted stock awards to key employees and directors ~~under the Quorum Health Corporation 2016 Stock Award Plan (the “2016 Stock Award Plan”). The Company~~and recognizes stock-based compensation expense over each of the restricted stock award’s requisite service periods based on the estimated grant date fair value of each restricted stock award. See Note 14 — Stock-Based Compensation for additional information related to stock-based compensation.

~~QUORUM HEALTH CORPORATION~~

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~~(Continued)~~

Benefit Plans

~~Benefit Plans~~

The Company maintains various benefit plans, including defined contribution plans, deferred compensation plans, a ~~defined benefit~~supplemental executive retirement plan and a ~~deferred compensation~~defined benefit plan, for which certain of the Company’s subsidiaries are the plan sponsors. The rights and obligations of these plans were transferred from CHS to the Company, pursuant to the Separation and Distribution ~~Agreement.~~Agreement, which was entered into with CHS in connection with the Spin-off which governed or continue to govern the allocation of employees, assets and liabilities that were transferred to QHC from CHS. Benefits costs are recorded as salaries and benefits expenses in the

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

consolidated statements of income. The cumulative liability for these benefit costs is recorded in other long-term liabilities in the consolidated balance sheets.

The Company recognizes the unfunded liability of its defined benefit plan in other long-term liabilities in the consolidated balance sheets. Unrecognized gains (losses) and prior service credits (costs) are recorded as changes in other comprehensive income (loss) ~~in the consolidated statements of income.~~. The measurement date of the plan’s assets and liabilities coincides with the Company’s year end. The Company’s pension benefit obligation is measured using actuarial calculations that incorporate discount rates, rate of compensation increases and expected long-term returns on plan assets. The calculations additionally consider expectations related to the retirement age and mortality of plan participants. The Company records pension benefit costs related to all of its plans as salaries and benefits expenses in the consolidated statements of income.

Fair Value of Financial Instruments

The Company utilizes the U.S. GAAP fair value hierarchy to measure the fair value of its financial instruments. The fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The inputs used to measure fair value are classified into the following fair value hierarchy:

Level 1 - Quoted market prices in active markets for identical assets and liabilities.

Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3 - Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies or similar techniques reflecting the Company’s own assumptions.

Segment Reporting

The principal business of the Company is to provide healthcare services at its hospitals and ~~affiliated~~ outpatient service facilities. The Company’s only other line of business is the hospital management advisory and healthcare consulting services it provides through QHR. The Company has determined that its hospital operations business and QHR business ~~meet~~meets the criteria for separate segment reporting. The Company’s corporate functions ~~are~~have been reported in the all other reportable segment. See Note 13 — Segments for additional information related to the Company’s segment reporting.

~~New~~Recent Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other — Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to provide guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is accounted for as a service contract. This ASU requires entities to account for such costs consistent with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU No. 2018-15 on January 1, 2019 on a prospective basis. There was no material impact on the Company’s consolidated financial position and results of operations as a result of adoption of ASU No. 2018-15.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income,, which allows for reclassification from accumulated other comprehensive income to retained earnings of the stranded tax effects in accumulated other comprehensive income resulting from the enactment of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) and corresponding accounting treatment recorded in the fourth quarter of 2017. The Company adopted ASU ~~is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early~~No. 2018-02 on January 1, 2019. The adoption of ~~the amendments in this~~ ASU ~~is permitted, including adoption in any interim period for reporting periods for which financial statements have~~No. 2018-02 did not ~~yet been issued. The Company does not anticipate that the adoption of this standard will~~ have a significant impact on ~~its~~the Company’s consolidated balance sheet.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. This ASU instead permits an entity to recognize goodwill impairment as the excess of a reporting unit’s carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The new guidance continues to allow an entity to perform a qualitative assessment of goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early

QUORUM HEALTH CORPORATION

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(Continued)

adoption permitted. The Company is currently evaluating the impact this guidance may have on its consolidated results of operations and financial ~~position and cash flows.~~

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows — Restricted Cash, which addressed classification and presentation of changes in restricted cash on the statement of cash flows. The standard requires a reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents; however, the nature of the restrictions should be disclosed. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This ASU is to be applied using a retrospective transition method for each period presented. The Company adopted ASU 2016-18 on January 1, 2018 and concurrently revised its presentation of cash and cash equivalents on the consolidated statement of cash flows. For periods prior to January 1, 2018, the presentation of cash and cash equivalents on the consolidated statement of cash flows has been revised to conform to the current presentation.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the accounting for leases and requires the rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. ASU 2016-02 is effective for interim periods and fiscal years beginning after December 15, 2018, with early adoption permitted. Under ASU 2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients. The Company’s adoption process of ASU 2016-02 is ongoing, including identifying and validating the population of both known and embedded leases, implementing the Company’s acquired lease software and quantifying the impact on its consolidated financial statements. The Company anticipates that the adoption of ASU 2016-02 will result in a material increase in both total assets and total liabilities reflected on its consolidated balance sheets upon the recognition of right-of-use assets and obligations for leases currently classified as operating leases. In addition, the Company is continuing to evaluate and address the impact that the adoption of this standard will have on the Company’s policies, procedures, financial disclosures and control framework. The Company anticipates substantially completing its evaluation of the impact of the adoption of ASU 2016-02 by December 1, 2018.position.

NOTE 32 – IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

2019 Impairment

During the three months ended ~~September 30, 2018,~~March 31, 2019, the Company evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, the Company recognized long-lived asset impairment of ~~$32.4~~$8.9 million during the three months ended ~~September 30, 2018,~~March 31, 2019, which consisted of ~~$31.5~~$8.4 million of property and equipment and ~~$0.9~~$0.5 million of capitalized software costs.

2018 Impairment

During the three months ended March 31, 2018, the Company evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, the Company recognized long-lived asset impairment of $39.8 million during the three months ended March 31, 2018, which consisted of $34.7 million of property and equipment and $5.1 million of capitalized software costs.

~~During the three months ended September 30, 2017,~~NOTE 3 –DIVESTITURES

Scenic Mountain Medical Center

On January 7, 2019, the Company ~~evaluated~~announced that it had entered into a definitive agreement to sell 146-bed Scenic Mountain Medical Center and its affiliated facilities (“Scenic Mountain”), located in Big Spring, TX, for proceeds of $11.7 million. The Company completed the ~~fair value~~sale of ~~hospitals classified as held for sale and other hospitals intended for potential divestiture. In connection with~~ this evaluation, the Company recognized long-lived asset and goodwill impairment of $5.3 million during the three months ended September 30, 2017, which consisted of $3.7 million of property and equipment, $1.0 million of intangibles and $0.6 million of goodwill impairment.

During the three months ended June 30, 2017, the Company evaluated the fair value of hospitals classified as held for sale and other hospitals intended for potential divestiture. In connection with this evaluation, the Company recognized $12.9 million of impairment to property and equipment during the three months ended June 30, 2017.

~~During~~hospital on April 12, 2019. For the three months ended March 31, 2017, management made a decision to classify certain hospitals as held for sale. In connection with this decision, the Company evaluated the estimated relative fair value of the hospitals classified as held for sale in relation to the overall fair value of the hospital operations reporting unit utilizing a September 30, 2016 measurement date, which was the measurement date of the Company’s most recent annual goodwill impairment analysis,2019 and recognized long-lived asset and goodwill impairment of $3.3 million during the three months ended March 31, 2017, which consisted of $1.1 million of property and equipment, $0.8 million of capitalized software costs and $1.4 million of goodwill.

~~NOTE 4 –DIVESTITURES~~

~~McKenzie Regional Hospital~~

~~On September 30,~~ 2018, the Company sold 45-bed McKenzie Regional Hospital and its affiliated facilities (“McKenzie”), located in McKenzie, Tennessee, for proceeds of $1.7 million, which were received in October 2018. For the three months ended September 30, 2018 and 2017, the Company’s operating results included pre-tax ~~losses~~income of ~~$4.2~~$0.4 million and ~~$1.3~~$0.3 million, respectively, related to McKenzie, and pre-tax losses of $6.0 million and $3.2 million for the nine months ended September 30, 2018 and 2017, respectively. In addition to the above, the Company recorded a $0.7 million loss on the sale of McKenzie in the nine months ended September 30, 2018, which includes a write-off of allocated goodwill of $0.4 million.

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

~~Clearview Regional Medical Center~~

On March 31, 2018, the Company sold 77-bed Clearview Regional Medical Center and its affiliated facilities (“Clearview”), located in Monroe, Georgia, for proceeds of $37.4 million, of which $8.0 million was placed in an escrow account subject to resolution of certain outstanding litigation initiated before the Spin-off and for which CHS agreed to indemnify the Company for the resulting liability. For the three months ended September 30, 2018 and 2017, the Company’s operating results included pre-tax losses of $1.7 million and $0.7 million, respectively, related to Clearview, and pre-tax losses of $5.3 million and $2.3 million for the nine months ended September 30, 2018 and 2017, respectively. In addition to the above, the Company recorded a $7.9 million loss on the sale of Clearview in the nine months ended September 30, 2018, which includes a write-off of allocated goodwill of $9.4 million.

~~Vista Medical Center West~~

On March 1, 2018, the Company sold 70-bed Vista Medical Center West and its affiliated facilities (“Vista West”), located in Waukegan, Illinois, for proceeds of $1.2 million. For the three months ended September 30, 2018 and 2017, the Company’s operating results included pre-tax losses of $1.3 million and $0.2 million, respectively, related to Vista West, and pre-tax losses of $2.1 million and $1.5 million for the nine months ended September 30, 2018 and 2017, respectively. In addition to the above, the Company recorded a $0.2 million loss on the sale of Vista West in the nine months ended September 30, 2018.

~~Affinity Medical Center~~

On January 5, 2018, the Company announced plans to close Affinity Medical Center (“Affinity”) located in Massillon, Ohio. Subsequent to January 5, 2018, the Company’s affiliates entered into an agreement with the City of Massillon related to the closure whereby all of the owned real property and a portion of the related tangible assets located at the hospital would be transferred to the City of Massillon in exchange for nominal consideration and the City of Massillon’s assumption of certain ongoing real property lease obligations and equipment lease obligations. Operations ceased on February 11, 2018 and the Company transferred the agreed-upon assets to the City of Massillon on May 16, 2018. For the three months ended September 30, 2018 and 2017, the Company’s operating results included pre-tax losses of $2.2 million and $2.3 million respectively, related to Affinity, and pre-tax losses of $26.6 million and $8.3 million for the nine months ended September 30, 2018 and 2017, respectively. Included in the pre-tax loss for the nine months ended September 30, 2018 was $18.2 million of closure costs related to the closure of Affinity which includes $8.1 million of severance and salary continuation costs, $5.0 million in losses associated with the disposal of assets that have no future value to the Company and $5.1 million of other costs and fees related to termination of contracts and other miscellaneous costs. The Company anticipates that in the remainder of 2018 it will incur costs, beyond those already incurred of approximately $0.5 million to $1.0 million related to the wind down and transfer of assets to other facilities. In addition, beyond 2018, the Company is obligated to maintain patient health records for approximately 19 years with an estimated annual cost of $0.3 million.Scenic Mountain.

NOTE 54 – PROPERTY AND EQUIPMENT

The following table provides a summary of the components of property and equipment (in thousands):

	September 30,			December 31,			March 31,			December 31,
	2018			2017			2019			2018

Property and equipment, at cost:
Land and improvements	$	51,983		$	70,731		$	48,721		$	49,637
Building and improvements		724,753			790,619			704,654			723,345
Equipment and fixtures		496,939			529,150			488,813			498,139
Construction in progress		11,020			14,684			8,101			16,208
Total property and equipment, at cost		1,284,695			1,405,184			1,250,289			1,287,329
Less: Accumulated depreciation and amortization		(718,309	)		(729,905	)		(712,865	)		(727,891	)
Total property and equipment, net	$	566,386		$	675,279		$	537,424		$	559,438

Depreciation expense was ~~$12.4~~$10.7 million and ~~$14.6~~$13.0 million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $37.6 million and $45.2 million for the nine months ended September 30, 2018 and 2017,~~ respectively. See Note 65 — Goodwill and Intangible Assets for information on amortization expense ~~related to leasehold improvements and~~recorded for property and equipment held under ~~capital~~finance lease obligations. The total amount of ROU assets held under ~~capital~~finance lease obligations, at cost, was ~~$29.2~~$29.4 million and $29.3 million at ~~both September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018, respectively. The total amount of ROU assets held under ~~capital~~finance lease obligations, net of accumulated amortization was ~~$24.2~~$23.4 million and ~~$25.6~~$23.8 million at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

20Purchases of property and equipment accrued in accounts payable were $2.8 million and $4.9 million as of March 31, 2019 and December 31, 2018, respectively.

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

~~Purchases of property and equipment accrued in accounts payable were $3.0 million and $6.8 million as of September 30, 2018 and December 31, 2017, respectively.~~

NOTE 65 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table provides a summary of changes in goodwill (in thousands):

	Nine Months Ended			Three Months Ended
	September 30, 2018			March 31, 2019

Balance at beginning of period	$	409,229		$	401,073
Acquisitions		77			375
Divestitures		(9,826	)
Reclasses from held for sale		1,593
Reclass to held for sale					(3,300	)
Balance at end of period	$	401,073		$	398,148

Goodwill related to the Company’s hospital operations reporting unit was ~~$367.7~~$364.8 million and ~~$375.9~~$367.8 million as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. Goodwill related to the ~~Company’s~~ hospital management advisory and healthcare consulting services reporting unit was $33.3 million at both ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. Total accumulated goodwill impairment losses were $126.9 million for both March 31, 2019 and December 31, 2018.

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

Intangible Assets

The following table provides a summary of the components of intangible assets (in thousands):

	September 30,			December 31,			March 31,			December 31,
	2018			2017			2019			2018

Finite-lived intangible assets:
Capitalized software costs:
Cost	$	144,571		$	159,449		$	144,071		$	145,795
Accumulated amortization		(109,322	)		(111,661	)		(111,470	)		(111,658	)
Capitalized software costs, net		35,249			47,788			32,601			34,137
Physician guarantee contracts:
Cost		5,431			7,489			5,654			5,008
Accumulated amortization		(3,147	)		(4,290	)		(3,055	)		(2,679	)
Physician guarantee contracts, net		2,284			3,199			2,599			2,329
Other finite-lived intangible assets:
Cost		43,221			43,376			43,222			43,221
Accumulated amortization		(36,013	)		(34,668	)		(36,978	)		(36,512	)
Other finite-lived intangible assets, net		7,208			8,708			6,244			6,709
Total finite-lived intangible assets
Cost		193,223			210,314			192,947			194,024
Accumulated amortization		(148,482	)		(150,618	)		(151,503	)		(150,849	)
Total finite-lived intangible assets, net	$	44,741		$	59,696		$	41,444		$	43,175

Indefinite-lived intangible assets:
Tradenames	$	4,000		$	4,000		$	4,000		$	4,000
Licenses and other indefinite-lived intangible assets		1,125			1,154			1,133			1,114
Total indefinite-lived intangible assets	$	5,125		$	5,154		$	5,133		$	5,114

Total intangible assets:
Cost	$	198,348		$	215,468		$	198,080		$	199,138
Accumulated amortization		(148,482	)		(150,618	)		(151,503	)		(150,849	)
Total intangible assets, net	$	49,866		$	64,850		$	46,577		$	48,289

As of ~~September 30, 2018,~~March 31, 2019, the Company had ~~$0.9~~$0.1 million of capitalized software costs that are currently in the development stage. Amortization of these costs will begin once the software projects are complete and ready for their intended use.

~~Amortization Expense~~

~~The following table provides a summary of the components of amortization expense (in thousands):~~

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

Amortization of finite-lived intangible assets:

Capitalized software costs

$
2,416

$
3,889

$
8,515

$
12,428

Physician guarantee contracts

497

416

1,942

1,572

Other finite-lived intangible assets

508

920

1,522

2,046

Total amortization expense related to finite-lived intangible assets

3,421

5,225

11,979

16,046

Amortization of leasehold improvements and property and equipment assets held under capital lease obligations

792

886

2,468

2,225

Total amortization expense

$
4,213

$
6,111

$
14,447

$
18,271

2218

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Amortization Expense

The following table provides a summary of the components of amortization expense (in thousands):

	Three Months Ended March 31,
	2019		2018

Amortization of finite-lived intangible assets:
Capitalized software costs	$	2,205	$	3,324
Physician guarantee contracts		509		529
Other finite-lived intangible assets		474		507
Total amortization expense related to finite-lived intangible assets		3,188		4,360
Amortization of leasehold improvements and property and equipment assets held under finance lease obligations		786		893
Total amortization expense	$	3,974	$	5,253

As of ~~September 30, 2018,~~March 31, 2019, the weighted-average remaining amortization period of the Company’s intangible assets subject to amortization, except for capitalized software costs and physician guarantee contracts, was approximately ~~3.8~~3.3 years.

NOTE 76 – LONG-TERM DEBT

The following table provides a summary of the components of long-term debt (in thousands):

	September 30,			December 31,			March 31,			December 31,
	2018			2017			2019			2018

Senior Credit Facility:
Revolving Credit Facility, maturing 2021	$	—		$	—		$	—		$	—
Term Loan Facility, maturing 2022		800,696			831,158			789,380			790,751
ABL Credit Facility, maturing 2021		—			—			16,000			14,000
Senior Notes, maturing 2023		400,000			400,000			400,000			400,000
Unamortized debt issuance costs and discounts		(37,953	)		(42,934	)		(33,376	)		(35,537	)
Capital lease obligations		23,607			24,411
Finance lease obligations								23,090			23,386
Other debt		878			1,255			948			874
Total debt		1,187,228			1,213,890			1,196,042			1,193,474
Less: Current maturities of long-term debt		(1,544	)		(1,855	)		(1,721	)		(1,697	)
Total long-term debt	$	1,185,684		$	1,212,035		$	1,194,321		$	1,191,777

Senior Credit Facility

In connection with the Spin-off, on April 29, 2016, the Company entered into a credit agreement (the “CS Agreement”), among the Company, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent. On April 11, 2017, the Company executed an agreement with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit Facility (the “CS Amendment”), as described below. On March 14, 2018, the Company executed a second agreement with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit Facility (the “CS Second Amendment”), as described below.

The CS Agreement initially provided for an $880 million senior secured term loan facility (the “Term Loan Facility”) and a $100 million senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). The Term Loan Facility was issued at a discount of $17.6 million, or 98% of par value, and has a maturity date of April 29, 2022, subject to customary acceleration events and repayment, extension or refinancing. The Revolving Credit Facility has a maturity date of April 29, 2021, subject to certain customary acceleration events and repayment, extension or refinancing. The CS Amendment reduced the Revolving Credit Facility’s capacity from $100 million to $87.5 million until December 31, 2017, at which time the capacity decreased to $75.0 ~~million through maturity.~~million. The CS Second Amendment further reduced the Revolving Credit Facility’s capacity to $62.5 million through maturity, effective with the execution of the amendment on March 14, 2018.

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Amendment with its Senior Credit Facility lenders to amend the calculation of the Secured Net Leverage Ratio beginning July 1, 2017 through maturity, among other provisions. In addition, the CS Amendment raised the minimum Secured Net Leverage Ratio required for the Company to remain in compliance for certain periods, and also changed the calculation of compliance for specified periods. The CS Second Amendment, which was executed on March 14, 2018, ~~further~~ amended the Secured Net Leverage Ratio for the period July 1, 2017 through maturity. As of ~~September 30, 2018,~~March 31, 2019, the Company had a Secured Net Leverage Ratio of ~~4.15~~4.45 to 1.00 implying additional borrowing capacity of ~~$167.0~~$103.1 million as of ~~September 30, 2018.~~March 31, 2019.

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

After giving effect to the CS Amendment and the CS Second Amendment, the maximum Secured Net Leverage Ratio permitted under the CS Agreement, as determined based on 12 month trailing Consolidated EBITDA and as defined in the CS Agreement follows:

		Maximum
		Secured Net
Period		Leverage Ratio

Period from January 1, 2017 to June 30, 2017		4.50 to 1.00
Period from July 1, 2017 to June 30, 2018		4.75 to 1.00
Period from July 1, 2018 to December 31, 2019		5.00 to 1.00
Period from January 1, 2020 and thereafter		4.50 to 1.00

In addition to amending the calculation of the Secured Net Leverage Ratio and the Maximum Secured Net Leverage Ratio, the CS Amendment and the CS Second Amendment also affected other terms of the CS Agreement as follows:

Through April 29, 2022, the Company is required to use asset sales proceeds to make mandatory redemptions under the Term Loan Facility.

Through December 31, 2018, the Company ~~may~~could request to exercise Incremental Term Loan Commitments, as defined in the CS Agreement, only if the Secured Net Leverage Ratio, adjusted for the requested Incremental Term Loan borrowing, iswas below 3.35 to 1.00. After December 31, 2018, the Company may request to exercise Incremental Term Loan Commitments for the greater of $100 million or an amount which would produce a Secured Net Leverage Ratio of 3.35 to 1.00.

Through December 31, 2018, the Company iswas allowed to incur Permitted Additional Debt, as defined in the CS Agreement, only if the Total Leverage Ratio, adjusted for the Permitted Additional Debt, iswas below 4.50 to 1.00. After December 31, 2018, the Company may incur Permitted Additional Debt so long as the Total Leverage Ratio, adjusted for the Permitted Additional Debt, is below 5.50 to 1.00.

Prior to the CS Amendment, interest under the Term Loan Facility accrued, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 5.75%, or the alternate base rate plus 4.75%. Following the CS Amendment, interest under the Term Loan Facility accrues, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 6.75%, or the alternate base rate plus 5.75%. The effective interest rate on the Term Loan Facility was ~~9.29%~~9.72% as of ~~September 30, 2018.~~March 31, 2019. Interest on outstanding borrowings under the Revolving Credit Facility accrues, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 0% plus 2.75%, or the alternate base rate plus 1.75%, and remains unchanged under the CS Amendment and the CS Second Amendment.

Borrowings from the Revolving Credit Facility are used for working capital and general corporate purposes. As of ~~September 30, 2018,~~March 31, 2019, the Company had no borrowings outstanding ~~under~~on the Revolving Credit Facility and had ~~$13.7~~$14.2 million of letters of credit outstanding that were primarily related to the self-insured retention levels of professional and general liability and workers’ compensation liability insurance as security for the payment of claims. As of ~~September 30, 2018,~~March 31, 2019, the Company had borrowing capacity under its Revolving Credit Facility of ~~$48.8~~$48.3 million.

ABL Credit Facility

In connection with the Spin-off, on April 29, 2016, the Company entered into an ABL Credit Agreement (the “UBS Agreement,” and together with the CS Agreement, collectively, the “Credit Agreements”), among the Company, the lenders party thereto and UBS AG, Stamford Branch (“UBS”), as administrative agent and collateral agent. On April 11, 2017, we executed an amendment to the UBS Agreement with its lender party thereto, which aligned the provisions of the UBS Agreement with the CS Amendment. The UBS Agreement provides for a $125 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”). The available borrowings from the ABL Credit Facility, which are based on eligible patient accounts receivable, are used for working capital and

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

general corporate purposes. As of ~~September 30, 2018,~~March 31, 2019, the Company had no$16.0 million of borrowings outstanding on the ABL Credit Facility and borrowing capacity of ~~$120.3~~$109.0 million.

The ABL Credit Facility has a maturity date of April 29, 2021, subject to customary acceleration events and repayment, extension or refinancing. Interest on outstanding borrowings under the ABL Credit Facility accrues, at the option of the Company, at a base rate or LIBOR, subject to statutory reserves and a floor of 0%, except that all swingline borrowings will accrue interest based on the base rate, plus an applicable margin determined by the average excess availability under the ABL Credit Facility for the fiscal quarter immediately

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

preceding the date of determination. The applicable margin ranges from 1.75% to 2.25% for LIBOR advances and from 0.75% to 1.25% for base rate advances.

The ABL Credit Facility has a “Covenant Trigger Event” definition that requires the Company to maintain excess availability under the ABL Credit Facility equal to or greater than the greater of (i) $12.5 million and (ii) 10% of the aggregate commitments under the ABL Credit Facility. If a Covenant Trigger Event occurs, then the Company is required to maintain a minimum Consolidated Fixed Charge Ratio of 1.10 to 1.00 until such time that a Covenant Trigger Event is no longer continuing. In addition, if excess availability under the ABL Credit Facility were to fall below the greater of (i) 12.5% of the aggregate commitments under the ABL Credit Facility and (ii) $15.0 million, then a “Cash Dominion Event” would be triggered upon which the lenders could assume control of the Company’s cash.

Credit Agreement Covenants

In addition to the specific covenants described above, the Credit Agreements contain customary negative covenants which limit the Company’s ability to, among other things, incur additional indebtedness, create liens, make investments, transfer assets, merge or acquire assets, and make restricted payments, including dividends, distributions and specified payments on other indebtedness. They include customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary Employee Retirement Income Security Act (“ERISA”) events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreements also contain customary affirmative covenants and representations and warranties.

Senior Notes

On April 22, 2016, ~~the Company~~QHC issued $400 million aggregate principal amount of 11.625% Senior Notes due 2023, pursuant to the Indenture. The Senior Notes were issued at a discount of $6.9 million, or 1.734%, in a private placement and are senior unsecured obligations of the Company guaranteed on a senior basis by certain of the Company’s subsidiaries (the “Guarantors”). The Senior Notes mature on April 15, 2023 and bear interest at a rate of 11.625% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2016. Interest on the Senior Notes accrues from the date of original issuance and is calculated on the basis of a 360-day year comprised of twelve 30-day months. The effective interest rate on the Senior Notes was 12.49% as of ~~September 30, 2018.~~March 31, 2019.

The Indenture contains covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur certain liens, sell assets and subsidiary stock, transfer all or substantially all of its assets or enter into merger or consolidation transactions.

On May 17, 2017, the Company exchanged the 11.625% Senior Notes due 2023 (the “Initial Notes”) in the aggregate principal amount of $400 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 11.625% Senior Notes due 2023 (the “Exchange Notes”), which have been registered under the Securities Act. The Initial Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Initial Notes.

2521

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

On and after April 15, 2019, the Company is entitled, at its option, to redeem all or a portion of the Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices specified in the table below, plus accrued and unpaid interest, if any, to the redemption date. The redemption prices are expressed as a percentage of the principal amount on the redemption date. Holders of record on the relevant record date have the right to receive interest due on the relevant interest payment date. In addition, prior to April 15, 2019, the Company ~~may redeem~~could have redeemed some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium, as set forth in the Indenture. The Company iswas entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes until April 15, 2019 with the net proceeds from certain equity offerings at the redemption price set forth in the Indenture.

The following table provides a summary of the redemption ~~dates~~periods and prices related to the Senior Notes:

	Redemption
Period	Prices

Period from April 15, 2019 to April 14, 2020		108.719	%
Period from April 15, 2020 to April 14, 2021		105.813	%
Period from April 15, 2021 to April 14, 2022		102.906	%
Period from April 15, 2022 to April 14, 2023		100.000	%

Debt Issuance Costs and Discounts

The following table provides a summary of unamortized debt issuance costs and discounts (in thousands):

	September 30,			December 31,			March 31,			December 31,
	2018			2017			2019			2018

Debt issuance costs	$	34,533		$	32,265		$	34,533		$	34,533
Debt discounts		24,536			24,536			24,536			24,536
Total debt issuance costs and discounts at origination		59,069			56,801			59,069			59,069
Less: Amortization of debt issuance costs and discounts		(21,116	)		(13,867	)		(25,693	)		(23,532	)
Total unamortized debt issuance costs and discounts	$	37,953		$	42,934		$	33,376		$	35,537

~~Capital~~Finance Lease Obligations and Other Debt

The Company’s debt arising from ~~capital~~finance lease obligations primarily relates to its corporate office in Brentwood, Tennessee. As of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, this ~~capital~~finance lease obligation was ~~$17.4~~$16.9 million and ~~$17.9~~$17.2 million, respectively. The remainder of the Company’s ~~capital~~finance lease obligations relate to property and equipment at its hospitals and ~~QHR.~~corporate office. Other debt consists of physician loans and miscellaneous notes payable to banks.

Debt Maturities

The following table provides a summary of debt maturities for the next five years and thereafter (in thousands):

	September 30, 2018		March 31, 2019

Remainder of 2018	$	403
2019		1,549
Remainder of 2019			$	1,312
2020		1,621		1,720
2021		1,639		17,713
2022		802,096		790,800
2023				401,327
Thereafter		417,873		16,546
Total debt, excluding unamortized debt issuance costs and discounts	$	1,225,181	$	1,229,418

2622

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Interest Expense, Net

The following table provides a summary of the components of interest expense, net (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended March 31,
	2018		2017			2018			2017			2019			2018

Senior Credit Facility:
Revolving Credit Facility	$	63	$	98		$	205		$	429		$	60		$	78
Term Loan Facility		18,121		17,512			53,174			48,795			18,332			17,400
ABL Credit Facility		276		638	��		1,115			1,507			386			328
Senior Notes		11,626		11,631			34,865			34,886			11,626			11,613
Amortization of debt issuance costs and discounts		2,079		2,067			7,249			6,271			2,161			2,106
All other interest expense (income), net		285		270			(1,301	)		(1,684	)		(299	)		(594	)
Total interest expense, net	$	32,450	$	32,216		$	95,307		$	90,204		$	32,266		$	30,931

NOTE 7 – LEASES

The Company has operating and finance leases for its corporate office, certain of its hospitals, medical office buildings, medical equipment and office equipment.

The following table provides a summary of the components of lease costs and rent (in thousands):

	Three Months Ended
	March 31, 2019

Operating lease costs:
Operating lease cost	$	9,076
Variable lease cost		605
Short-term rent expense		1,850
Total operating lease costs	$	11,531

Finance lease costs:
Amortization of right-of-use assets	$	389
Interest on lease liabilities		378
Total finance lease costs	$	767

The following table provides supplemental balance sheet information related to finance leases (in thousands):

	Balance Sheet Classification	March 31, 2019

Finance Leases:
Finance lease ROU assets	Property and equipment	$	29,358
Accumulated amortization	Accumulated depreciation and amortization		5,969
Current finance lease liabilities	Current maturities of long-term debt		1,280
Long-term finance lease liabilities	Long-term debt		21,810

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The following table provides supplemental cash flow information related to leases (in thousands):

	Three Months Ended
	March 31, 2019

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	9,106
Operating cash flows from finance leases		332
Financing cash flows from finance leases		375

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	5,268
Finance leases		79

The following table provides the weighted-average lease terms and discount rates used for the Company’s operating and finance leases:

	March 31, 2019

Weighted-average remaining lease term (years):
Operating leases		7.9
Finance leases		5.1

Weighted-average discount rate:
Operating leases		10.2	%
Finance leases		6.3	%

The following table provides a summary of lease liability maturities for the next five years and thereafter (in thousands):

	Operating			Finance
	Leases			Leases

Remainder of 2019	$	25,720		$	1,932
2020		30,905			2,610
2021		19,989			2,647
2022		12,735			2,344
2023		7,527			6,974
Thereafter		25,167			13,715
Total lease payments		122,043			30,222
Less: Imputed interest		(28,695	)		(7,132	)
Total lease obligations		93,348			23,090
Less: Lease obligations held-for-sale		(2,991	)		—
Total lease obligations excluding held-for-sale		90,357			23,090
Less: Current portion		(24,670	)		(1,280	)
Total Long-term lease obligations excluding held-for-sale	$	65,687		$	21,810

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

As previously disclosed in the Company’s 2018 Annual Report on Form 10-K, which followed the lease accounting standard prior to the adoption of ASC Topic 842, future commitments related to non-cancellable operating and capital leases for each for the next five years and thereafter as of December 31, 2018 were as follows (in thousands):

	Operating		Finance
	Leases⁽¹⁾		Leases

2019	$	34,885	$	2,549
2020		29,609		2,587
2021		20,098		2,625
2022		12,932		2,328
2023		7,588		6,974
Thereafter		26,469		13,716
Total minimum future payments obligations	$	131,581		30,779
Less: Imputed interest				(7,393	)
Total capital lease obligations				23,386
Less: Current portion of capital lease obligations				(1,304	)
Total long-term capital lease obligations			$	22,082

(1)

Minimum lease payment obligations have not been reduced by minimum sublease rentals due in the future of $0.8 million.

NOTE 8 – OTHER LONG-TERM ASSETS AND OTHER LONG-TERM LIABILITIES

The following table provides a summary of the components of other long-term assets (in thousands):

	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018

Receivable for professional and general liability insurance reserves indemnified by CHS	$	31,903	$	44,377	$	28,430	$	34,535
Assets of deferred compensation plan						15,650		14,980
Receivable for workers' compensation liability insurance reserves indemnified by CHS		11,734		14,545		11,908		12,118
Nonqualified Deferred Compensation Plan Assets		18,432		23,052
Restricted cash		8,000		—
Other miscellaneous long-term assets		10,925		13,633		12,864		12,673
Total other long-term assets	$	80,994	$	95,607	$	68,852	$	74,306

The following table provides a summary of the components of other long-term liabilities (in thousands):

	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018

Professional and general liability insurance reserves	$	78,612	$	76,993	$	80,729	$	82,828
Workers' compensation liability insurance reserves		17,879		18,558		16,520		16,819
Benefit plan liabilities		28,639		36,103		23,617		22,712
Deferred rent		2,770		4,268
Other miscellaneous long-term liabilities		1,925		2,032		2,906		4,140
Total other long-term liabilities	$	129,825	$	137,954	$	123,772	$	126,499

See Note 17 — Commitments and Contingencies for additional information about the Company’s insurance ~~reserves.~~reserves and Note 15 — Benefit Plans for additional information about the Company’s benefit plan liabilities.

NOTE 9 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company’s cash and cash equivalents, patient accounts receivable, amounts due from and due to third-party payors, restricted cash and accounts payable approximate their fair values due to the short-term maturity of these financial instruments.

27The Company recorded impairment related to long-lived assets and goodwill during the three months ended March 31, 2019 and 2018. See Note 2 — Impairment of Long-Lived Assets and Goodwill for additional information on these impairments. The assessment of fair value was based on Level 3 inputs, as the valuation methodologies used to determine impairment were based on internal

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

projections and unobservable inputs. The portion of the impairment related to hospital assets held for sale was determined based on Level 2 inputs, as the valuation methodologies used to determine impairment considered letters of intent received on these hospitals.

The following table provides a summary of the carrying amounts and estimated fair values of the Company’s long-term debt (in thousands):

	September 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Carrying		Estimated		Carrying		Estimated		Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value		Amount		Fair Value

Revolving Credit Facility	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Term Loan Facility		800,696		813,211		831,158		838,954		789,380		778,526		790,751		784,821
ABL Credit Facility		—		—		—		—		16,000		16,000		14,000		14,000
Senior Notes		400,000		401,088		400,000		393,396		400,000		361,132		400,000		382,984
Other debt		24,485		24,485		25,666		25,666		24,038		24,038		24,260		24,260
Total debt, excluding unamortized debt issuance costs and discounts	$	1,225,181	$	1,238,784	$	1,256,824	$	1,258,016	$	1,229,418	$	1,179,696	$	1,229,011	$	1,206,065

The Company considers its long-term debt instruments to be measured based on Level 2 inputs. Information about the valuation methodologies used in the determination of the fair values for the Company’s long-term debt instruments follows:

Term Loan Facility. The estimated fair value is based on publicly available trading activity and supported with information from the Company’s lending institutions regarding relevant pricing for trading activity.

Senior Notes. The estimated fair value is based on the closing market price for these notes.

All other debt. The carrying values of the Company’s other debt instruments, including the Revolving Credit Facility, ABL Credit Facility, ~~capital~~finance lease obligations, physician loans and miscellaneous notes payable to banks, approximate their estimated fair values due to the nature of these obligations.

NOTE 10 – EQUITY

Preferred Stock

In connection with the Spin-off, the Company authorized 100,000,000 shares of preferred stock, par value of $0.0001 per share. No shares of preferred stock have been issued as of ~~September 30, 2018.~~March 31, 2019. The Board has the discretion, subject to limitations prescribed by Delaware law and by the Company’s amended and restated certificate of incorporation, to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock, when and if issued.

Common Stock

In connection with the Spin-off, the Company authorized 300,000,000 shares of common stock, par value of $0.0001 per share, and issued 28,412,054 shares of common stock on April 29, 2016 to CHS stockholders of record on the Record Date, or April 22, 2016. The Company’s common stock began trading on the NYSE on May 2, 2016 under the ticker symbol “QHC.” As of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Company had ~~31,527,885~~31,294,669 shares and ~~30,294,895~~31,521,398 shares, respectively, of common stock issued and outstanding.

Holders of the Company’s common stock are entitled to one vote for each share held of record on all matters for which stockholders may vote. Holders of the Company’s common stock do not have cumulative voting rights in the election of directors. There are no preemptive rights, conversion, redemption or sinking fund provisions applicable to the common stock. In the event of liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in the assets available for distribution. Delaware law prohibits the Company from paying any dividends unless it has capital surplus or net profits available for this purpose. In addition, the Company’s Credit Agreements and the Indenture impose restrictions on its ability to pay dividends.

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Additional Paid-in Capital

In connection with the Spin-off, the Company issued common stock, as described above, to CHS stockholders. In addition, pursuant to the Separation and Distribution Agreement, CHS contributed capital ~~in excess of par value of common stock~~ of $530.6 million, in lieu of a cash settlement payment, related to the remaining intercompany indebtedness with CHS and the ~~Parent’s~~ equity attributable to CHS. ~~See Note 1 — Description of the Business and Spin-off for a summary of the major transactions to effect the Spin-off.~~

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

Accumulated Deficit

Accumulated deficit of the Company, as shown in the consolidated balance sheets as of March 31, 2019 and December 31, 2018, represents the Company’s cumulative net losses since the ~~Spin-off date.~~Spin-off.

NOTE 11 – INCOME TAXES

The Company and its subsidiaries are subject to U.S. federal income tax and income tax of multiple state and local jurisdictions. The Company provides for income taxes based on the enacted tax laws and rates in jurisdictions in which it conducts its operations.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was ~~enacted, significantly decreasing~~signed into law, resulting in significant changes from previous law. The most notable change was a reduction of the U.S. ~~federal~~corporate income tax rate from 35% to 21% for corporations effective January 1, 2018. As a result, the Company remeasured its deferred tax assets, liabilities and related valuation allowances as of the date of enactment. This remeasurement yielded a one-time benefit of approximately $24.0 million due to the lower income tax rate in the fourth quarter of 2017. Given the substantial changes associated with the Tax Act, the estimated financial impacts for 2017 are provisional and subject to further interpretation and clarification of the Tax Act during 2018.

The Tax Act also provides for ~~acceleration~~other changes which include limitations on the deductibility of ~~depreciation for certain assets placed into service after September 27, 2017, as well as~~interest expense, an increased limitation on the deductibility of executive compensation, and acceleration of depreciation for certain assets placed in service after September 27, 2017. As permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, the Company recorded provisional estimates in its 2017 financial statements for the effects of the Tax Act. The Company recorded a total income tax benefit of $24.0 million as of December 31, 2017 for the estimated impact of the Tax Act using current available information and technical guidance on the interpretations of the Tax Act. The total tax benefit of $24.0 million was comprised of a tax benefit of $10.9 million from the reduction of the Company’s net deferred tax liabilities measured at the new 21% tax rate, and a $13.1 million tax benefit for the reduction in valuation allowance attributable to the net realizability of deferred tax assets. The Company completed its analysis of the Tax Act during 2018 and has included its effects in the consolidated financial statements. Adjustments made during 2018 for the finalization of our analysis were not material to the Company’s consolidated financial statements.

One key aspect of the Tax Act that impacts the Company is the limitation on the deductibility of interest expense. The Tax Act provides that net interest expense is limited to 30% of Adjusted Taxable Income (“ATI”). ATI is defined as taxable income computed without regard to deductions for (1) business interest expense and ~~new rules surrounding meals~~income, (2) net operating losses allowable under Internal Revenue Code Section 172, and ~~entertainment expense and fines and penalties.~~(3) depreciation, amortization, or depletion (for years beginning before January 1, 2022). The Company will continue to analyze additional information and guidance related to the Tax Act as supplemental legislation, regulatory federal or state guidance, or evolving technical interpretations become available. The Company will continue to refine the provisional amounts within the measurement period provided by Staff Accounting Bulletin No. 118. The Company expects to complete its analysis by the endhas calculated an estimated excess interest expense of ~~2018.~~approximately $91.2 million for 2018 which may be carried forward for an indefinite number of years.

The Company’s effective tax rates were ~~2.0% and 1.9%~~(0.4)% for both the three months ended ~~September 30, 2018~~March 31, 2019 and 2017, respectively, and 0.6% and 0.1% for the nine months ended September 30, 2018 and 2017, respectively. The increase in the Company’s effective tax rate for the three and nine months ended September 30, 2018, when compared to the three and nine months ended September 30, 2017, was primarily due to the impairment or disposal of certain indefinite-lived assets and the change in expected realization of deferred tax assets under the new law established by the Tax Act.

2018. The Company’s deferred income tax liabilities, net were ~~$6.7~~$6.9 million as of ~~September 30, 2018,~~March 31, 2019, compared to ~~$7.8~~$6.7 million as of December 31, ~~2017,~~2018, a ~~$1.1~~$0.2 million ~~decrease.~~increase. This ~~decrease~~increase was a result of an increase in deferred tax liabilities during the period due to tax deductible amortization on indefinite-lived intangibles including goodwill and the reclassification of refundable alternative minimum tax (“AMT”) ~~credit, which was offset by a decrease in deferred tax liabilities due to the impairment and disposal of certain indefinite-lived intangible assets during the period.~~credit.

In the ordinary course of business, there is inherent uncertainty in quantifying the Company’s income tax positions. The Company assesses its income tax positions and records income tax benefits for all tax years subject to examination based on management’s evaluation of the facts, circumstances, and information available at the reporting date. The Company is not aware of any unrecognized income tax benefits; therefore, it has not recorded any such amounts for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

2927

QUORUM HEALTH CORPORATION

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(Continued)

NOTE 12 – EARNINGS PER SHARE

The following table provides a summary of the computation of basic and diluted earnings (loss) per share (in thousands, except earnings per share and shares):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018

Numerator:
Net income (loss)	$	(53,886	)	$	(28,554	)	$	(178,314	)	$	(86,334	)	$	(38,606	)	$	(98,487	)
Less: Net income (loss) attributable to noncontrolling interests		54			637			1,200			1,048			400			481
Net income (loss) attributable to Quorum Health Corporation	$	(53,940	)	$	(29,191	)	$	(179,514	)	$	(87,382	)	$	(39,006	)	$	(98,968	)
Denominator:
Weighted-average shares outstanding - basic and diluted		29,215,823			28,245,833			28,891,363			28,068,085			29,438,015			28,454,336

Earnings (loss) per share attributable to Quorum Health Corporation stockholders - basic and diluted	$	(1.85	)	$	(1.03	)	$	(6.21	)	$	(3.11	)	$	(1.33	)	$	(3.48	)

Due to the net ~~loss~~losses attributable to Quorum Health Corporation in the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ no incremental shares ~~are~~were included in diluted earnings (loss) per share for these periods because the net effect of the ~~incremental~~ shares would be anti-dilutive.

NOTE 13 – SEGMENTS

The ~~Company operates~~Company’s operations consists of two distinct operating segments, its hospital operations business and its hospital management advisory and healthcare consulting services business. The hospital operations segment includes the operations of the Company’s owned and leased hospitals and their affiliated outpatient ~~facilities.~~facilities that provide inpatient and outpatient healthcare services. The hospital management advisory and healthcare consulting services segment includes the operations of QHR. Both segments meet the criteria to be classified as a separate reportable ~~segments.~~segment. The financial information for the Company’s corporate functions has been reported in the ~~table~~tables below as part of the all other reportable segment.

The following tables provide a summary of financial information related to the Company’s reportable segments (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018

Net operating revenues:
Hospital operations	$	442,802		$	478,815		$	1,363,628		$	1,494,351		$	426,153		$	467,166
QHR operations		16,937			19,494			55,145			60,385			15,057			19,588
All other		768			993			1,186			2,352			1,595			66
Total net operating revenues	$	460,507		$	499,302		$	1,419,959		$	1,557,088		$	442,805		$	486,820

Adjusted EBITDA:
Hospital operations	$	39,137		$	39,227		$	109,455		$	118,229		$	28,333		$	26,283
QHR operations		4,715			5,391			13,518			15,848			4,079			4,352
All other		(9,710	)		(12,350	)		(34,088	)		(41,237	)		(11,781	)		(12,215	)
Total Adjusted EBITDA	$	34,142		$	32,268		$	88,885		$	92,840		$	20,631		$	18,420

	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018

Assets:
Hospital operations	$	1,481,792	$	1,687,576	$	1,541,822	$	1,453,693
QHR operations		58,082		61,752		54,472		55,823
All other		73,255		79,513		51,053		64,578
Total assets	$	1,613,129	$	1,828,841	$	1,647,347	$	1,574,094

3028

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(Continued)

The following table provides a reconciliation of Adjusted EBITDA to net income (loss), ~~its~~the most directly comparable U.S. GAAP financial measure (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018

Adjusted EBITDA	$	34,142		$	32,268		$	88,885		$	92,840
Net income (loss)													$	(38,606	)	$	(98,487	)
Interest expense, net		(32,450	)		(32,216	)		(95,307	)		(90,204	)		32,266			30,931
(Provision for) benefit from income taxes		1,074			542			1,162			86
Provision for (benefit from) income taxes														155			366
Depreciation and amortization		(16,612	)		(20,735	)		(52,015	)		(63,441	)		14,639			18,261
EBITDA														8,454			(48,929	)
Legal, professional and settlement costs		(1,519	)		(2,050	)		(10,349	)		(6,519	)		685			3,413
Impairment of long-lived assets and goodwill		(32,438	)		(5,261	)		(72,198	)		(21,461	)		8,860			39,760
Loss (gain) on sale of hospitals, net		(805	)		(79	)		(8,927	)		5,112			—			7,815
Loss on closure of hospitals, net		(1,111	)		—			(18,195	)		—			—			13,746
Transition of transition services agreements		(2,445	)		—			(3,682	)		—			1,142			717
Transaction costs related to the Spin-off		—			(173	)		—			(204	)
Post-spin headcount reductions and executive severance		(1,722	)		(850	)		(7,688	)		(2,543	)		1,490			1,898
Net income (loss)	$	(53,886	)	$	(28,554	)	$	(178,314	)	$	(86,334	)
Adjusted EBITDA													$	20,631		$	18,420

NOTE 14 – STOCK-BASED COMPENSATION

On April 1, 2016, the Company adopted the Quorum Health Corporation 2016 Stock Award Plan (“2016 Stock Award Plan”). The Company filed a Registration Statement on Form S-8 on April 29, 2016 to register 4,700,000 shares of QHC common stock that may be issued under the ~~plan.~~2016 Stock Award Plan. On December 17, 2018, the Company adopted the Quorum Health Corporation 2018 Restricted Stock Plan (the “2018 Stock Plan”) effective December 18, 2018 and subject to stockholder approval. The Company filed a Registration Statement on Form S-8 on December 18, 2018 to register 625,000 shares of QHC common stock that may be issued under the 2018 Stock Plan once stockholder approval for the 2018 Stock Plan is obtained. On February 14, 2019, the Company adopted the Quorum Health Corporation Amended and Restated 2016 Stock Award Plan (the “Amended and Restated 2016 Stock Award Plan”). The Company filed a Registration Statement on Form S-8 on February 14, 2019 to register an additional 3,700,000 shares of QHC common stock that may be issued under the Amended and Restated 2016 Stock Award Plan once stockholder approval for the Amended and Restated 2016 Stock Award Plan is obtained.

As defined in the Separation and Distribution Agreement, ~~pursuant to the Spin-off,~~ QHC and CHS employees who held CHS restricted stock awards on the Record Date received QHC restricted stock awards for the number of whole shares, rounded down, of QHC common stock that they would have received as a shareholder of CHS as if the underlying CHS stock were unrestricted on the Record Date, except, that with respect to a portion of CHS restricted stock awards granted to any QHC employees on March 1, 2016 that were cancelled and forfeited on the Spin-off date. The QHC restricted stock awards received by QHC and CHS employees in connection with the Spin-off vest on the same terms as the CHS restricted stock awards to which they relate, through the continued service by such employees with their respective employer. CHS restricted stock awards were adjusted by increasing the number of shares of CHS stock subject to restricted stock awards by an amount of whole shares, rounded down, necessary to preserve the intrinsic value of such awards at the Spin-off date. QHC did not issue any stock options as part of the distribution of shares to holders of CHS stock ~~options.~~options in connection with the Spin-off.

The following table provides a summary of the activity related to unvested QHC restricted stock awards held by QHC and CHS employees during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 that were distributed in the Spin-off (in shares):

	QHC Awards Distributed in Spin-off

Unvested restricted stock awards at December 31, ~~2017~~2018		~~266,880~~80,350
Vested		(~~136,562~~61,150	)
Forfeited		(~~48,717~~19,200	)
Unvested restricted stock awards at ~~September 30, 2018~~March 31, 2019		~~81,601~~—

3129

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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The following table provides a summary of the activity related to unvested restricted stock awards during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 that were granted to QHC employees subsequent to the Spin-off:

	QHC Awards Granted					QHC Awards Granted
	Subsequent to Spin-off					Subsequent to Spin-off
				Weighted-					Weighted-
				Average					Average
				Grant Date					Grant Date
				Fair Value					Fair Value
	Shares			Per Share		Shares			Per Share

Unvested restricted stock awards at December 31, 2017		1,779,488		$	9.58
Unvested restricted stock awards at December 31, 2018							2,207,117		$	7.04
Granted		1,616,707			6.10		5,000			2.75
Vested		(830,898	)		9.81		(545,870	)		7.21
Forfeited		(335,512	)		9.01		(212,529	)		7.79
Unvested restricted stock awards at September 30, 2018		2,229,785			7.06
Unvested restricted stock awards at March 31, 2019							1,453,718		$	6.85

During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Company granted 512,500 performance-based restricted stock awards to certain of its executive officers. If the performance-based objectives are attained in accordance with the targets set forth in the performance-based restricted stock award agreement, the restrictions on the restricted stock awards will lapse on the second anniversary of the grant date. In addition, the Company granted 939,1675,000 time-based restricted stock awards in which the restrictions will lapse in equal installments on each of the first three anniversaries of the grant date. ~~In addition, the Company granted 165,040 time-based restricted stock awards to its non-employee directors which will lapse on the first anniversary of the grant date.~~

The Company records stock-based compensation expense related to the vesting of QHC restricted stock awards issued to QHC employees on the Spin-off date, CHS restricted stock awards held by QHC employees on the Spin-off date, and restricted stock awards granted by QHC subsequent to the Spin-off. Stock-based compensation expense is included in salaries and benefits expenses in the consolidated statements of income.

The following table provides a summary of stock-based compensation expense for the periods subsequent to the Spin-off (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018

Stock-based compensation resulting from the Spin-off	$	—	$	435	$	372	$	1,799	$	—	$	370
Stock-based compensation related to grants following the Spin-off		2,766		1,939		7,614		5,903		1,770		2,094
Total stock-based compensation expense	$	2,766	$	2,374	$	7,986	$	7,702	$	1,770	$	2,464

Stock-based compensation expense is recognized as a component of salaries and benefits expenses in the consolidated statements of income. As of ~~September 30, 2018,~~March 31, 2019, the Company had unrecognized stock-based compensation expense of ~~$10.6~~$5.9 million related to restricted stock awards.

NOTE 15 – ~~EMPLOYEE~~ BENEFIT PLANS

The Company maintains various benefit plans, including defined contribution plans, deferred compensation plans, a supplemental executive retirement plan and a defined benefit plan ~~and a deferred compensation plan,~~, of which certain of the Company’s subsidiaries are the plan sponsors. The rights and obligations of certain of these plans were transferred from CHS in connection with the Spin-off, pursuant to the Separation and Distribution ~~Agreement.~~Agreement.

Defined Contribution Plans

The Quorum Health Retirement Savings Plan (the “Retirement Savings Plan”) is a defined contribution plan, which was established on January 1, 2016 by CHS in anticipation of the Spin-off. Prior to the Spin-off, the cumulative liability for these benefit costs was recorded in Due to Parent, net. The assets and liabilities under this plan were transferred to QHC in connection with the Spin-off. The Retirement Savings Plan covers the majority of the employees at the Company’s subsidiaries. The Company has other minor defined contribution plans at certain of its hospitals that cover employees under the terms of these individual plans. Total ~~expense (benefit)~~expenses to the Company under all defined contribution plans was ~~$3.8~~$0.4 million and ~~$(4.9)~~less than $0.1 million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $8.1 million and $1.5 million for the nine months ended September 30, 2018 and 2017,~~ respectively. ~~The benefit in the three months ended September 30, 2017 related to a reduction in~~

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~~discretionary employee benefits for the full year.~~ The benefit costs associated with ~~the Retirement Savings Plan~~these defined contribution plans are ~~included in~~recorded as salaries and benefits expenses in the consolidated statements of income.

Deferred Compensation Plans

On August 18, 2016, the Compensation Committee of the Board of Directors adopted the Executive Nonqualified Excess Plan Adoption Agreement (the “Adoption Agreement”) and the Executive Nonqualified Excess Plan Document (the “Plan Document”), that together, the Adoption Agreement names as the QHCCS, LLC Nonqualified Deferred Compensation Plan (the “NQDCP”). The NQDCP is an unfunded, nonqualified deferred compensation plan that provides deferred compensation benefits for a select group of

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management, highly compensated employees and independent contractors of the Company’s wholly-owned subsidiary, QHCCS, LLC, a Delaware limited liability company (“QHCCS”), including the Company’s named executive officers. The NQDCP permits participants to defer a portion of their annual base salary, service bonus and performance-based compensation, as well as up to 100% of their incentive compensation in any calendar year. In addition to participant deferrals, QHCCS, and/or its affiliates may make discretionary credits to participants’ accounts for any year. As of ~~September 30,~~March 31, 2019, the assets and liabilities under this plan were $15.6 million and $16.9 million, respectively. As of December 31, 2018, the assets and liabilities under this plan were ~~$18.4~~$15.0 million and ~~$19.8~~$16.2 million, respectively. ~~As of December 31, 2017, the assets and liabilities under this plan were $23.1 million and $24.3 million, respectively.~~ The assets and liabilities under this plan are included in other long-term assets and other long-term liabilities, respectively, in the consolidated balance ~~sheets.~~sheet.

Supplemental Executive Retirement Plan

On April 1, 2016, the Board adopted the Quorum Health Corporation Supplemental Executive Retirement Plan (the “Original ~~SERP”~~SERP Plan”). Pursuant to the Employee Matters Agreement between the Company and CHS, the Company assumed the liabilities for all obligations under the Original SERP Plan as of April 29, 2016, the Spin-off date, which related to QHC employees, as defined in the Employee Matters Agreement. In addition, as defined by the Employee Matters Agreement, no additional benefits were to accrue under the Original SERP Plan following the Spin-off and no assets were transferred to the Company related to the Original ~~SERP.~~SERP Plan. The accrued benefit liability transferred to the Company for the Original SERP Plan was $6.0 million.

On May 24, 2016, the Board, upon recommendation of the Compensation Committee, approved the Company’s Amended and Restated Supplemental Executive Retirement Plan (the “Amended and Restated SERP”), in order to accrue additional benefits with respect to QHC Employees who otherwise qualify as “Participants” under the Amended and Restated SERP. The Amended and Restated SERP is a noncontributory non-qualified deferred compensation plan under Section 409A of the Internal Revenue Code. The benefit costs under the Amended and Restated SERP were ~~$0.3~~$0.2 million and $0.5 million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $0.9 million and $1.5 million for the nine months ended September 30, 2018 and 2017,~~ respectively, and are included in salaries and benefits expenses in the consolidated statements of income.

The long-term portion of the benefit liability for the Amended and Restated SERP was ~~$5.8~~$3.3 million and ~~$8.7~~$3.1 million as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017, respectively. The current portion of~~2018, respectively, and is included in other long-term liabilities in the ~~benefit liability as of September 30, 2018 was $3.8 million.~~consolidated balance sheets. There was no current portion of the benefit liability as of March 31, 2019 and December 31, ~~2017. The current portion of the benefit liability is included in accrued salaries and benefits and the long-term portion is included in other long-term liabilities in the consolidated balance sheets.~~2018.

Director’s Fees Deferral Plan

On September 16, 2016, the Board adopted the Quorum Health Corporation Director’s Fees Deferral Plan (the “Director’s Plan”). Pursuant to the Director’s Plan, members of the Board may elect to defer and accumulate fees and stock units, including retainer fees and fees for attendance at Board meetings and Board committees. AUnder this plan, a director may elect that all or any specified portion of the director’s fees to be earned during a calendar year be credited to a director’s cash account and/or a director’s stock unit account maintained on the individual director’s behalf in lieu of payment. Payment of amounts credited to a director’s cash account and stock unit account will be made upon a payment commencement event, as defined in the Director’s Plan, in accordance with the payment method elected by ~~the individual~~each director, either in lump sum or in a number of annual installments, not to exceed 15 installments. ~~Eligibility to participate in the~~The Director’s Plan ~~extends to~~covers directors of the Board not employed by the Company or any of its subsidiaries. Pursuant to the Director’s Plan, the Company registered and made available for issuance under the Director’s Plan a maximum of 150,000 shares of QHC common stock.On February 14, 2019, the Board adopted the Quorum Health Corporation Amended and Restated Director’s Fees Deferral Plan to allow directors to defer and accumulate the equity portion of their director compensation to a restricted stock unit account.

Defined Benefit Pension Plan

~~QHC~~The Company provides benefits to employees at one of its hospitals through a defined benefit plan (the “Pension Plan”). The Pension Plan provides benefits to covered individuals satisfying certain age and service requirements. Employer contributions to the Pension Plan are made by the Company in accordance with the minimum funding requirements of ERISA. Benefit costs related to the Pension Plan were $0.1 million for both the three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017, and $0.2 million and $0.3 million for the nine months ended~~

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~~September 30, 2018 and 2017, respectively.~~2018. The Company recognizes the unfunded liability of the Pension Plan in other long-term liabilities in ~~its~~the consolidated balance sheets. Unrecognized gains (losses) and prior service credits (costs) are ~~recognized~~recorded as other comprehensive income (loss). The accrued benefit liability for the Pension Plan was ~~$0.8~~$1.1 million and $1.2 million at ~~both September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018, respectively.

NOTE 16 – RELATED PARTY TRANSACTIONS

CHS was a related party to QHC prior to the Spin-off. The agreements between QHC and CHS as of and subsequent to the Spin-off are described below.

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Agreements with CHS Related to the Spin-off

In connection with the Spin-off and effective as of April 29, 2016, the Company entered into certain agreements with CHS that allocated between the Company and CHS the various assets, employees, liabilities and obligations (including investments, property, employee benefits and tax-related assets and liabilities) that were previously part of CHS. In addition, these agreements govern certain relationships between, and activities of, the Company and CHS for a definitive period of time after the Spin-off, as specified by each individual agreement.

The agreements were as follows:

Separation and Distribution Agreement. This agreement governed the principal actions of both the Company and CHS that needed to be taken in connection with the Spin-off. It also sets forth other agreements that govern certain aspects of the Company’s relationship with CHS following the Spin-off.

Tax Matters Agreement. This agreement governs respective rights, responsibilities and obligations of the Company and CHS after the Spin-off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state and local income taxes, other tax matters and related tax returns.

Employee Matters Agreement. This agreement governs certain compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of both the Company and CHS. It also allocated liabilities and responsibilities relating to employment matters, employee compensation and benefit plans and programs as of the Spin-off date.

In addition to the agreements referenced above, the Company entered into certain transition services agreements and other ancillary agreements with CHS defining agreed upon services to be provided by CHS to certain or all QHC hospitals, as determined by each agreement, commencing on the Spin-off date. The agreements generally have terms of five years.

A summary of the major provisions of the transition services agreements follows:

Shared ~~Services~~Service Centers Transition Services Agreement. This agreement defines services to be provided by CHS related to billing and collections utilizing CHS shared services centers. Services include, but are not limited to, billing and receivables management, statement processing, denials management, cash posting, patient customer service, and credit balance and other account research. In addition, it provides for patient pre-arrival services, including pre-registration, insurance verification, scheduling and charge estimates. Fees are based on a percentage of cash collections each month.

Computer and Data Processing Transition Services Agreement. This agreement defines services to be provided by CHS for information technology infrastructure, support and maintenance. Services include, but are not limited to, operational support for various applications, oversight, maintenance and information technology support services, such as helpdesk, product support, network monitoring, data center operations, service ticket management and vendor relations. Fees are based on both a fixed charge for labor costs, as well as direct charges for all third-party vendor contracts entered into by CHS on QHC’s behalf.

•

Receivables Collection Agreement (“PASI”). This agreement defines services to be provided by CHS’ wholly-owned subsidiary, PASI, which currently serves as a third-party collection agency to QHC related to accounts receivable collections of both active and bad debt accounts of QHC hospitals, including both receivables that existed as of the Spin-off date and those that have occurred since the Spin-off date. Services include, but are not limited to, self-pay collections, insurance follow-up, collection letters and calls, payment arrangements, payment posting, dispute resolution and credit balance research. Fees are based on the type of service and are calculated based on a percentage of recoveries. Effective October 1, 2018, by mutual agreement of both companies, each of the parties’ obligations under this transition services

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~~agreement to the other were terminated. The Company replaced the services provided by CHS with external service providers and internal resources.~~

~~Billing and Collection Agreement (“PPSI”~~). This agreement ~~defines~~defined services to be provided by ~~CHS~~CHS’s wholly-owned subsidiary, PASI, which served as a third-party collection agency to QHC related to accounts receivable collections of both active and bad debt accounts ~~receivable generated by~~of QHC hospitals, including both receivables that existed as of the ~~Company’s affiliated outpatient healthcare facilities.~~Spin-off date and those that have occurred since the Spin-off date. Services ~~include,~~included, but ~~are~~were not limited to, self-pay collections, insurance follow-up, collection letters and calls, payment arrangements, payment posting, dispute resolution and credit balance research. Fees ~~are~~were based on the type of service and are calculated based on a percentage of recoveries. Effective October 1, 2018, by mutual agreement of both companies, each of the parties’ obligations under this transition services agreement to the other were terminated. The Company replaced the services provided by CHS with external service providers and internal resources.

~~Employee Service Center Agreement.~~Billing and Collection Agreement (“PPSI”). This agreement ~~defines~~defined services to be provided by CHS related to ~~payroll processing~~collections of accounts receivable generated by the Company’s affiliated outpatient healthcare facilities. Services included, but were not limited to, self-pay collections, insurance follow-up, collection letters and ~~human resources information systems support.~~calls, payment arrangements, payment posting, dispute resolution and credit balance research. Fees ~~are~~were based on the type of service and were calculated based on a ~~fixed charge per employee headcount per month.~~percentage of recoveries. Effective October 1, 2018, by mutual agreement of both companies, each of the parties’ obligations under this transition services agreement to the other were terminated. The Company replaced the services provided by CHS with external service providers and internal resources.

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•

Employee Service Center Agreement. This agreement defines services to be provided by CHS related to payroll processing and human resources information systems support. Fees are based on a fixed charge per employee headcount per month.

Eligibility Screening Services Agreement. This agreement ~~defines~~defined services to be provided by CHS for financial and program criteria screening related to Medicaid or other program eligibility for pure self-pay patients. Fees ~~are~~were based on a fixed charge for each hospital receiving services. Effective June 24, 2018, per mutual agreement of both companies, the employees responsible for screening patients for program eligibility were transferred to QHC, which terminated the obligations of both parties under this transition services agreement.

The total expenses recorded by the Company under the transition services agreements with CHS were ~~$14.1~~$7.8 million and ~~$15.5~~$15.1 million for the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $43.3 million and $47.7 million for the nine months ended September 30, 2018 and 2017,~~ respectively. ~~The Company is disputing in arbitration, among other issues and actions, certain charges and lack of performance of various obligations under the transition services agreements with CHS.~~

~~See Note 17 — Commitments and Contingencies for additional information on the arbitration.~~

NOTE 17 - COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company is a party to various legal, regulatory and governmental proceedings incidental to its business. Based on current knowledge, management does not believe that loss contingencies arising from pending legal, regulatory and governmental proceedings, including the matters described herein, will have a material adverse effect on the operating results, financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s consolidated results of operations or cash flows for any particular reporting period.

In connection with the Spin-off, CHS agreed to indemnify QHC for certain liabilities relating to outcomes or events occurring prior to the closing of the Spin-off, including (i) certain claims and proceedings known to be outstanding on or prior to the closing date of the Spin-off and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or related to the Company’s healthcare facilities prior to the closing date of the Spin-off, but only to the extent, in the case of clause (ii), that such claims are covered by insurance policies maintained by CHS, including professional and general liability and workers’ compensation liability. In this regard, CHS will continue to be responsible for certain Health Management Associates, Inc. legal matters covered by its contingent value rights agreement that relate to the portion of ~~CHS’~~CHS’s business now held by QHC. Notwithstanding the foregoing, CHS is not indemnifying QHC in respect of any claims or proceedings arising out of, or related to, the business operations of QHR at any time or QHC’s compliance with the Corporate Integrity Agreement (“CIA”) with the United States Department of Health and Human Services Office of the Inspector General (“OIG”). Subsequent to the Spin-off, the OIG entered into an “Assumption of CIA Liability Letter” with the Company reiterating the applicability of the CIA to certain of the Company’s hospitals, although the OIG declined to enter into a separate agreement with the Company.

With respect to all legal, regulatory and governmental proceedings, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the amount of possible loss or range of loss. However, the Company is

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unable to estimate an amount of possible loss or range of loss in some instances based on the significant uncertainties involved in, or the preliminary nature of, certain legal, regulatory and governmental matters.

Commercial Litigation and Other Lawsuits

~~Arbitration with Community Health Systems, Inc.~~ On August 4, 2017, the Company received a demand for arbitration from CHS seeking payment of certain amounts the Company has withheld pursuant to the Shared Services Centers Transition Services Agreement (the “SSC TSA”) and the Computer and Data Processing Transition Services Agreement (the “IT TSA”). The Company contends that the amounts are not payable to CHS and were not properly billed by CHS under the agreements. The matter is pending before the American Arbitration Association. CHS seeks payment of approximately $12.1 million relating to these two transition services agreements. The Company is vigorously contesting the charges as not payable to CHS under the transition services agreements and has made counterclaims that include, among other things, termination of the SSC TSA, a ruling that the IT TSA is terminable at the Company’s option (as described below), and substantial damages the Company believes it has suffered as a result of the transition services agreements and other actions taken by CHS in connection with the Spin-off. Additionally, on March 19, 2018, the Company received notice from CHS that CHS was seeking to terminate, effective September 30, 2018, the SSC TSA and the IT TSA and to impose a September 30, 2018 deadline for completion of the transition services under the SSC TSA and IT TSA, as a result of alleged breaches by the Company of the agreements. The notice from CHS also provided an indication of CHS’s preference to terminate the Receivables Collection Agreement, the Eligibility Screening Services Agreement, and the Billing and Collection Agreement. The Company amended its counterclaims to include allegations that CHS’s attempt to terminate the SSC TSA and IT TSA and to impose a September 30, 2018 deadline for completing the transition of services under those contracts violated the terms of the contracts and was invalid and without effect. The validity and effectiveness of CHS’s attempt to terminate the SSC TSA and IT TSA and to impose a September 30, 2018 deadline was litigated during the course of arbitration proceedings held in late June 2018. After hearing testimony regarding the termination issues, the arbitration panel ruled that each of the SSC TSA and IT TSA will continue in effect according to their original terms through 2021, subject to any agreement by the parties to terminate the SSC TSA and the IT TSA at an earlier time. The panel ordered that, after the date of the ruling, the Company would prospectively pay the amounts invoiced under the TSAs as billed, but deferred ruling on the parties’ economic claims related to the TSAs. The arbitration reconvened October 1, 2018 with QHC presenting the Company’s counter-claims and defenses that certain amounts were not payable to CHS. The arbitration concluded October 9, 2018 and a decision is expected in mid-January 2019.The Company is unable to predict the outcome of this matter; however, it is reasonably possible that the Company may incur a loss in connection with this matter. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

•

~~Zwick Partners LP and Aparna Rao, Individually and On Behalf of All Others Similarly Situated v. Quorum Health Corporation,~~Arbitration with Community Health Systems, Inc.~~, Wayne T. Smith, W. Larry Cash, Thomas D. Miller and Michael J. Culotta~~. On September 9, 2016, a shareholder filed a purported class action in the United States District Court for the Middle District of Tennessee against the Company and certain of its officers. The Amended Complaint, filed on September 13, 2017, purports to be brought on behalf of a class consisting of all persons (other than defendants) who purchased or otherwise acquired securities of the Company between May 2, 2016 and August 10, 2016 and alleges that the Company and certain of its officers violated federal securities laws, including Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, by making alleged false and/or misleading statements and failing to disclose certain information regarding aspects of the Company’s business, operations and compliance policies. On April 17, 2017, Plaintiff filed a Second Amended Complaint adding additional defendants, CHS, Wayne T. Smith and W. Larry Cash. On June 23,4, 2017, the Company ~~filed~~received a ~~motion~~demand for arbitration from CHS seeking payment of certain amounts the Company has withheld pursuant to ~~dismiss, which Plaintiff opposed~~the Shared Service Centers Transition Services Agreement (the “SSC TSA”) and the Computer and Data Processing Transition Services Agreement (the “IT TSA”). CHS sought payment of approximately $12.1 million relating to these two transition services agreements. The Company contested the charges as not payable to CHS under the transition services agreements and made counterclaims that included, among other things, termination of the SSC TSA, a ruling that the IT TSA was terminable at the Company’s option, and substantial damages the Company believed it had suffered as a result of the transition services agreements and other actions taken by CHS in connection with the Spin-off. Additionally, on ~~August 22, 2017. On April~~March 19, 2018, the ~~Court denied~~Company received notice from CHS that CHS sought to terminate, effective September 30, 2018, the ~~Company’s motion to dismiss,~~SSC TSA and the ~~Company filed its answer~~IT TSA and to impose a September 30, 2018 deadline for completion of the Second Amended Complaint on May 18, 2018. On July 13, 2018, Plaintiff filed its motion for class certification, which Defendants opposed on August 31, 2018. The motion for class certification is currently pending. On September 14, 2018, Plaintiff filedtransition services under the SSC TSA and IT TSA, as a ~~Third Amended Complaint adding additional~~result of alleged ~~misstatements. On October 12, 2018, Defendants moved to dismiss the new allegations, which motion is currently pending. The case is in discovery, and~~breaches by the Company ~~is vigorously defending itself in this matter.~~of the agreements. The Company is unable to predict the outcome of this matter. However, it is reasonably possible that the Company may incur a loss in connection with this matter. The Company is unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.notice from CHS also provided an indication

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~~United Tort Claimants v. Quorum Health Resources, LLC~~ ~~(U.S. Bankruptcy Court~~of CHS’s preference to terminate the Receivables Collection Agreement, the Eligibility Screening Services Agreement, and the Billing and Collection Agreement. The Company amended its counterclaims to include allegations that CHS’s attempt to terminate the SSC TSA and IT TSA and to impose a September 30, 2018 deadline for completing the ~~District~~transition of ~~New Mexico);~~ ~~Douthitt - Dugger, et al. v. Quorum Health Resources, LLC~~ ~~(Bernalillo County, New Mexico District Court). Plaintiffs sued QHR~~services under those contracts violated the terms of the contracts and ~~Gerald Champion Regional Medical Center~~was invalid and without effect. The validity and effectiveness of CHS’s attempt to terminate the SSC TSA and IT TSA and to impose a September 30, 2018 deadline was litigated during the course of arbitration proceedings held in ~~New Mexico state court~~late June 2018. After hearing testimony regarding the termination issues, the arbitration panel ruled that each of the SSC TSA and ~~bankruptcy court arising from surgical procedures alleged~~IT TSA will continue in effect according to their original terms through 2021, subject to any agreement by the parties to terminate the SSC TSA and the IT TSA at an earlier time. The panel ordered that, after the date of the ruling, the Company would prospectively pay the amounts invoiced under the TSAs as billed, but deferred ruling on the parties’ economic claims related to the TSAs. The arbitration reconvened October 1, 2018 with QHC presenting the Company’s counter-claims and defenses that certain amounts were not payable to CHS. The arbitration concluded October 9, 2018. The panel issued its final arbitration award on January 3, 2019. In connection with the SSC TSA payment dispute, the panel determined that CHS was not entitled to have ~~been experimental~~charged the disputed fees under that agreement, and ~~performed~~thus that (i) the Company was entitled to retain the approximately $9.3 million previously withheld by ~~an unqualified doctor.~~the Company, and (ii) CHS was required to pay back the approximately $2.1 million paid by the Company under the SSC TSA since the panel’s June 2018 order. The ~~parties have now agreed~~Company will not be required to ~~a global settlement of~~pay such overcharged amounts under the ~~United Tort Claimants (“UTC”)~~SSC TSA in the future. In connection with the IT TSA payment dispute, the panel determined that CHS’s fees under the IT TSA were proper. The Company paid the approximately $1.5 million previously withheld under that agreement, and the Company will continue to pay such amounts under the IT TSA in the future. The panel’s June 2018 ruling that CHS is not entitled to terminate the SSC and IT TSAs remains in effect. The panel denied the Company’s other affirmative claims for a confidential amount to be fully funded by Lexington Insurance Company (“Lexington”). The specific language of releases and related settlement documents is being negotiated and will be subject to bankruptcy court approval.against CHS.

~~Lexington Insurance Company v. Quorum Health Resources, LLC, et al.~~ ~~(Williamson County, Tennessee Chancery Court)) Lexington has sued QHR in Williamson County, Tennessee seeking a judicial declaration that the UTC’s claims~~Zwick Partners LP and ~~the cost~~Aparna Rao, Individually and On Behalf of defending QHR are not covered by Lexington. Lexington has now agreed not to seek reimbursement from QHR (1) for any part of the settlement with UTC (as described above); or (2) for the cost of defending QHR in the UTC litigation in New Mexico. The carrier has also agreed not to seek appellate review of prior court rulings in QHR’s favor on coverage issues. While QHR believes these agreements have been adequately confirmed with Lexington, further proceedings will be necessary in the Tennessee trial court to establish these agreements in a court order. QHR has asserted bad faith claims against Lexington and excess carrier Ironshore in the Tennessee state court action, which are expected to be set for trial in 2019. The Company has concluded that there is a remote likelihood of a material loss in these matters, and as a result, does not believe that either the UTC litigation in New Mexico nor the insurance coverage litigation in Tennessee state court will have a material adverse effect on the operating results, financial position or liquidity of the Company.

~~R2 Investments, LDC~~All Others Similarly Situated v. Quorum Health Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry Cash, Thomas D. Miller and Michael J. Culotta ~~John A. Clerico, James S. Ely, III, John A. Fry, William Norris Jennings, Julia B. North, H. Mitchell Watson, Jr. and H. James Williams~~. On ~~October 25, 2017,~~September 9, 2016, a shareholder filed ana purported class action in the ~~Circuit~~United States District Court for the Middle District of ~~Williamson County,~~ Tennessee against the Company and certain of its ~~officers~~former officers. On April 17, 2017, Plaintiff filed a Second Amended Complaint adding additional defendants, CHS, Wayne T. Smith and ~~directors~~W. Larry Cash. The Second Amended Complaint alleges claims for violations of Sections 10(b) and CHS and certain of its officers and directors. The complaint alleges that the defendants violated the Tennessee Securities Act and common law by, among other things, making alleged false and/or misleading statements and failing to disclose certain information regarding aspects20(a) of the ~~Company’s business, operations~~Securities Exchange Act of 1934, as amended (the “Exchange Act”), and ~~financial condition. Plaintiff~~Rule 10b-5 promulgated thereunder, and is ~~seeking rescissionary, compensatory~~brought on behalf of a class consisting of all persons (other than defendants) who purchased or otherwise acquired securities of the Company between May 2, 2016 and ~~punitive damages. The~~August 10, 2016. On June 23, 2017, the Company filed a motion to dismiss, ~~the action on January 16, 2018,~~ which Plaintiff opposed on ~~March 5, 2018.~~August 22, 2017. On ~~May 11,~~April 19, 2018, the Court denied the Company’s motion to ~~dismiss. The~~dismiss, and the Company ~~subsequently~~ filed anits answer to the ~~complaint,~~Second Amended Complaint on May 18, 2018. On July 13, 2018, Plaintiff filed its motion for class certification, which Defendants opposed on August 31, 2018. On March 29, 2019, the Court granted the motion and certified the class. Defendants have filed a petition for permission to appeal the class certification decision with the Sixth Circuit Court of Appeals, which petition is currently pending. On September 14, 2018, Plaintiff filed a Third Amended Complaint adding additional alleged misstatements. On October 12, 2018, Defendants moved to dismiss the new allegations, and, on March 29, 2019, the Court granted the motion and dismissed the new allegations. The case is ~~now~~ in ~~discovery. The~~discovery, and the Company is vigorously defending itself in this matter. The Company is unable to predict the outcome of this matter. However, it is reasonably possible that the Company may incur a loss in connection with this matter. The Company is unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

•

R2 Investments, LDC v. Quorum Health Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry Cash, Thomas D. Miller, Michael J. Culotta, John A. Clerico, James S. Ely, III, John A. Fry, William Norris Jennings, Julia B. North, H. Mitchell Watson, Jr. and H. James Williams. On October 25, 2017, a shareholder filed an action in the Circuit Court of Williamson County, Tennessee against the Company and certain of its former officers and directors and CHS and certain of its officers and directors. The complaint alleges that the defendants violated the Tennessee Securities Act and common law by, among other things, making alleged false and/or misleading statements and failing to disclose certain information regarding aspects of the Company’s business, operations and financial condition. Plaintiff is seeking rescissionary, compensatory and punitive damages. The Company filed a motion to dismiss the action on January 16, 2018, which Plaintiff opposed on March 5, 2018. On May 11, 2018, the Court denied the Company’s motion to dismiss. The Company subsequently filed an answer to the complaint, and the case is now in discovery. The Company is vigorously defending itself in this matter. The Company is unable to predict the outcome of this matter. However, it is reasonably possible that the Company may incur a loss in connection with this matter. The Company is unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its

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(Continued)

early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

Harvey Horwitz, Derivatively on Behalf of Quorum Health Corporation v. Thomas D. Miller, Michael J. Culotta, Barbara R. Paul, R. Lawrence Van Horn, William S. Hussey, James T. Breedlove, William M. Gracey, Joseph A. Hastings, and Adam Feinstein, and Quorum Health Corporation, as Nominal Defendant. On September 17, 2018, a purported shareholder filed a derivative action on behalf of the Company in the United States District Court for the Middle District of Tennessee. The complaint alleges claims for violation of Section 29(a) of the Exchange Act, breach of fiduciary duty, waste of corporate assets, unjust enrichment, and indemnification and contribution. Plaintiff seeks damages allegedly sustained by the Company, rescission of the Separation Agreement with CHS, corporate governance reforms, equitable and/or injunctive relief, restitution, and attorneys’ fees and costs. On October 26, 2018, the Court entered an order granting a stay of the case pending entry of an order on any motions for summary judgment in the Rao v. Quorum Health Corporation case described above. Once the stay is lifted, the Company intends to move to transfer the action to Delaware consistent with the Company’s by-laws. The Company is vigorously defending itself in this matter. The Company is unable to predict the outcome of this matter. However, it is reasonably possible that the Company may incur a loss in connection with this matter. The Company is unable to reasonably estimate the amount or range of such reasonably possible loss because the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

37Reda Slone v. Kentucky River Medical Center (an assumed name of Jackson Hospital Corporation). On April 19, 2017, a former director of the emergency department of Kentucky River Medical Center ("KRMC") filed an action in the Circuit Court of Breathitt County, Kentucky (Case No.: 17-CI-00095), against KRMC alleging wrongful discharge in violation of KRS 216B.165 (known unofficially as Kentucky’s healthcare worker’s whistleblower statute), common law wrongful discharge, violation of Plaintiff’s free speech under the Section 1 of the Kentucky Constitution, and intentional and/or negligent infliction of emotional distress. The Plaintiff is claiming that KRMC terminated the Plaintiff’s employment because she made complaints that the emergency department did not have adequate staffing levels/nurse to patient ratios, and did not have sufficient numbers of adequately trained staff. The Plaintiff is seeking damages for back pay and front pay ($549,623), incidental damages ($310,000), emotional pain and suffering ($350,000), attorney’s fees ($200,000), and punitive damages ($11,250,000). KRMC filed an answer to the complaint and the matter is now in discovery. A trial date is set for July 22, 2019. KRMC is vigorously defending the matter. The outcome of the matter cannot be predicted. However, it is reasonably possible that KRMC may incur a loss in connection with this matter. The Company is unable to reasonably estimate the amount or range of such reasonably possible loss because discovery is still ongoing and there is uncertainty as to the outcome of the upcoming trial or motions. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

Mary Della-Maggiora, as an individual and on behalf of all others similarly situated, v. Watsonville Community Hospital, entity unknown, and DOES 1 through 50, inclusive (Superior Court of the State of California for the County of Santa Cruz). On January 22, 2018, Plaintiff filed a purported class action alleging violations of California Labor Code Section 226(a). On May 14, 2018, Plaintiff filed her Second Amended Class Action Complaint. The Second Amended Class Action Complaint contains two causes of action. The first cause of action is brought by Plaintiff in her individual capacity and as potential class representative for all other Watsonville Community Hospital employees for alleged violations of Labor Code Section 226(a), subsections (6), (8), and (9). The second cause of action is brought under the California Private Attorneys General Act of 2004 by Plaintiff in her individual capacity and as “appointed” representative of the State of California Labor and Workforce Development Agency, for alleged violations of Labor Code Section 226(a), subsection (9). Plaintiff generally alleges that the paystubs issued to Watsonville employees did not include all information required by California Labor Code Section 226(a). The case is in discovery, and Watsonville Community Hospital is vigorously defending itself in this matter. The Company is unable to predict the outcome of this matter. However, it is reasonably possible that the Company may incur a loss in connection with this matter. The Company is unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

•

Nedal Alqalqili v. Hospital of Barstow, Inc., dba Barstow Community Hospital; Quorum Health Corp.; Carrie Howell, an individual; and DOES 1 through 10, inclusive (Superior Court of the State of California for the County of San Bernardino). On June 28, 2018, Plaintiff filed a complaint alleging discrimination, harassment, and retaliation arising from her employment with Hospital of Barstow, Inc. On October 17, 2018, Plaintiff filed her First Amended Complaint for Damages and Declaratory and Injunctive Relief for Employment Discrimination. The First Amended Complaint contains

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(Continued)

eleven claims for monetary relief as well as claims for declaratory and injunctive relief. In the First Amended Complaint Plaintiff alleges claims for: interference, discrimination, and retaliation in violation of the California Family Rights Act, California Government Code Section 12945.2; national origin-based hostile work environment, religious creed-based hostile work environment, sex discrimination, national origin discrimination, religious creed discrimination, failure to prevent discrimination and harassment, and retaliation in violation of the Fair Employment and Housing Act, California Government Code Section 12940, et seq.; and failure to timely provide employment records in violation of California Labor Code Section 1198.5. The case is in discovery, and Barstow Community Hospital is vigorously defending itself in this matter. The Company is unable to predict the outcome of this matter. However, it is reasonably possible that the Company may incur a loss in connection with this matter. The Company is unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

Insurance Reserves

As part of the business of owning and operating hospitals, the Company is subject to potential professional and general liability and workers’ compensation liability claims or other legal actions alleging liability on its part. The Company is also subject to similar liabilities related to its QHR business.

Prior to the Spin-off, CHS provided professional and general liability insurance and workers’ compensation liability insurance to QHC and indemnified QHC from losses under these insurance arrangements related to the hospital operations business assumed by QHC in the Spin-off. The liabilities for claims prior to the Spin-off and related to QHC’s hospital operations business ~~were~~are determined based on an actuarial study of QHC’s operations and historical claims experience at its hospitals, including during the period of ownership by CHS. Corresponding receivables from CHS are established to reflect the indemnification by CHS for each of these liabilities for claims that related to events and circumstances that occurred prior to the Spin-off.

After the Spin-off, QHC entered into its own professional and general liability insurance and workers’ compensation liability insurance arrangements to mitigate the risk for claims ~~related to events occurring after the Spin-off date that exceed~~exceeding its self-insured retention levels. The Company maintains a self-insured retention level for professional and general liability claims of $5 million per claim and maintains a $0.5 million per claim, high deductible program for workers’ ~~compensation.~~compensation liability claims. Due to the differing nature of its business, ~~operations,~~ the Company maintains separate insurance arrangements for professional and general liability claims related to its subsidiary, QHR. The self-insured retention level for QHR is $6 million for professional and general liability insurance.

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(Continued)

The following table provides a summary of the Company’s insurance reserves related to professional and general liability and workers’ compensation liability, distinguished between those indemnified by CHS and those related to the Company’s own risks (in thousands):

	September 30, 2018								March 31, 2019
	Current		Long-Term		Current		Long-Term		Current		Long-Term		Current		Long-Term
	Receivable		Receivable		Liability		Liability		Receivable		Receivable		Liability		Liability

Professional and general liability:
Insurance reserves indemnified by CHS, Inc.	$	25,342	$	31,903	$	25,342	$	31,903	$	15,672	$	28,430	$	15,672	$	28,430
All other self-insurance reserves		—		—		4,189		46,709		—		—		6,013		52,299
Total insurance reserves for professional and general liability		25,342		31,903		29,531		78,612		15,672		28,430		21,685		80,729
Workers' compensation liability:
Insurance reserves indemnified by CHS, Inc.		2,368		11,734		2,368		11,734		1,267		11,908		1,267		11,908
All other self-insurance reserves		—		—		2,093		6,145		—		—		2,522		4,612
Total insurance reserves for workers' compensation liability		2,368		11,734		4,461		17,879		1,267		11,908		3,789		16,520
Total self-insurance reserves	$	27,710	$	43,637	$	33,992	$	96,491	$	16,939	$	40,338	$	25,474	$	97,249

	December 31, 2017								December 31, 2018
	Current		Long-Term		Current		Long-Term		Current		Long-Term		Current		Long-Term
	Receivable		Receivable		Liability		Liability		Receivable		Receivable		Liability		Liability

Professional and general liability:
Insurance reserves indemnified by CHS, Inc.	$	21,465	$	44,377	$	21,465	$	44,377	$	20,200	$	34,535	$	20,200	$	34,535
All other self-insurance reserves		—		—		2,883		32,616		—		—		5,195		48,293
Total insurance reserves for professional and general liability		21,465		44,377		24,348		76,993		20,200		34,535		25,395		82,828
Workers' compensation liability:
Insurance reserves indemnified by CHS, Inc.		3,032		14,545		3,032		14,545		1,412		12,118		1,412		12,118
All other self-insurance reserves		—		—		3,120		4,013		—		—		2,525		4,701
Total insurance reserves for workers' compensation liability		3,032		14,545		6,152		18,558		1,412		12,118		3,937		16,819
Total self-insurance reserves	$	24,497	$	58,922	$	30,500	$	95,551	$	21,612	$	46,653	$	29,332	$	99,647

The receivables from CHS are included in other current assets and other long-term assets in the consolidated balance sheets. The liability for the current portion of professional and general liability claims is included in other current liabilities, while the current portion of the liability for workers’ compensation claims is included in accrued salaries and benefits. The long-term portions of both claims liabilities are included in other long-term liabilities.

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

Construction and Capital Commitments

The Company ~~is in the process of completing~~substantially completed construction of a new patient tower and expanding surgical capacity at McKenzie – Willamette Medical Center, its hospital in Springfield, ~~Oregon.~~Oregon at December 31, 2018. During the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and September 30, 2017,~~ the Company incurred costs of ~~$3.6~~$2.1 million and ~~$6.5~~$6.1 million, ~~respectively, and incurred costs of $14.3 million and $31.1 million during the nine months ended September 30, 2018 and 2017,~~ respectively, related to this project. As of ~~September 30, 2018,~~March 31, 2019, the Company has incurred a total of ~~$97.3~~$102.8 million of costs for this project, of which ~~$90.5~~$101.3 million has been placed into service as of ~~September 30, 2018.~~March 31, 2019. The total estimated cost of this project, including equipment costs, is estimated to be approximately $105.0 million. The Company’s anticipated remaining costs on the project ~~is expected to be substantially complete by the end of 2018.~~in 2019 are $2.2 million.

NOTE 18 - SUBSEQUENT EVENTS

~~In October 2018,~~On April 12, 2019, the Company ~~utilized~~sold 146-bed Scenic Mountain Medical Center and its affiliated facilities, located in Big Spring, Texas, for proceeds ~~including the receipt~~ of ~~$8.0~~$11.7 million, all of ~~restricted cash held in escrow, from divestitures~~which was used to pay down ~~$9.9 million of~~ principal on ~~the Company’s~~its Term Loan ~~Facility.~~Facility on April 24, 2019.

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(Continued)

NOTE 19 - GUARANTOR AND NON-GUARANTOR SUPPLEMENTAL INFORMATION

The Senior Notes are senior unsecured obligations of the Company guaranteed on a senior basis by certain of its existing and subsequently acquired or organized 100% owned domestic subsidiaries (the “Guarantors”). The Senior Notes are fully and unconditionally guaranteed on a joint and several basis, with exceptions considered customary for such guarantees, limited to the release of the guarantee when a subsidiary guarantor’s capital stock is sold, or when a sale of all of the subsidiary guarantor’s assets used in operations occurs.

The condensed consolidating financial statements have been prepared and presented in accordance with SEC Regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

The accounting policies used in the preparation of this financial information are consistent with the accompanying condensed consolidated financial statements of the Company, except as follows:

Intercompany receivables and payables are presented gross in the supplemental condensed consolidating balance sheets.

Investments in consolidated subsidiaries, as well as guarantor subsidiaries’ investments in non-guarantor subsidiaries, are presented under the equity method of accounting with the related investments presented within the line items net investment in subsidiaries and other long-term liabilities in the supplemental condensed consolidating balance sheets.

Income tax expense is allocated from the parent issuer to the income producing operations (other guarantors and non-guarantors) through stockholders’ equity. As this approach represents an allocation, the income tax expense allocation is considered non-cash for statement of cash flow purposes.

The Company’s intercompany activity consists primarily of daily cash transfers, the allocation of certain expenses and expenditures paid by the parent issuer on behalf of its subsidiaries, and the push down of investment in its subsidiaries. The parent issuer’s investment in its subsidiaries reflects the activity since the Spin-off. Likewise, the parent issuer’s equity in earnings of unconsolidated affiliates represents the Company’s earnings since the Spin-off.

QUORUM HEALTH CORPORATION

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(Continued)

Condensed Consolidating Statement of Income (Loss)

Three Months Ended March 31, 2019

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net operating revenues	$	—		$	337,935		$	104,870		$	—		$	442,805
Operating costs and expenses:
Salaries and benefits		—			154,102			70,973			—			225,075
Supplies		—			36,349			15,036			—			51,385
Other operating expenses		13			110,925			25,851			—			136,789
Depreciation and amortization		—			11,356			3,283			—			14,639
Lease costs and rent		—			6,628			4,903			—			11,531
Electronic health records incentives		—			9			17			—			26
Legal, professional and settlement costs		—			684			1			—			685
Impairment of long-lived assets and goodwill		—			8,860			—			—			8,860
Total operating costs and expenses		13			328,913			120,064			—			448,990
Income (loss) from operations		(13	)		9,022			(15,194	)		—			(6,185	)
Interest expense, net		32,580			(229	)		(85	)		—			32,266
Equity in earnings of affiliates		6,231			326			—			(6,557	)		—
Income (loss) before income taxes		(38,824	)		8,925			(15,109	)		6,557			(38,451	)
Provision for (benefit from) income taxes		182			36			(63	)		—			155
Net income (loss)		(39,006	)		8,889			(15,046	)		6,557			(38,606	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			400			—			400
Net income (loss) attributable to Quorum Health Corporation	$	(39,006	)	$	8,889		$	(15,446	)	$	6,557		$	(39,006	)

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(Continued)

Condensed Consolidating Statement of Income (Loss)

Three Months Ended ~~September 30,~~March 31, 2018

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated			Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net operating revenues	$	—		$	356,986		$	103,521		$	—		$	460,507		$	—		$	372,537		$	114,283		$	—		$	486,820

Operating costs and expenses:
Salaries and benefits		—			154,547			71,690			—			226,237			—			169,733			77,267			—			247,000
Supplies		—			35,237			13,712			—			48,949			—			42,600			16,286			—			58,886
Other operating expenses		—			115,994			27,722			—			143,716			1,870			122,166			28,702			—			152,738
Depreciation and amortization		—			12,431			4,181			—			16,612			—			14,705			3,556			—			18,261
Rent		—			6,580			5,081			—			11,661			—			7,317			5,215			—			12,532
Electronic health records incentives earned		—			14			(45	)		—			(31	)
Electronic health records incentives																	—			(49	)		(92	)		—			(141	)
Legal, professional and settlement costs		—			1,399			120			—			1,519			—			3,413			—			—			3,413
Impairment of long-lived assets and goodwill		—			32,438			—			—			32,438			—			37,960			1,800			—			39,760
Loss (gain) on sale of hospitals, net		—			805			—			—			805			—			7,815			—			—			7,815
Loss on closure of hospitals, net		—			1,111			—			—			1,111
Transaction costs related to the Spin-off																	—			13,746			—			—			13,746
Total operating costs and expenses		—			360,556			122,461			—			483,017			1,870			419,406			132,734			—			554,010
Income (loss) from operations		—			(3,570	)		(18,940	)		—			(22,510	)		(1,870	)		(46,869	)		(18,451	)		—			(67,190	)
Interest expense (income), net		32,204			245			1			—			32,450
Interest expense, net																	31,474			(522	)		(21	)		—			30,931
Equity in earnings of affiliates		22,932			(2,483	)		—			(20,449	)		—			64,851			43,853			—			(108,704	)		—
Income (loss) before income taxes		(55,136	)		(1,332	)		(18,941	)		20,449			(54,960	)		(98,195	)		(90,200	)		(18,430	)		108,704			(98,121	)
Provision for (benefit from) income taxes		(1,196	)		8			114			—			(1,074	)		773			(336	)		(71	)		—			366
Net income (loss)		(53,940	)		(1,340	)		(19,055	)		20,449			(53,886	)		(98,968	)		(89,864	)		(18,359	)		108,704			(98,487	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			54			—			54			—			—			481			—			481
Net income (loss) attributable to Quorum Health Corporation	$	(53,940	)	$	(1,340	)	$	(19,109	)	$	20,449		$	(53,940	)	$	(98,968	)	$	(89,864	)	$	(18,840	)	$	108,704		$	(98,968	)

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

~~Condensed Consolidating Statement of Income (Loss)~~

~~Three Months Ended September 30, 2017~~

~~(In Thousands)~~

Parent
Issuer

Other
Guarantors

Non-
Guarantors

Eliminations

Consolidated

Operating revenues

$
—

$
439,813

$
118,034

$
—

$
557,847

Provision for bad debts

—

48,652

9,893

—

58,545

Net operating revenues

—

391,161

108,141

—

499,302

Operating costs and expenses:

Salaries and benefits

—

176,085

75,695

—

251,780

Supplies

—

43,590

15,067

—

58,657

Other operating expenses

100

120,035

25,222

—

145,357

Depreciation and amortization

—

17,289

3,446

—

20,735

Rent

—

7,332

5,045

—

12,377

Electronic health records incentives earned

—

(377
)

90

—

(287
)
Legal, professional and settlement costs

—

2,050

—

—

2,050

Impairment of long-lived assets and goodwill

—

5,261

—

—

5,261

Loss (gain) on sale of hospitals, net

—

100

(21
)

—

79

Transaction costs related to the Spin-off

—

134

39

—

173

Total operating costs and expenses

100

371,499

124,583

—

496,182

Income (loss) from operations

(100
)

19,662

(16,442
)

—

3,120

Interest expense (income), net

32,001

206

9

—

32,216

Equity in earnings of affiliates

(2,366
)

3,184

—

(818
)

—

Income (loss) before income taxes

(29,735
)

16,272

(16,451
)

818

(29,096
)
Provision for (benefit from) income taxes

(544
)

(266
)

268

—

(542
)
Net income (loss)

(29,191
)

16,538

(16,719
)

818

(28,554
)
Less: Net income (loss) attributable to noncontrolling interests

—

—

637

—

637

Net income (loss) attributable to Quorum Health Corporation

$
(29,191
)

$
16,538

$
(17,356
)

$
818

$
(29,191
)

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

~~Condensed Consolidating Statement of Income (Loss)~~

~~Nine Months Ended September 30, 2018~~

~~(In Thousands)~~

Parent
Issuer

Other
Guarantors

Non-
Guarantors

Eliminations

Consolidated

Net operating revenues

$
—

$
1,091,781

$
328,178

$
—

$
1,419,959

Operating costs and expenses:

Salaries and benefits

—

484,728

221,140

—

705,868

Supplies

—

114,678

46,054

—

160,732

Other operating expenses

1,897

355,090

83,923

—

440,910

Depreciation and amortization

—

40,956

11,059

—

52,015

Rent

—

20,464

15,087

—

35,551

Electronic health records incentives earned

—

(416
)

(201
)

—

(617
)
Legal, professional and settlement costs

—

10,229

120

—

10,349

Impairment of long-lived assets and goodwill

—

70,398

1,800

—

72,198

Loss (gain) on sale of hospitals, net

—

8,933

(6
)

—

8,927

Loss on closure of hospitals, net

—

18,195

—

—

18,195

Total operating costs and expenses

1,897

1,123,255

378,976

—

1,504,128

Income (loss) from operations

(1,897
)

(31,474
)

(50,798
)

—

(84,169
)
Interest expense (income), net

96,612

(1,303
)

(2
)

—

95,307

Equity in earnings of affiliates

81,849

38,348

—

(120,197
)

—

Income (loss) before income taxes

(180,358
)

(68,519
)

(50,796
)

120,197

(179,476
)
Provision for (benefit from) income taxes

(844
)

(412
)

94

—

(1,162
)
Net income (loss)

(179,514
)

(68,107
)

(50,890
)

120,197

(178,314
)
Less: Net income (loss) attributable to noncontrolling interests

—

—

1,200

—

1,200

Net income (loss) attributable to Quorum Health Corporation

$
(179,514
)

$
(68,107
)

$
(52,090
)

$
120,197

$
(179,514
)

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

~~Condensed Consolidating Statement of Income (Loss)~~

~~Nine Months Ended September 30, 2017~~

~~(In Thousands)~~

Parent
Issuer

Other
Guarantors

Non-
Guarantors

Eliminations

Consolidated

Operating revenues

—

1,344,687

386,320

—

$
1,731,007

Provision for bad debts

—

146,261

27,658

—

173,919

Net operating revenues

—

1,198,426

358,662

—

1,557,088

Operating costs and expenses:

Salaries and benefits

—

539,544

242,147

—

781,691

Supplies

—

134,866

51,725

—

186,591

Other operating expenses

2,992

373,979

89,423

—

466,394

Depreciation and amortization

—

53,408

10,033

—

63,441

Rent

—

21,494

15,137

—

36,631

Electronic health records incentives earned

—

(3,815
)

(701
)

—

(4,516
)
Legal, professional and settlement costs

—

6,519

—

—

6,519

Impairment of long-lived assets and goodwill

—

21,461

—

—

21,461

Loss (gain) on sale of hospitals, net

—

100

(5,212
)

—

(5,112
)
Transaction costs related to the Spin-off

—

157

47

—

204

Total operating costs and expenses

2,992

1,147,713

402,599

—

1,553,304

Income (loss) from operations

(2,992
)

50,713

(43,937
)

—

3,784

Interest expense (income), net

91,934

(1,820
)

90

—

90,204

Equity in earnings of affiliates

(7,457
)

8,316

—

(859
)

—

Income (loss) before income taxes

(87,469
)

44,217

(44,027
)

859

(86,420
)
Provision for (benefit from) income taxes

(87
)

(44
)

45

—

(86
)
Net income (loss)

(87,382
)

44,261

(44,072
)

859

(86,334
)
Less: Net income (loss) attributable to noncontrolling interests

—

—

1,048

—

1,048

Net income (loss) attributable to Quorum Health Corporation

$
(87,382
)

$
44,261

$
(45,120
)

$
859

$
(87,382
)

4340

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended ~~September 30, 2018~~March 31, 2019

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated			Parent Issuer			Other Guarantors		Non- Guarantors			Eliminations			Consolidated

Net income (loss)	$	(53,940	)	$	(1,340	)	$	(19,055	)	$	20,449		$	(53,886	)	$	(39,006	)	$	8,889	$	(15,046	)	$	6,557		$	(38,606	)
Amortization and recognition of unrecognized pension cost components, net of income taxes		114			114			—			(114	)		114			49			49		—			(49	)		49
Comprehensive income (loss)		(53,826	)		(1,226	)		(19,055	)		20,335			(53,772	)		(38,957	)		8,938		(15,046	)		6,508			(38,557	)
Less: Comprehensive income (loss) attributable to noncontrolling interests		—			—			54			—			54			—			—		400			—			400
Comprehensive income (loss) attributable to Quorum Health Corporation	$	(53,826	)	$	(1,226	)	$	(19,109	)	$	20,335		$	(53,826	)	$	(38,957	)	$	8,938	$	(15,446	)	$	6,508		$	(38,957	)

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended ~~September 30, 2017~~

~~(In Thousands)~~

Parent
Issuer

Other
Guarantors

Non-
Guarantors

Eliminations

Consolidated

Net income (loss)

$
(29,191
)

$
16,538

$
(16,719
)

$
818

$
(28,554
)
Amortization and recognition of unrecognized pension cost components, net of income taxes

123

123

—

(123
)

123

Comprehensive income (loss)

(29,068
)

16,661

(16,719
)

695

(28,431
)
Less: Comprehensive income (loss) attributable to noncontrolling interests

—

—

637

—

637

Comprehensive income (loss) attributable to Quorum Health Corporation

$
(29,068
)

$
16,661

$
(17,356
)

$
695

$
(29,068
)

~~QUORUM HEALTH CORPORATION~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Continued)~~

~~Condensed Consolidating Statement of Comprehensive Income (Loss)~~

~~Nine Months Ended September 30,~~March 31, 2018

(In Thousands)

Parent
Issuer

Other
Guarantors

Non-
Guarantors

Eliminations

Consolidated

Net income (loss)

$
(179,514
)

$
(68,107
)

$
(50,890
)

$
120,197

$
(178,314
)
Amortization and recognition of unrecognized pension cost components, net of income taxes

39

39

—

(39
)

39

Comprehensive income (loss)

(179,475
)

(68,068
)

(50,890
)

120,158

(178,275
)
Less: Comprehensive income (loss) attributable to noncontrolling interests

—

—

1,200

—

1,200

Comprehensive income (loss) attributable to Quorum Health Corporation

$
(179,475
)

$
(68,068
)

$
(52,090
)

$
120,158

$
(179,475
)

~~Condensed Consolidating Statement of Comprehensive Income (Loss)~~

~~Nine Months Ended September 30, 2017~~

~~(In Thousands)~~

	Parent Issuer			Other Guarantors		Non- Guarantors			Eliminations			Consolidated			Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net income (loss)	$	(87,382	)	$	44,261	$	(44,072	)	$	859		$	(86,334	)	$	(98,968	)	$	(89,864	)	$	(18,359	)	$	108,704		$	(98,487	)
Amortization and recognition of unrecognized pension cost components, net of income taxes		365			365		—			(365	)		365			114			114			—			(114	)		114
Comprehensive income (loss)		(87,017	)		44,626		(44,072	)		494			(85,969	)		(98,854	)		(89,750	)		(18,359	)		108,590			(98,373	)
Less: Comprehensive income (loss) attributable to noncontrolling interests		—			—		1,048			—			1,048			—			—			481			—			481
Comprehensive income (loss) attributable to Quorum Health Corporation	$	(87,017	)	$	44,626	$	(45,120	)	$	494		$	(87,017	)	$	(98,854	)	$	(89,750	)	$	(18,840	)	$	108,590		$	(98,854	)

4541

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating Balance Sheet

~~September 30, 2018~~March 31, 2019

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated			Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

ASSETS
Current assets:
Cash and cash equivalents	$	221		$	5,276		$	569		$	—		$	6,066		$	630		$	907		$	179		$	—		$	1,716
Patient accounts receivable, net of allowance for doubtful accounts		—			250,315			67,969			—			318,284
Patient accounts receivable																	—			251,334			75,305			—			326,639
Inventories		—			36,967			9,997			—			46,964			—			34,359			9,234			—			43,593
Prepaid expenses		59			16,020			5,146			—			21,225			8			14,165			3,746			—			17,919
Due from third-party payors		—			56,581			7,528			—			64,109			—			63,548			4,200			—			67,748
Current assets of hospitals held for sale																	—			2,286			—			—			2,286
Other current assets		248			41,587			16,327			—			58,162			122			22,237			9,944			—			32,303
Total current assets		528			406,746			107,536			—			514,810			760			388,836			102,608			—			492,204
Intercompany receivable		3			597,765			271,159			(868,927	)		—			3			704,694			302,688			(1,007,385	)		—
Property and equipment, net		—			428,481			137,905			—			566,386			—			396,343			141,081			—			537,424
Goodwill		—			235,418			165,655			—			401,073			—			232,118			166,030			—			398,148
Intangible assets, net		—			44,782			5,084			—			49,866			—			42,024			4,553			—			46,577
Operating lease right-of-use assets																	—			53,501			36,137			—			89,638
Long-term assets of hospitals held for sale																	—			14,504			—			—			14,504
Other long-term assets		—			56,043			24,951			—			80,994			—			53,779			15,073			—			68,852
Net investment in subsidiaries		1,411,102			—			—			(1,411,102	)		—			1,422,926			—			—			(1,422,926	)		—
Total assets	$	1,411,633		$	1,769,235		$	712,290		$	(2,280,029	)	$	1,613,129		$	1,423,689		$	1,885,799		$	768,170		$	(2,430,311	)	$	1,647,347
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	—		$	1,427		$	117		$	—		$	1,544		$	—		$	1,582		$	139		$	—		$	1,721
Current portion of operating lease liabilities																	—			16,489			8,181			—			24,670
Accounts payable		80			126,489			19,834			—			146,403			163			127,592			19,329			—			147,084
Accrued liabilities:
Accrued salaries and benefits		—			62,524			24,763			—			87,287			—			59,979			23,329			—			83,308
Accrued interest		22,046			—			—			—			22,046			22,061			—			—			—			22,061
Due to third-party payors		—			37,731			6,203			—			43,934			—			39,217			6,519			—			45,736
Current liabilities of hospitals held for sale																	—			1,205			—			—			1,205
Other current liabilities		—			32,547			15,203			—			47,750			—			27,866			12,406			—			40,272
Total current liabilities		22,126			260,718			66,120			—			348,964			22,224			273,930			69,903			—			366,057
Long-term debt		1,162,743			22,736			205			—			1,185,684			1,172,004			22,158			159			—			1,194,321
Long-term operating lease liabilities																	—			37,018			28,669			—			65,687
Intercompany payable		294,891			271,163			302,874			(868,928	)		—			351,403			302,692			353,290			(1,007,385	)		—
Deferred income tax liabilities, net		6,670			—			—			—			6,670			6,947			—			—			—			6,947
Long-term liabilities of hospitals held for sale																	—			2,414			—			—			2,414
Other long-term liabilities		—			224,768			31,683			(126,626	)		129,825			—			213,218			29,727			(119,173	)		123,772
Total liabilities		1,486,430			779,385			400,882			(995,554	)		1,671,143			1,552,578			851,430			481,748			(1,126,558	)		1,759,198
Redeemable noncontrolling interests		—			—			2,279			—			2,279			—			—			2,278			—			2,278
Equity:
Quorum Health Corporation stockholders' equity (deficit):
Preferred stock		—			—			—			—			—			—			—			—			—			—
Common stock		3			—			—			—			3			3			—			—			—			3
Additional paid-in capital		554,847			1,177,836			584,102			(1,761,938	)		554,847			558,498			1,183,653			581,940			(1,765,593	)		558,498
Accumulated other comprehensive income (loss)		(1,917	)		(1,917	)		—			1,917			(1,917	)		808			808			—			(808	)		808
Accumulated deficit		(627,730	)		(186,069	)		(289,477	)		475,546			(627,730	)		(688,198	)		(150,092	)		(312,556	)		462,648			(688,198	)
Total Quorum Health Corporation stockholders' equity (deficit)		(74,797	)		989,850			294,625			(1,284,475	)		(74,797	)		(128,889	)		1,034,369			269,384			(1,303,753	)		(128,889	)
Nonredeemable noncontrolling interests		—			—			14,504			—			14,504			—			—			14,760			—			14,760
Total equity		(74,797	)		989,850			309,129			(1,284,475	)		(60,293	)
Total equity (deficit)																	(128,889	)		1,034,369			284,144			(1,303,753	)		(114,129	)
Total liabilities and equity	$	1,411,633		$	1,769,235		$	712,290		$	(2,280,029	)	$	1,613,129		$	1,423,689		$	1,885,799		$	768,170		$	(2,430,311	)	$	1,647,347

4642

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating Balance Sheet

December 31, ~~2017~~2018

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated			Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

ASSETS
Current assets:
Cash and cash equivalents	$	1,051		$	4,222		$	344		$	—		$	5,617		$	1,209		$	1,457		$	537		$	—		$	3,203
Patient accounts receivable, net of allowance for doubtful accounts		—			262,690			80,455			—			343,145
Patient accounts receivable																	—			260,339			62,269			—			322,608
Inventories		—			43,276			10,183			—			53,459			—			36,349			9,297			—			45,646
Prepaid expenses		33			16,980			4,154			—			21,167			33			15,269			4,381			—			19,683
Due from third-party payors		—			93,323			3,879			—			97,202			—			57,049			6,394			—			63,443
Current assets of hospitals held for sale		—			8,112			—			—			8,112
Other current assets		—			32,867			14,573			—			47,440			314			23,714			12,377			—			36,405
Total current assets		1,084			461,470			113,588			—			576,142			1,556			394,177			95,255			—			490,988
Intercompany receivable		3			402,817			172,098			(574,918	)		—			3			661,887			303,059			(964,949	)		—
Property and equipment, net		—			543,073			132,206			—			675,279			—			419,292			140,146			—			559,438
Goodwill		—			243,618			165,611			—			409,229			—			235,418			165,655			—			401,073
Intangible assets, net		—			58,240			6,610			—			64,850			—			43,575			4,714			—			48,289
Long-term assets of hospitals held for sale		—			7,730			4			—			7,734
Other long-term assets		—			74,918			20,689			—			95,607			—			57,047			17,259			—			74,306
Net investment in subsidiaries		1,488,021			—			—			(1,488,021	)		—			1,428,675			—			—			(1,428,675	)		—
Total assets	$	1,489,108		$	1,791,866		$	610,806		$	(2,062,939	)	$	1,828,841		$	1,430,234		$	1,811,396		$	726,088		$	(2,393,624	)	$	1,574,094
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	—		$	1,434		$	421		$	—		$	1,855		$	-		$	1,557		$	140		$	—		$	1,697
Accounts payable		132			146,193			24,925			—			171,250			121			122,999			20,797			—			143,917
Accrued liabilities:
Accrued salaries and benefits		—			56,522			21,281			—			77,803			—			55,780			21,128			—			76,908
Accrued interest		10,466			—			—			—			10,466			10,024			—			—			—			10,024
Due to third-party payors		—			46,381			1,324			—			47,705			—			38,560			7,292			—			45,852
Current liabilities of hospitals held for sale		—			2,577			—			—			2,577
Other current liabilities		516			30,664			12,507			—			43,687			248			28,713			14,375			—			43,336
Total current liabilities		11,114			283,771			60,458			—			355,343			10,393			247,609			63,732			—			321,734
Long-term debt		1,188,224			23,809			2			—			1,212,035			1,169,214			22,370			193			—			1,191,777
Intercompany payable		182,555			173,341			219,022			(574,918	)		—			334,284			303,063			327,602			(964,949	)		—
Deferred income tax liabilities, net		7,774			—			—			—			7,774			6,736			—			—			—			6,736
Other long-term liabilities		—			195,132			31,100			(88,278	)		137,954			—			212,240			33,106			(118,847	)		126,499
Total liabilities		1,389,667			676,053			310,582			(663,196	)		1,713,106			1,520,627			785,282			424,633			(1,083,796	)		1,646,746
Redeemable noncontrolling interests		—			—			2,325			—			2,325			—			—			2,278			—			2,278
Equity:
Quorum Health Corporation stockholders' equity:
Preferred stock		—			—			—			—			—			—			—			—			—			—
Common stock		3			—			—			—			3			3			—			—			—			3
Additional paid-in capital		549,610			1,291,581			471,767			(1,763,348	)		549,610			557,309			1,183,608			580,824			(1,764,432	)		557,309
Accumulated other comprehensive income (loss)		(1,956	)		(1,956	)		—			1,956			(1,956	)		759			759			—			(759	)		759
Accumulated deficit		(448,216	)		(173,812	)		(187,837	)		361,649			(448,216	)		(648,464	)		(158,253	)		(297,110	)		455,363			(648,464	)
Total Quorum Health Corporation stockholders' equity		99,441			1,115,813			283,930			(1,399,743	)		99,441			(90,393	)		1,026,114			283,714			(1,309,828	)		(90,393	)
Nonredeemable noncontrolling interests		—			—			13,969			—			13,969			—			—			15,463			—			15,463
Total equity		99,441			1,115,813			297,899			(1,399,743	)		113,410			(90,393	)		1,026,114			299,177			(1,309,828	)		(74,930	)
Total liabilities and equity	$	1,489,108		$	1,791,866		$	610,806		$	(2,062,939	)	$	1,828,841		$	1,430,234		$	1,811,396		$	726,088		$	(2,393,624	)	$	1,574,094

4743

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Statement of Cash Flows

~~Nine~~Three Months Ended ~~September 30, 2018~~March 31, 2019

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated			Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net cash provided by (used in) operating activities	$	(80,781	)	$	124,538		$	(822	)	$	—		$	42,935		$	(18,355	)	$	49,256		$	(22,823	)	$	—		$	8,078

Cash flows from investing activities:
Capital expenditures for property and equipment		—			(21,193	)		(13,702	)		—			(34,895	)		—			(4,674	)		(3,618	)		—			(8,292	)
Capital expenditures for software		—			(1,400	)		(127	)		—			(1,527	)		—			(1,026	)		(165	)		—			(1,191	)
Acquisitions, net of cash acquired		—			(42	)		(79	)		—			(121	)		—			—			(455	)		—			(455	)
Proceeds from the sale of hospitals		—			39,384			(214	)		—			39,170
Other investing activities		—			190			69			—			259			—			1,709			20			—			1,729
Changes in intercompany balances with affiliates, net		—			(137,364	)		—			137,364			—			—			(45,088	)		—			45,088			—
Net cash provided by (used in) investing activities		—			(120,425	)		(14,053	)		137,364			2,886			—			(49,079	)		(4,218	)		45,088			(8,209	)

Cash flows from financing activities:
Borrowings under of revolving credit facilities		368,000			—			—			—			368,000
Borrowings under revolving credit facilities																	152,000			—			—			—			152,000
Repayments under revolving credit facilities		(368,000	)		—			—			—			(368,000	)		(150,000	)		—			—			—			(150,000	)
Borrowings of long-term debt		—			102			55			—			157			—			161			—			—			161
Repayments of long-term debt		(30,463	)		(1,182	)		(156	)		—			(31,801	)		(1,371	)		(427	)		(35	)		—			(1,833	)
Payments of debt issuance costs		(2,268	)		—			—			—			(2,268	)
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(1,979	)		—			—			(1,979	)		—			(461	)		—			—			(461	)
Cash distributions to noncontrolling investors		—			—			(1,481	)		—			(1,481	)		—			—			(1,223	)		—			(1,223	)
Changes in intercompany balances with affiliates, net		112,682			—			24,682			(137,364	)		—			17,147			—			27,941			(45,088	)		—
Net cash provided by (used in) financing activities		79,951			(3,059	)		23,100			(137,364	)		(37,372	)		17,776			(727	)		26,683			(45,088	)		(1,356	)

Net change in cash, cash equivalents and restricted cash		(830	)		1,054			8,225			—			8,449
Cash, cash equivalents and restricted cash at beginning of period		1,051			4,222			344			—			5,617
Cash, cash equivalents and restricted cash at end of period	$	221		$	5,276		$	8,569		$	—		$	14,066
Net change in cash and cash equivalents																	(579	)		(550	)		(358	)		—			(1,487	)
Cash and cash equivalents at beginning of period																	1,209			1,457			537			—			3,203
Cash and cash equivalents at end of period																$	630		$	907		$	179		$	—		$	1,716

4844

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating Statement of Cash Flows

~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2018

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated			Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net cash provided by (used in) operating activities	$	(81,234	)	$	88,802		$	(6,779	)	$	—		$	789		$	(20,032	)	$	50,737		$	(33,298	)	$	—		$	(2,593	)

Cash flows from investing activities:
Capital expenditures for property and equipment		—			(18,057	)		(32,610	)		—			(50,667	)		—			(10,630	)		(3,898	)		—			(14,528	)
Capital expenditures for software		—			(5,412	)		(762	)		—			(6,174	)		—			(513	)		—			—			(513	)
Acquisitions, net of cash acquired		—			(53	)		(1,867	)		—			(1,920	)		—			—			(32	)		—			(32	)
Proceeds from sale of hospitals		—			9,348			19,892			—			29,240
Proceeds from the sale of hospitals																	—			38,663			—			—			38,663
Other investing activities																	—			161			36			—			197
Changes in intercompany balances with affiliates, net		—			(72,795	)		—			72,795			—			—			(67,747	)		—			67,747			—
Net cash provided by (used in) investing activities		—			(86,969	)		(15,347	)		72,795			(29,521	)		—			(40,066	)		(3,894	)		67,747			23,787

Cash flows from financing activities:
Borrowings under revolving credit facilities		433,000			—			—			—			433,000			132,000			—			—			—			132,000
Repayments under revolving credit facilities		(388,000	)		—			—			—			(388,000	)		(114,000	)		—			—			—			(114,000	)
Borrowings of long-term debt		—			247			—			—			247			—			12			—			—			12
Repayments of long-term debt		(15,032	)		(1,219	)		(266	)		—			(16,517	)		(136	)		(443	)		(48	)		—			(627	)
Payments of debt issuance costs		(3,119	)		—			—			—			(3,119	)		(2,268	)		—			—			—			(2,268	)
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(1,503	)		—			—			(1,503	)		—			(634	)		—			—			(634	)
Cash distributions to noncontrolling investors		—			—			(3,851	)		—			(3,851	)
Purchases of shares from noncontrolling investors		—			—			(1,244	)		—			(1,244	)		—			—			(803	)		—			(803	)
Changes in intercompany balances with affiliates, net		45,289			—			27,506			(72,795	)		—			29,671			—			38,076			(67,747	)		—
Net cash provided by (used in) financing activities		72,138			(2,475	)		22,145			(72,795	)		19,013			45,267			(1,065	)		37,225			(67,747	)		13,680

Net change in cash and cash equivalents		(9,096	)		(642	)		19			—			(9,719	)
Cash and cash equivalents at beginning of period		21,609			3,498			348			—			25,455
Cash and cash equivalents at end of period	$	12,513		$	2,856		$	367		$	—		$	15,736
Net change in cash, cash equivalents and restricted cash																	25,235			9,606			33			—			34,874
Cash, cash equivalents and restricted cash at beginning of period																	1,051			4,222			344			—			5,617
Cash, cash equivalents and restricted cash at end of period																$	26,286		$	13,828		$	377		$	—		$	40,491

4945

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition, results of operations and cash flows, together with the unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q, as well as the audited consolidated and combined financial statements and accompanying notes, and additionally the sections entitled “Business” and “Risk Factors,” included in our Annual Report on Form 10-K filed with the SEC on March ~~15, 2018~~12, 2019 (the ~~“2017~~“2018 Annual Report on Form 10-K”). The financial information discussed below and included in our ~~2017~~2018 Annual Report on Form 10-K may not necessarily reflect what our results of operations, financial position and cash flows would have been had we been a stand-alone company for the entirety of the periods presented herein or what our results of operations, financial position and cash flows may be in the future. Except as otherwise indicated or unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “QHC” and the “Company” refer to the consolidated business operations of the hospitals and Quorum Health Resources, LLC (“QHR”) that CHS spun off to Quorum Health Corporation on April 29, 2016 (the “Spin-off”). Additionally, all references to “CHS” and “Parent” refer to Community Health Systems, Inc. and its consolidated subsidiaries. References to our financial statements and financial outlook are on a consolidated basis unless otherwise noted.

Forward Looking Statements

Some of the matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “thinks,” and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements.

These factors include, but are not limited to, the following:

general economic and business conditions, both nationally and in the regions in which we operate;

risks associated with our substantial indebtedness, leverage and debt service obligations, including our ability to comply with our debt covenants, including our senior credit facility, as amended;

our ability to successfully complete divestitures and the timing thereof, our ability to complete any such divestitures on desired terms or at all, and our ability to realize the intended benefits from any such divestitures;

changes in reimbursement methodologies and rates paid by federal or state healthcare programs, including Medicare and Medicaid, or commercial payors, and the timeliness of reimbursement payments, including delays in certain states in which we operate;

the extent to which regulatory and economic changes occur in Illinois, where a material portion of our revenues are concentrated;

demographic changes;

the impact of changes made to the Affordable Care Act, the potential for repeal or additional changes to the Affordable Care Act, its implementation or its interpretation, as well as changes in other federal, state or local laws or regulations affecting the healthcare industry;

increases in the amount and risk of collectability of patient accounts receivable, including lower collectability levels which may result from, among other things, self-pay growth and difficulties in collecting payments for which patients are responsible, including co-pays and deductibles;

competition;

changes in medical or other technology;

any potential impairments in the carrying values of long-lived assets and goodwill or the shortening of the useful lives of long-lived assets;

the costs associated with the transition of the transition services agreements (“TSAs”) with CHS, ~~including the related arbitration proceeding,~~ as well as the additional costs and risks associated with any operational problems, delays in collections from payors, and errors and control issues during the termination and transition process, and our ability to realize the intended benefits from transitioning the transition services agreements;

~~an unfavorable outcome from the arbitration with CHS;~~

the impact of certain outsourcing functions, and the ability of CHS, as current provider of our billing and collection services pursuant to the ~~TSAs,~~Shared Service Centers Transition Services Agreement, and R1 RCM, as future provider of our revenue cycle management services, to timely and appropriately bill and collect;

our ability to manage effectively our arrangements with third-party vendors for key non-clinical business functions and services;

5046

•

our ability to achieve operating and financial targets and to control the costs of providing services if patient volumes are lower than expected;

our ability to achieve and realize the operational and financial benefits expected from our margin improvement program;

the effects related to outbreaks of infectious diseases;

our ability to attract and retain, at reasonable employment costs, qualified personnel, key management, physicians, nurses and other healthcare workers;

the impact of seasonal or severe weather conditions or earthquakes;

increases in wages as a result of inflation or competition for highly technical positions and rising medical supply and drug costs due to market pressure from pharmaceutical companies and new product releases;

our ongoing ability to ~~demonstrate meaningful use of~~maintain and utilize certified EHR technology, including meeting interoperability objectives, and avoid related penalties and recognize income for the related Medicare or Medicaid incentive payments, to the extent such payments have not expired;technology;

the efforts of healthcare insurers, providers, large employer groups and others to contain healthcare costs, including the trend toward treatment of patients in less acute or specialty healthcare settings and the increased emphasis on value-based purchasing;

the failure to comply with governmental regulations;

our ability, where appropriate, to enter into, maintain and comply with provider arrangements with payors and the terms of these arrangements, which may be impacted by the increasing consolidation of health insurers and managed care companies and vertical integration efforts involving payors and healthcare providers;

the potential adverse impact of known and unknown government investigations, internal investigations, audits, and federal and state false claims act litigation and other legal proceedings, including the shareholder and creditor litigations against our company and certain of our officers and directors, the labor and employment litigations and threats of litigation, as well as the significant costs and attention from management required to address such matters;

liabilities and other claims asserted against us, including self-insured malpractice claims;

the impact of cyber-attacks or security breaches, including, but not limited to, the compromise of our facilities and confidential patient data, potential harm to patients, remediation and other expenses, potential liability under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and consumer protection laws, federal and state governmental inquiries, and damage to our reputation;

our ability to utilize our income tax loss ~~carryforwards and risks associated with the Tax Cuts and Jobs Act of 2017;~~carryforwards;

our ability to maintain certain accreditations at our ~~existing facilities and any future facilities we may acquire;~~facilities;

the success and long-term viability of healthcare insurance exchanges and potential changes to the beneficiary enrollment process;

the extent to which states support or implement changes to Medicaid programs, utilize healthcare insurance exchanges or alter the provision of healthcare to state residents through regulation or otherwise;

the timing and amount of cash flows related to the California Hospital Quality Assurance Fee (“HQAF”) program, as well as the potential for retroactive adjustments for prior year payments;

the effects related to the continued implementation of the sequestration spending reductions and the potential for future deficit reduction legislation;

changes in U.S. generally accepted accounting principles, including the impacts of adopting newly issued accounting standards;

the availability and terms of capital to fund ~~acquisitions, replacement facilities or other~~ capital expenditures;

our ability to obtain adequate levels of professional and general liability and workers’ compensation liability insurance; and

the risk factors included in our other filings with the SEC and included in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any.

Although we believe that these forward-looking statements are based upon reasonable assumptions, these assumptions are inherently subject to significant regulatory, economic and competitive uncertainties and contingencies, which are difficult or impossible to predict accurately and may be beyond our control. Accordingly, we cannot give any assurance that our expectations will in fact occur and caution that actual results may differ materially from those in the forward-looking statements. Given these

uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this filing. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

As of ~~September 30, 2018,~~March 31, 2019, we owned or leased a diversified portfolio of 27 hospitals in rural and mid-sized markets, which are located in 14 states and have a total of 2,604 licensed beds. Our hospitals provide a broad range of hospital and outpatient healthcare services, including general and acute care, emergency room, general and specialty surgery, critical care, internal medicine, ~~obstetrics,~~ diagnostic services, obstetrics, psychiatric and rehabilitation services. For our hospital operations business, we are paid for our services by governmental agencies, commercial insurers and directly by the patients we serve. We also operate QHR, a leading hospital management advisory and healthcare consulting services business. For our hospital management advisory and healthcare consulting services business, we are paid by the non-affiliated hospitals utilizing our services. Over 95% of our net operating revenues are attributable to our hospital operations business.

Business Strategy Summary

Our business strategy is focused on the following key objectives:

improve our financial results and position by refining our portfolio to include high-quality, profitable hospitals and outpatient service facilities through the sale or closure of underperforming hospitals;

strategically expand the breadth and capacity of the specialty care service lines and outpatient services we offer;

enhance patient safety, quality of care and satisfaction at our healthcare facilities; and

improve the operating and financial performance of our hospital and clinical operations ~~business; and~~

~~grow our revenues through selective acquisitions.~~business.

We perform an ongoing strategic review of our hospitals based upon an analysis of financial performance, current competitive conditions, market demographic and economic trends and capital allocation requirements. As part of this strategy, we intend to continue to divest or close underperforming hospitals and outpatient service facilities which, in turn, will allow us to reduce our corporate indebtedness and refine our hospital portfolio to become a sustainable group of hospitals and outpatient service facilities with higher operating margins. We are pursuing divestiture or closure opportunities that align with this strategy. Since the Spin-off, we have divested or closed 11 of the 38 hospitals we originally acquired from CHS. Our strategic review process is ongoing and we have targeted additional hospitals for divestiture with the intention of utilizing substantially all net proceeds to pay down our secured debt. ~~We intend to divest or close these hospitals by the end of 2019.~~ For a discussion of our recent divestiture ~~and closure~~ activities, see below section entitled “Recent Divestiture Activity.”

Financial Overview

Our net operating revenues for the three months ended ~~September 30, 2018~~March 31, 2019 decreased ~~$38.8~~$44.0 million to ~~$460.5~~$442.8 million, compared to ~~$499.3~~$486.8 million for the three months ended ~~September 30, 2017,~~March 31, 2018, a ~~7.8%~~9.0% decrease. The ~~$38.8~~$44.0 million decrease was primarily attributable to a ~~$64.0~~$27.4 million decrease in net operating revenues resulting from the hospitals sold or closed ~~subsequent to~~during or since the prior period and a $21.8 million reduction in volume, offset by ~~$8.7~~a $6.4 million of HQAF program revenues recognized in the three months ended September 30, 2018 with no corresponding amount recorded in the three months ended September 30, 2017 and $12.4 million due to an improved payor mix as well an increase in rate and acuity. In addition, we recognized revenues of $7.3 million from the sale the Illinois property tax credits in the three months ended September 30, 2018. Recognition of the benefit from the Illinois property tax credits was previously recognized as a reduction in other operating expenses. For the three months ended September 30, 2017, the reduction to other operating expenses was $7.8 million. We believe the Illinois property tax credits operate as a supplemental payment program for uncompensated charity care. Income (loss)Loss from operations for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~$(22.5)~~$6.2 million, compared to ~~$3.1~~$67.2 million for the three months ended ~~September 30, 2017. Income (loss)~~March 31, 2018. Loss from operations ~~decreased primarily due to~~in the 2018 period was negatively impacted by an ~~increase in~~additional $30.9 million of impairment charges, $7.8 million related to losses on sale of ~~$27.2 million.~~two hospitals and $13.7 million related to the loss on closure of a hospital. Our operating results for the three months ended ~~September 30, 2018~~March 31, 2019 reflect a ~~17.8%~~13.6% decrease in total admissions and a ~~16.2%~~12.0% decrease in total adjusted admissions compared to the same period in ~~2017.~~2018. Same-facility admissions decreased ~~4.5%~~7.4% and same-facility adjusted admissions decreased ~~2.1%~~4.9% for the three months ended ~~September 30, 2018~~March 31, 2019 compared to the same period in ~~2017.~~2018. The decrease in same-facility admissions and adjusted admissions was primarily a result of ~~closing~~our initiatives, which were implemented in the second quarter of 2018, to discontinue underperforming patient service lines and the termination of payor and physician contracts. ~~The reduction in same-facility admissions was offset by an increase in our overall rate and acuity.~~

~~Our net operating revenues for~~Additionally, the ~~nine months ended September 30, 2018 decreased $137.1 million to $1,420.0 million, compared to $1,557.1 million for the nine months ended September 30, 2017, a 8.8% decrease. The $137.1 million~~ decrease was ~~primarily attributable~~due to ~~a $197.3 million decrease~~lower flu-related admissions in ~~net operating revenues~~the 2019 period and lower surgical admissions in the 2019 period resulting from ~~the hospitals sold or closed subsequent~~physician turnover, inclement weather conditions in Springfield, Oregon and from our effort to ~~the prior period, offset by a $24.4 million increase related to the HQAF program with no corresponding amount recorded~~re-syndicate two outpatient surgical centers in ~~the nine months ended September 30, 2017 and a $34.7 million increase due to improved payor mix and an increase in rate and acuity. In~~

addition, we recognized revenues of $7.3 million from the sale of the Illinois property tax credits in the nine months ended September 30, 2018. Recognition of the benefit from the Illinois property tax credits was previously recognized as a reduction in other operating expenses. For the nine months ended September 30, 2017, the reduction to other operating expenses was $7.8 million. In addition, we had a $2.3 million increase in revenues from the Medicare low volume hospital payment adjustments that related to the fourth quarter of 2017 as the program was not approved until the first quarter of 2018. Income (loss) from operations for the nine months ended September 30, 2018 was $(84.2) million, compared to $3.8 million for the nine months ended September 30, 2017. Income (loss) from operations decreased $8.9 million related to the combined losses on the sales of Vista West, Clearview and McKenzie (each defined below), $18.2 million related to the closure of Affinity (defined below), and $72.2 million related to impairment of long-lived assets of hospitals intended for divestiture. Our operating results for the nine months ended September 30, 2018 reflect a 16.3% decrease in total admissions and a 15.9% decrease in total adjusted admissions compared to the same period in 2017. Same-facility admissions decreased 2.4% and adjusted admissions decreased 1.0% for the nine months ended September 30, 2018 compared to the same period in 2017. The decrease in same-facility admissions and adjusted admissions was primarily a result of closing underperforming service lines and the termination of payor and physician contracts. The reduction in same-facility admissions was offset by an increase in our overall rate and acuity.Illinois.

Recent Divestiture Activity

On ~~September 30, 2018,~~April 12, 2019, we sold 45-bed McKenzie Regional Hospital and its affiliated facilities (“McKenzie”), located in McKenzie, Tennessee, for proceeds of $1.7 million, which were received in October 2018. For the three months ended September 30, 2018 and 2017, our operating results included pre-tax losses of $3.2 million and $1.3 million, respectively, related to McKenzie, and pre-tax losses of $6.0 million and $4.2 million for the nine months ended September 30, 2018 and 2017, respectively. In addition to the above, we recorded a $0.7 million loss on the sale of McKenzie in the nine months ended September 30, 2018, which includes a write-off of allocated goodwill of $0.4 million.

~~On March 31, 2018, we sold 77-bed Clearview Regional~~146-bed Scenic Mountain Medical Center and its affiliated facilities (“~~Clearview”~~Scenic Mountain”), located in ~~Monroe, Georgia,~~Big Spring, Texas, for proceeds of ~~$37.4~~$11.7 million, all of which ~~$8.0 million~~ was ~~placed in an escrow account subject~~used to resolution of certain outstanding litigation. This matter was resolved in October 2018 and we received the $8.0 million of proceeds during October. For the three months ended September 30, 2018 and 2017,pay down principal on our operating results included pre-tax losses of $1.7 million and $0.7 million, respectively, related to Clearview, and pre-tax losses of $5.3 million and $2.3 million for the nine months ended September 30, 2018 and 2017, respectively. In addition to the above, we recorded a $7.9 million lossTerm Loan Facility on ~~the sale of Clearview in the nine months ended September 30, 2018, which includes a write-off of allocated goodwill of $9.4 million.~~

On March 1, 2018, we sold 70-bed Vista Medical Center West and its affiliated facilities (“Vista West”), located in Waukegan, Illinois, for proceeds of $1.2 million. For the three months ended September 30, 2018 and 2017, our operating results included pre-tax losses of $1.3 million and $0.2 million, respectively, related to Vista West, and pre-tax losses of $2.1 million and $1.5 million for the nine months ended September 30, 2018 and 2017, respectively. In addition to the above, we recorded a $0.2 million loss on the sale of Vista West in the nine months ended September 30, 2018.

On January 5, 2018, we announced plans to close Affinity Medical Center (“Affinity”) located in Massillon, Ohio. Subsequent to January 5, 2018, we entered into an agreement with the City of Massillon related to the closure whereby all of the owned real property and a portion of the related tangible assets located at the hospital would be transferred to the City of Massillon in exchange for nominal consideration and the City of Massillon’s assumption of certain ongoing real property lease obligations and equipment lease obligations. Operations ceased on February 11, 2018 and we transferred the agreed-upon assets to the City of Massillon on May 16, 2018. For the three months ended September 30, 2018 and 2017, our operating results included pre-tax losses of $2.2 million and $2.3 million, respectively, related to Affinity, and pre-tax losses of $26.6 million and $8.3 million for the nine months ended September 30, 2018 and 2017, respectively. Included in the pre-tax losses for the nine months ended September 30, 2018 was $18.2 million of closure costs related to the closure of Affinity which includes $8.1 million of severance and salary continuation costs, $5.0 million in losses associated with the disposal of assets that have no future value to us and $5.1 million of other costs and fees related to termination of contracts and other miscellaneous costs. We anticipate that in the remainder of 2018 we will incur costs, beyond those already incurred of approximately $0.5 million to $1.0 million related to the wind down and transfer of assets to other facilities. In addition, beyond 2018, we are obligated to maintain patient health records for approximately 19 years with an estimated annual cost of $0.3 million.

~~Update on TSAs and Arbitration with CHS~~

~~Since the Spin-off with CHS in~~ April 2016, we have outsourced to CHS, through various TSAs, certain services including, among others, services related to patient eligibility screening, billing, accounts receivable collections and other revenue management services and support, as well as information technology, payroll processing and other human resources functions. On August 4, 2017, we received a demand for arbitration from CHS seeking payment of certain amounts withheld by us pursuant to the Shared Service Centers Transition Services Agreement (the “SSC TSA”) and the Computer and Data Processing Transition Services Agreement (the “IT TSA”). We contend that the amounts are not payable to CHS and were not properly billed by CHS under the agreements. The matter is pending before the American Arbitration Association, and CHS seeks payment of approximately $12.1 million relating to24, 2019.

these two TSAs. We are vigorously contesting the charges as not payable to CHS under the terms of the agreements and have made counterclaims that include, among other things, termination of the SSC TSA, a ruling that the IT TSA is terminable at our option (as described below), and substantial damages we believe we have suffered as a result of the TSAs and other actions taken by CHS in connection with the Spin-off. Additionally, on March 19, 2018, we received notice from CHS that CHS was seeking to terminate, effective September 30, 2018, the SSC TSA and the IT TSA and to impose a September 30, 2018 deadline for completion of the transition of services under the SSC TSA and the IT TSA. The notice from CHS also provided an indication of CHS’s preference to terminate the Receivables Collection Agreement, the Eligibility Screening Services Agreement, and the Billing and Collection Agreement. We amended our counterclaims to include allegations that CHS's attempt to terminate the SSC TSA and the IT TSA, and to impose a September 30, 2018 deadline for completing the transition of services under those contracts violated the terms of the contracts, and was invalid and without effect.

The validity and effectiveness of CHS’s attempt to terminate the SSC TSA and IT TSA and to impose a September 30, 2018 deadline was litigated during the course of arbitration proceedings held in late June 2018. After hearing testimony regarding the termination issues, the arbitration panel ruled that each of the SSC TSA and IT TSA will continue in effect according to their original terms through 2021, subject to any agreement by the parties to terminate the SSC TSA and the IT TSA at an earlier time. The panel ordered that, after the date of the ruling, we would pay the amounts invoiced under the TSAs as billed, but deferred ruling on the parties’ economic claims related to the TSAs until additional arbitration proceedings in early October 2018. The arbitration reconvened October 1, 2018, with us presenting our claims that certain amounts are not payable to CHS and were not properly billed by CHS under the agreements, which constitute approximately $12.1 million in dispute, and certain counterclaims against CHS. The arbitration concluded October 9, 2018 and a decision is expected in mid-January 2019. We continue to believe that termination of all the TSAs is in our best long-term interests, and are working to ensure that the transitions are undertaken in a manner that minimizes the associated risks inherent in such a termination. We completed transition of the Eligibility Screening Services TSA (“ESS TSA”) during the second quarter of 2018. We completed transition of the Physician Practice Support Agreement (“PPSA”), which is related to the billing and collecting on accounts receivable for the physicians and owned clinics, and the Professional Account Services (“PASI”) Receivables Collection Agreement, which is primarily related to collecting receivables on aged/bad debt accounts for both the physicians and hospitals, effective October 1, 2018. Terminating or transitioning the services provided by the transition services agreements with CHS could result in additional costs and a risk of operational problems, delays in collections from payors, potential errors and possible control issues during the termination and transition processes, any of which could adversely affect our business, results of operations, financial condition and cash flows. For additional information, see Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018.

Healthcare Reform

The ~~Affordable Care Act, as currently structured, mandates that substantially all U.S. citizens maintain health insurance coverage, while expanding access~~healthcare industry in the United States remains subject to ~~coverage through a combination of private sector health insurance~~continuing regulatory and market uncertainty due to recent reforms and ~~public program expansion. However, there is considerable uncertainty with regard to the future of the Affordable Care Act, as the~~reform proposals. The current presidential administration and certain members of Congress have ~~expressed their intent~~sought to repeal or make significant changes to the ~~law, its implementation~~Affordable Care Act. In addition, governmental agencies and ~~its~~courts have narrowed the scope of the law’s reforms through subsequent interpretation. For example, in 2017, Congress eliminated the financial penalties associated with the individual mandate, effective January 1, 2019, which may result in fewer individuals electing to purchase health insurance. Further, in June 2018, the DepartmentCourts and government agencies could eliminate provisions of ~~Labor issued a final rule expanding availability of association health plans, which are not required to cover all of the essential health benefits mandated by~~ the Affordable Care ~~Act. This change may result~~Act that are beneficial to us and leave in ~~individuals purchasing less comprehensive coverage.~~effect provisions that reduce our reimbursement. In addition, ~~several~~government and private health insurers have withdrawn from or limited their participation in the healthcare insurance exchanges, and the presidential administration has taken steps, including ending cost-sharing subsidies that were previously available to insurers, which may threaten the long-term viability of those marketplaces. Healthcare reform initiatives, includingpayors’ efforts to fundamentally change ~~alter~~ the ~~implementation~~finance and delivery of ~~or repeal the Affordable Care Act,~~health care may have an adverse effect on our business, results of operations, ~~financial position,~~ cash flow ~~capital resources~~ and liquidity. For example, certain members of Congress have proposed measures that would expand

government-sponsored coverage of healthcare expenses, including single-payor proposals. Other industry groups, such as large employers and private payors and their affiliates, have also proposed reforms to the structure of private health insurance.

California 2017-2019 Hospital Quality Assurance Fee Program

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 2016, 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 expired on December 31, 2016. The California Department of Health Care Services (“DHCS”) submitted the Phase V HQAF program package to CMS on March 30, 2017 for 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 inpatient and outpatient upper payments limits (“UPL”) for each of the state fiscal years in the period January 1, 2017 through June 30, 2019. CMS issued formal approval of Phase V HQAF on December 15, 2017. The approvals included the inpatient and outpatient fee-for-service supplemental payments and the overall tax structure. The California Hospital Association will work with the DHCS to develop an

implementation schedule and update the draft model to reflect the CMS-approved amounts. However, CMS has not yet issued a decision on the managed care components of the Phase V HQAF program and, therefore, the payment amounts in the draft model are preliminary. Furthermore, the supplemental Medi-Cal managed care payments made through the new directed payment mechanism have been estimated using inpatient utilization data publicly reported to the California Office of Statewide Health Planning and Development for the fiscal year ending in 2015. However, in actuality, the directed payments will be made for inpatient and outpatient services provided to in-network patients during the current state fiscal year. Phase V of California’s HQAF program expires on June 30, 2019. Although a state constitutional amendment indefinitely extended the program, CMS is required to approve the next phase of the program, Phase VI, which begins July 1, 2019 and is expected to be 24 to 36 months, but is unknown at this time. The CMS approval process can be lengthy, and we are unable to recognize revenue until CMS approves each phase of the program. We cannot provide any assurances of the amount of revenues our hospitals may receive from or the timing of CMS’ approval of the next phase of the HQAF program, the timing of the related cash flows, or that the program will be approved at all.

Of the total supplemental payments received by all hospitals, our portion represents 0.50%. We are estimating that our net impact over the 30-month period will be $56.8 million. While uncertainties regarding the timing and amount of payments under the HQAF program exist, our estimates of future cash collections at this time, net of any provider taxes, including those related to previous programs, are ~~$31.5 million for the full year 2018,~~ $22.3 million in 2019, $12.7 million in 2020 and $7.7 million in 2021.

Illinois 2018 Hospital Assessment Program Redesign

The Illinois Hospital Assessment program provides funding for supplemental payments to hospitals, particularly those that serve higher proportions of Medicaid and uninsured patients in Illinois. Revenues generated from fees assessed on certain general and acute care Illinois hospitals draw down federal matching funds that are issued as supplemental payments to hospitals for care of Medicaid patients. The program was redesigned to modernize payment methodologies and satisfy certain CMS requirements. The “new” program received CMS approval to begin effective July 1, 2018. Among other changes, the program includes updated base year data and requires a greater percentage of funds to hospitals to be delivered at the paid claims level rather than through lump sum payments.

According to the Illinois Health and Hospital Association, the total funding available to hospitals under the redesigned program will approximate the old program. However, funding allocations may vary with the updated base year data and other changes in payment methodology. The most recent models provided by the Illinois Health and Hospital Association show our hospital payments being reduced by approximately ~~$7.7~~$7.9 million annually.

Other Government Regulations

Our hospital operations business is highly regulated. We are required to comply with extensive, complicated and overlapping governmental laws and regulations at the federal, state and local levels. These laws and regulations govern every aspect of how our hospitals conduct their operations, including the service lines that must be offered for licensure as an acute care hospital, restrictions related to employing physicians, and requirements applicable to eligibility and payment structures under the Medicare and Medicaid programs. The failure to comply with these laws and regulations can result in severe penalties including criminal penalties, civil sanctions, and the loss of our ability to qualify for participation in the Medicare and Medicaid programs.

Rules, regulations and laws imposed on the U.S. healthcare industry are subject to ongoing and frequent changes with little or no notice and are often interpreted and applied differently by various regulatory agencies with authority to enforce such requirements. Each change or conflicting interpretation may require us to make changes at our hospitals and other healthcare facilities related to aspects such as space usage, equipment, technology, staffing and service lines. We may also be required to revise or implement operating policies and procedures that were previously believed to be compliant. The cost of compliance with governmental laws and

regulations is a significant component of our overall operating costs. Furthermore, these costs have been rising in recent years due to new regulatory requirements and increasing enforcement provisions. Management anticipates that compliance costs will continue to grow in the foreseeable future. The U.S. healthcare industry has seen a number of ongoing investigations related to patient referrals, physician recruiting and employment practices, cost reporting and billing practices, medical necessity of inpatient admissions, physician office leasing, laboratory and home healthcare services, physician ownership of hospitals and other healthcare providers, and joint ventures involving hospitals and physicians. Hospitals continue to be one of the primary focus areas of the Office of Inspector General (“OIG”), Department of Justice (“DOJ”) and other governmental fraud and abuse regulatory authorities and programs.

Basis of Presentation

Our financial statements have been prepared under the assumption that QHC will continue as a going concern. We have historical net losses and our maximum Secured Net Leverage Ratio, as permitted under the CS Agreement, will reduce to 4.50 from 5.00 as of and for the three and nine months ended September 30, 2017 include certain reclassifications to conform to the presentation as of and for the three and nine months ended September 30, 2018. These reclassifications had no net effect on our consolidated results of operations, financial position or cash flows reported in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2018. See Note 2 — Basis of Presentation and Significant Accounting Policies — Reclassifications and Immaterial Restatements in the accompanying consolidated financial statements.

~~Revenues~~

~~Adoption of ASC Topic 606 “Revenue from Contracts with Customers”~~

On January 1, ~~2018, we adopted ASC 606 using~~2020. See “— Liquidity and Capital Resources — Financial Outlook” for additional information regarding factors impacting our future earnings projections and management’s plans which alleviate the ~~modified retrospective method~~substantial doubt about our ability to ~~all contracts existing on January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and~~ continue ~~to be reported in accordance with our historical accounting under Topic 605. The key impacts on our consolidated financial statements include the following:~~

~~Prior to the adoption of ASC 606,~~as a significant portion of our allowance for doubtful accounts related to amounts due from self-pay patients, as well as co-pays and deductibles owed to us by patients with insurance. Under ASC 606, the estimated allowance for these patient accounts are generally considered a direct reduction to net operating revenues rather than as previously reported as provision for bad debts.going concern.

Prior to the adoption of ASC 606, our presentation and disclosure of net revenue by payor included the portion of the revenue related to co-pays and deductibles as third-party revenues. Under ASC 606, the co-pays and deductibles portions of net revenue are classified as self-pay after insurance.

~~Revenue Recognition~~Revenues

We generate revenues by providing healthcare services at our hospitals and affiliated outpatient service facilities to patients seeking medical treatment. Hospital revenues depend on, among other factors, inpatient occupancy and acuity levels, the volume of outpatient procedures and the charges and negotiated reimbursement rates for the healthcare services provided. Our primary sources of payment for patient healthcare services are third-party payors, including the Medicare and Medicaid programs, Medicare and Medicaid managed care programs, commercial insurance companies, other managed care programs, workers’ compensation carriers and employers. Self-pay revenues are the portion of our revenues generated from providing healthcare services to patients who do not have health insurance coverage as well as the patient responsibility portion of charges that are not covered for an individual by a health insurance program or plan. We generate revenues related to our QHR business when hospital management advisory and healthcare consulting services are provided. We generate other non-patient revenues primarily from rental income and hospital cafeteria sales.

Amounts we collect for medical treatment of patients covered by Medicare, Medicaid and non-governmental third-party payors are generally less than our standard billing rates. Our standard charges and reimbursement rates for routine inpatient services vary significantly depending on the type of medical procedure performed and the geographical location of the hospital. Differences in our standard billing rates and the amounts we expect to collect from third-party payors are classified as contractual adjustments. The reimbursements we ultimately receive as payments for services are determined for each patient instance of care, based on the contractual terms we negotiate with third-party payors or based on federal and state regulations related to governmental healthcare programs. Billings and collections are outsourced to CHS under ~~TSAs~~a TSA that ~~were~~was put in place by CHS in connection with the Spin-off. Our contractual adjustments are impacted by the timing and ability of CHS to monitor the classification and collection of our patient accounts receivable. See Note 16 — Related Party Transactions in the accompanying consolidated financial statements for additional information on ~~these agreements.~~this agreement. Except for emergency department services, our policy is to determine the payment methodology with patients prior to when the services are performed. Self-pay and other payor discounts are incentives offered to uninsured or underinsured patients or other payors to reduce their costs of healthcare services.

The following table provides a summary of our net operating revenues for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ by payor source (dollars in thousands):

	Three Months Ended September 30,										Three Months Ended March 31,
	2018					2017					2019					2018
	$ Amount		% of Total			$ Amount		% of Total			$ Amount		% of Total			$ Amount		% of Total

Medicare	$	123,788		26.9	%	$	156,547		31.4	%	$	129,046		29.1	%	$	144,583		29.7	%
Medicaid		97,803		21.2	%		92,563		18.5	%		81,924		18.5	%		85,103		17.5	%
Managed care and commercial		185,493		40.3	%		184,390		36.9	%		174,075		39.3	%		185,226		38.0	%
Self-pay and self-pay after insurance		33,647		7.3	%		42,385		8.5	%		37,137		8.4	%		49,684		10.2	%
Non-patient		19,776		4.3	%		23,417		4.7	%		20,623		4.7	%		22,224		4.6	%
Total net operating revenues	$	460,507		100.0	%	$	499,302		100.0	%	$	442,805		100.0	%	$	486,820		100.0	%


	Nine Months Ended September 30,
	2018					2017
	$ Amount		% of Total			$ Amount		% of Total

Medicare	$	398,477		28.1	%	$	468,627		30.1	%
Medicaid		270,047		19.0	%		292,380		18.8	%
Managed care and commercial		560,445		39.5	%		583,073		37.4	%
Self-pay and self-pay after insurance		125,619		8.8	%		140,296		9.0	%
Non-patient		65,371		4.6	%		72,712		4.7	%
Total net operating revenues	$	1,419,959		100.0	%	$	1,557,088		100.0	%

For the three months ended September 30, 2018 and 2017, Medicare revenues related to Medicare Advantage Plans were $32.0 million and $47.0 million, respectively, or 25.9% and 30.0%, respectively, as a percentage of total Medicare revenues. For the nine months ended September 30, 2018 and 2017, Medicare revenues related to Medicare Advantage Plans were $103.4 million and $133.4 million, respectively, or 25.9% and 28.5%, respectively, as a percentage of total Medicare revenues.

Charity Care

In the ordinary course of business, we provide services to patients who are financially unable to pay for hospital care. The related charges for those patients who are financially unable to pay that otherwise do not qualify for reimbursement from a governmental

program are classified as charity care. We determine amounts that qualify for charity care primarily based on the patient’s household income relative to the poverty level guidelines established by the federal government. Our policy is not to pursue collections for such amounts; therefore, the related charges are recorded in operating revenues at the standard billing rates and fully offset in contractual adjustments in the same period.

Leases

In February 2016, the FASB issued a new accounting standard, ASC Topic 842, related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We adopted ASC Topic 842 effective January 1, 2019 using the modified retrospective transition approach as of the period of adoption. Our financial statements prior to January 1, 2019 were not modified for the application of the new lease standard. Upon adoption of ASC Topic 842, we recognized $93.7 million of ROU assets and $95.6 million of lease liabilities associated with operating leases. The accounting for capital leases remained substantially unchanged. In addition, we recognized a $0.7 million cumulative effect adjustment that increased accumulated deficit in our consolidated balance sheet at January 1, 2019.

Critical Accounting Policies

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts and related disclosures. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The critical accounting estimates and judgments presented below are not intended to be a comprehensive list of all our accounting policies that require estimates, but are limited to those that involve a higher degree of judgment and complexity. We believe the current assumptions and other considerations used to estimate amounts in our financial statements are appropriate. If actual results differ from these assumptions and considerations, the resulting impact could have a material adverse effect on our results of operations and financial condition.

Third-Party Reimbursements and State Supplemental Payment Programs

Our ~~estimate~~estimates of our patient revenues due from third-party payors ~~is subject to complexities, including~~are highly complex and include interpretations of governmental regulations and payor-specific contractual agreements that are frequently changing. The Medicare and Medicaid programs, which are the payor sources for a major portion of our patient revenues, are ~~highly complex programs and~~ subject to interpretation of federal and state-specific reimbursement rates, new or changing legislation and final cost report settlements. Contractual adjustments are recorded in the period services are performed and the patient’s method of payment is verified. Estimates for contractual adjustments are subject to change, in large part, due to ongoing contract negotiations and regulatory changes, which is typical in the U.S. healthcare industry. Revisions to estimates for contractual adjustments are recorded in the periods in which they

become known and may be subject to further revisions. ~~Hospital contractual adjustments calculations are reviewed on a monthly basis by management to ensure reasonableness and accuracy.~~

We use a third-party automated contractual adjustments system to calculate our contractual adjustments each month. Contractual adjustments are calculated utilizing historical paid claims data by payor ~~source, which is uploaded into the system each month.~~source. The key assumptions used by the system to calculate the current period estimated contractual adjustments are derived on a payor-specific basis from the estimated contractual reimbursement percentage and historical paid claims data. The automated contractual adjustments system does not include patient account level information, as it estimates an average contractual adjustment for each payor source. ~~Due to the complexities involved in the contractual adjustments estimates, actual~~Actual reimbursement payments we receive from third-party payors could be different from the amounts we estimated and recorded. If the actual contractual reimbursement percentages by payor source differed by 1% from our estimated contractual reimbursement percentages, our net loss for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 would have changed by ~~$15.8~~$15.7 million. If we applied a 1% differential to our patient accounts receivable due from governmental, managed care and commercial third-party payors as of ~~September 30, 2018,~~March 31, 2019, patient accounts receivable, net would have changed by ~~$15.9~~$15.8 million.

Cost report settlements under reimbursement programs with Medicare, Medicaid and other managed care plans are estimated and recorded in the period patient services are performed and any revisions to estimates of previous program reimbursements are recorded in subsequent periods until the final cost report settlements are determined. We account for cost report settlements in contractual adjustments in our consolidated statements of income and recognize these amounts as due from and due to third-party payors on our consolidated balance sheets. Contractual adjustments related to previous program reimbursements and final cost report settlements favorably ~~(unfavorably)~~ impacted net operating revenues by ~~$(0.5)~~$1.8 million and ~~$2.5~~$0.5 million during the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $(0.4) million and $2.5 million during the nine months ended September 30, 2018 and 2017,~~ respectively.

Several states utilize supplemental payment programs, including disproportionate share programs, for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. The amounts due to us under such programs are included in due from third-party payors on our balance sheets. Some of these programs have participation costs, referred to as fees or provider taxes. We record these costs in due to third-party payors on our consolidated balance sheets. After

a state supplemental program is approved and fully authorized, we recognize the reimbursement payments due to us from these programs in the periods amounts are estimable and revenue collection is reasonably assured. We record the revenues as favorable contractual adjustments in our net operating revenues and the related provider taxes as other operating expenses in our statements of income.

The following table shows the portion of our Medicaid reimbursements attributable to state supplemental payment programs for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,		Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018

Medicaid state supplemental payment program revenues	$	57,555	$	46,866	$	158,186	$	138,544	$	47,690	$	48,561
Provider taxes and other expenses		19,131		16,523		55,326		50,646		18,866		19,144
Reimbursements attributable to state supplemental payment programs, net of expenses	$	38,424	$	30,343	$	102,860	$	87,898	$	28,824	$	29,417

The California Department of Health Care Services administers the HQAF program, imposing a fee on certain general and acute care California hospitals. Revenues generated from these fees provide funding for the non-federal supplemental payments to California hospitals that serve California’s Medi-Cal and uninsured patients. Under the HQAF program, we recognized ~~$8.7~~$8.1 million of Medicaid revenues and ~~$0.1~~$2.2 million of provider taxes for the three months ended ~~September 30, 2018~~March 31, 2019 and ~~$24.4~~$7.9 million of Medicaid revenues and ~~$4.4~~$2.1 million of provider taxes for the ~~nine~~three months ended ~~September 30,~~March 31, 2018.

In addition, we recognized $2.0 million of Medicaid revenues in the three months ended March 31, 2019 related to the sale of Illinois property tax credits. There were no corresponding amounts recognized in the three ~~and nine~~months ended March 31, 2018 as the amount for the full year 2018, which was $7.3 million, was recognized in the three months ended September 30, ~~2017. The revenues and fees for the full year 2017 were recognized in the fourth quarter of 2017 when CMS approved the current phase of the program.~~2018.

In addition, we recognized $7.3 million of Medicaid revenues in the three and nine months ended September 30, 2018 related to the sale the Illinois property tax credits. For the three and nine months ended September 30, 2017, the Company recognized $7.8 million from the sale of the Illinois property tax credits as a direct reduction to other operating expenses.

The following table provides a summary of the components of amounts due from and due to third-party payors (in thousands):

	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018

Amounts due from third-party payors:
Previous program reimbursements and final cost report settlements	$	13,878	$	17,383	$	14,669	$	14,374
State supplemental payment programs		50,231		79,819		53,079		49,069
Total amounts due from third-party payors	$	64,109	$	97,202	$	67,748	$	63,443

Amounts due to third-party payors:
Previous program reimbursements and final cost report settlements	$	32,830	$	33,163	$	34,208	$	32,174
State supplemental payment programs		11,104		14,542		11,528		13,678
Total amounts due to third-party payors	$	43,934	$	47,705	$	45,736	$	45,852

Accounts Receivable

Substantially all of our accounts receivable are related to providing healthcare services to patients at our hospitals and affiliated outpatient facilities. Collection of these accounts receivable is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patients and the patient financial responsibility portion of payments due from insured patients, generally co-pays and deductibles. Our policy is to verify the health insurance coverage of a patient prior to the procedure date for all medical treatment scheduled in advance. We do not verify insurance coverage in advance of treatment for walk-in and emergency room patients.

We adopted ASC 606 on January 1, 2018. Prior to the adoption of ASC 606, a significant portion of our allowance for doubtful accounts related to self-pay patients, as well as co-pays and deductibles owed to us by patients with insurance. Under ASC 606, the estimated allowance for these patients are generally considered a direct reduction to net operating revenues rather than as previously reported as provision for bad debts.

Collections are impacted by the economic ability of patients to pay and the effectiveness of ~~CHS’~~CHS’s billing and collection efforts, including their current policies on billings, accounts receivable payor classifications, collections, the effectiveness of our third party collection agencies and our own efforts to further attempt collection. As previously stated, billings and certain collections are outsourced to CHS under ~~the~~a transition services ~~agreements~~agreement that ~~were~~was put in place with the Spin-off. See Note 16 — Related Party Transactions in the accompanying consolidated financial statements for additional information on ~~these agreements.~~this agreement. Significant changes in payor mix, centralized business office operations, including ~~CHS’~~CHS’s efforts in collecting our accounts receivables, economic conditions or trends in federal and state governmental healthcare coverage, among other things, could affect our collection levels.

Our policy is to write off gross accounts receivable if the balance is under $10.00 or when such amounts are placed with outside secondary collection agencies. We believe this policy accurately reflects our ongoing collection efforts and is consistent with practices within the U.S. healthcare industry. We had ~~$519.9~~$514.6 million and ~~$474.3~~$486.8 million of past due patient account balances at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, being pursued by secondary collection agencies, excluding accounts that were being pursued by CHS’s wholly-owned subsidiary, PASI, under the transition services agreement. Effective October 1, 2018, by mutual agreement of

both companies, each of the parties’ obligations under this transition services agreement to the other were terminated. We replaced the services provided by CHS either by utilizing external service providers ~~and/or~~and internal resources. We expect to collect less than 3%, net of estimated collection fees, of the amounts being pursued by these secondary collection agencies. As these amounts have been written-off, they are not included in accounts receivable in our consolidated balance sheets.

For self-pay receivables, the total amount of contractual adjustments, discounts and implicit price concessions that reduces these receivables to their net carrying value were ~~$552.0~~$575.8 million and ~~$545.8~~$575.6 million as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. If our actual collection percentage differed by 1% from our estimated collection percentage as a result of a change in recoveries, our net loss for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 would have changed ~~$6.1~~$6.4 million.

Days revenue outstanding related to patients accounts receivable, excluding amounts recorded as due to or due from third-party payors, was 6467 days and 6364 days as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

Impairment of Long-Lived Assets and Goodwill

Whenever an event occurs or changes in circumstances indicate that the carrying values of certain long-lived assets may be impaired, we project the undiscounted cash flows expected to be generated by those assets. If the projections indicate that the carrying values are not expected to be recovered, the assets are reduced to their estimated fair value based on a quoted market price, if available, or an estimated value based on valuation techniques available in the circumstances.

Our hospital operations and hospital management advisory and healthcare consulting services operations meet the criteria to be classified as reporting units for goodwill. Goodwill is evaluated for impairment at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of a reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required. Step two is to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. When an indicator of potential impairment is identified in interim periods, we evaluate goodwill for impairment at such date.

We perform our annual goodwill impairment evaluation in the fourth quarter of each year. For our annual evaluation, we estimate the fair value of each of our reporting units utilizing two modeling approaches, a discounted cash flow model and an earnings multiple model. The discounted cash flow model applies a discount rate to our cash flow forecasts that is based on our best estimate of a market participant’s weighted-average cost of capital. The earnings multiple model applies a market supported multiple to EBITDA. Both models are based on our best estimate of future revenues and operating costs and expenses as of the testing date. Additionally, the results of both models are reconciled to our consolidated market capitalization, which considers the amount a potential buyer would be required to pay, in the form of a control premium, to gain sufficient ownership to set policies, direct operations and control management decisions of our company.

During the three months ended ~~September 30, 2018, we~~March 31, 2019, the Company evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, wethe Company recognized long-lived asset impairment of ~~$32.4~~$8.9 million during the three months ended ~~September 30, 2018,~~March 31, 2019, which consisted of ~~$31.5~~$8.4 million of property and equipment and ~~$0.9~~$0.5 million of capitalized software costs. ~~See Note 3 — Impairment of Long-Lived Assets and Goodwill in our accompanying consolidated financial statements.~~

During the three months ended March 31, 2018, we evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, we recognized long-lived asset impairment of $39.8 million during the three months ended March 31, 2018, which consisted of $34.7 million of property and equipment and $5.1 million of capitalized software costs. ~~See Note 3 — Impairment of Long-Lived Assets and Goodwill in our accompanying consolidated financial statements.~~

During the three months ended September 30, 2017, we evaluated the fair value of hospitals classified as held for sale and other hospitals intended for potential divestiture. In connection with this evaluation, we recognized long-lived asset and goodwill impairment of $5.3 million during the three months ended September 30, 2017, which consisted of $3.7 million of property and equipment, $1.0 million of intangibles and $0.6 million of goodwill impairment. See Note 3 — Impairment of Long-Lived Assets and Goodwill in our accompanying consolidated financial statements.

During the three months ended June 30, 2017, we evaluated the fair value of hospitals classified as held for sale and evaluated other hospitals intended for potential divestiture. In connection with this evaluation, we recognized $12.9 million of impairment to property and equipment during the three months ended June 30, 2017. See Note 3 — Impairment of Long-Lived Assets and Goodwill in our accompanying consolidated financial statements.

During the three months ended March 31, 2017, management made a decision to classify certain hospitals as held for sale. In connection with this decision, we evaluated the estimated relative fair value of the hospitals classified as held for sale in relation to the overall fair value of the hospital operations reporting unit utilizing a September 30, 2016 measurement date, which was the measurement date of our most recent annual goodwill impairment analysis, and recognized $3.3 million of impairment to long-lived assets and goodwill during the three months ended March 31, 2017, which consisted of $1.1 million of property and equipment, $0.8 million of capitalized software costs and $1.4 million of goodwill. See Note 3 — Impairment of Long-Lived Assets and Goodwill in our accompanying consolidated financial statements.

Professional and General Liability Insurance and Workers’ Compensation Liability Insurance Reserves

As part of the business of owning and operating hospitals, we are subject to legal actions alleging liability on our part. To mitigate a portion of this risk, we maintain insurance exceeding a self-insured retention level for these types of claims. Our self-insurance reserves reflect the current estimate of all outstanding losses, including incurred but not reported losses, based on actuarial calculations as of period end. The loss estimates included in the actuarial calculations may change in the future due to updated facts and circumstances. Insurance expense in the statements of income includes the actuarially determined estimates for losses in the current year, including claims incurred but not reported, the changes in estimates for losses in prior years based on actual claims development experience as compared to prior actuarial projections, the insurance premiums for losses related to policies obtained to cover amounts in excess of our self-insured retention levels, the administrative costs of the insurance programs, and interest expense related to the discounted portions of these liabilities. Our reserves for professional and general liability and workers’ compensation liability claims are based on semi-annual actuarial calculations, which are discounted to present value and consider historical claims data, demographic factors, severity factors and other actuarial assumptions. The liabilities for self-insured claims are discounted based on our risk-free interest rate that corresponds to the period when the self-insured claims are incurred and projected to be paid.

A portion of our reserves for workers’ compensation and professional and general liability claims included on our balance sheets relates to reserved claims and incurred but not reported claims prior to the Spin-off. These claims were fully indemnified by

CHS under the terms of the Separation and Distribution Agreement. As a result, we have a corresponding receivable from CHS related to these claims on our consolidated balance sheets. See Note 17 — Commitments and Contingencies in our accompanying consolidated

financial statements for a table that summarizes the receivables and liabilities associated with our workers’ compensation liability and professional and general liability claims as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

Income Taxes

The breadth of our operations and the complexity of tax regulations require assessments of uncertainties and judgments in estimating the amount of income taxes that we will ultimately pay. The amount of final income taxes ultimately paid by us is dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal and state tax audits in the normal course of business.

We calculate our provision for income taxes and account for income taxes using the asset and liability method. Under this method, deferred income taxes are recorded to represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred income taxes during the year. Deferred income taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and the enactment of new or amended tax laws.

Under the asset and liability method, valuation allowances are recorded to reduce deferred income tax assets when it is more likely than not that a tax benefit will not be realized. We assess the realization of our deferred tax assets to determine whether an income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The main factors that we consider include:

cumulative earnings or losses in recent years, adjusted for certain nonrecurring items;

expected earnings or losses in future years;

unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and earnings levels;

the availability, or lack thereof, of taxable income in prior carryback periods that would limit realization of tax benefits; and

the carryforward period associated with the deferred tax assets and liabilities.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record deferred income tax benefits for all tax years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date about the ability to realize the benefit of the deferred tax assets or tax positions. For those tax positions where it is more likely than not that a future tax benefit will be sustained, our policy is to record the largest amount of income tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that an income tax benefit will not be sustained in the future, we do not recognize a deferred tax benefit in our financial statements. We record interest and penalties, net of any applicable tax benefit, related to income taxes, if any, as a component of the provision for income taxes when applicable.

~~See Note 11~~Recent Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-15, Intangibles — ~~Income Taxes~~Goodwill and Other — Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to provide guidance on the ~~accompanying~~accounting for implementation costs incurred in a cloud computing arrangement that is accounted for as a service contract. This ASU requires entities to account for such costs consistent with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. We adopted ASU No. 2018-15 on January 1, 2019 on a prospective basis. There was no material impact on our consolidated financial ~~statements for information on the projected impact~~position and results of ~~the new tax laws.~~

~~New Accounting Pronouncements~~operations as a result of adoption of ASU No. 2018-15.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income, which allows for reclassification from accumulated other comprehensive income to retained earnings of the stranded tax effects in accumulated other comprehensive income resulting from the enactment of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) and corresponding accounting treatment recorded in the fourth quarter of 2017. ~~The~~We adopted ASU ~~is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early~~No. 2018-02 on January 1, 2019. The adoption of ~~the amendments in this~~ ASU ~~is permitted, including adoption in any interim period for reporting periods for which financial statements have~~No. 2018-02 did not ~~yet been issued. We do not anticipate that the adoption of this standard will~~ have a significant impact on our consolidated balance sheet.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. This ASU instead permits an entity to recognize goodwill impairment as the excess of a reporting unit's carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The new guidance continues to allow an entity to perform a qualitative assessment of goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early

6154

adoption permitted. We are currently evaluating the impact this guidance may have on our consolidated results of operations and financial ~~position and cash flows.~~position.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows — Restricted Cash, which addressed classification and presentation of changes in restricted cash on the statement of cash flows. The standard requires a reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents; however, the nature of the restrictions should be disclosed. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This ASU is to be applied using a retrospective transition method for each period presented. We adopted ASU 2016-18 on January 1, 2018 and concurrently revised our presentation of cash and cash equivalents on the consolidated statement of cash flows. For periods prior to January 1, 2018, the presentation of cash and cash equivalents on the consolidated statement of cash flows has been revised to conform to the current presentation.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the accounting for leases and requires the rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. ASU 2016-02 is effective for interim periods and fiscal years beginning after December 15, 2018, with early adoption permitted. Under ASU 2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients. Our adoption process of ASU 2016-02 is ongoing, including identifying and validating the population of both known and embedded leases, implementing our acquired lease software and quantifying the impact on our consolidated financial statements. We anticipate that the adoption of ASU 2016-02 will result in a material increase in both total assets and total liabilities reflected on our consolidated balance sheets upon the recognition of right-of-use assets and obligations for leases currently classified as operating leases. In addition, we are continuing to evaluate and address the impact that the adoption of this standard will have on our policies, procedures, financial disclosures and control framework. We anticipate substantially completing our evaluation of the impact of the adoption of ASU 2016-02 by December 1, 2018.

Results of Operations

We have summarized our results of operations, including certain financial and operating data for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ on a comparative basis below. The definitions of certain terms used throughout the remainder of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” follows:

Same-facility. Same-facility financial and operating data, as presented in the comparative discussions herein, excludes hospitals that were sold or closed prior to and as of the end of the current reporting period. Our same-facility operating results for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ which are reported herein, have been adjusted to exclude the operating results of Sandhills Regional Medical Center and its affiliated facilities (“Sandhills”), Barrow Regional Medical Center and its affiliated facilities (“Barrow”), Cherokee Medical Center and its affiliated facilities (“Cherokee”), Trinity Hospital of Augusta and its affiliated facilities (“Trinity”), Lock Haven Hospital and its affiliated facilities (“Lock Haven”), Sunbury Community Hospital and its affiliated facilities (“Sunbury”), L.V. Stabler Memorial Hospital and its affiliated facilities (“L.V. Stabler”), Affinity, Vista West, Clearview and McKenzie which we sold or closed on December 1, 2016, December 31, 2016, March 31, 2017, June 30, 2017, September 30, 2017, September 30, 2017, October 31, 2017, February 11, 2018, March 1, 2018, March 31, 2018 and September 30, 2018, respectively.

Divestitures Group. The divestitures group, as of ~~September 30, 2018,~~March 31, 2019, includes all hospitals that had been sold or closed by us since the Spin-off through ~~September 30, 2018.~~March 31, 2019. The divestitures group includes Sandhills, Barrow, Cherokee, Trinity, Lock Haven, Sunbury, L.V. Stabler, Affinity, Vista West, Clearview and McKenzie. This group of hospitals has certain ongoing operations during the wind-down periods related to the assets and liabilities which were not part of the hospital sale, which typically includes patient accounts receivable, ~~and~~ third-party receivables and ~~payables.~~accounts payable.

Licensed Beds. Licensed beds are the number of beds for which the appropriate state agency licenses a hospital, regardless of whether the beds are actually available for patient use.

Admissions. Admissions represent the number of patients admitted for inpatient services.

Adjusted Admissions. Adjusted admissions is computed by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient ~~revenues~~revenues..

~~Total~~ Surgeries. ~~Total surgeries~~Surgeries represent the number of inpatient and outpatient surgeries.

Emergency ~~Room Visits.~~room visits. Emergency room visits represent the number of patients registered and treated in our emergency rooms.

Medicare ~~Case Mix Index.~~case mix index. Medicare case mix index is a relative value assigned to a diagnosis-related group of patients that is used in determining the allocation of resources necessary to treat the patients in that group. Medicare case mix index is calculated as the average case mix index for all Medicare admissions during the period.

Hospital ~~Operations Man-Hours~~operations man-hours per ~~Adjusted Admission.~~adjusted admission. Hospital operations man-hours per adjusted admission is calculated as total paid employed and contract labor hours ~~including~~at both our hospitals and affiliated outpatient facilities ~~including clinics,~~ divided by adjusted admissions. It is used by management as a ~~measure~~measurement of productivity.

Days ~~Revenue Outstanding.~~revenue outstanding. Days revenue outstanding approximates the average collection period for patient accounts receivable. It is calculated by dividing net patient accounts receivable at the end of the period by average net operating revenues per day for the most recent three months. Net patient accounts receivable excludes the amounts reported as due from and ~~due~~ to third-party payors related to final cost report settlements and state supplemental payment programs.

EBITDA. EBITDA is a non-GAAP financial measure that consists of net income (loss) before interest, income taxes, depreciation and amortization.

Adjusted EBITDA. 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 gain (loss) on sale of hospitals, net loss on closure of hospitals, transition of TSAs, transaction costs related to the Spin-off, severance costs for post-spin headcount reductions and executive severance and changes in estimate related to collectability of patient accounts receivable. We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by our management to assess the operating performance of our hospital operations business and to make decisions on the allocation of resources. Additionally, management utilizes Adjusted EBITDA in assessing our consolidated results of operations and in comparing our results of operations between periods.

Same-facility Adjusted EBITDA. Same-facility Adjusted EBITDA, ~~Adjusted for Divestitures.~~ ~~Adjusted EBITDA, Adjusted for Divestitures,~~ also a non-GAAP financial measure, is further adjusted to exclude the effect of ~~negative~~ EBITDA of the divestitures group. We present Same-facility Adjusted EBITDA ~~Adjusted for Divestitures~~ because management believes this measure provides investors and other users of our financial statements with additional information about how management assesses our results of operations. Same-facility Adjusted EBITDA was previously defined as Adjusted EBITDA, Adjusted for Divestitures in prior periods. There has been no change in how the financial measure is being calculated.

Three Months Ended ~~September 30, 2018~~March 31, 2019 Compared to Three Months Ended ~~September 30, 2017~~

~~The following table provides a summary of our results of operations, both in dollars and as a percentage of net operating revenues (dollars in thousands):~~

Three Months Ended September 30,

2018

2017

% of

% of

$ Amount

Revenues

$ Amount

Revenues

Operating revenues

$
557,847

Provision for bad debts

58,545

Net operating revenues

$
460,507

100.0
%

499,302

100.0
%
Operating costs and expenses:

Salaries and benefits

226,237

49.1
%

251,780

50.4
%
Supplies

48,949

10.6
%

58,657

11.7
%
Other operating expenses

143,716

31.4
%

145,357

29.2
%
Depreciation and amortization

16,612

3.6
%

20,735

4.2
%
Rent

11,661

2.5
%

12,377

2.5
%
Electronic health records incentives earned

(31
)

—
%

(287
)

(0.1
)%
Legal, professional and settlement costs

1,519

0.3
%

2,050

0.4
%
Impairment of long-lived assets and goodwill

32,438

7.0
%

5,261

1.1
%
Loss (gain) on sale of hospitals, net

805

0.2
%

79

—
%
Loss on closure of hospitals, net

1,111

0.2
%

—

—
%
Transaction costs related to the Spin-off

—

—
%

173

—
%
Total operating costs and expenses

483,017

104.9
%

496,182

99.4
%
Income (loss) from operations

(22,510
)

(4.9
)%

3,120

0.6
%
Interest expense, net

32,450

7.0
%

32,216

6.4
%
Income (loss) before income taxes

(54,960
)

(11.9
)%

(29,096
)

(5.8
)%
Provision for (benefit from) income taxes

(1,074
)

(0.2
)%

(542
)

(0.1
)%
Net income (loss)

(53,886
)

(11.7
)%

(28,554
)

(5.7
)%
Less: Net income (loss) attributable to noncontrolling interests

54

—
%

637

0.1
%
Net income (loss) attributable to Quorum Health Corporation

$
(53,940
)

(11.7
)%

$
(29,191
)

(5.8
)%

~~The following table reconciles Adjusted EBITDA and Adjusted EBITDA, Adjusted for Divestitures to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):~~

Three Months Ended September 30,

2018

2017

Net income (loss)

$
(53,886
)

$
(28,554
)
Interest expense, net

32,450

32,216

Provision for (benefit from) income taxes

(1,074
)

(542
)
Depreciation and amortization

16,612

20,735

EBITDA

(5,898
)

23,855

Legal, professional and settlement costs

1,519

2,050

Impairment of long-lived assets and goodwill

32,438

5,261

Loss (gain) on sale of hospitals, net

805

79

Loss on closure of hospitals, net

1,111

—

Transition of transition services agreements

2,445

—

Transaction costs related to the Spin-off

—

173

Post-spin headcount reductions and executive severance

1,722

850

Adjusted EBITDA

34,142

32,268

Negative EBITDA of divested hospitals

8,651

6,032

Adjusted EBITDA, Adjusted for Divestitures

$
42,793

$
38,300

~~Revenues~~

~~The following table provides information related to our net operating revenues (dollars in thousands, except per adjusted admission amounts):~~

Three Months Ended September 30,

2018

2017

$ Variance

% Variance

Consolidated:

Net patient revenues

$
440,731

$
475,885

$
(35,154
)

(7.4
)%
Non-patient revenues

19,776

23,417

(3,641
)

(15.5
)%
Total net operating revenues

$
460,507

$
499,302

$
(38,795
)

(7.8
)%
Net patient revenues per adjusted admission

$
9,679

$
8,756

$
923

10.5
%
Net operating revenues per adjusted admission

$
10,113

$
9,187

$
926

10.1
%

Same-facility:

��

Net patient revenues

$
444,034

$
415,546

$
28,488

6.9
%
Non-patient revenues

19,810

23,051

(3,241
)

(14.1
)%
Total net operating revenues

$
463,844

$
438,597

$
25,247

5.8
%
Net patient revenues per adjusted admission

$
9,866

$
9,037

$
829

9.2
%
Net operating revenues per adjusted admission

$
10,306

$
9,538

$
768

8.1
%

~~The following table provides information related to our net operating revenues by payor source (dollars in thousands):~~

Three Months Ended September 30,

2018

2017

2018 vs 2017

$ Amount

% of Total

$ Amount

% of Total

$ Variance

Change in %

Consolidated:

Medicare

$
123,788

26.9
%

$
156,547

31.4
%

$
(32,759
)

(4.5
)%
Medicaid

97,803

21.2
%

92,563

18.5
%

5,240

2.7
%
Managed care and commercial

185,493

40.3
%

184,390

36.9
%

1,103

3.4
%
Self-pay and self-pay after insurance

33,647

7.3
%

42,385

8.5
%

(8,738
)

(1.2
)%
Non-patient

19,776

4.3
%

23,417

4.7
%

(3,641
)

(0.4
)%
Total net operating revenues

$
460,507

100.0
%

$
499,302

100.0
%

$
(38,795
)

Same-facility:

Medicare

$
122,846

26.5
%

$
132,080

30.1
%

$
(9,234
)

(3.6
)%
Medicaid

98,074

21.1
%

82,997

18.9
%

15,077

2.2
%
Managed care and commercial

184,860

39.9
%

161,506

36.8
%

23,354

3.1
%
Self-pay and self-pay after insurance

38,254

8.2
%

38,963

8.9
%

(709
)

(0.7
)%
Non-patient

19,810

4.3
%

23,051

5.3
%

(3,241
)

(1.0
)%
Total net operating revenues

$
463,844

100.0
%

$
438,597

100.0
%

$
25,247

~~The following table provides information related to certain drivers of our net operating revenues:~~

Three Months Ended September 30,

2018

2017

Variance

% Variance

Consolidated:

Number of licensed beds at end of period

2,604

3,051

(447
)

(14.7
)%
Admissions

17,797

21,646

(3,849
)

(17.8
)%
Adjusted admissions

45,536

54,350

(8,814
)

(16.2
)%
Total surgeries

17,927

24,168

(6,241
)

(25.8
)%
Emergency room visits

135,231

163,986

(28,755
)

(17.5
)%
Medicare case mix index

1.42

1.43

(0.01
)

(0.7
)%

Same-facility:

Number of licensed beds at end of period

2,604

2,630

(26
)

(1.0
)%
Admissions

17,666

18,499

(833
)

(4.5
)%
Adjusted admissions

45,001

45,984

(983
)

(2.1
)%
Total surgeries

17,727

18,706

(979
)

(5.2
)%
Emergency room visits

134,153

135,628

(1,475
)

(1.1
)%
Medicare case mix index

1.43

1.42

0.01

0.7
%

~~Net operating revenues for the three months ended September 30,~~March 31, 2018 decreased $38.8 million compared to the three months ended September 30, 2017, consisting of a $35.2 million decrease in net patient revenues and a $3.6 million decrease in non-patient revenues. Our decrease in net patient revenues consisted of a $63.6 million decline related to the divestitures group and a $28.4 million increase related to our same-facility hospitals. Same-facility net patient revenues include $8.7 million of revenues from the California HQAF program recognized in the three months ended September 30, 2018 and $7.3 million of revenues from the sale of the Illinois property tax credits, with no comparable revenues recorded in the 2017 period. Excluding the California HQAF and Illinois property tax credits revenues of $16.0 million, same-facility net patient revenues increased $12.4 million due to an improved payor mix, as well as an increase in rate and acuity. On a consolidated basis, admissions and adjusted admissions declined 17.8% and 16.2%, respectively, when comparing third quarter of 2018 to the same period in 2017. On a same-facility basis, admissions and adjusted admissions decreased 4.5% and 2.1%, respectively, when comparing third quarter of 2018 to the same period in 2017. The decrease in admissions and adjusted admissions was primarily a result of closing underperforming service lines and the termination of payor and physician contracts. The reduction in admissions was offset by an increase in our overall rate and acuity.

~~Salaries and Benefits~~

~~The following table provides information related to our salaries and benefits expenses (dollars in thousands, except per adjusted admission amounts):~~

Three Months Ended September 30,

2018

2017

$ Variance

% Variance

Salaries and benefits

$
226,237

$
251,780

$
(25,543
)

(10.1
)%
Hospital operations salaries and benefits

$
208,664

$
230,168

$
(21,504
)

(9.3
)%
Hospital operations salaries and benefits per adjusted admission

$
4,582

$
4,235

$
347

8.2
%
Hospital operations man-hours per adjusted admission

110.4

106.7

3.7

3.5
%

Salaries and benefits decreased $25.5 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Salaries and benefits declined $31.8 million related to the divestitures group, offset by an increase in same-facility salaries and benefits of $6.3 million. The same-facility increase included $1.7 million related to executive severance with the remainder of the increase primarily related to merit increases at our facilities.

~~Supplies~~

~~The following table provides information related to our supplies expense (dollars in thousands, except per adjusted admissions amounts):~~

Three Months Ended September 30,

2018

2017

$ Variance

% Variance

Supplies

$
48,949

$
58,657

$
(9,708
)

(16.6
)%
Supplies per adjusted admission

$
1,075

$
1,079

$
(4
)

(0.4
)%

Supplies expense decreased $9.7 million for the three months ended September 30, 2018 when compared to the three months ended September 30, 2017, which primarily included an $8.5 million decline related to the divestitures group.

~~Other Operating Expenses~~

~~The following table provides information related to our other operating expenses (dollars in thousands):~~

Three Months Ended September 30,

2018

2017

$ Variance

% Variance

Purchased services

$
37,955

$
40,716

$
(2,761
)

(6.8
)%
Taxes and insurance

33,631

24,929

8,702

34.9
%
Medical specialist fees

26,078

27,254

(1,176
)

(4.3
)%
Transition services agreements

14,101

15,468

(1,367
)

(8.8
)%
Repairs and maintenance

8,962

10,166

(1,204
)

(11.8
)%
Utilities

6,559

7,853

(1,294
)

(16.5
)%
Other miscellaneous operating expenses

16,430

18,971

(2,541
)

(13.4
)%
Total other operating expenses

$
143,716

$
145,357

$
(1,641
)

(1.1
)%

Other operating expenses decreased $1.6 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Other operating expenses declined $20.8 million related to the divestitures group, offset by an increase in same-facility other operating expenses of $19.1 million. The same-facility increase was primarily due to a $7.8 million increase in taxes due to the recognition of the sale of the Illinois property tax credits as an offset to net patient revenues whereas in the three months ended September 30, 2017, the amount was recognized as a reduction in taxes, an increase of $2.6 million in medical specialist fees due to the addition of new service lines and changes in hospital-based providers, and an increase of $4.0 million in purchased services primarily related to software maintenance contracts and consulting services.

~~Depreciation and Amortization~~

Depreciation and amortization expense decreased $4.1 million during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. This decrease was primarily due to the overall reduction in our long-lived assets due to the divestiture of five hospitals subsequent to the third quarter of 2017.

~~Rent~~

Rent expense decreased $0.7 million during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. As a percentage of net operating revenues, rent expense was comparable for the respective periods.

~~Electronic Health Records Incentives Earned~~

Electronic health records incentives earned decreased $0.3 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 primarily due to the decrease in activity as we move closer toward full implementation of EHR. See Note 2 — Basis of Presentation and Significant Accounting Policies in the accompanying consolidated financial statements for additional information on EHR.

~~Legal, Professional and Settlement Costs~~

Legal, professional and settlement costs decreased $0.5 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. These costs included legal costs and related settlements, if any, related to arbitration costs, regulatory claims, government investigations into reimbursement payments and other litigation matters. See Note 17 — Commitments and Contingencies in the accompanying consolidated financial statements for additional information on these matters.

~~Impairment of Long-Lived Assets and Goodwill~~

For the three months ended September 30, 2018, we recognized $32.4 million of impairment to long-lived assets of certain hospitals which we have identified as potential divestiture candidates and for which we have received letters of intent. For the three months ended September 30, 2017, we recognized $5.3 million of impairment to long-lived assets and goodwill of certain hospitals which we identified as potential divestiture candidates and for which we had received letters of intent.

~~Loss (Gain) on Sale of Hospitals, Net~~

For the three months ended September 30, 2018, we recognized a $0.8 million loss primarily on the sale of McKenzie. We recognized a $0.1 million loss on the sale of hospitals, net in the three months ended September 30, 2017 primarily related to the sale of Lock Haven and Sunbury. See Note 4 — Divestitures in the accompanying consolidated financial statements for additional information on divestitures.

~~Loss on Closure of Hospitals, Net~~

For the three months ended September 30, 2018, we recognized a $1.1 million loss on closure of hospitals, net related to the closure of Affinity. We ceased operations at this hospital on February 11, 2018, but will have certain continuing closures costs during the wind-down period. See Note 4 — Divestitures in the accompanying consolidated financial statements for additional information on divestitures.

~~Interest Expense, Net~~

~~The following table provides information related to interest expense, net (dollars in thousands):~~

Three Months Ended September 30,

2018

2017

$ Variance

% Variance

Senior Credit Facility:

Revolving Credit Facility

$
63

$
98

$
(35
)

(35.7
)%
Term Loan Facility

18,121

17,512

609

3.5
%
ABL Credit Facility

276

638

(362
)

(56.7
)%
Senior Notes

11,626

11,631

(5
)

—
%
Amortization of debt issuance costs and discounts

2,079

2,067

12

0.6
%
All other interest expense (income), net

285

270

15

5.6
%
Total interest expense, net

$
32,450

$
32,216

$
234

0.7
%

Interest expense, net remained flat when comparing the three months ended September 30, 2018 to the three months ended September 30, 2017. See Liquidity and Capital Resources below and Note 7 — Long-Term Debt in the accompanying consolidated financial statements for additional information on our indebtedness.

~~Provision for (Benefit from) Income Taxes~~

The benefit from income taxes increased $0.5 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Our effective tax rates were 2.0% and 1.9% for these respective periods. The increase in the effective tax rate for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, was primarily due to the impairment and disposal of certain indefinite-lived intangible assets and the change in the expected realization of deferred tax assets under the new laws established by the Tax Act.

~~Net Income (Loss) Attributable to Noncontrolling Interests~~

Net income (loss) attributable to noncontrolling interests was $0.1 million and $0.6 million in the three months ended September 30, 2018 and 2017, respectively. As a percentage of net operating revenues, it was comparable for the respective periods.

~~Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017~~

The following table provides a summary of our results of operations, both in dollars and as a percentage of net operating revenues (dollars in thousands):

	Nine Months Ended September 30,												Three Months Ended March 31,
	2018						2017						2019						2018						2019 vs 2018
				% of						% of						% of						% of			$			Change
	$ Amount			Revenues			$ Amount			Revenues			$ Amount			Revenues			$ Amount			Revenues			Variance			in %

Operating revenues							$	1,731,007
Provision for bad debts								173,919
Net operating revenues	$	1,419,959			100.0	%		1,557,088			100.0	%	$	442,805			100.0	%	$	486,820			100.0	%	$	(44,015	)
Operating costs and expenses:
Salaries and benefits		705,868			49.7	%		781,691			50.2	%		225,075			50.8	%		247,000			50.7	%		(21,925	)		0.1	%
Supplies		160,732			11.3	%		186,591			12.0	%		51,385			11.6	%		58,886			12.1	%		(7,501	)		(0.5	)%
Other operating expenses		440,910			31.0	%		466,394			29.9	%		136,789			30.9	%		152,738			31.3	%		(15,949	)		(0.4	)%
Depreciation and amortization		52,015			3.7	%		63,441			4.1	%		14,639			3.3	%		18,261			3.8	%		(3,622	)		(0.5	)%
Rent		35,551			2.5	%		36,631			2.4	%
Electronic health records incentives earned		(617	)		—	%		(4,516	)		(0.3	)%
Lease costs and rent														11,531			2.6	%		12,532			2.6	%		(1,001	)		—	%
Electronic health records incentives														26			—	%		(141	)		—	%		167			—	%
Legal, professional and settlement costs		10,349			0.7	%		6,519			0.4	%		685			0.2	%		3,413			0.7	%		(2,728	)		(0.5	)%
Impairment of long-lived assets and goodwill		72,198			5.1	%		21,461			1.4	%		8,860			2.0	%		39,760			8.2	%		(30,900	)		(6.2	)%
Loss (gain) on sale of hospitals, net		8,927			0.6	%		(5,112	)		(0.3	)%		—			—	%		7,815			1.6	%		(7,815	)		(1.6	)%
Loss on closure of hospitals, net		18,195			1.3	%		—			—	%		—			—	%		13,746			2.8	%		(13,746	)		(2.8	)%
Transaction costs related to the Spin-off		—			—	%		204			—	%
Total operating costs and expenses		1,504,128			105.9	%		1,553,304			99.8	%		448,990			101.4	%		554,010			113.8	%		(105,020	)		(12.4	)%
Income (loss) from operations		(84,169	)		(5.9	)%		3,784			0.2	%		(6,185	)		(1.4	)%		(67,190	)		(13.8	)%		61,005			12.4	%
Interest expense, net		95,307			6.7	%		90,204			5.8	%		32,266			7.3	%		30,931			6.4	%		1,335			0.9	%
Income (loss) before income taxes		(179,476	)		(12.6	)%		(86,420	)		(5.6	)%		(38,451	)		(8.7	)%		(98,121	)		(20.2	)%		59,670			11.5	%
Provision for (benefit from) income taxes		(1,162	)		—	%		(86	)		(0.1	)%		155			—	%		366			—	%		(211	)		—	%
Net income (loss)		(178,314	)		(12.6	)%		(86,334	)		(5.5	)%		(38,606	)		(8.7	)%		(98,487	)		(20.2	)%		59,881			11.5	%
Less: Net income (loss) attributable to noncontrolling interests		1,200			—	%		1,048			0.1	%		400			0.1	%		481			0.1	%		(81	)		—	%
Net income (loss) attributable to Quorum Health Corporation	$	(179,514	)		(12.6	)%	$	(87,382	)		(5.6	)%	$	(39,006	)		(8.8	)%	$	(98,968	)		(20.3	)%	$	59,962			11.5	%

The following table reconciles Adjusted EBITDA and Same-facility Adjusted EBITDA ~~Adjusted for Divestitures~~ to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):

	Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2019			2018

Net income (loss)	$	(178,314	)	$	(86,334	)	$	(38,606	)	$	(98,487	)
Interest expense, net		95,307			90,204			32,266			30,931
Provision for (benefit from) income taxes		(1,162	)		(86	)		155			366
Depreciation and amortization		52,015			63,441			14,639			18,261
EBITDA		(32,154	)		67,225			8,454			(48,929	)
Legal, professional and settlement costs		10,349			6,519			685			3,413
Impairment of long-lived assets and goodwill		72,198			21,461			8,860			39,760
Loss (gain) on sale of hospitals, net		8,927			(5,112	)		—			7,815
Loss on closure of hospitals, net		18,195			—			—			13,746
Transition of transition services agreements		3,682			—			1,142			717
Transaction costs related to the Spin-off		—			204
Post-spin headcount reductions and executive severance		7,688			2,543			1,490			1,898
Adjusted EBITDA		88,885			92,840			20,631			18,420
Negative EBITDA of divested hospitals		21,290			20,510			2,874			8,646
Adjusted EBITDA, Adjusted for Divestitures	$	110,175		$	113,350
Same-facility Adjusted EBITDA							$	23,505		$	27,066

6856

Revenues

The following table provides information related to our net operating revenues (dollars in thousands, except per adjusted admission amounts):

	Nine Months Ended September 30,										Three Months Ended March 31,
	2018		2017		$ Variance			% Variance			2019		2018		$ Variance			% Variance

Consolidated:
Net patient revenues	$	1,354,588	$	1,484,375	$	(129,787	)		(8.7	)%	$	422,182	$	464,596	$	(42,414	)		(9.1	)%
Non-patient revenues		65,371		72,713		(7,342	)		(10.1	)%		20,623		22,224		(1,601	)		(7.2	)%
Total net operating revenues	$	1,419,959	$	1,557,088	$	(137,129	)		(8.8	)%	$	442,805	$	486,820	$	(44,015	)		(9.0	)%
Net patient revenues per adjusted admission	$	9,656	$	8,897	$	759			8.5	%	$	9,749	$	9,438	$	311			3.3	%
Net operating revenues per adjusted admission	$	10,122	$	9,333	$	789			8.5	%	$	10,225	$	9,889	$	336			3.4	%

Same-facility:
Net patient revenues	$	1,331,907	$	1,265,465	$	66,442			5.3	%	$	424,408	$	439,796	$	(15,388	)		(3.5	)%
Non-patient revenues		64,884		71,116		(6,232	)		(8.8	)%		20,620		21,798		(1,178	)		(5.4	)%
Total net operating revenues	$	1,396,791	$	1,336,581	$	60,210			4.5	%	$	445,028	$	461,594	$	(16,566	)		(3.6	)%
Net patient revenues per adjusted admission	$	9,850	$	9,264	$	586			6.3	%	$	9,800	$	9,661	$	139			1.4	%
Net operating revenues per adjusted admission	$	10,330	$	9,785	$	545			5.6	%	$	10,276	$	10,139	$	137			1.3	%

The following table provides information related to our net operating revenues by payor source (dollars in thousands):

	Nine Months Ended September 30,																Three Months Ended March 31,
	2018					2017					2018 vs 2017						2019					2018					2019 vs 2018
	$ Amount		% of Total			$ Amount		% of Total			$ Variance			Change in %			$ Amount		% of Total			$ Amount		% of Total			$ Variance			Change in %

Consolidated:
Medicare	$	398,477		28.1	%	$	468,627		30.1	%	$	(70,150	)		(2.0	)%	$	129,046		29.1	%	$	144,583		29.7	%	$	(15,537	)		(0.6	)%
Medicaid		270,047		19.0	%		292,380		18.8	%		(22,333	)		0.2	%		81,924		18.5	%		85,103		17.5	%		(3,179	)		1.0	%
Managed care and commercial		560,445		39.5	%		583,073		37.4	%		(22,628	)		2.1	%		174,075		39.3	%		185,226		38.0	%		(11,151	)		1.3	%
Self-pay and self-pay after insurance		125,619		8.8	%		140,296		9.0	%		(14,677	)		(0.2	)%		37,137		8.4	%		49,684		10.2	%		(12,547	)		(1.8	)%
Non-patient		65,371		4.6	%		72,712		4.7	%		(7,341	)		(0.1	)%		20,623		4.7	%		22,224		4.6	%		(1,601	)		0.1	%
Total net operating revenues	$	1,419,959		100.0	%	$	1,557,088		100.0	%	$	(137,129	)				$	442,805		100.0	%	$	486,820		100.0	%	$	(44,015	)

Same-facility:
Medicare	$	387,812		27.8	%	$	381,590		28.5	%	$	6,222			(0.7	)%	$	129,434		29.1	%	$	135,272		29.3	%	$	(5,838	)		(0.2	)%
Medicaid		265,055		19.0	%		256,211		19.2	%		8,844			(0.2	)%		82,111		18.5	%		79,819		17.3	%		2,292			1.2	%
Managed care and commercial		549,900		39.5	%		501,592		37.6	%		48,308			1.9	%		174,535		39.2	%		176,005		38.1	%		(1,470	)		1.1	%
Self-pay and self-pay after insurance		129,140		9.2	%		126,071		9.4	%		3,069			(0.2	)%		38,328		8.6	%		48,700		10.6	%		(10,372	)		(2.0	)%
Non-patient		64,884		4.5	%		71,117		5.3	%		(6,233	)		(0.8	)%		20,620		4.6	%		21,798		4.7	%		(1,178	)		(0.1	)%
Total net operating revenues	$	1,396,791		100.0	%	$	1,336,581		100.0	%	$	60,210					$	445,028		100.0	%	$	461,594		100.0	%	$	(16,566	)

6957

The following table provides information related to certain drivers of our net operating revenues:

	Nine Months Ended September 30,										Three Months Ended March 31,
	2018		2017		$ Variance			% Variance			2019		2018		Variance			% Variance

Consolidated:
Number of licensed beds at end of period		2,604		3,051		(447	)		(14.7	)%		2,604		2,675		(71	)		(2.7	)%
Admissions		56,546		67,572		(11,026	)		(16.3	)%		17,755		20,549		(2,794	)		(13.6	)%
Adjusted admissions		140,282		166,841		(26,559	)		(15.9	)%		43,304		49,226		(5,922	)		(12.0	)%
Total surgeries		57,628		77,070		(19,442	)		(25.2	)%
Surgeries												16,723		20,587		(3,864	)		(18.8	)%
Emergency room visits		424,417		504,500		(80,083	)		(15.9	)%		132,125		153,797		(21,672	)		(14.1	)%
Medicare case mix index		1.43		1.42		0.01			0.7	%		1.47		1.44		0.03			2.1	%

Same-facility:
Number of licensed beds at end of period		2,604		2,630		(26	)		(1.0	)%		2,604		2,630		(26	)		(1.0	)%
Admissions		54,781		56,142		(1,361	)		(2.4	)%		17,755		19,174		(1,419	)		(7.4	)%
Adjusted admissions		135,218		136,597		(1,379	)		(1.0	)%		43,304		45,525		(2,221	)		(4.9	)%
Total surgeries		54,750		56,318		(1,568	)		(2.8	)%
Surgeries												16,723		18,301		(1,578	)		(8.6	)%
Emergency room visits		407,090		406,188		902			0.2	%		132,125		139,226		(7,101	)		(5.1	)%
Medicare case mix index		1.43		1.40		0.03			2.1	%		1.47		1.43		0.04			2.8	%

Net operating revenues for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 decreased ~~$137.1~~$44.0 million compared to the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, consisting of a ~~$129.8~~$42.4 million decrease in net patient revenues and a ~~$7.3~~$1.6 million decrease in non-patient revenues. Our decrease in net patient revenues consisted of a ~~$196.2~~$27.0 million decline related to the divestitures group and a ~~$66.4~~$15.4 million ~~increase~~decline related to our same-facility hospitals. ~~Same-facility net patient revenues include $24.4~~The $15.4 million ~~of revenues from the California HQAF program recognized~~decline in the nine months ended September 30, 2018 and $7.3 million of revenues from the sale of the Illinois property tax credits, with no comparable revenues in the 2017 period. Excluding the California HQAF and Illinois property tax credits revenues of $31.7 million,our same-facility net patient revenues ~~increased $34.7 million~~was primarily due to ~~an improved payor mix~~a $21.8 million decrease resulting from lower admissions and ansurgical volume, offset by a $6.4 million increase in rate and acuity. On a consolidated basis, admissions and adjusted admissions declined ~~16.3%~~13.6% and ~~15.9%~~12.0%, respectively, when comparing the ~~nine months ended September 30, 2018~~first quarter of 2019 to the same period in ~~2017.~~2018. On a same-facility basis, admissions and adjusted admissions decreased ~~2.4%~~7.4% and ~~1.0%~~4.9%, respectively, when comparing the ~~nine months ended September 30, 2018~~first quarter of 2019 to the same period in ~~2017.~~2018. The decrease in same-facility admissions and adjusted admissions was primarily a result of ~~closing~~our initiatives, which were implemented in the second quarter of 2018, to discontinue underperforming patient service lines and ~~the termination of~~terminate certain payor and physician contracts. ~~The reduction~~Additionally, the decrease was due to lower flu-related admissions in the 2019 period and lower surgical admissions ~~was offset by an increase~~ in the 2019 period resulting from physician turnover, inclement weather conditions in Springfield, Oregon and from our ~~overall rate and acuity.~~effort to re-syndicate two outpatient surgical centers in Illinois.

Salaries and Benefits

The following table provides information related to our salaries and benefits expenses (dollars in thousands, except per adjusted admission amounts):

	Nine Months Ended September 30,										Three Months Ended March 31,
	2018		2017		$ Variance			% Variance			2019		2018		$ Variance			% Variance

Salaries and benefits	$	705,868	$	781,691	$	(75,823	)		(9.7	)%	$	225,075	$	247,000	$	(21,925	)		(8.9	)%
Hospital operations salaries and benefits	$	641,110	$	713,348	$	(72,238	)		(10.1	)%	$	204,735	$	223,978	$	(19,243	)		(8.6	)%
Hospital operations salaries and benefits per adjusted admission	$	4,570	$	4,276	$	294			6.9	%	$	4,728	$	4,550	$	178			3.9	%
Hospital operations man-hours per adjusted admission		110.2		105.6		4.7			4.4	%		111.6		110.5		1.1			1.0	%

Salaries and benefits decreased ~~$75.8~~$21.9 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 compared to the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. Salaries and benefits declined ~~$102.8~~$15.1 million related to the divestitures ~~group. This decline was offset by an increase in~~group and $6.8 million related to same-facility salaries and ~~benefits~~benefits. The same-facility decrease of ~~$27.0~~$6.8 million ~~of which $2.2 million~~was primarily related to ~~increased~~a reduction in same-facility admissions of 7.4%, termination of physician contracts as part of our cost savings initiatives implemented in the second quarter of 2018 and a decrease in health benefit costs ~~at our physician clinics~~ as a result of ~~recruitment efforts, $7.7 million related~~changes to ~~severance for headcount~~our employee health benefit plans and reductions ~~and the remainder primarily related to merit increases at~~in our ~~facilities.~~health claims activity.

7058

Supplies

The following table provides information related to our supplies expense (dollars in thousands, except per adjusted ~~admission~~admissions amounts):

	Nine Months Ended September 30,										Three Months Ended March 31,
	2018		2017		$ Variance			% Variance			2019		2018		$ Variance			% Variance

Supplies	$	160,732	$	186,591	$	(25,859	)		(13.9	)%	$	51,385	$	58,886	$	(7,501	)		(12.7	)%
Supplies per adjusted admission	$	1,146	$	1,118	$	28			2.5	%	$	1,187	$	1,196	$	(9	)		(0.8	)%

Supplies expense decreased ~~$25.9~~$7.5 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 when compared to the ~~nine~~three months ended ~~September 30, 2017. Supplies expense declined $29.1~~March 31, 2018, which included a $4.0 million decline related to the divestitures group ~~which~~and a $3.5 million decline related to our same-facility hospitals. The $3.5 million decline in our same-facility hospitals was ~~offset by an increase in same-facility supplies expense of $3.2 million~~ primarily due to ~~an increase~~a reduction in ~~orthopedic surgery cases at several~~same-facility admissions of ~~our larger facilities, which resulted in an increase in implant costs.~~7.4% and a reduction of same-facility surgeries of 8.6%.

Other Operating Expenses

The following table provides information related to our other operating expenses (dollars in thousands):

	Nine Months Ended September 30,										Three Months Ended March 31,
	2018		2017		$ Variance			% Variance			2019		2018		$ Variance			% Variance

Purchased services	$	116,537	$	130,155	$	(13,618	)		(10.5	)%	$	37,842	$	41,080	$	(3,238	)		(7.9	)%
Taxes and insurance		100,313		92,782		7,531			8.1	%		33,964		33,055		909			2.7	%
Medical specialist fees		79,459		84,605		(5,146	)		(6.1	)%		26,070		26,948		(878	)		(3.3	)%
Transition services agreements		43,284		47,736		(4,452	)		(9.3	)%		7,849		15,117		(7,268	)		(48.1	)%
Repairs and maintenance		27,659		31,368		(3,709	)		(11.8	)%		9,535		9,637		(102	)		(1.1	)%
Utilities		18,274		21,245		(2,971	)		(14.0	)%		5,302		6,123		(821	)		(13.4	)%
Other miscellaneous operating expenses		55,384		58,503		(3,119	)		(5.3	)%		16,227		20,778		(4,551	)		(21.9	)%
Total other operating expenses	$	440,910	$	466,394	$	(25,484	)		(5.5	)%	$	136,789	$	152,738	$	(15,949	)		(10.4	)%

Other operating expenses decreased ~~$25.5~~$15.9 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 compared to the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. Other operating expenses declined ~~$64.3~~$12.9 million related to the divestitures group ~~offset by an increase in~~and declined $3.0 million related to our same-facility ~~other operating expenses of $38.8 million.~~hospitals. The same-facility ~~increase~~decrease was primarily due to a ~~$4.4 million increase~~reduction in ~~provider taxes associated with the California HQAF program with no comparable~~transition services agreement expenses in the 2017 period, an increase of $7.8 million in taxes due to the recognition of sale of the Illinois property tax credits as an offset to net patient revenues in the current period whereas the amount was recognized asand a reduction in ~~taxes~~purchased services expenses as a result of lower admissions and surgeries in the ~~2017~~2019 period ~~an increase of $6.5 million in medical specialist fees due~~when compared to the addition of new service lines and changes in hospital-based providers, and an increase of $9.1 million in purchased services primarily related to software maintenance contracts and consulting services.2018 period.

Depreciation and Amortization

Depreciation and amortization expense decreased ~~$11.4~~$3.6 million during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 compared to the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. This decrease was primarily due to the overall reduction in our long-lived assets due to the divestiture or closure of ~~five~~four hospitals ~~subsequent~~in 2018 and to impairment charges since the ~~third quarter of 2017.~~prior year same period.

Lease Costs and Rent

~~Rent~~Lease costs and rent expense decreased ~~$1.1~~$1.0 million during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 compared to the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. As a percentage of net operating revenues, these costs were comparable for the respective periods. The types of costs included in lease costs and rent expense ~~was comparable~~are the same for ~~these respective~~both periods. We adopted ASC Topic 842 as of January 1, 2019 and have made additional disclosures about our lease arrangements. See Note 7 — Leases in the accompanying consolidated financial statements for additional information on our leases.

Electronic Health Records Incentives ~~Earned~~

Electronic health records incentives ~~earned~~ decreased ~~$3.9~~$0.2 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 compared to the ~~nine~~three months ended ~~September 30, 2017 primarily due~~March 31, 2018. EHR incentives will continue to ~~the decrease in activity~~decline as we move closer toward full implementation of EHR. See Note 21 — Basis of Presentation and Significant Accounting Policies in the accompanying consolidated financial statements for additional information on EHR.

Legal, Professional and Settlement Costs

Legal, professional and settlement costs ~~increased $3.8~~decreased $2.7 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019 compared to the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. These costs included legal costs and related settlements, if any, related to arbitration, ~~costs,~~ regulatory claims, government investigations into reimbursement payments and other litigation matters. See Note 17 — Commitments and Contingencies in the accompanying consolidated financial statements for additional information on these matters.

7159

Impairment of Long-Lived Assets and Goodwill

For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, we recognized ~~$72.2~~$8.9 million of impairment to long-lived assets of certain hospitals which ~~related to hospitals~~ we have identified as potential divestiture candidates or for which we have received letters of intent. For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, we recognized ~~$21.5~~$39.8 million of impairment to long-lived assets and goodwill ~~which related to~~of certain hospitals ~~classified as held for sale during the first quarter of 2017 and hospitals~~which we identified as potential divestiture candidates or for which we had received letters of intent.

Loss (Gain) on Sale of Hospitals, Net

~~For the nine months ended September 30, 2018, we recognized an $8.9 million loss on the sales of hospitals, net, which included a net loss of $7.9 million related to the sale of Clearview.~~ We recognized a ~~$5.1~~$7.8 million ~~gain~~loss on the sale of hospitals, net in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 primarily related to the sale of ~~Trinity. See Note 4 — Divestitures in the accompanying consolidated financial statements for additional information on divestitures.~~Clearview.

Loss on Closure of Hospitals, Net

For the ~~nine~~three months ended ~~September 30,~~March 31, 2018, we recognized ~~an $18.2~~a $13.7 million loss on closure of hospitals, net related to the closure of Affinity. We ceased operations at this hospital on February 11, 2018, ~~and~~but will have certain continuing closures costs ~~during~~primarily related to the ~~wind-down period. See Note 4 — Divestitures in the accompanying consolidated financial statements for additional information on divestitures.~~regulatory requirements surrounding maintaining patient records.

Interest Expense, Net

The following table provides information related to interest expense, net (dollars in thousands):

	Nine Months Ended September 30,												Three Months Ended March 31,
	2018			2017			$ Variance			% Variance			2019			2018			$ Variance			% Variance

Senior Credit Facility:
Revolving Credit Facility	$	205		$	429		$	(224	)		(52.2	)%	$	60		$	78		$	(18	)		(23.1	)%
Term Loan Facility		53,174			48,795			4,379			9.0	%		18,332			17,400			932			5.4	%
ABL Credit Facility		1,115			1,507			(392	)		(26.0	)%		386			328			58			17.7	%
Senior Notes		34,865			34,886			(21	)		(0.1	)%		11,626			11,613			13			0.1	%
Amortization of debt issuance costs and discounts		7,249			6,271			978			15.6	%		2,161			2,106			55			2.6	%
All other interest expense (income), net		(1,301	)		(1,684	)		383			(22.7	)%		(299	)		(594	)		295			(49.7	)%
Total interest expense, net	$	95,307		$	90,204		$	5,103			5.7	%	$	32,266		$	30,931		$	1,335			4.3	%

Interest expense, net increased ~~$5.1~~$1.3 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 compared to the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 primarily due to the increased interest ~~rates~~rate on our Term Loan ~~Facility and increased amortization of debt issuance costs and discounts after the CS Second Amendment.~~Facility. See Liquidity and Capital Resources below and Note 76 — Long-Term Debt in the accompanying consolidated financial statements for additional information on our indebtedness.

Provision for (Benefit from) Income Taxes

The ~~benefit from~~provision for income taxes ~~was $1.2 million and $0.1~~decreased $0.2 million for the ~~nine~~three months ended ~~September 30, 2018 and September 30, 2017, respectively.~~March 31, 2019 compared to the three months ended March 31, 2018. Our effective tax rates were ~~0.6% and 0.1%~~(0.4)% for ~~the~~both of these respective periods. The increase in the effective tax rate for the nine months ended September 30, 2018, when compared to the nine months ended September 30, 2017 was primarily due to the impairment and disposal of certain indefinite-lived intangible assets and the change in expected realization of deferred tax assets under the new laws established by the Tax Act.

Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to noncontrolling interests was ~~$1.2~~$0.4 million and ~~$1.0~~$0.5 million in the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. As a percentage of net operating revenues, it was comparable for the respective periods.

Liquidity and Capital Resources

Financial Outlook

Our primary sources of liquidity are cash flows from operations, proceeds from divestitures and available borrowing capacity under our revolving credit facilities. We believe that these amounts will be adequate to service our existing debt and finance internal growth and fund capital expenditures over the next 12 months and into the foreseeable future. Borrowings under our revolving credit facilities are intended to be used for working capital, capital expenditures and general corporate purposes. Our cash flows are negatively impacted by the significant amount of interest expense associated with the high debt leverage put in place to ~~effect~~affect the Spin-off. Interest payments were ~~$77.4~~$18.2 million and ~~$79.7~~$17.5 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~

respectively. In addition, ~~California, a~~one state in which we operate, California, is historically slow onmaking payments for ~~its~~their Medicaid supplemental payment programs. As of ~~September 30, 2018,~~March 31, 2019, receivables outstanding under the California state supplemental ~~program~~programs were ~~$34.2~~$41.7 million.

in 2019, three hospitals in 2018, five hospitals in 2017 and two hospitals in 2016, which have been used to pay down ~~$84.8~~$97.9 million on our Term Loan Facility. WeOur strategic review process is ongoing and we have targeted additional hospitals for divestiture or closure with the intention of utilizing substantially all net proceeds to pay down our secured debt.

Our financial statements have been prepared under the assumption that we ~~intend~~will continue as a going concern. In accordance with Accounting Standard Codification (“ASC”) 205-40, Presentation of Financial Statements — Going Concern, management concluded that there were probable conditions or events that raised substantial doubt about our ability to ~~sell or close by~~continue as a going concern due to the fact that our maximum Secured Net Leverage Ratio permitted under the CS Agreement is reduced to 4.50 from 5.00 in the first quarter of 2020. We are in compliance with our financial covenants as of March 31, 2019, and we believe that it is probable that our current and anticipated future operating results alleviate the substantial doubt about our ability to continue as a going concern for the one year period following the date these financial statements are issued. Management’s evaluation of our ability to comply with the Secured Net Leverage Ratio included, but was not limited to, the following factors:

On May 8, 2019, we entered into an agreement with R1 RCM to receive end-to-end revenue cycle management services. We believe that through our partnership with R1 RCM, we will achieve costs savings and improved net patient revenues through improvements in operational effectiveness and efficiencies;

Subsequent to the end of ~~2019.~~the first quarter of 2019, we completed the sale of Scenic Mountain Medical Center and are evaluating additional divestiture opportunities. The sale or closure of underperforming facilities will continue to generate additional costs savings and the decision to close facilities within the next twelve months is within our control; and

Management has a plan to achieve cost savings over the next twelve months through a reduction in corporate and other operating costs.

Statements of Cash Flows

As of September 30, 2018, we have $8.0 million of proceeds on the sale of Clearview, which occurred on March 31, 2018, recorded as restricted cash. This portion of the total proceeds of $37.4 million was being held in an escrow account subject to resolution of certain outstanding litigation. This matter was resolved in October 2018 and we received the $8.0 million of proceeds during October of 2018. At September 30, 2018, we did not expect this legal matter to reach final settlement within the next twelve months. As a result, we have classified the amount held in escrow in other long-term assets in our consolidated balance sheets as of this date.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in our consolidated balance sheets to our consolidated statements of cash flow (dollars in thousands):

September 30,

December 31,

2018

2017

2017

2016

Cash and cash equivalents

$
6,066

$
15,736

$
5,617

$
25,455

Restricted cash included in other long-term assets

8,000

—

—

—

Cash, cash equivalents and restricted cash

$
14,066

$
15,736

$
5,617

$
25,455

~~Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017~~

The following table provides a summary of our cash flows (in thousands):

	Three Months Ended September 30,									Three Months Ended March 31,
	2018			2017			$ Variance			2019			2018			$ Variance

Net cash provided by (used in) operating activities	$	28,334		$	9,744		$	18,590		$	8,078		$	(2,593	)	$	10,671
Net cash provided by (used in) investing activities		(10,112	)		(5,479	)		(4,633	)		(8,209	)		23,787			(31,996	)
Net cash provided by (used in) financing activities		(14,978	)		(10,934	)		(4,044	)		(1,356	)		13,680			(15,036	)
Net change in cash, cash equivalents and restricted cash	$	3,244		$	(6,669	)	$	9,913		$	(1,487	)	$	34,874		$	(36,361	)

Net cash provided by operating activities was ~~$28.3~~$8.1 million for the three months ended ~~September 30, 2018~~March 31, 2019 compared to ~~$9.7~~net cash used in operating activities of $2.6 million for the three months ended ~~September 30, 2017, an increase of $18.6 million.~~March 31, 2018, a $10.7 million increase. In the 2018 period, ~~our~~net cash ~~flow~~flows from ~~operations was favorably~~operating activities were unfavorably impacted by ~~$3.8 million in HQAF payments received during the three months ended September 30, 2018. In the 2017 period, our cash flow from operations was favorably impacted by $7.8~~$13.7 million of ~~cash received~~closure costs related to ~~the sale~~Affinity, of ~~the Illinois property tax credits and $5.0~~which approximately $5.3 million ~~of accrued interest on our term loan facility.~~was considered non-cash. All other changes in operating assets and liabilities on a comparative basis for the three months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ were considered to be part of our normal business operations.

Net cash used in investing activities was ~~$10.1~~$8.2 million for the three months ended ~~September 30, 2018~~March 31, 2019 compared to ~~$5.5~~net cash provided by investing activities of $23.8 million for the three months ended ~~September 30, 2017,~~March 31, 2018, a ~~$4.6~~$32.0 million increase. In the 2018 period, we sold McKenzie for proceeds of $1.7 million but did not receive the cash until October 2018. In the 2017 period, we sold Sunbury and Lock Haven for combined proceeds of $9.1 million. We had a decrease in capitaldecrease. Capital expenditures for property and equipment ~~of $1.9 million and a decrease in capital expenditures for software of $2.5~~decreased $6.2 million, primarily due to reduced spending ~~as a result~~on the new patient tower and expanded surgical capacity project at our hospital in Springfield, Oregon. In the 2018 period, net cash provided by investing activities included $38.7 million of proceeds from the sales of Clearview and Vista West. In the 2019 period, we did not complete any hospital divestitures.

Net cash used in financing activities was ~~$15.0~~$1.4 million for the three months ended ~~September 30, 2018~~March 31, 2019, compared to ~~$10.9~~net cash provided by financing activities of $13.7 million for the three months ended ~~September 30, 2017. We had~~March 31, 2018, a $15.0 million decrease. This decrease was primarily due to a $16.0 million reduction in our net borrowings under revolving credit facilities ~~of $9.0 million~~ in the ~~2018~~2019 period ~~when~~ compared to the ~~2017~~2018 period. ~~In the 2017 period, we paid down $4.2 million on our Term Loan Facility utilizing proceeds from divestitures.~~

7361

~~Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017~~

~~The following table provides a summary of our cash flows (in thousands):~~

Nine Months Ended September 30,

2018

2017

$ Variance

Net cash provided by (used in) operating activities

$
42,935

$
789

$
42,146

Net cash provided by (used in) investing activities

2,886

(29,521
)

32,407

Net cash provided by (used in) financing activities

(37,372
)

19,013

(56,385
)
Net change in cash, cash equivalents and restricted cash

$
8,449

$
(9,719
)

$
18,168

Net cash provided by operating activities was $42.9 million for the nine months ended September 30, 2018 compared to $0.8 million for the nine months ended September 30, 2017, an increase of $42.1 million. In the 2018 period, our cash flow from operations was favorably impacted by $12.2 million in HQAF payments received during the nine months ended September 30, 2018 and unfavorably impacted by $11.8 million of cash outlay related to the Affinity closure. In the 2017 period, our cash flow from operations was favorably impacted by $7.8 million of cash received related to the sale of the Illinois property tax credits. All other changes in operating assets and liabilities on a comparative basis for the nine months ended September 30, 2018 and 2017 were considered to be part of our normal business operations.

Net cash provided by investing activities was $2.9 million for the nine months ended September 30, 2018 compared to net cash used in investing activities of $29.5 million for the nine months ended September 30, 2017, a $32.4 million increase. Our expenditures for property and equipment decreased $15.8 million on a consolidated basis, which included a $16.8 million reduction in spending on the patient tower and expanded surgical capacity project at our Springfield, Oregon hospital as we are nearing completion. Our expenditures for software decreased $4.6 million. In addition, we had proceeds of $39.2 million in the 2018 period from the sale of hospitals compared to $29.2 million of proceeds from the sale of hospitals in the 2017 period. The 2018 proceeds do not included $1.7 million from the sale of McKenzie as the cash was not received until October 2018 and $8.0 million held in escrow related to the Clearview sale.

Of the $37.4 million proceeds received on the sale of Clearview in the 2018 period, $8.0 million was maintained in an escrow account, as previously discussed, and is reflected as restricted cash in our consolidated statement of cash flows. This restricted cash is recognized in other long-term assets on our consolidated balance sheets as of September 30, 2018.

Net cash used in financing activities was $37.4 million for the nine months ended September 30, 2018 compared to net cash provided by financing activities of $19.0 million for the nine months ended September 30, 2017, a $56.4 million decrease. In the 2018 period, we paid $30.5 million on our Term Loan Facility, paid $2.3 million of debt issuance costs related to the CS Second Amendment, which was completed on March 14, 2018, and made cash distributions of $1.5 million to noncontrolling investors. In the 2017 period, we had net borrowings on our credit facilities of $45.0 million, paid down $16.5 million on our Term Loan Facility, incurred $3.1 million of debt issuance costs related to the CS Amendment and made cash distributions of $3.9 million to noncontrolling investors. Our debt repayments in both the nine months ended September 30, 2018 and 2017, other than the Term Loan Facility payment, primarily related to our capital lease obligation on the corporate office.

Capital Expenditures

Capital expenditures for property, equipment and software were ~~$36.4~~$9.5 million and ~~$56.8~~$15.0 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. In addition, we had ~~$3.0~~$2.8 million and ~~$6.8~~$3.5 million of capital expenditures related to property and equipment accrued in accounts payable at ~~September 30,~~March 31, 2019 and 2018, ~~and December 31, 2017,~~ respectively. ~~Capital~~Our capital expenditures ~~during each~~primarily consist of ~~the nine months ended September 30, 2018 and 2017 primarily related to the patient tower and expanded surgical capacity project at our Springfield, Oregon hospital, as described below, and to~~ purchases of medical equipment, ~~and minor~~ renovations at our hospitals and investments in a standalone information ~~systems~~system infrastructure.

~~We are in the process of completing~~ Our construction project on a new patient tower and ~~expanding the surgical~~expanded surgery capacity at our hospital in Springfield, ~~Oregon.~~Oregon was substantially complete at December 31, 2018. During the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we incurred costs of ~~$3.6~~$2.1 million and ~~$6.5~~$6.1 million, ~~respectively, and incurred costs of $14.3 million and $31.1 million during the nine months ended September 30, 2018 and 2017,~~ respectively, related to ~~this~~the project. As of ~~September 30, 2018, we have~~March 31, 2019, our total costs incurred ~~a total of $97.3 million of costs for this project. The total estimated cost for~~on this project, including purchases of medical equipment, are $102.8 million. Our anticipated remaining costs ~~is estimated to be approximately $105~~on the project in 2019 are $2.2 million. ~~The project is expected to be substantially complete by the end of 2018.~~

Capital Resources

Our net working capital was ~~$165.8~~$126.1 million and ~~$220.8~~$169.3 million as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, a ~~$55.0~~$43.2 million decrease. This decrease in net working capital was primarily due to the adoption of ASC Topic 842 as of January 1, 2019, which resulted in $24.7 million of current operating lease liability as of March 31, 2019 with no comparable amount at December 31, 2018. In addition, we had a $12.0 million increase in accrued interest primarily related to timing of interest payments on our ~~divestiture activity and a reduction~~Senior Notes. All other changes in ~~amounts due from third-party payors as we received $38.6 million in HQAF payments during the nine months ended September 30, 2018 which was used to pay down~~net working capital were part of our ~~Term Loan Facility.~~normal business operations.

Long-Term Debt

The following table provides a summary of activity related to our long-term debt (in thousands):

	Nine Months Ended September 30, 2018																Three Months Ended March 31, 2019
																									Assets
	Total								Debt					Total			Total								Acquired				Total
	Debt at								Issuance					Debt			Debt at								Under				Debt
	Beginning								Costs					at End			Beginning								Capital				at End
	of Period			Borrowings		Repayments			Payments			Amortization		of Period			of Period			Borrowings		Repayments			Leases		Amortization		of Period

Senior Credit Facility:
Revolving Credit Facility, maturing 2021	$	—		$	—	$	—		$	—		$	—	$	—		$	—		$	—	$	—		$	—	$	—	$	—
Term Loan Facility, maturing 2022		831,158			—		(30,462	)		—			—		800,696			790,751			—		(1,371	)		—		—		789,380
ABL Credit Facility, maturing 2021		—			368,000		(368,000	)		—			—		—			14,000			152,000		(150,000	)		—		—		16,000
Senior Notes, maturing 2023		400,000			—		—			—			—		400,000			400,000			—		—			—		—		400,000
Unamortized debt issuance costs and discounts		(42,934	)		—		—			(2,268	)		7,249		(37,953	)		(35,537	)		—		—			—		2,161		(33,376	)
Capital lease obligations		24,411			—		(804	)		—			—		23,607
Finance lease obligations																		23,386			—		(375	)		79		—		23,090
Other debt		1,255			157		(534	)		—			—		878			874			161		(87	)		—		—		948
Total debt		1,213,890			368,157		(399,800	)		(2,268	)		7,249		1,187,228			1,193,474			152,161		(151,833	)		79		2,161		1,196,042
Less: Current maturities of long-term debt		(1,855	)												(1,544	)		(1,697	)											(1,721	)
Total long-term debt	$	1,212,035		$	368,157	$	(399,800	)	$	(2,268	)	$	7,249	$	1,185,684		$	1,191,777		$	152,161	$	(151,833	)	$	79	$	2,161	$	1,194,321

The following table provides a summary of our long-term debt, allocated between fixed and variable debt (dollars in thousands):

	September 30, 2018					March 31, 2019
			% of					% of
	$ Amount		Total Debt			$ Amount		Total Debt

Fixed	$	424,485		34.6	%	$	424,038		34.5	%
Variable		800,696		65.4	%		805,380		65.5	%
Total debt, excluding unamortized debt issuance costs and discounts	$	1,225,181		100.0	%	$	1,229,418		100.0	%

Senior Credit Facility

In connection with the Spin-off, on April 29, 2016 we entered into a credit agreement (the “CS Agreement”), among us, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent. On April 11, 2017, we executed an agreement with ~~our~~its Senior Credit Facility lenders to amend certain provisions of our Senior Credit Facility (the “CS Amendment”), as described below. On March 14, 2018, we executed a second agreement with our Senior Credit Facility lenders to amend certain provisions of our Senior Credit Facility (the “CS Second Amendment”), as described below.

maturity date of April 29, 2021, subject to certain customary acceleration events and repayment, extension or refinancing. The CS Amendment reduced the Revolving Credit Facility’s borrowing capacity from $100 million to $87.5 million until December 31, 2017, at which time the borrowing capacity decreased to $75.0 million. The CS Second Amendment further reduced the Revolving Credit Facility’s capacity to $62.5 million through maturity, effective with the ~~execution of the~~ amendment executed on March 14, 2018.

The CS Agreement contains customary covenants, including a maximum permitted Secured Net Leverage Ratio, as determined based on 12 month trailing Consolidated EBITDA, as defined in the CS Agreement. On April 11, 2017, we executed the CS Amendment with our Senior Credit Facility lenders to amend the calculation of the Secured Net Leverage Ratio beginning July 1, 2017 through maturity, among other provisions. In addition, the CS Amendment raised the minimum Secured Net Leverage Ratio required for the Company to remain in compliance for certain periods, and also changed the calculation of compliance for specified periods. The CS Second Amendment, which was executed on March 14, 2018, ~~further~~ amended the Secured Net Leverage Ratio for the period July 1, 2017 through maturity. As of ~~September 30, 2018,~~March 31, 2019, we had a Secured Net Leverage Ratio of ~~4.15~~4.45 to 1.00 implying additional borrowing capacity of ~~$167.0~~$103.1 million as of ~~September 30, 2018.~~March 31, 2019.

		Maximum
		Secured Net
Period		Leverage Ratio

Period from January 1, 2017 to June 30, 2017		4.50 to 1.00
Period from July 1, 2017 to June 30, 2018		4.75 to 1.00
Period from July 1, 2018 to December 31, 2019		5.00 to 1.00
Period from January 1, 2020 and thereafter		4.50 to 1.00

In addition to amending the calculation of the Secured Net Leverage Ratio and the Maximum Secured Net Leverage Ratio, the CS Amendment and CS Second Amendment also affected other terms of the CS Agreement as follows:

Through April 29, 2022, we are required to use asset sales proceeds to make mandatory redemptions under the Term Loan Facility.

Through December 31, 2018, we ~~may~~could request to exercise Incremental Term Loan Commitments, as defined in the CS Agreement, only if the Secured Net Leverage Ratio, adjusted for the requested Incremental Term Loan borrowing, iswas below 3.35 to 1.00. After December 31, 2018, we may request to exercise Incremental Term Loan Commitments for the greater of $100 million or an amount which would produce a Secured Net Leverage Ratio of 3.35 to 1.00.

Through December 31, 2018, we ~~are~~were allowed to incur Permitted Additional Debt, as defined in the CS Agreement, ~~as long as our~~only if the Total Leverage Ratio, adjusted for the Permitted Additional Debt, iswas below 4.50 to 1.00. After December 31, 2018, we may incur Permitted Additional Debt so as long as our Total Leverage Ratio, adjusted for the Permitted Additional Debt, is below 5.50 to 1.00.

Prior to the CS Amendment, interest under the Term Loan Facility accrued, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 5.75%, or the alternate base rate plus 4.75%. Following the CS Amendment, interest under the Term Loan Facility accrues, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 6.75%, or the alternate base rate plus 5.75%. The effective interest rate on the Term Loan Facility was ~~9.29%~~9.72% as of ~~September 30, 2018.~~March 31, 2019. Interest on outstanding borrowings under the Revolving Credit Facility accrues, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of 0% plus 2.75%, or the alternate base rate plus 1.75%, and remains unchanged under the CS Amendment and the CS Second Amendment.

Borrowings from the Revolving Credit Facility are used for working capital and general corporate purposes. As of ~~September 30, 2018,~~March 31, 2019, we had no borrowings outstanding on the Revolving Credit Facility and had ~~$13.7~~$14.2 million of letters of credit outstanding that were primarily related to the self-insured retention levels of professional and general liability and workers’ compensation liability insurance and as security for the payment of claims. As of ~~September 30, 2018,~~March 31, 2019, we had a borrowing capacity under our Revolving Credit Facility of ~~$48.8~~$48.3 million.

ABL Credit Facility

In connection with the Spin-off on April 29, 2016, we entered into an ABL Credit Agreement (the “UBS Agreement,” and together with the CS Agreement, collectively, the “Credit Agreements”), among us, the lenders party thereto and UBS AG, Stamford Branch (“UBS”), as administrative agent and collateral agent. On April 11, 2017, we executed an amendment to the UBS Agreement with its lender party thereto, which aligned the provisions of the UBS Agreement with the CS Amendment. The UBS Agreement provides for a $125 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”). The available borrowings from the ABL Credit Facility, which are based on eligible patient accounts receivable, are used for working capital and general corporate purposes. As of September 30, 2018, we had no borrowings outstanding on the ABL Credit Facility and borrowing capacity of $120.3 million.

The ABL Credit Facility has a maturity date of April 29, 2021, subject to customary acceleration events and repayment, extension or refinancing. Interest on outstanding borrowings under the ABL Credit Facility accrues, at our option, at a base rate or LIBOR, subject to statutory reserves and a floor of 0%, except that all swingline borrowings will accrue interest based on the base rate, plus an applicable margin determined by the average excess availability under the ABL Credit Facility for the fiscal quarter immediately preceding the date of determination. The applicable margin ranges from 1.75% to 2.25% for LIBOR advances and from 0.75% to

1.25% for base rate advances. As of March 31, 2019, we had $16.0 million of borrowings outstanding under the ABL Credit Facility and borrowing capacity of $109.0 million.

The ABL Credit Facility has a “Covenant Trigger Event” definition that requires us to maintain excess availability under the ABL Credit Facility equal to or greater than the greater of (i) $12.5 million and (ii) 10% of the aggregate commitments under the ABL Credit Facility. If a Covenant Trigger Event occurs, then we are required to maintain a minimum Consolidated Fixed Charge Ratio of 1.10 to 1.00 until such time that a Covenant Trigger Event is no longer continuing. In addition, if excess availability under the ABL

Credit Facility were to fall below the greater of (i) 12.5% of the aggregate commitments under the ABL Credit Facility and (ii) $15.0 million, then a “Cash Dominion Event” would be triggered upon which the lenders could assume control of our cash.

Credit Agreement Covenants

In addition to the specific covenants described above, the Credit Agreements contain customary negative covenants, which limit our ability to, among other things, incur additional indebtedness, create liens, make investments, transfer assets and merge or acquire assets, and make restricted payments, including dividends, distributions, and specified payments on other indebtedness. They include customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary Employee Retirement Income Security Act events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreements also contain customary affirmative covenants and representations and warranties.

Senior Notes

On April 22, 2016, we issued $400 million aggregate principal amount of 11.625% Senior Notes due 2023, pursuant to the Indenture. The Senior Notes were issued at a discount of $6.9 million, or 1.734%, in a private placement and are senior unsecured obligations guaranteed on a senior basis by certain of our subsidiaries (the “Guarantors”). The Senior Notes mature on April 15, 2023 and bear interest at a rate of 11.625% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, ~~which began~~beginning on October 15, 2016. Interest on the Senior Notes accrues from the date of original issuance and is calculated on the basis of a 360-day year comprised of twelve 30-day months. The effective interest rate on the Senior Notes was 12.49% as of ~~September 30, 2018.~~March 31, 2019.

The Indenture contains covenants that, among other things, limit our ability and certain of our subsidiaries’ ability to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur certain liens, sell assets and subsidiary stock, transfer all or substantially all of our assets or enter into merger or consolidation transactions.

On May 17, 2017, we exchanged the 11.625% Senior Notes due 2023 (the “Initial Notes”) in the aggregate principal amount of $400 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 11.625% Senior Notes due 2023 (the “Exchange Notes”), which have been registered under the Securities Act. The Initial Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Initial Notes.

On and after April 15, 2019, we are entitled, at our option, to redeem all or a portion of the Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices specified in the table below, plus accrued and unpaid interest, if any, to the redemption date. The redemption prices are expressed as a percentage of the principal amount on the redemption date. Holders of record on the relevant record date have the right to receive interest due on the relevant interest payment date. In addition, prior to April 15, 2019, we ~~may redeem~~could have redeemed some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium, as set forth in the Indenture. We ~~are~~were entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes until April 15, 2019 with the net proceeds from certain equity offerings at the redemption price set forth in the Indenture.

The following table provides a summary of the redemption ~~dates~~periods and prices related to the Senior Notes:

	Redemption
Period	Prices

Period from April 15, 2019 to April 14, 2020		108.719	%
Period from April 15, 2020 to April 14, 2021		105.813	%
Period from April 15, 2021 to April 14, 2022		102.906	%
Period from April 15, 2022 to April 14, 2023		100.000	%

Debt Issuance Costs and Discounts

The following table provides a summary of unamortized debt issuance costs and discounts (in thousands):

	September 30,			December 31,			March 31,			December 31,
	2018			2017			2019			2018

Debt issuance costs	$	34,533		$	32,265		$	34,533		$	34,533
Debt discounts		24,536			24,536			24,536			24,536
Total debt issuance costs and discounts at origination		59,069			56,801			59,069			59,069
Less: Amortization of debt issuance costs and discounts		(21,116	)		(13,867	)		(25,693	)		(23,532	)
Total unamortized debt issuance costs and discounts	$	37,953		$	42,934		$	33,376		$	35,537

~~Capital~~Finance Lease Obligations and Other Debt

Our debt arising from ~~capital~~finance lease obligations primarily relates to our corporate office in Brentwood, Tennessee. As of ~~September 30,~~March 31, 2019 and December 31, 2018, this ~~capital~~finance lease obligation was ~~$17.4 million.~~$16.9 million and $17.2 million, respectively. The remainder of our finance lease obligations relate to property and equipment at our hospitals and corporate office. Other debt consists of physician loans and miscellaneous notes payable to banks.

Debt Maturities

The following table provides a summary of our debt maturities for the next five years and thereafter (in thousands):

	September 30, 2018		March 31, 2019

Remainder of 2018	$	403
2019		1,549
Remainder of 2019			$	1,312
2020		1,621		1,720
2021		1,639		17,713
2022		802,096		790,800
2023				401,327
Thereafter		417,873		16,546
Total debt, excluding unamortized debt issuance costs and discounts	$	1,225,181	$	1,229,418

Noncontrolling Interests and Redeemable Noncontrolling Interests

Our financial statements include all assets, liabilities, revenues and expenses of less than 100% owned entities that we control. Accordingly, we have recorded noncontrolling interests in the earnings and equity of such entities. Certain of our consolidated subsidiaries have noncontrolling physician ownership interests with redemption features that require us to deliver cash upon the occurrence of certain events outside our control, such as the retirement, death, or disability of a physician-owner. We record the carrying amount of redeemable noncontrolling interests at the greater of: (1) the initial carrying amount increased or decreased for the noncontrolling interests' share of cumulative net income (loss), net of cumulative amounts distributed, if any, or (2) the redemption value. As of ~~September 30, 2018,~~March 31, 2019, we had redeemable noncontrolling interests of $2.3 million and non-redeemable noncontrolling interests of ~~$14.5~~$14.8 million that are included in our consolidated balance sheets.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk associated with changes in interest rates on our variable rate long-term debt. In connection with the Spin-off, on April 29, 2016, we entered into two credit agreements, the Senior Credit Facility and the ABL Credit Facility, that subject us to variable interest rates tied to LIBOR or a base rate. As of ~~September 30, 2018,~~March 31, 2019, we had outstanding principal amount of debt, excluding unamortized debt issuance costs and discounts, of ~~$800.7~~$805.4 million ~~which was~~ subject to variable rates of ~~interest.~~interest, which included $16.0 million of borrowings outstanding under revolving credit facilities as of March 31, 2019. If the interest ~~rates~~rate on our variable rate long-term debt outstanding as of ~~September 30, 2018,~~March 31, 2019, after taking into consideration the 1% floor on our Term Loan Facility, was 100 basis points higher for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the additional interest expense impacting net income (loss) would have been ~~$6.1~~$2.0 million, or ~~$0.21~~$(0.06) per basic and diluted share. We do not currently have any derivative or hedging arrangements, or other known exposures, to changes in interest rates.

Item 4. Controls and Procedures

~~Disclosure Controls~~Our management, with the participation of our Chief Executive Officer and ~~Procedures~~

~~We maintain~~Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures ~~that are designed with the objective of providing reasonable assurance that information required to be disclosed~~(as defined in ~~our reports filed or submitted~~Rules 13a-15(e) and 15d-15(e)) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (principal executive officer) (“CEO”) and chief financial officer (principal financial officer) (“CFO”), as appropriate to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management, with the participation of our CEO and our CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15-15(e) of the Exchange Act, as of September 30, 2018, the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form ~~10-Q, the Company’s CEO~~10-Q.

Based on such evaluation, our Chief Executive Officer and ~~CFO have~~Chief Financial Officer concluded that, ~~the Company’s~~as of such date, our disclosure controls and procedures ~~(as defined~~were effective (at the reasonable assurance level) to ensure that the information required to be disclosed by us in ~~Rules 13a-15(e) and 15d-15(e)~~the reports that we file or submit under the Exchange ~~Act) were not effective because of~~Act is recorded, processed, summarized and reported within the material weakness in our internal control over financial reporting described below. Notwithstanding such material weakness in internal control over financial reporting, our CEO and CFO have concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, present fairly, in all material respects, our results of operations, financial position and cash flows for thetime periods ~~presented in conformity with accounting principles generally accepted~~specified in the ~~United States.~~SEC’s rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As previously disclosed in our 2017 Annual Report on Form 10-K, we identified a deficiency as it related to the controls intended to properly document and review on a timely basis our analysis of self-pay patient accounts receivable at a more comprehensive and disaggregated level related to our adoption of ASU 2014-09 Revenue from Contracts with Customers. We concluded that the deficiency constitutes a material weakness in our internal control over financial reporting. There were no material errors in the financial results or balances identified as a result of the control deficiency, and there was no restatement of prior period financial statements and no change in previously released financial results were required as a result of this control deficiency.

~~We have implemented a remediation plan to address the control deficiency that led to the material weakness. The remediation plan is ongoing and currently includes the following:~~

Evaluating the effectiveness of specific new procedures related to the disaggregated analysis of the estimated transaction price, as determined by reducing our standard billing charges by any contractual adjustments, discounts and implicit price concessions, related to our self-pay and self-pay after insurance revenue that conforms to the requirements under ASC 2014-09; and

Evaluating the effectiveness of specific review procedures designed to enhance our controls over the preparation of the disaggregated estimated transaction price, as determined by reducing our standard billing charges by any contractual adjustments, discounts and implicit price concessions, related to our self-pay and self-pay after insurance revenue.

Management believes that the above measures will help to effectively remediate the control deficiency that gave rise to this material weakness. Our material weaknesses will not be considered remediated until new internal controls are operational for a period of time and are tested, and management concludes that these controls are operating effectively. We anticipate that this material weakness will be remediated by the end of 2018.

We can give no assurance that the measures we have taken will remediate this material weakness or that additional material weaknesses will not arise in the future. Management will continue to assess the effectiveness of its remediation efforts in this matter in

connection with its evaluations of internal control over financial reporting. We will continue to monitor the effectiveness of these and other processes, procedures, and controls and will make any further changes management determines to be appropriate.

~~Changes in Internal Control over Financial Reporting~~

~~Except as described above, there~~ have been no changes in our internal control over financial reporting during the three months ended ~~September 30, 2018~~March 31, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

8066

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to lawsuits and other legal matters arising in the ordinary course of our business, including claims of damages for personal injuries, medical malpractice, breach of hospital management contracts, breach of other contracts, wrongful restriction of or interference with physicians’ staffing privileges and other employment-related claims. In certain of these claims, plaintiffs request payment for damages, including punitive damages that may not be covered by our insurance policies.

Healthcare facilities are also subject to the regulation and oversight of various federal and state governmental agencies. The healthcare industry has seen numerous ongoing investigations related to compliance and billing practices and hospitals, in particular, continue to be the subject of governmental fraud and abuse programs and a primary enforcement target for the OIG and DOJ. From time to time, we detect issues of non-compliance with federal healthcare laws pertaining to claims submission and reimbursement payment practices or financial relationships with physicians. We avail ourselves of various mechanisms to address potential overpayments arising out of these issues, including repayment of claims, rebilling of claims, and participation in voluntary disclosure protocols offered by CMS and the OIG. Participating in voluntary repayment of claims and voluntary disclosure protocols can have the potential for significant settlement obligations or even enforcement action. Additionally, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against healthcare facilities that submit false claims for payments to, or improperly retain overpayments from, governmental payors. Some states have adopted similar state whistleblower and false claims provisions. Qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements for filing such suits. As a result, they could lead to proceedings without our knowledge. Certain of our healthcare facilities have received, and from time to time other healthcare facilities may receive, inquiries or subpoenas from fiscal intermediaries or federal and state agencies. Any proceedings against us may involve potentially substantial settlement amounts, as well as the possibility of civil, criminal, or administrative fines, penalties or other sanctions which could be material. Settlements of suits involving Medicare and Medicaid issues routinely require both monetary payments as well as corporate integrity agreements from the offending healthcare company. Depending on how the underlying conduct is interpreted by the inquiring or investigating federal or state agency, the resolution could have a material adverse effect on our results of operations, financial position and cash flows.

In connection with the Spin-off, CHS agreed to indemnify us for certain liabilities relating to outcomes or events occurring prior to the closing of the Spin-off, including (i) certain claims and proceedings known to be outstanding on or prior to the Spin-off and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or related to our healthcare facilities prior to the closing date of the Spin-off, , but only to the extent, in the case of clause (ii), that such claims are covered by insurance policies maintained by CHS, including professional and general liability and workers’ compensation liability. In this regard, CHS will continue to be responsible for certain Health Management Associates, Inc. legal matters covered by its contingent value rights agreement that relate to the portion of CHS’s business now held by us. Notwithstanding the foregoing, CHS is not indemnifying us in respect of any claims or proceedings arising out of, or related to, the business operations of QHR at any time or our compliance with the Corporate Integrity Agreement (“CIA”) between CHS and the OIG. Subsequent to the Spin-off, the OIG entered into an “Assumption of CIA Liability Letter” with us reiterating the applicability of the CIA to certain of our hospitals, although the OIG declined to enter into a separate agreement with us.

We do not control and cannot predict with certainty the progress or final outcome of discussions with government agencies, investigations and legal proceedings against us. Therefore, the final amounts paid to resolve such matters, claims and obligations could be material and could materially differ from amounts currently recorded, if any. Any such changes in our estimates or any adverse judgments could materially adversely impact our future results of operations, financial position and cash flows.

We have included a discussion of specific legal proceedings below, some ~~or all,~~ of which may not be required to be disclosed in this Part II, Item 1 under SEC rules due to the nature of our business; however, we believe that the discussion of these ~~open~~ legal matters may provide useful information to security holders or the other readers of this Quarterly Report on Form 10-Q. The proceedings discussed below do not include claims and lawsuits covered by professional and general liability or employment practices insurance and risk retention ~~programs, none of which claims or lawsuits would in any event be required to be disclosed in this Part II, Item 1 under SEC rules.~~programs. The legal matters referenced below are also discussed in Note 17 –— Commitments and Contingencies toin the accompanying ~~consolidated~~ financial statements.

With respect to all legal, regulatory and governmental proceedings, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, we record an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and we are able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, we disclose the estimate of the amount of possible loss or range of loss. However, we are unable to estimate an amount of possible loss or range of loss in some instances based on the significant uncertainties involved in, or the preliminary nature of, certain legal, regulatory and governmental matters.

8167

Commercial Litigation and Other Lawsuits

Arbitration with Community Health Systems, Inc. On August 4, 2017, we received a demand for arbitration from CHS seeking payment of certain amounts that we have withheld pursuant to the Shared ~~Services~~Service Centers Transition Services Agreement (the “SSC TSA”) and the Computer and Data Processing Transition Services Agreement (the “IT TSA”). ~~We contend that the amounts are not payable to~~ CHS ~~and were not properly billed by CHS under the agreements. The matter is pending before the American Arbitration Association. CHS seeks~~sought payment of approximately $12.1 million relating to these two transition services agreements. We ~~are vigorously contesting~~contested the charges as not payable to CHS under the transition services agreements and ~~have~~ made counterclaims that ~~include,~~included, among other things, termination of the SSC TSA, a ruling that the IT TSA iswas terminable at our option, ~~(as described below),~~ and substantial damages we ~~believe~~believed that we ~~have~~had suffered as a result of the transition services agreements and other actions taken by CHS in connection with the Spin-off. Additionally, on March 19, 2018, we received notice from CHS that CHS ~~was seeking~~sought to terminate, effective September 30, 2018, the SSC TSA and the IT TSA and to impose a September 30, 2018 deadline for completion of the transition services under the SSC TSA and IT TSA, as a result of alleged breaches by the Company of the agreements. The notice from CHS also provided an indication of CHS’s preference to terminate the Receivables Collection Agreement, the Eligibility Screening Services Agreement, and the Billing and Collection Agreement. We amended our counterclaims to include allegations that CHS’s attempt to terminate the SSC TSA and IT TSA and to impose a September 30, 2018 deadline for completing the transition of services under those contracts violated the terms of the contracts and was invalid and without effect. The validity and effectiveness of CHS’s attempt to terminate the SSC TSA and IT TSA and to impose a September 30, 2018 deadline was litigated during the course of arbitration proceedings held in late June 2018. After hearing testimony regarding the termination issues, the arbitration panel ruled that each of the SSC TSA and IT TSA will continue in effect according to their original terms through 2021, subject to any agreement by the parties to terminate the SSC TSA and the IT TSA at an earlier time. The panel ordered that, after the date of the ruling, we would prospectively pay the amounts invoiced under the TSAs as billed, but deferred ruling on the parties’ economic claims related to the TSAs. The arbitration reconvened October 1, 2018 with QHC presenting our counter-claims and defenses that certain amounts were not payable to CHS. The arbitration concluded October 9, ~~2018 and a decision is expected in mid-January~~2018. The panel issued its final arbitration award on January 3, 2019. ~~We are unable to predict the outcome of this matter; however, it is reasonably possible that we may incur a loss in~~In connection with ~~this matter. Under some circumstances, losses incurred~~the SSC TSA payment dispute, the panel determined that CHS was not entitled to have charged the disputed fees under that agreement, and thus that (i) we were entitled to retain the approximately $9.3 million previously withheld by us, and (ii) CHS was required to pay back the approximately $2.1 million paid by us under the SSC TSA since the panel’s June 2018 order. We will not be required to pay such overcharged amounts under the SSC TSA in the future. In connection with ~~adverse outcomes~~the IT TSA payment dispute, the panel determined that CHS’s fees under the IT TSA were proper. We paid the approximately $1.5 million previously withheld under that agreement, and we will continue to pay such amounts under the IT TSA in ~~this matter could be material. See Item 1A. Risk Factors~~the future. The panel’s June 2018 ruling that CHS is not entitled to terminate the SSC and IT TSAs remains in effect. The panel denied our ~~Quarterly Report Form 10-Q for the quarterly period ended March 31, 2018.~~other affirmative claims against CHS.

Zwick Partners LP and Aparna Rao, Individually and On Behalf of All Others Similarly Situated v. Quorum Health Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry Cash, Thomas D. Miller and Michael J. Culotta. On September 9, 2016, a shareholder filed a purported class action in the United States District Court for the Middle District of Tennessee against ~~QHC~~us and certain of our former officers. ~~The~~On April 17, 2017, Plaintiff filed a Second Amended Complaint ~~filed on September 13, 2017, purports to be~~adding additional defendants, CHS, Wayne T. Smith and W. Larry Cash. The Second Amended Complaint alleges claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and is brought on behalf of a class consisting of all persons (other than defendants) who purchased or otherwise acquired securities of ~~QHC~~the Company between May 2, 2016 and August 10, 2016 and alleges that we and certain of our officers violated federal securities laws, including Sections 10(b) and/or 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, by making alleged false and/or misleading statements and failing to disclose certain information regarding aspects of our business, operations and compliance policies. On April 17, 2017, Plaintiff filed a Second Amended Complaint adding additional defendants, CHS, Wayne T. Smith and W. Larry Cash.2016. On June 23, 2017, we filed a motion to dismiss, which Plaintiff opposed on August 22, 2017. On April 19, 2018, the Court denied our motion to dismiss, and we filed our answer to the Second Amended Complaint on May 18, 2018. On July 13, 2018, Plaintiff filed its motion for class certification, which Defendants opposed on August 31, 2018. ~~The~~On March 29, 2019, the Court granted the motion and certified the class. Defendants have filed a petition for permission to appeal the class certification decision with the Sixth Circuit Court of Appeals, which petition is currently pending. On September 14, 2018, Plaintiff filed a Third Amended Complaint adding additional alleged misstatements. On October 12, 2018, Defendants moved to dismiss the new allegations, ~~which~~and, on March 29, 2019, the Court granted the motion ~~is currently pending.~~and dismissed the new allegations. The case is ~~now~~ in discovery, and we are vigorously defending ourselves in this matter. We are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

~~United Tort Claimants v. Quorum Health Resources, LLC~~ ~~(U.S. Bankruptcy Court for the District of New Mexico);~~ ~~Douthitt - Dugger, et al. v. Quorum Health Resources, LLC~~ (Bernalillo County, New Mexico District Court). Plaintiffs sued QHR and Gerald Champion Regional Medical Center in New Mexico state court and bankruptcy court arising from surgical procedures alleged to have been experimental and performed by an unqualified doctor. The parties have now agreed to a global settlement of the United Tort Claimants (“UTC”) claims for a confidential amount to be fully funded by Lexington Insurance Company (“Lexington”). The specific language of releases and related settlement documents is being negotiated and will be subject to bankruptcy court approval.

•

~~Lexington Insurance Company~~R2 Investments, LDC v. Quorum Health ~~Resources, LLC, et al.~~Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry Cash, Thomas D. Miller, Michael J. Culotta, John A. Clerico, James S. Ely, III, John A. Fry, William Norris Jennings, Julia B. North, H. Mitchell Watson, Jr. and H. James Williams ~~(Williamson County, Tennessee Chancery Court)) Lexington has sued QHR~~. On October 25, 2017, a shareholder filed an action in the Circuit Court of Williamson County, Tennessee ~~seeking a judicial declaration~~against us and certain of our former officers and directors and CHS and certain of its officers and directors. The complaint alleges that the UTC’s claims and the cost of defending QHR are not covered by Lexington. Lexington has now agreed not to seek reimbursement from QHR (1) for any part of the settlement with UTC (as described above); or (2) for the cost of defending QHR in the UTC litigation in New Mexico. The carrier has also agreed not to seek appellate review of prior court rulings in QHR’s favor on coverage issues. While QHR believes these agreements have been adequately confirmed with Lexington, further proceedings will be necessary indefendants violated the Tennessee ~~trial court to establish these agreements in a court order. QHR has asserted bad faith claims against Lexington~~Securities Act and excess carrier Ironshore in the Tennessee state court action, which are expected to be set for trial in 2019. We have concluded that there is a remote likelihood of a material loss in these matters, and as a result, do not believe that either the UTC litigation in New Mexico nor the insurance coverage litigation in Tennessee state court will have a material adverse effect on our operating results, financial position or liquidity.common law

R2 Investments, LDC v. Quorum Health Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry Cash, Thomas D. Miller, Michael J. Culotta, John A. Clerico, James S. Ely, III, John A. Fry, William Norris Jennings, Julia B. North, H. Mitchell Watson, Jr. and H. James Williams. On October 25, 2017, a shareholder filed an action in the Circuit Court of Williamson County, Tennessee against us and certain of our officers and directors and CHS and certain of its officers and directors. The complaint alleges that the defendants violated the Tennessee Securities Act and common law by, among other things, making alleged false and/or misleading statements and failing to disclose certain information regarding aspects of our business, operations and financial condition. Plaintiff is seeking rescissionary, compensatory, and punitive damages. We filed a motion to dismiss the action on January 16, 2018, which Plaintiff opposed on March 5, 2018. On May 11, 2018, the Court denied our motion to dismiss. We subsequently filed an answer to the complaint, and the case is now in discovery. We are vigorously defending ourselves in this matter. We are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

by, among other things, making alleged false and/or misleading statements and failing to disclose certain information regarding aspects of our business, operations and financial condition. Plaintiff is seeking rescissionary, compensatory and punitive damages. We filed a motion to dismiss the action on January 16, 2018, which Plaintiff opposed on March 5, 2018. On May 11, 2018, the Court denied our motion to dismiss. We subsequently filed an answer to the complaint, and the case is now in discovery. We are vigorously defending ourselves in this matter. We are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

Harvey Horwitz, Derivatively on Behalf of Quorum Health Corporation v. Thomas D. Miller, Michael J. Culotta, Barbara R. Paul, R. Lawrence Van Horn, William S. Hussey, James T. Breedlove, William M. Gracey, Joseph A. Hastings, and Adam Feinstein, and Quorum Health Corporation, as Nominal ~~Defendant.~~Defendant. On September 17, 2018, a purported shareholder filed a derivative action on behalf of the Company in the United States District Court for the Middle District of Tennessee. The complaint alleges claims for violation of Section 29(a) of the Exchange Act, breach of fiduciary duty, waste of corporate assets, unjust enrichment, and indemnification and contribution. Plaintiff seeks damages allegedly sustained by ~~the Company,~~us, rescission of the Separation Agreement with CHS, corporate governance reforms, equitable and/or injunctive relief, restitution, and attorneys’ fees and costs. On October 26, 2018, the Court entered an order granting a stay of the case pending entry of an order on any motions for summary judgment in the Rao v. Quorum Health Corporation case described above. Once the stay is lifted, we intend to move to transfer the action to Delaware consistent with our by-laws. We are vigorously defending ourselves in this matter. We are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss because the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

Reda Slone v. Kentucky River Medical Center (an assumed name of Jackson Hospital Corporation). On April 19, 2017, a former director of the emergency department of Kentucky River Medical Center ("KRMC") filed an action in the Circuit Court of Breathitt County, Kentucky (Case No.: 17-CI-00095), against KRMC alleging wrongful discharge in violation of KRS 216B.165 (known unofficially as Kentucky’s healthcare worker’s whistleblower statute), common law wrongful discharge, violation of Plaintiff’s free speech under the Section 1 of the Kentucky Constitution, and intentional and/or negligent infliction of emotional distress. The Plaintiff is claiming that KRMC terminated the Plaintiff’s employment because she made complaints that the emergency department did not have adequate staffing levels/nurse to patient ratios, and did not have sufficient numbers of adequately trained staff. The Plaintiff is seeking damages for back pay and front pay ($549,623), incidental damages ($310,000), emotional pain and suffering ($350,000), attorney’s fees ($200,000), and punitive damages ($11,250,000). KRMC filed an answer to the complaint and the matter is now in discovery. A trial date is set for July 22, 2019. KRMC is vigorously defending the matter. The outcome of the matter cannot be predicted. However, it is reasonably possible that KRMC may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss because discovery is still ongoing and there is uncertainty as to the outcome of the upcoming trial or motions. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

Mary Della-Maggiora, as an individual and on behalf of all others similarly situated, v. Watsonville Community Hospital, entity unknown, and DOES 1 through 50, inclusive (Superior Court of the State of California for the County of Santa Cruz). On January 22, 2018, Plaintiff filed a purported class action alleging violations of California Labor Code Section 226(a). On May 14, 2018, Plaintiff filed her Second Amended Class Action Complaint. The Second Amended Class Action Complaint contains two causes of action. The first cause of action is brought by Plaintiff in her individual capacity and as potential class representative for all other Watsonville Community Hospital employees for alleged violations of Labor Code Section 226(a), subsections (6), (8), and (9). The second cause of action is brought under the California Private Attorneys General Act of 2004 by Plaintiff in her individual capacity and as “appointed” representative of the State of California Labor and Workforce Development Agency, for alleged violations of Labor Code Section 226(a), subsection (9). Plaintiff generally alleges that the paystubs issued to Watsonville employees did not include all information required by California Labor Code Section 226(a). The case is in discovery, and Watsonville Community Hospital is vigorously defending itself in this matter. We are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

•

Damages and Declaratory and Injunctive Relief for Employment Discrimination. The First Amended Complaint contains eleven claims for monetary relief as well as claims for declaratory and injunctive relief. In the First Amended Complaint Plaintiff alleges claims for: interference, discrimination, and retaliation in violation of the California Family Rights Act, California Government Code Section 12945.2; national origin-based hostile work environment, religious creed-based hostile work environment, sex discrimination, national origin discrimination, religious creed discrimination, failure to prevent discrimination and harassment, and retaliation in violation of the Fair Employment and Housing Act, California Government Code Section 12940, et seq.; and failure to timely provide employment records in violation of California Labor Code Section 1198.5. The case is in discovery, and Barstow Community Hospital is vigorously defending itself in this matter. We are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss because discovery has only recently started and the case remains in its early stages. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

Corporate Integrity Agreement

On August 4, 2014, CHS became subject to the terms of a five-year CIA with the OIG arising from a civil settlement with the U.S. Department of Justice, other federal agencies and identified relators that concluded previously announced investigations and litigation related to short stay admissions through emergency departments at certain of their affiliated hospitals. The OIG has required us to be bound by the terms of the CHS CIA commencing on the Spin-off date and applying to us for the remainder of the five-year compliance term required of CHS, which terminates on August 4, 2019.

The compliance measures and reporting and auditing requirements contained in the CIA include:

continuing the duties and activities of the Corporate Compliance Officer, Corporate Compliance Work Group, and Facility Compliance Officers and committees;

maintaining a written Code of Conduct, which sets forth our commitment to full compliance with all statutes, regulations, and guidelines applicable to federal healthcare programs;

maintaining written policies and procedures addressing matters included in our Compliance Program, including adherence to medical necessity and admissions standards for inpatient hospital stays;

continuing general compliance training;

83providing specific training for employees and affiliates handling our billing, case management and clinical documentation;

•

~~providing specific training for employees and affiliates handling our billing, case management and clinical documentation;~~

engaging an independent third party to perform an annual review of our compliance with the CIA;

continuing the Confidential Disclosure Program and hotline to enable employees or others to disclose issues or questions regarding possible inappropriate policies or behavior;

continuing the screening program to ensure that we do not hire or engage employees or contractors who are ineligible persons for federal healthcare programs;

reporting any material deficiency which resulted in an overpayment to us by a federal healthcare program; and

submitting annual reports to the OIG which describe in detail the operations of the Corporate Compliance Program.

A material, uncorrected violation of the CIA could lead to our ~~suspension~~exclusion or disbarment from participation in Medicare, Medicaid and other federal and state healthcare programs. In addition, we are subject to possible civil penalties if we fail to substantially comply with the terms of the CIA, including stipulated penalties ranging from $1,000 to $2,500 per day. We are also subject to a stipulated penalty of $50,000 for each false certification by us or any individual or entity on behalf of us in connection with reports required under the CIA. The CIA increases the amount of information we are required to provide to the federal government regarding our healthcare practices and our compliance with federal regulations. We believe that we are currently operating our business in compliance with the CIA and are unaware of any historical actions on our part that could represent a violation under the terms of the CIA.

Item 1A. Risk Factors

~~There~~Except as set forth below, there have been no material changes to the risk factors discussed in the ~~2017~~2018 Annual Report on Form ~~10-K~~10-K.

Our financial statements have been prepared under the assumption that we will continue as a going concern.

Our financial statements have been prepared under the assumption that we will continue as a going concern. However, in light the reduction in the maximum Secured Net Leverage Ratio permitted under the CS Agreement to 4.50 from 5.00 in the first quarter of 2020, management concluded that there were probable conditions or events that raised substantial doubt about our ability to continue as a going concern. Management believes that it is probable that substantial doubt about our ability to remain in compliance with the Secured Net Leverage Ratio has been alleviated due to, but not limited to, our partnership with R1 RCM, the completion of the sale of Scenic Mountain Medical Center and the ~~risk factor discussed~~opportunity for additional divestitures, and management’s plan to reduce corporate and other operating costs over the next twelve months.

We believe that these efforts will achieve cost savings and improved net patient revenues. However, we cannot predict with certainty the outcome of our actions. Our ability to fund capital requirements, service our existing debt and comply with our debt covenants will depend on our future operating performance and will be impacted by financial, business, economic, regulatory and other factors. If we do not generate enough cash to pay our debt service obligations or our operating performance does not comply with our debt covenants, we may be required to refinance all or part of our existing indebtedness, sell assets, borrow additional money or raise equity. Breach of covenants included in our debt agreements, which could result in the ~~Quarterly Report on Form 10-Q filed on May 10, 2018.~~lenders demanding payment of the unpaid principal and interest balances, would have a material adverse effect upon our business and would likely require us to do any or all of the following: seek to renegotiate these debt arrangements with the lenders, seek waivers from the lenders, or seek to raise additional capital and increase revenues. If such negotiations and capital raising attempts proved unsuccessful, we may be required to seek protection from creditors through bankruptcy proceedings.

8471

Item 6. Exhibits

No.		Description

10.1†		~~Employment Agreement by and between~~ Quorum Health Corporation Amended and ~~Robert H. Fish~~Restated 2016 Stock Award Plan (incorporated by reference to Exhibit ~~10.1~~4.1 to the Company’s ~~Current Report~~Registration Statement on Form ~~8-K~~S-8 filed with the SEC on ~~August 27, 2018)~~February 15, 2019 (File No. ~~001-37550).~~

~~10.2†~~		Offer Letter by and between QHCCS and Glenn A. Hargreaves (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 27, 2018) (File No. 001-37550).

~~10.3†~~		Form of Inducement Award Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 28, 2018) (File No. 001-37550).

~~10.4†~~		Form of Inducement Award Performance-Based Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 28, 2018) (File No. 001-37550).

~~10.5†~~		Restricted Stock Inducement Award Agreement, by and between Robert H. Fish and Quorum Health Corporation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 28, 2018) (File No. 001-37550).

~~10.6†~~		Performance-Based Restricted Stock Inducement Award Agreement, by and between Robert H. Fish and Quorum Health Corporation (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 28, 2018) (File No. 001-37550)333-229696)).

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Extension Schema.

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase.

101.DEF*		XBRL Taxonomy Extension Definition Linkbase.

101.LAB*		XBRL Taxonomy Extension Label Linkbase.

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase.

Filed herewith.

Furnished herewith.

†

Indicates a management contract or compensation plan or arrangement.

8572

SIGNATURES

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

QUORUM HEALTH CORPORATION (Registrant)

By:		/s/ Robert H. Fish
		Robert H. Fish
		President and Chief Executive Officer
		(principal executive officer)

By:		/s/ Alfred Lumsdaine
		Alfred Lumsdaine
		Executive Vice President and
		Chief Financial Officer
		(principal financial officer)

By:		/s/ Glenn A. Hargreaves
		Glenn A. Hargreaves
		Senior Vice President and Chief Accounting Officer (principal accounting officer)

Date: ~~November 6, 2018~~May 10, 2019

8673

											Additional
	Long-Term			Due to			Common Stock				Paid-in			Parent's
	Debt			Parent, Net			Shares		Amount		Capital			Equity

Balance at April 29, 2016 (prior to the Spin-off)	$	24,179		$	1,813,836			—	$	—	$	—		$	3,137
Borrowings of long-term debt, net of debt issuance discounts		1,255,464			—			—		—		—			—
Payments of debt issuance costs		(29,146	)		—			—		—		—			—
Cash proceeds paid to Parent		—			(1,217,336	)		—		—		—			—
Transfer of liabilities from Parent		—			(22,292	)		—		—		—			—
Net deferred income tax liability resulting from the Spin-off		—			(46,783	)		—		—		—			—
Non-cash capital contribution from Parent		—			(527,425	)		—		—		530,562			(3,137	)
Distribution of common stock		—			—			27,719,645		3		(3	)		—
Distribution of restricted stock awards		—			—			692,409		—		—			—
Balance at April 29, 2016 (after the Spin-off)	$	1,250,497		$	—			28,412,054	$	3	$	530,559		$	—