Quorum Health 10Q 2017 Q3 Quarterly report

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, 2017

☐

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

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

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

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

As of November 3, 2017, there were 30,296,896 shares outstanding of the registrant’s Common Stock, $0.0001 par value per share.

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	55
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	93
	Item 4.	Controls and Procedures	93
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings	94
	Item 1A.	Risk Factors	97
	Item 6.	Exhibits	97
Signatures			98

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (LOSS)

(In Thousands, Except Earnings per Share and Shares)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Operating revenues, net of contractual allowances and discounts	$	557,847		$	612,551		$	1,731,007		$	1,825,198
Provision for bad debts		58,545			68,612			173,919			201,971
Net operating revenues		499,302			543,939			1,557,088			1,623,227
Operating costs and expenses:
Salaries and benefits		251,780			266,812			781,691			788,560
Supplies		58,657			64,013			186,591			191,810
Other operating expenses		145,357			154,878			466,394			482,526
Depreciation and amortization		20,735			28,234			63,441			90,854
Rent		12,377			12,823			36,631			37,917
Electronic health records incentives earned		(287	)		(1,336	)		(4,516	)		(9,791	)
Legal, professional and settlement costs		2,050			488			6,519			6,176
Impairment of long-lived assets and goodwill		5,261			—			21,461			250,400
Loss (gain) on sale of hospitals, net		79			—			(5,112	)		—
Transaction costs related to the Spin-off		173			532			204			5,444
Total operating costs and expenses		496,182			526,444			1,553,304			1,843,896
Income (loss) from operations		3,120			17,495			3,784			(220,669	)
Interest expense, net		32,216			28,028			90,204			84,756
Income (loss) before income taxes		(29,096	)		(10,533	)		(86,420	)		(305,425	)
Provision for (benefit from) income taxes		(542	)		(4,081	)		(86	)		(50,320	)
Net income (loss)		(28,554	)		(6,452	)		(86,334	)		(255,105	)
Less: Net income (loss) attributable to noncontrolling interests		637			507			1,048			1,917
Net income (loss) attributable to Quorum Health Corporation	$	(29,191	)	$	(6,959	)	$	(87,382	)	$	(257,022	)

Earnings (loss) per share attributable to Quorum Health Corporation stockholders:
Basic and diluted	$	(1.03	)	$	(0.24	)	$	(3.11	)	$	(9.05	)
Weighted-average shares outstanding:
Basic and diluted		28,245,833			28,413,532			28,068,085			28,412,552

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS)

(In Thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Net income (loss)	$	(28,554	)	$	(6,452	)	$	(86,334	)	$	(255,105	)
Amortization and recognition of unrecognized pension cost components, net of income taxes		123			100			365			(3,710	)
Comprehensive income (loss)		(28,431	)		(6,352	)		(85,969	)		(258,815	)
Less: Comprehensive income (loss) attributable to noncontrolling interests		637			507			1,048			1,917
Comprehensive income (loss) attributable to Quorum Health Corporation	$	(29,068	)	$	(6,859	)	$	(87,017	)	$	(260,732	)

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS

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

	September 30,			December 31,
	2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	15,736		$	25,455
Patient accounts receivable, net of allowance for doubtful accounts of $337,141 and $360,796 at September 30, 2017 and December 31, 2016, respectively		393,559			380,685
Inventories		55,125			58,124
Prepaid expenses		24,393			23,028
Due from third-party payors		98,778			116,235
Current assets of hospitals held for sale		9,202			1,502
Other current assets		40,920			57,942
Total current assets		637,713			662,971
Property and equipment, at cost		1,419,827			1,519,975
Less: Accumulated depreciation and amortization		(717,754	)		(786,075	)
Total property and equipment, net		702,073			733,900
Goodwill		409,229			416,833
Intangible assets, net		70,993			84,982
Long-term assets of hospitals held for sale		12,782			6,851
Other long-term assets		105,405			88,833
Total assets	$	1,938,195		$	1,994,370
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,887		$	5,683
Accounts payable		157,102			169,684
Accrued liabilities:
Accrued salaries and benefits		81,300			98,803
Accrued interest		27,350			19,915
Due to third-party payors		37,311			42,537
Current liabilities of hospitals held for sale		2,767			492
Other current liabilities		39,447			53,268
Total current liabilities		347,164			390,382
Long-term debt		1,276,874			1,241,142
Deferred income tax liabilities, net		31,087			31,474
Other long-term liabilities		145,559			108,996
Total liabilities		1,800,684			1,771,994
Redeemable noncontrolling interests		1,578			6,807
Equity:
Quorum Health Corporation stockholders' equity:
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; 30,249,502 shares issued and outstanding at September 30, 2017, and 29,482,050 shares issued and outstanding at December 31, 2016		3			3
Additional paid-in capital		546,609			537,911
Accumulated other comprehensive income (loss)		(2,395	)		(2,760	)
Accumulated deficit		(421,408	)		(334,026	)
Total Quorum Health Corporation stockholders' equity		122,809			201,128
Nonredeemable noncontrolling interests		13,124			14,441
Total equity		135,933			215,569
Total liabilities and equity	$	1,938,195		$	1,994,370

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF EQUITY

For the Nine Months Ended September 30, 2017

(In Thousands, Except Shares)

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

Balance at December 31, 2016	$	6,807			29,482,050		$	3	$	537,911		$	(2,760	)	$	(334,026	)	$	—	$	14,441		$	215,569
Comprehensive income (loss)		(1,158	)		—			—		—			365			(87,382	)		—		2,206			(84,811	)
Stock-based compensation expense		—			985,302			—		7,702			—			—			—		—			7,702
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(217,850	)		—		(1,503	)		—			—			—		—			(1,503	)
Cash distributions to noncontrolling investors		(42	)		—			—		—			—			—			—		(3,809	)		(3,809	)
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 investments		(264	)		—			—		264			—			—			—		—			264
Balance at September 30, 2017	$	1,578			30,249,502		$	3	$	546,609		$	(2,395	)	$	(421,408	)	$	—	$	13,124		$	135,933

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF EQUITY

For the Nine Months Ended September 30, 2016

(In Thousands, Except Shares)

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

Balance at December 31, 2015	$	8,958			—		$	—	$	—		$	—		$	—		$	3,184		$	12,759		$	15,943
Comprehensive income (loss)		(729	)		—			—		—			(3,710	)		(241,910	)		(15,112	)		2,646			(258,086	)
Transfers to Parent (prior to Spin-off)		—			—			—		—			—			—			15,112			—			15,112
Change in equity related to the Spin-off		—			28,412,054			3		518,518			—			—			(3,137	)		—			515,384
Stock-based compensation expense		—			1,075,737			—		4,678			—			—			—			—			4,678
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(1,576	)		—		(12	)		—			—			—			—			(12	)
Cash distributions to noncontrolling investors		(317	)		—			—		—			—			—			—			(2,511	)		(2,511	)
Purchases of shares from noncontrolling investors		(108	)		—			—		—			—			—			19			(12	)		7
Adjustments to redemption values of redeemable noncontrolling interests investments		82			—			—		(16	)		—			—			(66	)		—			(82	)
Noncontrolling interest in acquired entity		(132	)		—			—		—			—			—			—			—			—
Balance at September 30, 2016	$	7,754			29,486,215		$	3	$	523,168		$	(3,710	)	$	(241,910	)	$	—		$	12,882		$	290,433

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(In Thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Cash flows from operating activities:
Net income (loss)	$	(28,554	)	$	(6,452	)	$	(86,334	)	$	(255,105	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		20,735			28,234			63,441			90,854
Non-cash interest expense, net		1,793			1,257			3,223			1,986
Provision for (benefit from) deferred income taxes		(642	)		(4,081	)		(387	)		(51,532	)
Stock-based compensation expense		2,374			2,781			7,702			4,678
Impairment of long-lived assets and goodwill		5,261			—			21,461			250,400
Loss (gain) on sale of hospitals, net		79			—			(5,112	)		—
Changes in reserves for self-insurance claims, net of payments		4,999			11,208			16,253			28,099
Changes in reserves for legal, professional and settlement costs, net of payments		—			—			(3,651	)		4,642
Other non-cash expense (income), net		233			54			238			(533	)
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Patient accounts receivable, net		9,156			(9,586	)		(21,193	)		(16,797	)
Due from and due to third-party payors, net		(3,176	)		(7,528	)		12,231			(2,173	)
Inventories, prepaid expenses and other current assets		9,756			(14,689	)		2,024			(12,412	)
Accounts payable and accrued liabilities		(12,002	)		(2,505	)		(10,710	)		26,624
Long-term assets and liabilities, net		(268	)		880			1,603			(7,965	)
Net cash provided by (used in) operating activities		9,744			(427	)		789			60,766

Cash flows from investing activities:
Capital expenditures for property and equipment		(11,525	)		(23,241	)		(50,667	)		(56,448	)
Capital expenditures for software		(3,005	)		(1,454	)		(6,174	)		(5,258	)
Acquisitions, net of cash acquired		(33	)		(26	)		(1,920	)		(26	)
Proceeds from the sale of hospitals		9,084			—			29,240			—
Other investing activities		—			(346	)		—			1,056
Net cash provided by (used in) investing activities		(5,479	)		(25,067	)		(29,521	)		(60,676	)

Cash flows from financing activities:
Borrowings (repayments) of revolving credit facilities, net		(5,000	)		—			45,000			—
Borrowings of long-term debt		175			36			247			1,255,556
Repayments of long-term debt		(4,670	)		(3,165	)		(16,517	)		(7,442	)
Increase (decrease) in Due to Parent, net		—			—			—			25,183
Payments of debt issuance costs		(181	)		(1,136	)		(3,119	)		(29,139	)
Cash paid to Parent related to the Spin-off		—			—			—			(1,217,336	)
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		(14	)		(39	)		(1,503	)		(12	)
Cash distributions to noncontrolling investors		—			(181	)		(3,851	)		(2,828	)
Purchases of shares from noncontrolling investors		(1,244	)		(88	)		(1,244	)		(100	)
Net cash provided by (used in) financing activities		(10,934	)		(4,573	)		19,013			23,882

Net change in cash and cash equivalents		(6,669	)		(30,067	)		(9,719	)		23,972
Cash and cash equivalents at beginning of period		22,405			55,145			25,455			1,106
Cash and cash equivalents at end of period	$	15,736		$	25,078		$	15,736		$	25,078

Supplemental cash flow information:
Interest payments, net	$	13,105		$	15,432		$	79,677		$	51,779
Income tax payments, net of refunds (after the Spin-off)		311			—			339			—
Non-cash purchases of property and equipment under capital lease obligations		—			1,401			54			6,521

See accompanying notes

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF THE BUSINESS AND SPIN-OFF

Description of the Business

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, 2017, the Company owned or leased a diversified portfolio of 32 hospitals in rural and mid-sized markets, which are located in 15 states and have a total of 3,051 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 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 AND COMBINED 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		$	—

The following table provides a summary of the liabilities transferred to QHC from CHS in connection with the Spin-off (in thousands):

	April 29, 2016

Accounts payable	$	13,607
Benefit plan liabilities		5,964
Other liabilities		2,721
Total liabilities transferred from Parent	$	22,292

NOTE 2 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated and combined 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 and combined 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, 2017. 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 and combined financial statements should be read in conjunction with the consolidated and combined financial statements and accompanying notes thereto for the year ended December 31, 2016, contained in the Company’s Annual Report on Form 10-K filed with the SEC on April 12, 2017 (the “2016 Form 10-K”).

Prior to its separation from CHS on April 29, 2016, QHC did not operate as a separate company and stand-alone financial statements were not historically prepared; however, QHC was comprised of certain stand-alone legal entities for which discrete financial information was available under CHS’ ownership. The accompanying condensed consolidated and combined financial statements include amounts and disclosures for QHC that have been derived from the consolidated financial statements and accounting records of CHS for the periods prior to the Spin-off in combination with the amounts and disclosures related to the stand-alone financial statements and accounting records of QHC after the Spin-off. The accompanying condensed consolidated and combined financial statements may not necessarily be indicative of the results of operations, financial position and cash flows of QHC in the future or those that would have occurred had the Company operated on a stand-alone basis during the entirety of the periods

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

presented herein. See Note 16 — Related Party Transactions for additional information on the carve-out of financial information from CHS.

The Company’s financial statements have been prepared under the assumption that it will continue as a going concern. The Company has limited stand-alone operating history and has experienced net losses in each of the quarters subsequent to the Spin-off from CHS. On December 31, 2016, the Company adopted Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements — Going Concern, which requires management to evaluate if there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern. As a result of adopting ASU No. 2014-15, management was required to evaluate the Company’s ability to comply with the Secured Net Leverage Ratio under its Senior Credit Facility for one year following the issuance of the financial statements for the nine month period ended September 30, 2017. Although the Company was in compliance with its financial covenants as of September 30, 2017, the new standard requires management to base its evaluation about the ability to continue to comply with those covenants on results and events considered “probable” of occurring considering historical results, implemented plans, and executed agreements as of the date the financial statements are issued. In light of (i) the Company’s historical net operating results; (ii) delays in the approval by Centers for Medicare & Medicaid Services (“CMS”) of the California Hospital Quality Assurance Fee (“HQAF”) program for the 2017 to 2019 program period, which impacts the Company due to the inability to recognize any earned revenues until CMS approval of the program has been issued; and (iii) the amount of net operating losses from hospitals the Company intends to divest, management amended certain provisions of its Senior Credit Facility.

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”) to, among other things, raise the maximum Secured Net Leverage Ratio (as defined in the credit agreement (the “CS Agreement”), among the Company, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent) to 4.75x from 4.25x for the period July 1, 2017 to December 31, 2018 (which was previously 4.25x for the period July 1, 2017 to June 30, 2018), at which point it drops to 4.00x for the remainder of the agreement. The CS Amendment also provides for additional Consolidated EBITDA add-backs under the covenant calculation for certain items. For additional information related to the CS Amendment, see Note 7 — Long-Term Debt. Management has concluded that the CS Amendment alleviates any substantial doubt about its ability to continue as a going concern for the one year period following the issuance of its financial statements for the nine month period ended September 30, 2017. The Company is actively engaged in initiatives to divest underperforming hospitals and outpatient facilities, for which substantially all proceeds will be used to pay down the Company’s term loan under its credit facility.

For all defined terms related to the Company’s Senior Credit Facility, see Note 7 — Long-Term Debt.

Principles of Consolidation and Combination

The consolidated and combined 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 consolidated and combined 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 and combined statements of income, and net income is presented both in total and separately to 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 consolidated and combined balance sheets.

Intercompany transactions and accounts of the Company are eliminated in consolidation. Additionally, all significant transactions with CHS that occurred prior to the Spin-off were included in the consolidated and combined balance sheets within Due to Parent, net. This liability to CHS was settled in the Spin-off.

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 consolidated and combined financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions.

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Revenues and Accounts Receivable

Revenue Recognition

The Company recognizes revenues from patient services at its hospitals and affiliated outpatient facilities in the period services are performed and reports these revenues at the net realizable amount expected to be collected from patients and third-party payors. Billings and collections are outsourced to CHS under the transition services agreements that were entered into in connection with the Spin-off. See Note 16 — Related Party Transactions for additional information on these agreements.

The amounts collected for patient services are generally less than established billing rates, or standard billing charges, due to contractual agreements with third-party payors, governmental programs that require reduced billing rates, discounts offered as incentives for payment, and a portion related to bad debts. The Company recognizes revenues related to its QHR business when management advisory and consulting services are provided and reports these revenues at the net realizable amount expected to be collected from the non-affiliated hospital clients.

The following table provides a summary of the components of net operating revenues, before the provision for bad debts (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Operating revenues	$	2,908,657		$	3,016,603		$	9,000,774		$	9,140,042
Less: Contractual allowances		(2,247,142	)		(2,289,702	)		(6,954,721	)		(6,986,291	)
Less: Discounts		(103,668	)		(114,350	)		(315,046	)		(328,553	)
Total net operating revenues, before the provision for bad debts	$	557,847		$	612,551		$	1,731,007		$	1,825,198

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 consulting services business, rental income and hospital cafeteria sales.

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The following tables provide a summary of net operating revenues, before the provision for bad debts, by payor source (dollars in thousands):

	Three Months Ended September 30,
	2017					2016
	$ Amount		% of Total			$ Amount		% of Total

Medicare	$	167,287		30.0	%	$	162,753		26.6	%
Medicaid		94,571		17.0	%		125,679		20.5	%
Managed care and commercial plans		213,637		38.3	%		239,461		39.1	%
Self-pay		58,935		10.6	%		60,079		9.8	%
Non-patient		23,417		4.1	%		24,579		4.0	%
Total net operating revenues, before the provision for bad debts	$	557,847		100.0	%	$	612,551		100.0	%


	Nine Months Ended September 30,
	2017					2016
	$ Amount		% of Total			$ Amount		% of Total

Medicare	$	502,747		29.0	%	$	505,836		27.7	%
Medicaid		298,580		17.2	%		342,030		18.7	%
Managed care and commercial plans		683,642		39.6	%		714,340		39.2	%
Self-pay		173,325		10.0	%		184,004		10.1	%
Non-patient		72,713		4.2	%		78,988		4.3	%
Total net operating revenues, before the provision for bad debts	$	1,731,007		100.0	%	$	1,825,198		100.0	%

Contractual Allowances and Discounts

The net realizable amount of patient service revenues due from third-party payors is subject to complexities and interpretations of payor-specific contractual agreements and governmental regulations that are frequently changing. The 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. Contractual allowances, 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 allowances 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 allowance adjustments in the periods in which they become known and may be subject to further revisions. The Company’s contractual allowances are impacted by the timing and ability of CHS to monitor the classification and collection of our patient accounts receivable. Billings and collections are outsources to CHS under the transition services agreements that were put in place in connection with the Spin-off. Self-pay and other payor discounts are incentives offered to uninsured or underinsured patients and other payors to reduce their costs of healthcare services with the purpose of maximizing the Company’s collection efforts.

Third-Party Program Reimbursements

Cost report settlements under reimbursement programs with Medicare, Medicaid and other managed care plans are estimated and recorded in the period the related services are performed and are adjusted in future periods, as needed, until the final cost report settlements are determined. Previous program reimbursements and final cost report settlements are included in due from and due to third-party payors in the consolidated and combined balance sheets. Contractual allowance adjustments related to previous program reimbursements and final cost report settlements favorably (unfavorably) impacted net operating revenues $2.5 million and $(0.8) million during the three months ended September 30, 2017 and 2016, respectively, and $2.5 million and $(5.2) million during the nine months ended September 30, 2017 and 2016, 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

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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. Similar programs are also currently being considered by other states. These amounts are included in due from and due to third-party payors in the consolidated and combined balance sheets.

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,
	2017		2016

Amounts due from third-party payors:
Previous program reimbursements and final cost report settlements	$	22,120	$	23,876
State supplemental payment programs		76,658		92,359
Total amounts due from third-party payors	$	98,778	$	116,235

Amounts due to third-party payors:
Previous program reimbursements and final cost report settlements	$	31,467	$	33,366
State supplemental payment programs		5,844		9,171
Total amounts due to third-party payors	$	37,311	$	42,537

After a state supplemental payment program is approved and fully authorized by the appropriate state legislative or governmental agency, the Company recognizes revenue and related expenses based on the terms of the 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 consolidated and combined statements of income.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016

Medicaid revenues	$	46,866	$	54,688	$	138,544	$	162,009
Provider taxes and other expenses		16,523		19,559		50,646		57,590
Reimbursements attributable to state supplemental payment programs, net of expenses	$	30,343	$	35,129	$	87,898	$	104,419

The California Department of Health Care Services implemented 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 Phase IV of the program, covering the period January 2014 through December 2016, the Company recognized $11.5 million of Medicaid revenues and $2.7 million of provider taxes for the three months ended September 30, 2016 and $33.9 million of Medicaid revenues and $8.2 million of provider taxes for the nine months ended September 30, 2016. Phase IV of the program expired on December 31, 2016 and CMS has not yet issued the required approvals, including the waiver of certain healthcare-related tax rules, for Phase V of the program. Consistent with the first four phases of the HQAF program, the Company is not recognizing revenues under the pending program in 2017 or thereafter until CMS completes the approval process.

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 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 allowances in the same period. The gross amounts of charity care revenues were $5.7

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million and $10.1 million for the three months ended September 30, 2017 and 2016, respectively, and $25.6 million and $24.9 million for the nine months ended September 30, 2017 and 2016, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

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

The following table provides a summary of the components of patient accounts receivable, before contractual allowances, discounts and allowance for doubtful accounts (dollars in thousands):

	September 30, 2017					December 31, 2016
	$ Amount		% of Total			$ Amount		% of Total

Third-parties	$	2,068,705		77.4	%	$	1,930,103		74.6	%
Self-pay		605,002		22.6	%		656,373		25.4	%
Total patient accounts receivable, gross	$	2,673,707		100.0	%	$	2,586,476		100.0	%

Accounts receivable are reduced by an allowance for amounts that could become uncollectible in the future. The Company estimates the allowance for doubtful accounts by reserving a percentage of all self-pay accounts receivable without regard to aging category. The allowance percentage is based on a model that considers the historical write-off activity and is adjusted for expected recoveries and any anticipated changes in trends. The Company’s ability to estimate the allowance for doubtful accounts 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. For insured receivables, which are the non-self-pay receivables, the Company estimates the allowance for doubtful accounts based on a model that considers the uncontractualized portion of all accounts aging over 365 days from the date of patient discharge, reduced by an estimate for recoveries.

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

	Nine Months Ended
	September 30, 2017

Balance at beginning of period	$	360,796
Provision for bad debts		173,919
Amounts written off, net of recoveries		(197,574	)
Balance at end of period	$	337,141

Collections are impacted by the economic ability of patients to pay, the effectiveness of CHS’ 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 transition services agreements that were established with the Spin-off. See Note 16 — Related Party Transactions for additional information on these agreements. Significant changes in payor mix, centralized business office operations, including the CHS shared service centers’ efforts in collecting the Company’s accounts receivable, economic conditions or trends in federal and state governmental healthcare coverage, among others, could affect the Company’s estimates of accounts receivable collectability. The Company also continually reviews its overall allowance adequacy by monitoring historical cash collections as a percentage of trailing net operating revenues after the provision for bad debts, 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 acquisitions and divestitures.

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 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 a significant concentration of credit risk from payors. Accounts receivable, net of contractual allowances, from Medicare were $76.3 million and $72.6 million, or 10.4% and 9.8% of total patient accounts receivable, net as of September 30, 2017 and December 31, 2016, respectively. Additionally, due to fiscal problems in the state of Illinois, the Company believes Illinois Medicaid represents a concentration of credit risk. The Company’s accounts receivable, net of contractual allowances, from Illinois Medicaid were $44.8 million and $34.8 million, or 6.1% and 4.7% of total patient accounts

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receivable, net as of September 30, 2017 and December 31, 2016, respectively. The Company’s state supplemental program receivables from Illinois Medicaid were $19.6 million and $16.6 million, or 19.9% and 14.3% of total due from third-party payors, as of September 30, 2017 and December 31, 2016, 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 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 generated more than 5% of total net patient revenues, before the provision for bad debts, as determined in each period (dollars in thousands):

	Number of	Nine Months Ended September 30,
	Hospitals at	2017					2016
	September 30, 2017	$ Amount		% of Total			$ Amount		% of Total

Illinois	9	$	611,954		36.9	%	$	609,091		34.9	%
Oregon	1		160,563		9.7	%		156,397		9.0	%
Georgia	2		118,468		7.1	%		163,127		9.3	%
California	2		122,208		7.4	%		151,278		8.7	%
Kentucky	3		91,832		5.5	%		89,278		5.1	%

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,
	2017		2016		2017		2016

Purchased services	$	40,716	$	44,242	$	130,155	$	133,316
Taxes and insurance		24,929		24,690		92,782		94,257
Medical specialist fees		27,254		27,811		84,605		77,343
Transition services agreements and allocations from Parent		15,468		18,094		47,736		52,192
Repairs and maintenance		10,166		9,611		31,368		31,577
Utilities		7,853		8,369		21,245		22,525
Management fees from Parent		—		—		—		11,792
Other miscellaneous operating expenses		18,971		22,061		58,503		59,524
Total other operating expenses	$	145,357	$	154,878	$	466,394	$	482,526

Following the Spin-off, the Company began recording 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 and allocations from Parent” in the table above. Amounts allocated to the Company by CHS for the four month period in 2016 prior to the Spin-off are also included in “Transition services agreements and allocations from Parent” in the table above.

Prior to the Spin-off, QHC recorded a monthly corporate management fee from CHS that represented a portion of CHS’ corporate office costs, and this fee was included in other operating expenses. Following the Spin-off, the costs for corporate office functions are primarily included in salaries and benefits expenses in the consolidated and combined statements of income.

See Note 16 — Related Party Transactions for additional information on the allocated costs from 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

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tax, treasury, audit, risk management, legal, investor relations and human resources. These costs are primarily salaries and benefits expenses associated with these corporate office functions. General and administrative costs of the Company were $13.8 million and $14.1 million during the three months ended September 30, 2017 and 2016, respectively, and $43.9 million and $37.8 million during the nine months ended September 30, 2017 and 2016, respectively. Prior to the Spin-off, the majority of these costs were allocations from CHS. See Note 16 — Related Party Transactions for additional information on the allocated costs from CHS.

Electronic Health Records Incentives Earned

Pursuant to the Health Information Technology for Economic and Clinical Health Act (“HITECH”), the Company is eligible to receive incentive payments under the Medicare and Medicaid programs for its eligible hospitals and physician clinics that demonstrate meaningful use of certified Electronic Health Records (“EHR”) technology. Each of the Company’s eligible hospitals and physician clinics has completed the initial adoption phase of EHR implementation and is currently in the process of implementing the remaining two phases. 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 are further subject to audit.

The Company utilizes a gain contingency model to recognize EHR incentive payments. When the recognition criteria have been fully met, the Company recognizes the income from EHR incentives payments as a part of operating costs and expenses in the consolidated and combined statements of income. Medicaid EHR incentive payments are calculated based on prior period Medicare cost report information available at the time when eligible hospitals demonstrate meaningful use of certified EHR technology. Medicare EHR incentive payments are calculated when eligible hospitals demonstrate meaningful use of certified EHR technology and the information for the applicable full Medicare cost report year used to determine the final incentive payment is available. In some instances, the Company may receive estimated Medicare EHR incentive payments prior to when the Medicare cost report information used to determine the final incentive payment is available. In these instances, recognition of the income from EHR incentive payments is deferred until all recognition criteria are met. The Company recognizes receivables for EHR incentive payments that have been earned, but are uncollected at period end, as other current assets in the consolidated and combined balance sheets. The receivables are adjusted for any known audit or retrospective adjustments related to prior periods. Deferred revenue from EHR incentive payments is recorded in other current liabilities in the consolidated and combined balance sheets.

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. As the Company completes its full implementation of certified EHR technology in accordance with all three phases of the program, its EHR incentive payments will decline and ultimately end.

The following table provides a summary of activity related to EHR incentives (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Electronic health records incentives receivable at beginning of period	$	2,256		$	1,973		$	4,189		$	11,227
Electronic health records incentives earned		31			1,336			4,260			6,152
Cash incentive payments received		(278	)		(367	)		(5,744	)		(13,116	)
Adjustments to receivable based on final cost report settlement or audit		(295	)		458			(991	)		(863	)
Electronic health records incentives receivable at end of period	$	1,714		$	3,400		$	1,714		$	3,400

Deferred revenue related to electronic health records incentives at beginning of period	$	(256	)	$	(1,054	)	$	—		$	—
Cash received and deferred during period		—			1,054			(256	)		(3,639	)
Recognition of deferred incentives as earned		256			—			256			3,639
Deferred revenue related to electronic health records incentives at end of period	$	—		$	—		$	—		$	—

Total electronic health records incentives earned during period	$	287		$	1,336		$	4,516		$	9,791
Total cash incentive payments received (refunds made) during period		278			(687	)		6,000			16,755

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In the second quarter of 2016, the Company received a Medicare EHR incentive payment of $1.8 million that was recorded as deferred revenue in the quarter. The Company subsequently determined the payment was a duplicate and refunded the payment during the third quarter of 2016.

Legal, Professional and Settlement Costs

Legal, professional and settlement costs in the consolidated and combined statements of income primarily include legal costs and related settlements, if any, associated with regulatory claims, government investigations into reimbursement payments, claims associated with QHR’s contracts and professional costs of projects approved by the Company’s Board of Directors (the “Board”).

Loss (Gain) on Sale of Hospitals, Net

Loss (gain) on sale of hospitals, net is the loss (gain) related to the Company’s divestiture of hospitals and their related outpatient facilities. It is calculated as the difference between the cash received from the sale and the carrying value of the associated net assets at the date of sale, less certain incremental direct selling costs.

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, management advisory and consulting costs, investment advisory costs, legal expenses and other miscellaneous costs.

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 amounts 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 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 income taxes in the consolidated and combined statements of income. The Company classifies interest and penalties, if any, related to its tax positions as a component of income tax expense. See Note 11 — Income Taxes for information on the separate return method of accounting for income taxes that was used by the Company during the carve-out period.

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.

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.

Other Current Assets

Other current assets consists of the current portion of the insurance 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 electronic health records 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

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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.

Goodwill

The Company’s hospital operations and QHR’s hospital management advisory and consulting services operations meet the criteria to be classified as 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’ goodwill impairment testing date). Additional goodwill was allocated on a similar basis for four hospitals acquired by CHS in 2014 and 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 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. Costs incurred to renew certain contract-based intangibles, such as hospital management contracts and certificates of need, would be recognized as intangible assets and amortized over the respective renewed contract periods. Capitalized software costs that are in the development stage are not amortized until the related projects are complete. Assets for physician 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, 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 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 3 — Impairment of Long-Lived Assets and Goodwill for additional information related to impairment charges recorded in the condensed consolidated and combined statements of income for the nine months ended September 30, 2017 and the year ended December 31, 2016.

Other Long-Term Assets

Other long-term assets consists 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 and other miscellaneous long-term assets.

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Other Current Liabilities

Other current liabilities 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 electronic health records incentives, physician guarantees and other miscellaneous current liabilities.

Professional and General Liability 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 this risk, the Company maintains insurance exceeding a self-insured retention level for these types of claims. 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 estimate of losses for the current year, including claims incurred but not reported, the change in the estimate of losses for prior years based on 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 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.

See Note 17 — Commitments and Contingencies for information related to the portion of the Company’s insurance reserves for workers’ compensation liability and professional and general liability that are indemnified by CHS and the related accounting treatment and presentation in the consolidated and combined financial statements.

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 $8.3 million and $11.0 million as of September 30, 2017 and December 31, 2016, respectively and is included in accrued salaries and benefits in the consolidated and combined balance sheets. Expense each period is based on the actual claims received during the period plus any adjustment to the liability.

Prior to the Spin-off, QHC was allocated employee health expense as part of the monthly corporate overhead charges from CHS. The allocation was determined based on claims made by QHC employees during the period plus an estimate for the change in liability related to QHC employee health claims incurred but not reported. The liability was included in Due to Parent, net in the consolidated and combined balance sheets, as the related employee health insurance policy was owned by CHS. Employee health expense is included in salaries and benefits expenses in the consolidated and combined statements of income for all periods. See Note 16 — Related Party Transactions for additional information on corporate overhead costs from CHS prior to the Spin-off.

Redeemable and Non-Redeemable Noncontrolling Interests

The Company’s consolidated and combined 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 its control, such as the retirement, death, or disability of a physician-owner. The carrying amount of redeemable noncontrolling interests is recorded in the consolidated and combined balance sheets 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.

Assets and Liabilities of Hospitals Held for Sale

The Company reports separately from other assets on the consolidated and combined 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

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less costs to sell. The assets and liabilities classified as held for sale are no longer depreciated or amortized into expense. The carrying value of assets classified as held for sale are reported net of impairment charges in the consolidated and combined balance sheets.

Stock-Based Compensation

In connection with the Spin-off, the Company issued QHC restricted stock awards to all CHS restricted stock award holders as of the Record Date. Each holder of CHS restricted stock awards received one QHC restricted stock award for every four CHS restricted stock awards held. In addition, QHC employees that held CHS restricted stock awards were allowed to continue to hold the CHS awards under the same terms and conditions that existed prior to the Spin-off, excluding certain shares granted on March 1, 2016 that were canceled in connection with the Spin-off. The unrecognized compensation expense related to the vesting of the CHS restricted stock awards held by QHC employees was transferred to QHC with the Spin-off. As a result, the Company is responsible for recording stock-based compensation expense attributable to the unvested portion of CHS restricted stock awards held by QHC employees and the unvested portion of all QHC restricted stock awards held by its employees, consisting of both QHC awards issued on the Record Date and additional awards granted under the Quorum Health Corporation 2016 Stock Award Plan (the “2016 Stock Award Plan”) following the Spin-off.

Following the Spin-off, the Company accounts for stock-based compensation in accordance with Accounting Standards Codification Topic 718, “Compensation — Stock Compensation.” Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the number of stock-based awards that are expected to be forfeited. If actual forfeitures differ from the Company’s estimates, stock-based compensation expense and the Company’s results of operations would be impacted

See Note 14 — Stock-Based Compensation for additional information related to stock-based compensation.

Benefit Plans

Following the Spin-off, the Company maintains various benefit plans, including defined contribution plans, a defined benefit plan and deferred compensation plans, 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. Prior to the Spin-off, QHC was allocated a portion of CHS’ benefit costs under its defined contribution plans. The allocation was based on specific identification for plans associated exclusively with QHC hospitals and on QHC’s proportional share of employees covered under all other applicable plans. The expense was recorded as salaries and benefits in the consolidated and combined statements of income, and the cumulative liability for these benefit costs, which was transferred to the Company in the Spin-off, was recorded in Due to Parent, net in the consolidated and combined balance sheets.

QHC recognizes the unfunded liability of its defined benefit plan in other long-term liabilities in the consolidated and combined balance sheets. Unrecognized gains (losses) and prior service credits (costs) are recorded as changes in other comprehensive income (loss). 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 and combined statements of income.

Segment Reporting

The principal business of the Company is to provide healthcare services at its hospitals and outpatient facilities. The Company’s only other line of business is the hospital management advisory and consulting services it provides through QHR. The Company has determined that its hospital operations business meets the criteria for separate segment reporting. The financial information for QHR’s business does not meet the quantitative thresholds for separate segment reporting, and therefore has been combined with the Company’s corporate functions into the all other reportable segment. See Note 13 — Segments.

New Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Accounting for Goodwill Impairment, which simplifies the accounting for goodwill impairments 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

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this amount does not exceed the carrying amount of goodwill. The new guidance continues to allow an entity to perform a qualitative assessment over goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The ASU is effective for the Company’s annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance may have on its consolidated and combined results of operations, financial position and cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, which was issued to simplify some of the accounting guidance for share-based compensation. Among the areas impacted by the amendments in this ASU are the accounting for income taxes related to share-based payments, accounting for forfeitures, classification of awards as equity or liabilities and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted this ASU on January 1, 2017. The adoption of this ASU had no material impact on the Company’s consolidated and combined results of operations, financial position and cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the accounting for leases, requiring lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either finance or operating leases, which will impact the expense recognition of such leases over the lease term. The ASU also modifies the lease classification criteria for lessors and eliminates some of the real estate leasing guidance previously applied for certain leasing transactions. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and permits the use of either a full or modified retrospective approach upon adoption. The Company expects to adopt this ASU on January 1, 2019. The Company utilizes a number of leases to support its operations. As such, the adoption of this ASU is expected to have a significant impact on the Company’s consolidated and combined financial position. The Company is currently evaluating the quantitative and qualitative impact the adoption of this ASU will have on its operations, policies and procedures. The Company is additionally evaluating any modifications to its leasing strategy in response to the requirements of this standard.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides for a single comprehensive principles-based model for the recognition of revenue across all industries using a five-step model to recognize revenue from customer contracts. The new standard significantly expands disclosures about the nature, amount, timing, and uncertainty of revenues and cash flows, as well as certain additional quantitative and qualitative disclosures. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016, and permits the use of either a full or modified retrospective approach upon adoption. In preparation for adoption of the ASU, the Company has established an implementation team that is evaluating the current impact the new standard will have on its revenue recognition policies, procedures, financial position, results of operations, cash flows, financial disclosures and control framework. Specifically, the Company is quantifying the impact on its results of operations, financial position and cash flows in order to determine which method, either full or modified retrospective, to use upon adoption. The Company is using a program management approach for the various revenue streams to accomplish the revenue, financial reporting and organizational impact analysis according to project milestones to ensure a systematic and timely process that will allow consideration of impact findings in the selection and implementation of a transition method. The Company cannot reasonably estimate at this time the quantitative impact that the adoption of this accounting standard will have on its consolidated financial statements. The Company notes that industry guidance continues to develop and that further guidance regarding third-party reimbursements and other reimbursement programs unique to the healthcare industry may be issued in later 2017, which may impact our evaluation. In addition to new and expanded disclosures, the Company anticipates that the most significant impact will be to the presentation of the income statement, as the provision for doubtful accounts will be recorded as a direct reduction to revenues and will not be presented as a separate line item.

NOTE 3 — IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

2017 Impairments

During the three months ended September 30, 2017, the Company evaluated the fair value of hospitals classified as held for sale and evaluated other hospitals for 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 evaluated other hospitals for 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 the three months ended March 31, 2017, management made a decision to classify certain additional 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

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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. As a result, the Company 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 intangibles and $1.4 million of goodwill impairment.

2016 Impairments

During the second quarter of 2016, management made a decision to classify certain hospitals as held for sale and evaluate other hospitals for divestiture. Due to the increase in net operating losses associated with these hospitals, the Company analyzed the long-lived assets of all of its hospitals to test for impairment and recorded $45.4 million of impairment related to long-lived assets in this quarter. In addition, 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, 2015 measurement date, which was the measurement date of the Company’s most recent annual goodwill impairment analysis, and recognized $5.0 million of goodwill impairment in the second quarter of 2016. In this same quarter, management identified certain indicators of goodwill impairment related to the hospital operations reporting unit and concluded that such indicators necessitated an interim goodwill impairment evaluation. The primary indicators were declining market capitalization, as compared to the carrying value of equity, and a decrease in estimated future earnings of the hospital operations reporting unit. The Company performed a calculation of the overall fair value of this reporting unit in step one of the impairment test and concluded that the carrying value of the hospital operations reporting unit as of June 30, 2016 exceeded the estimated fair value. The Company performed a preliminary step two calculation of goodwill impairment to determine the implied fair value of goodwill of the hospital operations reporting unit in a hypothetical purchase price allocation. Based on this preliminary analysis, the Company estimated and recorded goodwill impairment of $200 million in the second quarter of 2016.

For step two goodwill impairment testing, the Company engaged a professional valuation firm to perform a hypothetical purchase price valuation of each of its hospitals utilizing a September 30, 2016 measurement date. The results of the third-party valuation, which was completed in the fourth quarter of 2016, indicated that the carrying values of certain of the Company’s individual hospitals exceeded their fair values. Considering these results to be an indicator of potential impairment and to assess whether any additional impairment of long-lived assets existed, the Company utilized a September 30, 2016 measurement date to perform an analysis of undiscounted cash flows for each hospital in which an indicator of impairment was identified. Based on the results of these analyses, the Company recorded impairment of $82.7 million related to long-lived assets at certain hospitals and a downward adjustment to its previously recorded goodwill estimate by $80 million in the fourth quarter of 2016. The net impact in the fourth quarter of 2016, in comparison to the $200 million estimate recorded as of June 30, 2016, was $2.7 million of additional impairment beyond this initial estimate.

In addition to the above, the Company experienced a decline in operating results at several hospitals in the fourth quarter of 2016. This led management to perform additional testing for impairment using a December 31, 2016 measurement date. As a result of this analysis, the Company recorded additional impairment of $38.8 million related to long-lived assets in the fourth quarter of 2016. The carrying values of long-lived assets, including those classified as held for sale, are reported net of these impairment charges on the consolidated and combined balance sheet as of December 31, 2016.

NOTE 4 — DIVESTITURES

Sunbury Community Hospital and Lock Haven Hospital

On September 30, 2017, the Company sold 70-bed Sunbury Community Hospital and its affiliated outpatient facilities (“Sunbury”), located in Sunbury, Pennsylvania, and 47-bed Lock Haven Hospital and its affiliated outpatient facilities (“Lock Haven”), located in Lock Haven, Pennsylvania, for combined proceeds of $9.1 million. For the three months ended September 30, 2017 and 2016, the Company’s operating results included pre-tax losses of $2.4 million in each period related to Sunbury and Lock Haven on a combined basis, and pre-tax losses of $6.5 million and $10.1 million for the nine months ended September 30, 2017 and 2016, respectively. In addition to the above, the Company recorded a $0.1 million loss on the sale in the three months ended September 30, 2017. The Company also recorded $1.9 million and $12.7 million of impairment to property, equipment and capitalized software costs of Sunbury and Lock Haven during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

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Vista Medical Center West

On September 12, 2017, the Company announced that it had entered into a definitive agreement to sell 70-bed Vista Medical Center West in Waukegan, Illinois. The definitive agreement covers the hospital and its affiliated outpatient facilities. The Company currently anticipates completing the sale of this hospital in the first quarter of 2018.

L.V. Stabler Memorial Hospital

On September 11, 2017, the Company announced that it had entered into a definitive agreement to sell 72-bed L.V. Stabler Memorial Hospital in Greenville, Alabama. The definitive agreement covers the hospital and its affiliated outpatient facilities. The Company currently anticipates completing the sale of this hospital in the fourth quarter of 2017.

Trinity Hospital of Augusta

On June 30, 2017, the Company sold 231-bed Trinity Hospital of Augusta and its affiliated outpatient facilities (“Trinity”), located in Augusta, Georgia, for $15.9 million. For the three months ended September 30, 2017 and 2016, the Company’s operating results included pre-tax losses of $0.4 million and $2.0 million, respectively, related to Trinity, and pre-tax losses of $7.9 million and $7.8 million for the nine months ended September 30, 2017 and 2016, respectively. In addition to the above, the Company recorded a $5.2 million gain on the sale in the nine months ended September 30, 2017. The Company also recorded $33.9 million of impairment to property, equipment and capitalized software costs of Trinity during the year ended December 31, 2016.

As part of the sale of Trinity, the Company redeemed shares valued at $3.5 million from minority interest partners, which included cash distributions of $1.2 million related to the dissolution of the partnership.

Cherokee Medical Center

On March 31, 2017, the Company sold 60-bed Cherokee Medical Center and its affiliated outpatient facilities (“Cherokee”), located in Centre, Alabama, for $4.3 million. For the three months ended September 30, 2017 and 2016, the Company’s operating results included pre-tax gains (losses) of less than $0.1 million and $(1.2) million, respectively, related to Cherokee, and pre-tax losses of $(1.0) million and $(3.8) million for the nine months ended September 30, 2017 and 2016, respectively. In addition to the above, the Company recorded a $0.2 million gain on the sale in the nine months ended September 30, 2017. The Company also recorded $3.9 million and $2.0 million of impairment to property, equipment and capitalized software costs of Cherokee during the years ended December 31, 2016 and 2015, respectively.

Barrow Regional Medical Center

Effective December 31, 2016, the Company sold 56-bed Barrow Regional Medical Center and its affiliated outpatient facilities (“Barrow”), located in Winder, Georgia, for $6.6 million. For the three months ended September 30, 2017 and 2016, the Company’s operating results included pre-tax losses of $0.4 million and $3.1 million, respectively, related to Barrow and pre-tax losses of $1.3 million and $8.4 million for the nine months ended September 30, 2017 and 2016, respectively. In addition to the above, the Company recorded a $1.2 million loss on the sale and $4.0 million of impairment to property, equipment and capitalized software costs of Barrow during the year ended December 31, 2016.

Sandhills Regional Medical Center

Effective December 1, 2016, the Company sold 64-bed Sandhills Regional Medical Center and its affiliated outpatient facilities (“Sandhills”), located in Hamlet, North Carolina, for $7.2 million. For the three months ended September 30, 2017 and 2016, the Company’s operating results included pre-tax gains (losses) of $(0.4) million and $(1.9) million, respectively, related to Sandhills, and less than $0.1 million and $(3.4) million for the nine months ended September 30, 2017 and 2016, respectively. In addition to the above, the Company recorded a $1.0 million loss on the sale and $4.8 million of impairment to property, equipment and capitalized software costs of Sandhills during the year ended December 31, 2016.

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NOTE 5 — PROPERTY AND EQUIPMENT

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

	September 30,			December 31,
	2017			2016

Property and equipment, at cost:
Land and improvements	$	72,950		$	84,474
Building and improvements		807,888			782,892
Equipment and fixtures		530,475			592,463
Construction in progress		8,514			60,146
Total property and equipment, at cost		1,419,827			1,519,975
Less: Accumulated depreciation and amortization		(717,754	)		(786,075	)
Total property and equipment, net	$	702,073		$	733,900

Depreciation expense was $14.6 million and $19.7 million for the three months ended September 30, 2017 and 2016, respectively and $45.2 million and $64.7 million for the nine months ended September 30, 2017 and 2016, respectively. See Note 6 — Goodwill and Intangible Assets for a table on amortization expense, which includes amortization of leasehold improvement assets and property and equipment held under capital lease obligations. The total amount of assets held under capital lease obligations, at cost, was $29.2 million and $30.2 million at September 30, 2017 and December 31, 2016, respectively, and $26.0 million and $27.5 million, net of accumulated amortization, at September 30, 2017 and December 31, 2016, respectively.

Purchases of property and equipment accrued in accounts payable were $6.4 million and $15.7 million as of September 30, 2017 and December 31, 2016, respectively.

NOTE 6 — GOODWILL AND INTANGIBLE ASSETS

Goodwill

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

	Nine Months Ended
	September 30, 2017

Balance at beginning of period	$	416,833
Acquisitions		1,211
Divestitures		(5,293	)
Reclassification to held-for-sale		(1,593	)
Impairment		(1,929	)
Balance at end of period	$	409,229

Goodwill related to the hospital operations reporting unit was $375.9 million and $383.5 million as of September 30, 2017 and December 31, 2016, respectively. Goodwill related to the hospital management advisory and consulting services reporting unit was $33.3 million at both September 30, 2017 and December 31, 2016. Goodwill related to divestitures was associated with the sale of Trinity. See Note 4 — Divestitures for a discussion of the divestiture of Trinity.

See Note 3 — Impairment of Long-Lived Assets and Goodwill for a discussion of the goodwill impairment charges recorded by the Company in 2017 and 2016.

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Intangible Assets

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

	September 30,			December 31,
	2017			2016

Finite-lived intangible assets:
Capitalized software costs:
Cost	$	161,397		$	180,855
Accumulated amortization		(108,598	)		(118,391	)
Capitalized software costs, net		52,799			62,464
Physician guarantee contracts:
Cost		7,860			11,355
Accumulated amortization		(4,044	)		(6,329	)
Physician guarantee contracts, net		3,816			5,026
Other finite-lived intangible assets:
Cost		43,377			44,342
Accumulated amortization		(34,129	)		(33,059	)
Other finite-lived intangible assets, net		9,248			11,283
Total finite-lived intangible assets
Cost		212,634			236,552
Accumulated amortization		(146,771	)		(157,779	)
Total finite-lived intangible assets, net	$	65,863		$	78,773

Indefinite-lived intangible assets:
Tradenames	$	4,000		$	4,000
Licenses and other indefinite-lived intangible assets		1,130			2,209
Total indefinite-lived intangible assets	$	5,130		$	6,209

Total intangible assets:
Cost	$	217,764		$	242,761
Accumulated amortization		(146,771	)		(157,779	)
Total intangible assets, net	$	70,993		$	84,982

As of September 30, 2017, the Company had $3.0 million of capitalized software costs that are currently in the development stage. Amortization of these capitalized costs will begin once the software projects are complete and ready for their intended use.

See Note 3 — Impairment of Long-Lived Assets and Goodwill for a discussion of the intangible asset impairment charges recorded by the Company in 2017 and 2016.

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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,
	2017		2016		2017		2016

Amortization of finite-lived intangible assets:
Capitalized software costs	$	3,889	$	6,214	$	12,428	$	19,539
Physician guarantee contracts		416		770		1,572		2,383
Other finite-lived intangible assets		920		675		2,046		2,191
Total amortization expense related to finite-lived intangible assets		5,225		7,659		16,046		24,113
Amortization of leasehold improvements and property and equipment assets held under capital lease obligations		886		812		2,225		2,105
Total amortization expense	$	6,111	$	8,471	$	18,271	$	26,218

As of September 30, 2017, 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 4.8 years.

NOTE 7 — LONG-TERM DEBT

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

	September 30,			December 31,
	2017			2016

Senior Credit Facility:
Revolving Credit Facility, maturing 2021	$	—		$	—
Term Loan Facility, maturing 2022		853,387			868,419
ABL Credit Facility, maturing 2021		45,000			—
Senior Notes, maturing 2023		400,000			400,000
Unamortized debt issuance costs and discounts		(45,612	)		(48,764	)
Capital lease obligations		24,702			25,588
Other debt		1,284			1,582
Total debt		1,278,761			1,246,825
Less: Current maturities of long-term debt		(1,887	)		(5,683	)
Total long-term debt	$	1,276,874		$	1,241,142

In connection with the Spin-off, the Company entered into two credit agreements and issued senior notes. In addition, the previous indebtedness with CHS, which was classified on the consolidated and combined balance sheets as Due to Parent, net was fully settled. See Note 1 — Description of the Business and Spin-off and Note 16 — Related Party Transactions for additional information on the use of proceeds from the new debt instruments and the settlement of Due to Parent, net.

Senior Credit Facility

On April 29, 2016, the Company entered into the CS Agreement, among the Company, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent. On April 11, 2017, the Company executed the CS Amendment with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit Facility, as described below.

The CS Agreement initially provided for an $880 million senior secured term loan facility and a $100 million senior secured revolving 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 borrowing capacity from $100 million to $87.5 million until December 31, 2017, at which time the borrowing capacity decreases to $75.0 million.

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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, the Company executed the CS Amendment with its Senior Credit Facility lenders to amend the calculation of the Secured Net Leverage Ratio beginning January 1, 2017 to December 31, 2018, among other provisions. The CS Amendment raised the maximum 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. As of September 30, 2017 and December 31, 2016, the Company had Secured Net Leverage Ratios of 4.24 to 1.00 and 3.93 to 1.00, respectively, implying additional borrowing capacity of $108.7 million as of September 30, 2017.

After giving effect to the CS 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 December 31, 2018		4.75 to 1.00
Period from January 1, 2019 and thereafter		4.00 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 also affected other terms of the CS Agreement as follows:

•

Through December 31, 2018, the Company is required to use asset sales proceeds to make mandatory redemptions under the Term Loan Facility. After December 31, 2018, the Company is required to use asset sale proceeds to make mandatory redemptions under the Term Loan Facility to the extent those proceeds are not expected to be reinvested within 15 months.

•

Through December 31, 2018, the Company may 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, is 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 is allowed to incur Permitted Additional Debt, as defined in the CS Agreement, only if the Total Leverage Ratio, adjusted for the Permitted Additional Debt, is 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 8.79% as of September 30, 2017. Interest 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.

Borrowings from the Revolving Credit Facility are used for working capital and general corporate purposes. As of September 30, 2017, the Company had no borrowings outstanding under the Revolving Credit Facility and had $10.2 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, 2017, the Company had borrowing capacity under its Revolving Credit Facility of $77.3 million.

ABL Credit Facility

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. 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

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eligible patient accounts receivable, are used for working capital and general corporate purposes. As of September 30, 2017, the Company had $45.0 million outstanding on the ABL Credit Facility and borrowing capacity of $80.0 million.

On April 11, 2017, the Company executed an amendment to the UBS Agreement with its lender party thereto, which aligned the provisions of the UBS Agreement with the CS Agreement. There were no changes to the UBS Agreement that impact the Company’s current interest or covenant calculations associated with the ABL Credit Facility.

The ABL Credit Facility has a maturity date of April 29, 2021, subject to customary acceleration events and repayment, extension or refinancing. Interest 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 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 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, 2017.

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 “Exchange Offer”). The Exchange Notes are substantially identical to the Initial 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, 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, through 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 some or all of the Senior Notes at a price equal to 100% of the

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principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium, as set forth in the Indenture. The Company is 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 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,
	2017			2016

Debt issuance costs	$	32,265		$	29,146
Debt discounts		24,536			24,536
Total debt issuance costs and discounts		56,801			53,682
Less: Amortization of debt issuance costs and discounts		(11,189	)		(4,918	)
Total unamortized debt issuance costs and discounts	$	45,612		$	48,764

Capital Lease Obligations and Other Debt

The Company’s debt arising from capital lease obligations primarily relates to the Company’s corporate office in Brentwood, Tennessee. As of September 30, 2017, this capital lease obligation was $18.1 million. The remainder of the Company’s capital lease obligations primarily relate to property and equipment at its 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 debt maturities for the next five years and thereafter (in thousands):

	September 30, 2017

Remainder of 2017	$	466
2018		1,807
2019		7,814
2020		10,293
2021		10,356
Thereafter		1,293,637
Total debt, excluding unamortized debt issuance costs and discounts	$	1,324,373

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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,
	2017		2016			2017			2016

Senior Credit Facility:
Revolving Credit Facility	$	98	$	124		$	429		$	209
Term Loan Facility		17,512		15,179			48,795			25,611
ABL Credit Facility		638		120			1,507			202
Senior Notes		11,631		11,626			34,886			20,540
Amortization of debt issuance costs and discounts		2,067		1,692			6,271			2,883
All other interest expense (income), net		270		(713	)		(1,684	)		(503	)
Total interest expense, net, from long-term debt		32,216		28,028			90,204			48,942
Due to Parent, net		—		—			—			35,814
Total interest expense, net	$	32,216	$	28,028		$	90,204		$	84,756

NOTE 8 — OTHER LONG-TERM LIABILITIES

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

	September 30,		December 31,
	2017		2016

Professional and general liability insurance reserves	$	82,555	$	74,194
Workers' compensation liability insurance reserves		20,186		17,416
Benefit plan liabilities		36,973		10,722
Deferred rent		3,808		4,001
Other miscellaneous long-term liabilities		2,037		2,663
Total other long-term liabilities	$	145,559	$	108,996

See Note 17 — Commitments and Contingencies for additional information about the Company’s insurance reserves and Note 15 — Employee 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, and accounts payable approximate their fair values due to the short-term maturity of these financial instruments.

The Company recorded impairment charges related to long-lived assets and goodwill during the three and nine months ended September 30, 2017 and the year ended December 31, 2016. See Note 3 — Impairment of Long-Lived Assets and Goodwill. The assessment of fair value was based on Level 3 inputs, as the valuation methodologies used to determine impairment were based on internal projections and unobservable inputs. The portion of 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.

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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, 2017				December 31, 2016
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value

Revolving Credit Facility	$	—	$	—	$	—	$	—
Term Loan Facility		853,387		865,121		868,419		849,427
ABL Credit Facility		45,000		45,000		—		—
Senior Notes		400,000		368,396		400,000		334,720
Other debt		25,986		25,986		27,170		27,170
Total debt, excluding unamortized debt issuance costs and discounts	$	1,324,373	$	1,304,503	$	1,295,589	$	1,211,317

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 amounts of the Company’s debt instruments, including the revolving credit facility, ABL credit facility, capital 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 have been issued as of September 30, 2017. The Board has the discretion, subject to limitations prescribed by Delaware law and by its 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 common stock began trading on the NYSE on May 2, 2016 under the ticker symbol “QHC.” As of September 30, 2017 and December 31, 2016, the Company had 30,249,502 shares and 29,482,050 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 will 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 impose restrictions on its ability to pay dividends.

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

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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.

Accumulated Deficit

Accumulated deficit of the Company, as shown on the consolidated and combined balance sheets as of September 30, 2017 and December 31, 2016, represents the Company’s cumulative net losses since the Spin-off date. The cumulative earnings and losses of the Company prior to the Spin-off were included in Due to Parent, net on the consolidated and combined balance sheets.

NOTE 11 — INCOME TAXES

The Company, or one of its subsidiaries, is 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. Prior to the Spin-off, the Company was included in the consolidated federal, state and local income tax returns filed by CHS and calculated income taxes for the purpose of carve-out financial statements using the “separate return method.” The Company deemed the amounts that it would have paid to or received from the U.S. Internal Revenue Service and certain state jurisdictions, had QHC not been a member of CHS’ consolidated tax group, to be immediately settled with CHS through Due to Parent, net in the consolidated and combined balance sheets. Since the Spin-off, the Company has filed its own consolidated federal, state and local income tax returns.

The Company’s effective tax rates were 1.9% and 38.7% for the three months ended September 30, 2017 and 2016, respectively and 0.1% and 16.5% for the nine months ended September 30, 2017 and 2016, respectively. The decrease in the Company’s effective tax rate for the three and nine months ended September 30, 2017, when compared to the three and nine months ended September 30, 2016, was primarily due to recording a valuation allowance against the deferred tax assets arising from the Company’s pre-tax loss in the 2017 period that are not more likely than not to be recognized.

The Company’s deferred income tax liabilities, net were $31.1 million as of September 30, 2017, compared to $31.5 million as of December 31, 2016, a $0.4 million decrease. This decrease was primarily due to a deferred tax benefit on the reversal of deferred tax liabilities previously recorded on goodwill and indefinite-lived assets of divested hospitals partially offset by the deferred tax provision recorded for tax deductible amortization of certain goodwill.

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 tax benefits; therefore, it has not recorded any such amounts for the three and nine months ended September 30, 2017 and 2016.

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,
	2017			2016			2017			2016

Numerator:
Net income (loss)	$	(28,554	)	$	(6,452	)	$	(86,334	)	$	(255,105	)
Less: Net income (loss) attributable to noncontrolling interests		637			507			1,048			1,917
Net income (loss) attributable to Quorum Health Corporation	$	(29,191	)	$	(6,959	)	$	(87,382	)	$	(257,022	)
Denominator:
Weighted-average shares outstanding - basic and diluted		28,245,833			28,413,532			28,068,085			28,412,552

Basic and diluted earnings (loss) per share attributable to Quorum Health Corporation stockholders	$	(1.03	)	$	(0.24	)	$	(3.11	)	$	(9.05	)

For comparative purposes, the Company used 28,412,054 shares as the number of basic and diluted shares outstanding for all periods prior to the Spin-off in calculating basic and diluted earnings (loss) per share. This number of shares represents the number of

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shares issued on the Spin-off date. Due to the net losses attributable to Quorum Health Corporation in the three and nine months ended September 30, 2017 and 2016, no incremental shares were included in diluted earnings (loss) per share for these periods because the effect of the incremental shares would be anti-dilutive. No incremental shares were considered for any periods prior to the Spin-off.

NOTE 13 — SEGMENTS

The Company operates in 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 that provide inpatient and outpatient healthcare services. The hospital management advisory and healthcare consulting services segment includes the operations of QHR. Only the hospital operations segment meets the criteria as a separate reportable segment. The financial information for QHR has been combined with the Company’s corporate functions and reported below as part of the all other reportable segment

Prior to the Spin-off, the Company included management fees allocated from Parent in the operating expenses of the hospital operations segment. Following the Spin-off, the Company began presenting general and administrative costs for corporate functions in the all other reportable segment.

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016

Net operating revenues:
Hospital operations	$	478,815		$	522,957	$	1,494,351		$	1,559,274
All other		20,487			20,982		62,737			63,953
Total net operating revenues	$	499,302		$	543,939	$	1,557,088		$	1,623,227

Adjusted EBITDA:
Hospital operations	$	39,227		$	41,618	$	118,229		$	117,014
All other		(6,959	)		5,131		(25,389	)		15,191
Total Adjusted EBITDA	$	32,268		$	46,749	$	92,840		$	132,205

	September 30,		December 31,
	2017		2016

Assets:
Hospital operations	$	1,789,217	$	1,802,121
All other		148,978		192,249
Total assets	$	1,938,195	$	1,994,370

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Adjusted EBITDA	$	32,268		$	46,749		$	92,840		$	132,205
Interest expense, net		(32,216	)		(28,028	)		(90,204	)		(84,756	)
(Provision for) benefit from income taxes		542			4,081			86			50,320
Depreciation and amortization		(20,735	)		(28,234	)		(63,441	)		(90,854	)
Legal, professional and settlement costs		(2,050	)		(488	)		(6,519	)		(6,176	)
Impairment of long-lived assets and goodwill		(5,261	)		—			(21,461	)		(250,400	)
Gain (loss) on sale of hospitals, net		(79	)		—			5,112			—
Transaction costs related to the Spin-off		(173	)		(532	)		(204	)		(5,444	)
Post-spin headcount reductions		(850	)		—			(2,543	)		—
Net income (loss)	$	(28,554	)	$	(6,452	)	$	(86,334	)	$	(255,105	)

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.

As defined in the Separation and Distribution Agreement, 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, as discussed above, 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.

On April 28, 2017, the Compensation Committee of the Board of Directors (the “Compensation Committee”) and the Governance and Nominating Committee of the Board of Directors (the “Governance and Nominating Committee”) granted 168,618 time-vested restricted stock awards to its non-employee directors. The grants were made pursuant to the 2016 Stock Award Plan and a director restricted stock award agreement. The restrictions on the time-vested restricted stock awards will lapse on February 22, 2018.

On February 22, 2017, the Compensation Committee granted 230,000 performance-based restricted stock awards to the Company’s executive officers. The grants were made pursuant to the 2016 Stock Award Plan and a performance-based restricted stock award agreement. 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 in equal installments on each of the first three anniversaries of the grant date.

On February 22, 2017, the Compensation Committee granted 230,000 time-based restricted stock awards to the Company’s executive officers, as well as 420,000 time-based restricted stock awards to certain employees of the Company. The grants were made pursuant to the 2016 Stock Award Plan and a restricted stock award agreement. The restrictions on the time-vested restricted stock awards will lapse in equal installments on each of the first three anniversaries of the grant date.

On May 3, 2016, the Compensation Committee granted 460,000 performance-based restricted stock awards to the Company’s executive officers. The grants were made pursuant to the 2016 Stock Award Plan and a performance-based restricted stock award agreement. 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 in equal installments on each of the first three anniversaries of the grant date.

On May 3, 2016, the Compensation Committee granted 551,005 time-vested restricted stock awards to certain employees of the Company. The grants were made pursuant to the 2016 Stock Award Plan and a restricted stock award agreement. The restrictions on

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the time-vested restricted stock awards will lapse in equal installments on each of the first three anniversaries of the grant date, except for 106,005 restricted stock awards, referred to by the Company as recoupment awards, which have a different vesting period. The recoupment awards were issued to a select group of QHC employees that were granted restricted stock awards by CHS on March 1, 2016. Pursuant to the Separation and Distribution Agreement, two-thirds of the shares granted to the QHC employee group on this grant date were canceled by CHS in connection with the Spin-off. The recoupment awards were issued by QHC and included in the May 3, 2016 grant of QHC restricted stock awards for the purpose of restoring the benefit previously provided by CHS to this employee group. Restrictions on the recoupment awards lapse in equal installments on the second and third anniversaries of the grant date.

On May 3, 2016, the Board, upon recommendation of its Compensation Committee and its Governance and Nominating Committee, granted 10,000 time-vested restricted stock awards to each of its seven non-employee directors. The grants were made pursuant to the 2016 Stock Award Plan and a director restricted stock award agreement. The restrictions on the time-vested restricted stock awards lapsed on the first anniversary of the grant date.

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 months ended September 30, 2017 that were distributed in the Spin-off (in shares):

	QHC Awards Distributed in Spin-off
	QHC Employees			CHS Employees			Total

Unvested restricted stock awards at December 31, 2016		52,462			621,525			673,987
Vested		(34,009	)		(202,286	)		(236,295	)
Forfeited		(14,129	)		(150,429	)		(164,558	)
Unvested restricted stock awards at September 30, 2017		4,324			268,810			273,134

The following table provides a summary of the activity related to unvested restricted stock awards during the nine months ended September 30, 2017 that were granted to QHC employees subsequent to the Spin-off:

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

Unvested restricted stock awards at December 31, 2016		1,081,005		$	12.77
Granted		1,093,618			7.64
Vested		(282,582	)		12.77
Forfeited		(161,506	)		9.63
Unvested restricted stock awards at September 30, 2017		1,730,535			9.82

Following the Spin-off, the Company began recording 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 recorded in salaries and benefits in the consolidated and combined statements of income for periods following the Spin-off. Prior to the Spin-off, an estimated portion of CHS’ stock-based compensation expense was allocated to QHC through the monthly corporate management fee from CHS, which was included in other operating expenses in the consolidated and combined statements of income, and therefore not included in stock-based compensation expense in the table below. The estimated costs allocated to QHC from CHS for stock-based compensation was $2.3 million for the nine months ended September 30, 2016.

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The following table provides a summary of stock-based compensation expense (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016

Stock-based compensation resulting from the Spin-off	$	435	$	1,149	$	1,799	$	1,958
Stock-based compensation related to grants following the Spin-off		1,939		1,632		5,903		2,720
Total stock-based compensation expense	$	2,374	$	2,781	$	7,702	$	4,678

As of September 30, 2017, the Company had $0.8 million of unrecognized stock-based compensation expense related to the outstanding unvested QHC and CHS restricted stock awards held by QHC employees as of the Spin-off date and $11.3 million of unrecognized stock-based compensation expense related to the QHC restricted stock awards granted subsequent to the Spin-off.

NOTE 15 — EMPLOYEE BENEFIT PLANS

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

Defined Contribution Plans

The Quorum Health Retirement Savings Plan (the “RSP”) is a defined contribution plan 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 RSP 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) to the Company under all defined contribution plans was $(4.9) million and $3.2 million for the three months ended September 30, 2017 and 2016, respectively, and $1.5 million and $10.2 million for the nine months ended September 30, 2017 and 2016, respectively. The benefit in the three months ended September 30, 2017 related to a reduction in discretionary employee benefits for the full year. The costs associated with the RSP are recorded as salaries and benefits expense in the consolidated and combined statements of income.

Deferred Compensation Plans

Certain QHC employees participated in CHS’ unfunded deferred compensation plans that allowed participants to defer receipt of a portion of their compensation. The election period for those employees continued under the CHS plan through December 31, 2016. In January 2017, the assets and liabilities attributable to QHC employees of $22.9 million and $23.9 million, respectively, were transferred to a new plan established by QHC, as described below.

On August 18, 2016, the Compensation Committee of the Board 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 management, highly compensated employees and independent contractors of the Company’s wholly-owned subsidiary, QHCCS, LLC (“QHCCS”), a Delaware limited liability company, 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, 2017, the assets and liabilities under this plan were $24.1 million and $25.3 million, respectively, and are included in other long-term assets and other long-term liabilities in the consolidated and combined balance sheet.

Supplemental Executive Retirement Plan

On April 1, 2016, the Board adopted the Quorum Health Corporation Supplemental Executive Retirement Plan (the “Original SERP Plan”). Pursuant to the Employee Matters Agreement between the Company and CHS, the Company assumed all liabilities for all obligations under the Original SERP Plan for the benefits of QHC employees, as defined in the Employee Matters Agreement,

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except that no additional benefits were to accrue under the Original SERP Plan following the Spin-off. The accrued benefit liability for the Original SERP Plan that was transferred to the Company in connection with the Spin-off was $6.0 million and is included in other long-term liabilities in the consolidated and combined balance sheet. There were no assets transferred to the Company related to the Original SERP Plan in connection with the Spin-off.

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 both SERP plans were $0.5 million for the three months ended September 30, 2017 and $1.5 million for the nine months ended September 30, 2017, and are included in salaries and benefits in the consolidated and combined statements of income. There was no current portion of the benefit liability for the Amended and Restated SERP as of September 30, 2017. The long-term portion of the benefit liability for the Amended and Restated SERP was $8.4 million as of September 30, 2017. As of December 31, 2016, the current and long-term portions of the benefit liability were $2.3 million and $7.1 million, respectively. The current portion is included in accrued salaries and benefits and the long-term portion is included in other long-term liabilities in the consolidated and combined balance sheet.

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, including retainer fees and fees for attendance at Board meetings and Board committees. 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 director, either in lump sum or in a number of annual installments, not to exceed 15 installments. The Director’s Plan extends to 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.

Defined Benefit Pension Plan

QHC 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 in accordance with the minimum funding requirements of ERISA. Benefit costs related to the Pension Plan were $0.1 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.3 million and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively. The Company recognizes the unfunded liability of the Pension Plan in other long-term liabilities in its consolidated and combined balance sheets. Unrecognized gains (losses) and prior service credits (costs) are recognized as other comprehensive income (loss). The accrued benefit liability for the Pension Plan was $1.0 million and $1.1 million at September 30, 2017 and December 31, 2016, respectively.

NOTE 16 — RELATED PARTY TRANSACTIONS

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

Carve-Out from Parent

Prior to the Spin-off, QHC did not operate as a separate company and stand-alone financial statements were not prepared. Historically, QHC was managed and operated in the normal course of business with all other hospitals and affiliates of CHS. Accordingly, for the purposes of the carve-out financial statements related to the Spin-off, a combined opening balance sheet for the QHC hospitals and QHR was established. The combined opening balance sheet included the assets and liabilities of QHC hospitals and QHR, as reported by CHS, and a net liability to CHS, referred to as Due to Parent, net for the net investment held by CHS related to its contribution of these net assets. The operating results of the QHC hospitals and QHR prior to the Spin-off were derived from the CHS operating results for these entities. In addition, certain corporate overhead costs were allocated to QHC from CHS during the carve-out period for the purpose of estimating QHC’s share of these expenses.

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Allocated Costs from CHS during the Carve-Out Period

CHS allocated costs to QHC during the carve-out period for a portion of its corporate overhead costs and any other costs related to QHC hospitals and QHR that were paid by CHS or covered by an agreement, policy or contract owned by CHS.

The following table provides a summary of allocated costs to QHC from CHS (in thousands):

	Nine Months Ended
	September 30,
	2016

Insurance costs	$	44,246
Management fees from Parent		11,792
All other allocated costs		25,021
Total related party operating costs and expenses	$	81,059

The allocation of insurance costs from CHS primarily included costs for self-insurance estimates and third-party policies related to employee health, professional and general liability and workers’ compensation liability coverage. Insurance costs were primarily allocated to QHC based on claims history of the QHC hospitals, as determined on an individual hospital level. Corporate management fees were allocated to QHC for certain corporate functions of CHS, including services such as, among others, executive and divisional management, treasury, accounting, risk management, legal, procurement, human resources, information technology support and other administrative support services. These corporate overhead costs were allocated to QHC using a ratio based on the number of licensed beds at each QHC hospital in proportion to CHS’ total licensed beds. This methodology is comparable to how CHS allocates corporate overhead costs to all of its hospitals through a management fee charge that eliminates in consolidation. All other allocated costs included any other costs allocated to QHC hospitals or QHR and that were not part of management fees. These costs were allocated to QHC using ratios based on revenues, expenses or licensed beds. If possible, allocations were made on a specific identification basis.

Following the Spin-off, the Company began performing corporate functions using internal resources or purchased services, certain of which are required to be provided by CHS pursuant to the transition services agreements and other ancillary agreements. See the section “Agreements with CHS Related to the Spin-off” below.

Due to Parent, Net

Prior to the Spin-off, Due to Parent, net in the consolidated and combined balance sheets represented the Company’s cumulative liability to CHS for the net assets of QHC hospitals and QHR, as well as an allocation of costs for corporate functions. See Note 1 — Description of the Business and Spin-off and Note 2 — Basis of Presentation and Significant Accounting Policies for additional information on the types of transactions settled through Due to Parent, net during the carve-out period and the transactions that occurred to settle the liability in connection with the Spin-off.

During the carve-out period, QHC was charged interest on a monthly basis by CHS on the amount of Due to Parent, net outstanding at the end of each month. Interest rates were variable and ranged from 4% to 7% during the carve-out period. Interest expense was recorded as an increase in the Due to Parent, net liability and was deemed settled each month. For the nine months ended September 30, 2016, interest expense related to Due to Parent, net was $35.8 million.

Agreements with CHS Related to the Spin-off

In connection with the Spin-off and 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.

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•

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 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.

•

Billing and Collection Agreement (“PPSI”). This agreement defines services to be provided by CHS related to collections of accounts receivable generated by the Company’s affiliated outpatient healthcare facilities. 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.

•

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 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 based on a fixed charge for each hospital receiving services.

The total expenses recorded by the Company under transition services agreements with CHS following the Spin-off were $15.5 million and $18.1 million for the three months ended September 30, 2017 and 2016, respectively. The total expenses recorded by the Company under transition services agreements with CHS following the Spin-off combined with the allocations from CHS for these same services prior to the Spin-off were $47.7 million and $52.2 million for the nine months ended September 30, 2017 and 2016, 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.

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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 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’ 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 its 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 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.

Government Investigations

•

Tooele, Utah – Physician Compensation. On May 5, 2016, the Company’s hospital in Tooele, Utah received a Civil Investigative Demand (“CID”) from the Office of the United States Attorney in Salt Lake City, Utah concerning allegations that the hospital and clinic corporation submitted or caused to be submitted false claims to the government for services referred by physicians with whom the hospital and clinic had inappropriate financial relationships, which allegedly violated federal law. The CID requested records and documentation concerning physician compensation. Because this matter remains at a preliminary stage, there are not sufficient facts available for the Company to assess what the outcome may be or to determine any estimate of the amount of loss or range of loss. The Company is fully cooperating with this investigation.

•

Blue Island, Illinois – Patient Status. On October 9, 2015, the Company’s hospital in Blue Island, Illinois received a CID from the Office of the United States Attorney in Chicago, Illinois concerning allegations of upcoding observation and other outpatient services and improperly falsifying inpatient admission orders. To date, the hospital has produced a significant amount of documents in response to requests for emails, medical records and documentation concerning status change from observation to inpatient, and the government has taken CID testimony from former hospital employees. The Company is unable to predict the outcome of this investigation. However, it is reasonably possible that the Company may incur a loss in connection with this investigation. The Company is unable to reasonably estimate the amount or range of such reasonably possible loss given that the investigation is still ongoing. Under some circumstances, losses incurred in connection with an adverse resolution in this investigation could be material. The Company is fully cooperating with this investigation.

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 two transition services agreements. The Company contends that the amounts are not payable to CHS and were not properly billed by CHS

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under the agreements. The matter is pending before the American Arbitration Association. CHS seeks payment of approximately $6 million relating to two of the transition service agreements. The Company intends to vigorously contest the charges as not payable to CHS under the transition service agreements and has made a counterclaim for substantial damages the Company believes it has suffered as a result of the transition service agreements and other actions taken by CHS in connection with the Spin-off. The matter is at a preliminary stage and the Company cannot assess the likelihood of a material adverse outcome at this time. The parties expect to engage in a mediation process and the arbitration has been scheduled for June 18-29, 2018.

•

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 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 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, Community Health Systems, Inc., Wayne T. Smith and W. Larry Cash. On June 23, 2017, the Company filed a motion to dismiss, which Plaintiffs opposed on August 22, 2017. 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 motion to dismiss is still pending and discovery is stayed pending resolution of the motion to dismiss. 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 in these cases underwent surgical procedures at Gerald Champion Regional Medical Center in New Mexico that they contend were experimental and performed by an unqualified doctor. Their lawsuits, originally filed on June 11, 2010, against the doctors, QHR and the hospital are pending in state court and in federal bankruptcy court in New Mexico. Subject to an adverse result in the insurance coverage litigation referenced below, in 2012, QHR resolved plaintiffs’ claims for QHR’s liability exceeding insurance limits, and for liability not covered by insurance, for $5.1 million through a settlement agreement. Litigation of plaintiffs’ claims against QHR has continued, and the trial of the claims of most of the plaintiffs is proceeding in phases in a bankruptcy court bench trial. During the liability phase, on December 23, 2016, the federal bankruptcy court in New Mexico ruled that QHR was 16.5% at fault for plaintiffs’ injuries. On June 19, 2017, a one-day bankruptcy court bench trial was held on an issue related to the enforceability of the prior settlement agreement, and no decision has been received to date. In addition, the final phase of the trial in federal bankruptcy court, to determine plaintiffs’ damages and QHR offsets, was tried July 24 through August 7, 2017, and no decision has been received to date. The United Tort Claimants (“UTC”) have made new and yet unproven allegations during trial that they contend warrant additional liability for QHR. QHR believes that the UTC’s contentions are without merit and are vigorously defending against them. The New Mexico state court has set March 8, 2018 as the trial date for plaintiffs’ claims against QHR. QHR’s insurer, Lexington Insurance Company, is providing a defense in these cases, subject to a reservation of rights. Lexington has sued QHR in Williamson County, Tennessee seeking a declaration that plaintiffs’ claims and the cost of defending QHR are not covered by Lexington. (Lexington Insurance Company v. Quorum Health Resources, LLC, et al. (Williamson County, Tennessee Chancery Court)). No trial date has been set for Lexington’s claim against QHR to nullify insurance coverage, which QHR is also vigorously defending. A court hearing is pending regarding Lexington's claim for reimbursement of defense costs incurred in the UTC actions, and no decision has been received. 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 proceedings with respect to the merits of the New Mexico state court action, the availability and extent of insurance coverage and damages are not sufficiently advanced. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

•

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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 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 is vigorously defending itself in this matter. Given the early stage of this matter, there are not sufficient facts available to reasonably assess the potential outcome of this matter or reasonably assess any estimate of the amount or range of any potential outcome

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 its hospital operations business. The liabilities for claims related to QHC’s hospital operations business were determined based on an actuarial study of QHC’s operations and historical claims experience at its hospitals. Corresponding receivables from CHS were 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 date.

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 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. Due to the differing nature of its business, the Company maintains separate insurance arrangements 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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The following tables provide a summary of the Company’s insurance reserves related to professional and general liability claims and workers’ compensation liability claims, distinguished between those indemnified by CHS and those related to the Company’s self-insurance risks (in thousands):

	September 30, 2017
	Current		Long-Term		Current		Long-Term
	Receivable		Receivable		Liability		Liability

Professional and general liability:
Insurance reserves indemnified by CHS, Inc.	$	16,247	$	54,051	$	16,247	$	54,051
All other self-insurance reserves		—		—		2,448		28,504
Total insurance reserves for professional and general liability		16,247		54,051		18,695		82,555
Workers' compensation liability:
Insurance reserves indemnified by CHS, Inc.		3,412		16,060		3,412		16,060
All other self-insurance reserves		—		—		1,778		4,126
Total insurance reserves for workers' compensation liability		3,412		16,060		5,190		20,186
Total self-insurance reserves	$	19,659	$	70,111	$	23,885	$	102,741

	December 31, 2016
	Current		Long-Term		Current		Long-Term
	Receivable		Receivable		Liability		Liability

Professional and general liability:
Insurance reserves indemnified by CHS, Inc.	$	17,580	$	59,652	$	17,580	$	59,652
All other self-insurance reserves		—		—		230		14,542
Total insurance reserves for professional and general liability		17,580		59,652		17,810		74,194
Workers' compensation liability:
Insurance reserves indemnified by CHS, Inc.		4,863		15,958		4,863		15,958
All other self-insurance reserves		—		—		1,736		1,458
Total insurance reserves for workers' compensation liability		4,863		15,958		6,599		17,416
Total self-insurance reserves	$	22,443	$	75,610	$	24,409	$	91,610

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

Physician Recruiting Commitments

As part of its physician recruitment strategy, the Company provides income guarantee agreements to certain physicians who agree to relocate to its communities and commit to remain in practice there. Under such agreements, the Company is required to make payments to a physician in excess of the amount earned in his or her practice, up to the amount of the income guarantee. The income guarantee period over which the Company agrees to subsidize a physician’s income is typically one year and the commitment period over which the physician agrees to practice in the designated community is typically three years. Under the terms of the agreements, such payments are recoverable by the Company from physicians who do not fulfill their commitment periods. The Company’s recorded liabilities related to these income guarantee agreements were $0.7 million and $1.6 million at September 30, 2017 and December 31, 2016, respectively, which are included in other current liabilities on the consolidated and combined balance sheets. At September 30, 2017, the maximum potential amount of future payments under these guarantees in excess of the liabilities recorded was $1.0 million.

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Construction and Capital Commitments

The Company is building a new patient tower and expanding surgical capacity at McKenzie–Willamette Medical Center, its hospital in Springfield, Oregon. During the three months ended September 30, 2017 and 2016, the Company incurred costs of $6.5 million and $9.8 million, respectively, and incurred costs of $31.1 million and $27.0 million during the nine months ended September 30, 2017 and 2016, respectively, related to this project. As of September 30, 2017, the Company had incurred a total of $79.9 million of costs for this project, of which $75.3 million has been placed into service as of September 30, 2017. The total estimated cost of this project, including equipment costs, is estimated to be approximately $105.0 million. The project is expected to be completed in late 2018.

NOTE 18 — SUBSEQUENT EVENTS

In October 2017, the Company received $30.9 million in cash from the State of California related to the 2015-2016 fiscal year HQAF Program, a portion of which was utilized to pay down additional principal on the Company’s secured debt.

On October 31, 2017, the Company completed the divestiture of L.V. Stabler Memorial Hospital (“L.V. Stabler”) and its affiliated outpatient facilities, located in Greenville, Alabama, and received proceeds of $2.8 million, substantially all of which the Company intends to use to pay down principal on the Term Loan Facility.

In October and November of 2017, the Company utilized proceeds from the HQAF Program and divestitures, including Lock Haven, Sunbury, Trinity and L.V. Stabler, to pay down $18.2 million of principal on the Term Loan Facility.

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.

These condensed consolidating and combining 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 and combined financial statements of the Company, except as follows:

•

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

•

Due to Parent and Due from Parent are presented gross in the supplemental condensed consolidating and combining 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 and combining 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.

Following the Spin-off, 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 of the period beginning April 29, 2016 through September 30, 2017. Likewise, the parent issuer’s equity in earnings of unconsolidated affiliates represents the Company’s earnings for the same post-spin period.

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Prior to the Spin-off, the Company’s intercompany activity consisted primarily of cash transfers and the allocation of certain expenses among the various subsidiaries, as well as the pushdown of the Guarantors’ investment in the subsidiary non-guarantors. Due to and due from Parent activity consist of the allocation of certain expenses and expenditures paid by CHS on behalf of QHC entities.

The Company’s subsidiaries generally do not purchase services from one another; thus, the intercompany and due to and due from parent activity do not represent revenue generating transactions. Intercompany transactions eliminate in consolidation.

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining Statement of Income (Loss)

Three Months Ended September 30, 2017

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Operating revenues, net of contractual allowances and discounts	$	—		$	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, 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 AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining Statement of Income (Loss)

Three Months Ended September 30, 2016

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Operating revenues, net of contractual allowances and discounts	$	—		$	464,406		$	148,145		$	—		$	612,551
Provision for bad debts		—			53,671			14,941			—			68,612
Net operating revenues		—			410,735			133,204			—			543,939
Operating costs and expenses:
Salaries and benefits		—			181,930			84,882			—			266,812
Supplies		—			44,800			19,213			—			64,013
Other operating expenses		—			118,525			36,353			—			154,878
Depreciation and amortization		—			23,894			4,340			—			28,234
Rent		—			7,117			5,706			—			12,823
Electronic health records incentives earned		—			(1,133	)		(203	)		—			(1,336	)
Legal, professional and settlement costs		—			488			—			—			488
Transaction costs related to the Spin-off		—			412			120			—			532
Total operating costs and expenses		—			376,033			150,411			—			526,444
Income (loss) from operations		—			34,702			(17,207	)		—			17,495
Interest expense, net		28,641			(631	)		18			—			28,028
Equity in earnings of affiliates		(17,865	)		5,805			—			12,060			—
Income (loss) before income taxes		(10,776	)		29,528			(17,225	)		(12,060	)		(10,533	)
Provision for (benefit from) income taxes		(3,817	)		3,220			(3,484	)		—			(4,081	)
Net income (loss)		(6,959	)		26,308			(13,741	)		(12,060	)		(6,452	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			507			—			507
Net income (loss) attributable to Quorum Health Corporation	$	(6,959	)	$	26,308		$	(14,248	)	$	(12,060	)	$	(6,959	)

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining Statement of Income (Loss)

Nine Months Ended September 30, 2017

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Operating revenues, net of contractual allowances and discounts	$	—		$	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, 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	)

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining Statement of Income (Loss)

Nine Months Ended September 30, 2016

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Operating revenues, net of contractual allowances and discounts	$	—		$	1,371,121		$	454,077		$	—		$	1,825,198
Provision for bad debts		—			153,577			48,394			—			201,971
Net operating revenues		—			1,217,544			405,683			—			1,623,227
Operating costs and expenses:
Salaries and benefits		—			532,507			256,053			—			788,560
Supplies		—			134,369			57,441			—			191,810
Other operating expenses		—			376,523			106,003			—			482,526
Depreciation and amortization		—			75,158			15,696			—			90,854
Rent		—			21,008			16,909			—			37,917
Electronic health records incentives earned		—			(9,127	)		(664	)		—			(9,791	)
Legal, professional and settlement costs		—			6,176			—			—			6,176
Impairment of long-lived assets and goodwill		—			213,600			36,800			—			250,400
Transaction costs related to the Spin-off		—			4,067			1,377			—			5,444
Total operating costs and expenses		—			1,354,281			489,615			—			1,843,896
Income (loss) from operations		—			(136,737	)		(83,932	)		—			(220,669	)
Interest expense, net		49,282			32,869			2,605			—			84,756
Equity in earnings of affiliates		199,186			7,565			—			(206,751	)		—
Income (loss) before income taxes		(248,468	)		(177,171	)		(86,537	)		206,751			(305,425	)
Provision for (benefit from) income taxes		(6,557	)		(29,190	)		(14,573	)		—			(50,320	)
Net income (loss)		(241,911	)		(147,981	)		(71,964	)		206,751			(255,105	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			1,917			—			1,917
Net income (loss) attributable to Quorum Health Corporation	$	(241,911	)	$	(147,981	)	$	(73,881	)	$	206,751		$	(257,022	)

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining 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	)

Condensed Consolidating and Combining Statement of Comprehensive Income (Loss)

Three Months Ended September 30, 2016

(In Thousands)

	Parent Issuer			Other Guarantors		Non- Guarantors			Eliminations			Consolidated

Net income (loss)	$	(6,959	)	$	26,308	$	(13,741	)	$	(12,060	)	$	(6,452	)
Amortization and recognition of unrecognized pension cost components, net of income taxes		100			100		—			(100	)		100
Comprehensive income (loss)		(6,859	)		26,408		(13,741	)		(12,160	)		(6,352	)
Less: Comprehensive income (loss) attributable to noncontrolling interests		—			—		507			—			507
Comprehensive income (loss) attributable to Quorum Health Corporation	$	(6,859	)	$	26,408	$	(14,248	)	$	(12,160	)	$	(6,859	)

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining Statement of Comprehensive Income (Loss)

Nine Months Ended September 30, 2017

(In Thousands)

	Parent Issuer			Other Guarantors		Non- Guarantors			Eliminations			Consolidated

Net income (loss)	$	(87,382	)	$	44,261	$	(44,072	)	$	859		$	(86,334	)
Amortization and recognition of unrecognized pension cost components, net of income taxes		365			365		—			(365	)		365
Comprehensive income (loss)		(87,017	)		44,626		(44,072	)		494			(85,969	)
Less: Comprehensive income (loss) attributable to noncontrolling interests		—			—		1,048			—			1,048
Comprehensive income (loss) attributable to Quorum Health Corporation	$	(87,017	)	$	44,626	$	(45,120	)	$	494		$	(87,017	)

Condensed Consolidating and Combining Statement of Comprehensive Income (Loss)

Nine Months Ended September 30, 2016

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations		Consolidated

Net income (loss)	$	(241,911	)	$	(147,981	)	$	(71,964	)	$	206,751	$	(255,105	)
Amortization and recognition of unrecognized pension cost components, net of income taxes		(3,710	)		(3,710	)		—			3,710		(3,710	)
Comprehensive income (loss)		(245,621	)		(151,691	)		(71,964	)		210,461		(258,815	)
Less: Comprehensive income (loss) attributable to noncontrolling interests		—			—			1,917			—		1,917
Comprehensive income (loss) attributable to Quorum Health Corporation	$	(245,621	)	$	(151,691	)	$	(73,881	)	$	210,461	$	(260,732	)

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining Balance Sheet

September 30, 2017

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

ASSETS
Current assets:
Cash and cash equivalents	$	12,513		$	2,856		$	367		$	—		$	15,736
Patient accounts receivable, net of allowance for doubtful accounts		—			306,572			86,987			—			393,559
Inventories		—			45,275			9,850			—			55,125
Prepaid expenses		58			18,971			5,364			—			24,393
Due from third-party payors		—			92,726			6,052			—			98,778
Current assets of hospitals held for sale		—			9,202			—			—			9,202
Other current assets		—			27,649			13,271			—			40,920
Total current assets		12,571			503,251			121,891			—			637,713
Intercompany receivable		3			277,910			146,036			(423,949	)		—
Property and equipment, net		—			571,271			130,802			—			702,073
Goodwill		—			243,618			165,611			—			409,229
Intangible assets, net		—			63,838			7,155			—			70,993
Long-term assets of hospitals held for sale		—			12,770			12			—			12,782
Other long-term assets		—			81,507			23,898			—			105,405
Net investment in subsidiaries		1,502,465			—			—			(1,502,465	)		—
Total assets	$	1,515,039		$	1,754,165		$	595,405		$	(1,926,414	)	$	1,938,195
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	—		$	1,394		$	493		$	—		$	1,887
Accounts payable		87			133,946			23,069			—			157,102
Accrued liabilities:
Accrued salaries and benefits		—			57,857			23,443			—			81,300
Accrued interest		27,350			—			—			—			27,350
Due to third-party payors		—			35,800			1,511			—			37,311
Current liabilities of hospitals held for sale		—			2,767			—			—			2,767
Other current liabilities		415			27,076			11,956			—			39,447
Total current liabilities		27,852			258,840			60,472			—			347,164
Long-term debt		1,252,775			24,093			6			—			1,276,874
Intercompany payable		80,516			147,270			196,163			(423,949	)		—
Deferred income tax liabilities, net		31,087			—			—			—			31,087
Other long-term liabilities		—			179,231			33,249			(66,921	)		145,559
Total liabilities		1,392,230			609,434			289,890			(490,870	)		1,800,684
Redeemable noncontrolling interests		—			—			1,578			—			1,578
Equity:
Quorum Health Corporation stockholders' equity:
Preferred stock		—			—			—			—			—
Common stock		3			—			—			—			3
Additional paid-in capital		546,609			1,316,949			438,533			(1,755,482	)		546,609
Accumulated other comprehensive income (loss)		(2,395	)		(2,395	)		—			2,395			(2,395	)
Accumulated deficit		(421,408	)		(169,823	)		(147,720	)		317,543			(421,408	)
Total Quorum Health Corporation stockholders' equity		122,809			1,144,731			290,813			(1,435,544	)		122,809
Nonredeemable noncontrolling interests		—			—			13,124			—			13,124
Total equity		122,809			1,144,731			303,937			(1,435,544	)		135,933
Total liabilities and equity	$	1,515,039		$	1,754,165		$	595,405		$	(1,926,414	)	$	1,938,195

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining Balance Sheet

December 31, 2016

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

ASSETS
Current assets:
Cash and cash equivalents	$	21,609		$	3,498		$	348		$	—		$	25,455
Patient accounts receivable, net of allowance for doubtful accounts		—			277,155			103,530			—			380,685
Inventories		—			46,318			11,806			—			58,124
Prepaid expenses		—			17,874			5,154			—			23,028
Due from third-party payors		—			109,793			6,442			—			116,235
Current assets of hospitals held for sale		—			1,502			—			—			1,502
Other current assets		—			41,673			16,269			—			57,942
Total current assets		21,609			497,813			143,549			—			662,971
Intercompany receivable		3			126,035			84,827			(210,865	)		—
Property and equipment, net		—			624,457			109,443			—			733,900
Goodwill		—			252,433			164,400			—			416,833
Intangible assets, net		—			73,404			11,578			—			84,982
Long-term assets of hospitals held for sale		—			6,851			—			—			6,851
Other long-term assets		—			72,967			15,866			—			88,833
Net investment in subsidiaries		1,485,213			—			—			(1,485,213	)		—
Total assets	$	1,506,825		$	1,653,960		$	529,663		$	(1,696,078	)	$	1,994,370
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,819		$	1,560		$	304		$	—		$	5,683
Accounts payable		158			147,521			22,005			—			169,684
Accrued liabilities:
Accrued salaries and benefits		—			69,896			28,907			—			98,803
Accrued interest		19,915			—			—			—			19,915
Due to third-party payors		—			40,595			1,942			—			42,537
Current liabilities of hospitals held for sale		—			492			—			—			492
Other current liabilities		—			46,002			7,266			—			53,268
Total current liabilities		23,892			306,066			60,424			—			390,382
Long-term debt		1,215,836			24,899			407			—			1,241,142
Intercompany payable		34,495			86,084			90,286			(210,865	)		—
Deferred income tax liabilities, net		31,474			—			—			—			31,474
Other long-term liabilities		—			144,950			22,651			(58,605	)		108,996
Total liabilities		1,305,697			561,999			173,768			(269,470	)		1,771,994
Redeemable noncontrolling interests		—			—			6,807			—			6,807
Equity:
Quorum Health Corporation stockholders' equity:
Preferred stock		—			—			—			—			—
Common stock		3			—			—			—			3
Additional paid-in capital		537,911			1,333,347			412,705			(1,746,052	)		537,911
Accumulated other comprehensive income (loss)		(2,760	)		(2,760	)		—			2,760			(2,760	)
Accumulated deficit		(334,026	)		(238,626	)		(78,058	)		316,684			(334,026	)
Total Quorum Health Corporation stockholders' equity		201,128			1,091,961			334,647			(1,426,608	)		201,128
Nonredeemable noncontrolling interests		—			—			14,441			—			14,441
Total equity		201,128			1,091,961			349,088			(1,426,608	)		215,569
Total liabilities and equity	$	1,506,825		$	1,653,960		$	529,663		$	(1,696,078	)	$	1,994,370

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining Statement of Cash Flows

Nine Months Ended September 30, 2017

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net cash provided by (used in) operating activities	$	(81,234	)	$	88,802		$	(6,779	)	$	—		$	789

Cash flows from investing activities:
Capital expenditures for property and equipment		—			(18,057	)		(32,610	)		—			(50,667	)
Capital expenditures for software		—			(5,412	)		(762	)		—			(6,174	)
Acquisitions, net of cash acquired		—			(53	)		(1,867	)		—			(1,920	)
Proceeds from the sale of hospitals		—			9,348			19,892			—			29,240
Changes in intercompany balances with affiliates, net		—			(72,795	)		—			72,795			—
Net cash provided by (used in) investing activities		—			(86,969	)		(15,347	)		72,795			(29,521	)

Cash flows from financing activities:
Borrowings (repayments) of revolving credit facilities, net		45,000			—			—			—			45,000
Borrowings of long-term debt		—			247			—			—			247
Repayments of long-term debt		(15,032	)		(1,219	)		(266	)		—			(16,517	)
Payments of debt issuance costs		(3,119	)		—			—			—			(3,119	)
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(1,503	)		—			—			(1,503	)
Cash distributions to noncontrolling investors		—			—			(3,851	)		—			(3,851	)
Purchases of shares from noncontrolling investors		—			—			(1,244	)		—			(1,244	)
Changes in intercompany balances with affiliates, net		45,289			—			27,506			(72,795	)		—
Net cash provided by (used in) financing activities		72,138			(2,475	)		22,145			(72,795	)		19,013

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

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating and Combining Statement of Cash Flows

Nine Months Ended September 30, 2016

(In Thousands)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net cash provided by (used in) operating activities	$	(19,258	)	$	122,361		$	(42,337	)	$	—		$	60,766

Cash flows from investing activities:
Capital expenditures for property and equipment		—			(48,965	)		(7,483	)		—			(56,448	)
Capital expenditures for software		—			(4,344	)		(914	)		—			(5,258	)
Acquisitions, net of cash acquired		—			—			(26	)		—			(26	)
Other investing activities		—			1,751			(695	)		—			1,056
Changes in intercompany balances with affiliates, net		—			(88,460	)		—			88,460			—
Net cash provided by (used in) investing activities		—			(140,018	)		(9,118	)		88,460			(60,676	)

Cash flows from financing activities:
Borrowings of long-term debt		1,255,464			92			—			—			1,255,556
Repayments of long-term debt		(4,400	)		(2,566	)		(476	)		—			(7,442	)
Increase (decrease) in Due to Parent, net		—			25,183			—			—			25,183
Payments of debt issuance costs		(29,139	)		—			—			—			(29,139	)
Cash paid to Parent related to the Spin-off		(1,217,336	)		—			—			—			(1,217,336	)
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(12	)		—			—			(12	)
Cash distributions to noncontrolling investors		—			—			(2,828	)		—			(2,828	)
Purchases of shares from noncontrolling investors		—			—			(100	)		—			(100	)
Changes in intercompany balances with affiliates, net		33,938			—			54,522			(88,460	)		—
Net cash provided by (used in) financing activities		38,527			22,697			51,118			(88,460	)		23,882

Net change in cash and cash equivalents		19,269			5,040			(337	)		—			23,972
Cash and cash equivalents at beginning of period		—			524			582			—			1,106
Cash and cash equivalents at end of period	$	19,269		$	5,564		$	245		$	—		$	25,078

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 and combined financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q, as well as the audited consolidated and combined financials statements and accompanying notes, and additionally the sections entitled “Business” and “Risk Factors,” included in our Annual Report on Form 10-K (the “2016 Annual Report on Form 10-K”). The financial information discussed below and included in our 2016 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 and combined business operations of the hospitals and Quorum Health Resources, LLC (“QHR”) that CHS spun off to Quorum Health Corporation on April 29, 2016. 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 and combined 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;

•

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

•

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

•

the success and long-term viability of healthcare insurance exchanges, which may be impacted by whether a sufficient number of payors participate, , the availability of cost-sharing subsidies and actions taken by the current administration and Congress affecting the Affordable Care Act;

•

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

•

demographic changes;

•

the failure to comply with governmental regulations;

•

the impact of certain outsourcing functions, and the ability of CHS, as provider of our billing and collection services pursuant to the transition services agreements, to timely and appropriately bill and collect;

•

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 threats of litigation, as well as the significant costs and attention from management required to address such matters;

•

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

•

changes in reimbursement rates paid by federal or state healthcare programs, including Medicare and Medicaid, or commercial payors, and the timeliness of reimbursement payments;

•

the timing of any approval by CMS of Phase V of the California HQAF Program, the recognition of any revenues from the California program, and the timing and amount of any related cash flows, as well as the potential for retroactive adjustments for prior year payments

•

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

•

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 in states that have not expanded Medicaid and difficulties in collecting payments for which patients are responsible, including co-pays and deductibles;

•

the efforts of healthcare insurers, providers 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;

•

our ongoing ability to demonstrate meaningful use of certified EHR technology and recognize income for the related Medicare or Medicaid incentive payments, to the extent such payments have not expired;

•

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;

•

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

•

competition;

•

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

•

changes in medical or other technology;

•

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

•

the impact of seasonal or severe weather conditions or earthquakes;

•

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

•

the effects related to outbreaks of infectious diseases;

•

the impact of cyber-attacks or security breaches;

•

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

•

our ability to maintain certain accreditations at our existing facilities and any future facilities we may acquire; 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 on 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, 2017, we owned or leased a diversified portfolio of 32 hospitals in rural and mid-sized markets, which are located in 15 states and have a total of 3,051 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, psychiatric and rehabilitation services. For our hospital operations business, we are paid for our services by governmental agencies, private insurers and directly by the patients we serve. We also operate QHR, a leading hospital management advisory and healthcare consulting services business. For our management advisory and 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:

•

refine our portfolio to include high-quality, profitable hospitals and outpatient service facilities;

•

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;

•

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

•

improve our financial results by pursuing the sale of underperforming hospitals; and

•

grow our revenues through selective acquisitions.

Our business strategy includes an ongoing strategic review of our hospitals based on an analysis of financial performance, current competitive conditions, expected demographic trends, joint venture opportunities and capital allocation requirements. As part of this strategy, we are actively engaging in initiatives, among others, to divest underperforming hospitals, reduce our debt and refine our portfolio to a more sustainable group of hospitals with higher operating margins. In December 2016, we sold Barrow Regional Medical Center (“Barrow”) for proceeds of $6.6 million and Sandhills Regional Medical Center (“Sandhills”) for proceeds of $7.2 million. In March 2017, we sold Cherokee Medical Center (“Cherokee”) for proceeds of $4.3 million and in June 2017, we sold Trinity Hospital of Augusta (“Trinity”) for proceeds of $15.9 million. In September 2017, we sold Lock Haven Hospital (“Lock Haven”) and Sunbury Community Hospital (“Sunbury”) for combined proceeds of $9.1 million. In the first quarter of 2017, we targeted an additional eight hospitals that we intend to divest within twelve to fifteen months. These eight potential divestiture hospitals had net operating income (losses) of $(4.7) million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively, and $(23.0) million and $(17.0) million for the nine months ended September 30, 2017 and 2016, respectively.

We refer to the six hospitals that we have divested through September 30, 2017 as the Divestitures Group, the eight remaining hospitals targeted for divestiture as the Potential Divestitures Group and the remaining twenty-four hospitals that we operate as the Continuing Hospitals Group. We believe that a discussion of our operating results that distinguishes between those hospitals that management does not foresee as being part of our ongoing hospital operations business and those hospitals that will become our core hospital operations business, and available to service our debt obligations into the future, is meaningful to our stockholders, investors and other users of our financial statements. See “— Overview — Recent Divestiture Activity” below for additional information on our divestitures. These hospital groups are also further defined in “— Results of Operations” below.

On October 31, 2017, we completed the sale of 72-bed L.V. Stabler Memorial Hospital and its affiliated outpatient facilities, located in Greenville, Alabama, for proceeds of $2.8 million. This hospital was included in the Potential Divestitures Group for the nine months ended September 30, 2017. We have a definitive agreement to sell one other hospital in the Potential Divestitures Group, 70-bed Vista Medical Center West, located in Waukegan, Illinois. We currently anticipate completing the sale of this hospital in the first quarter of 2018. See Note 2 — Basis of Presentation and Significant Accounting Policies — Assets and Liabilities of Hospitals Held for Sale in the accompanying financial statements for additional information on how hospitals meet the criteria for classification as held for sale.

Financial Overview

Our net operating revenues for the three months ended September 30, 2017 decreased $44.6 million to $499.3 million, compared to $543.9 million for the three months ended September 30, 2016, a 8.2% decrease. Net operating revenues for the quarter decreased $32.5 million from the Divestitures Group and decreased $11.5 million resulting from our inability to accrue in the 2017 period for the California HQAF program revenues pending approval for the 2017-2019 program period by Centers for Medicare & Medicaid Services (“CMS”). Excluding these amounts, net operating revenues decreased $0.6 million for the three months ended September 30, 2017 compared to the same period in 2016. Net loss attributable to Quorum Health Corporation for the three months ended September 30, 2017 was $(29.2) million compared to $(7.0) million for the same period in 2016. The net loss for the three months ended September 30, 2017 was impacted by an $8.8 million decrease, net of provider taxes, related to the California HQAF

program and $5.3 million of impairment charges related to certain hospitals intended for divestiture. On a same-facility basis, our operating results for the three months ended September 30, 2017 reflect a 0.2% decrease in admissions and a 0.5% increase in adjusted admissions compared to the same period in 2016. Excluding the Divestitures Group and the Potential Divestitures Group, admissions and adjusted admissions increased 1.3% and 3.2%, respectively, for these same periods.

Our net operating revenues for the nine months ended September 30, 2017 decreased $66.1 million to $1,557.1 million, compared to $1,623.2 million for the nine months ended September 30, 2016, a 4.1% decrease. Net operating revenues decreased $63.6 million related to the Divestitures Group and decreased $33.9 million due to the inability to accrue revenues related to the California HQAF program, as discussed above. Excluding these amounts, net operating revenues increased $31.4 million for the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to favorable volume and rate variances. Net loss attributable to Quorum Health Corporation for the nine months ended September 30, 2017 was $(87.4) million compared to $(257.0) million for the same period in 2016. The 2017 period included impairment charges of $21.5 million related to hospitals held for sale or identified for divestiture and a net gain of $5.1 million on the sale of hospitals. The 2016 period included $250.4 million of impairment charges mentioned above and $5.4 million of transaction costs related to the Spin-off, partially offset by $25.7 million in revenues, net of provider taxes, related to the California HQAF program. On a same-facility basis, our operating results for the nine months ended September 30, 2017 reflect a 0.9% decrease in admissions and a 0.2% increase in adjusted admissions compared to the same period in 2016. Excluding the Divestitures Group and the Potential Divestitures Group, admissions and adjusted admissions increased 0.7% and 2.0%, respectively, for these same periods.

The Spin-off

On April 29, 2016, CHS completed the spin-off of 38 hospitals, including their affiliated outpatient facilities, and QHR to form Quorum Health Corporation (the “Spin-off”) through the distribution of 100% of QHC common stock to CHS stockholders of record on April 22, 2016 (the “Record Date”). 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. Our common stock began trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “QHC” on May 2, 2016.

In connection with the Spin-off, we issued $400 million in aggregate principal amount of 11.625% Senior Notes due 2023 (the “Senior Notes”) on April 22, 2016 and entered into a credit agreement on April 29, 2016, consisting of 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”), or on a combined basis referred to as the “Senior Credit Facility.” In addition, we entered into a $125 million senior secured asset-based revolving credit facility. The net offering proceeds of the Senior Notes, together with the net borrowings under the Term Loan Facility, were used to make a $1.2 billion payment from QHC to CHS and to pay our transaction and financing fees and expenses.

In connection with the Spin-off, we entered into certain agreements with CHS that governed or continue to govern matters related to the Spin-off. These agreements include, among others, a Separation and Distribution Agreement, a Tax Matters Agreement and an Employee Matters Agreement. We also entered into various transition services agreements with CHS that define agreed upon services to be provided by CHS to QHC. The transition services agreements have five year terms and include, among others, the provision for services related to information technology, payroll processing, certain human resources functions, patient eligibility screening, billing, collections and other revenue management services.

Pursuant to the terms of the Separation and Distribution Agreement, CHS made a non-cash capital contribution of $530.6 million and transferred $13.5 million of cash to us on the Spin-off date. The cash transfer consisted of an agreed upon $20.0 million for the initial funding of our working capital, reduced by $6.5 million for the difference in estimated and actual financing fees and expenses incurred at the closing of the Spin-off.

The following table contains 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		$	—

Agreements with CHS Related to the Spin-off

In connection with the Spin-off and effective as of the Spin-off date, we entered into certain agreements with CHS that at the time of Spin-off governed the allocation to us of 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 and activities between QHC and CHS for a definitive period of time after the Spin-off date, as specified by each individual agreement.

A summary of these agreements follows:

•

Separation and Distribution Agreement. This agreement governed the principal actions of both QHC and CHS that needed to be taken to effect the Spin-off. It sets forth other agreements that govern certain aspects of our relationship with CHS following the Spin-off.

•

Tax Matters Agreement. This agreement governs respective rights, responsibilities and obligations of QHC and CHS after the Spin-off with respect to deferred 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 employees and non-employee directors of QHC and CHS. It also allocated liabilities and responsibilities relating to employment matters, employee compensation, employee benefit plans and other related matters as of the Spin-off date.

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

A summary of the major transition services agreements follows:

•

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 us 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 during the operating period 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.

•

Billing and Collection Agreement. This agreement defines services to be provided by CHS related to collections of certain accounts receivable generated from our outpatient healthcare services. 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.

•

We recorded total expenses under transition services agreements with CHS following the Spin-off combined with the allocations from CHS for these same services prior to the Spin-off of $15.5 million and $18.1 million for the three months ended September 30, 2017 and 2016, respectively, and $47.7 million and $52.2 million for the nine months ended September 30, 2017 and 2016, respectively.

Divestiture Activity

On September 30, 2017, we sold 70-bed Sunbury Community Hospital and its affiliated outpatient facilities (“Sunbury”), located in Sunbury, Pennsylvania, and 47-bed Lock Haven Hospital and its affiliated outpatient facilities (“Lock Haven”) located in Lock Haven, Pennsylvania, for combined proceeds of $9.1 million. For the three months ended September 30, 2017 and 2016, our operating results included pre-tax losses of $2.4 million in each period related to Sunbury and Lock Haven on a combined basis, and pre-tax losses of $6.5 million and $10.1 million for the nine months ended September 30, 2017 and 2016, respectively. In addition to the above, we recorded a $0.1 million loss on the sale in the three months ended September 30, 2017. We also recorded $1.9 million of impairment to property, equipment and capitalized software of Sunbury and Lock Haven during the nine months ended September 30, 2017.

On September 12, 2017, we announced that we had entered into a definitive agreement to sell 70-bed Vista Medical Center West, located in Waukegan, Illinois. We currently anticipate completing the sale of this hospital in the first quarter of 2018.

On September 11, 2017, we announced that we had entered into a definitive agreement to sell 72-bed L.V. Stabler Memorial Hospital, located in Greenville, Alabama. The definitive agreement covers the hospital and its affiliated outpatient facilities. On October 31, 2017, we sold this hospital and its affiliated outpatient facilities for proceeds of $2.8 million.

On June 30, 2017, we sold 231-bed Trinity Hospital of Augusta and its affiliated outpatient facilities (“Trinity”), located in Augusta, Georgia, for $15.9 million. For the three months ended September 30, 2017 and 2016, our operating results included pre-tax losses of $0.4 million and $2.0 million, respectively, related to Trinity, and pre-tax losses of $7.9 million and $7.8 million for the nine months ended September 30, 2017 and 2016, respectively. In addition to the above, we recorded a $5.2 million gain on the sale in the nine months ended September 30, 2017.

On March 31, 2017, we sold 60-bed Cherokee Medical Center and its affiliated outpatient facilities (“Cherokee”), located in Centre, Alabama, for $4.3 million. For the three months ended September 30, 2017 and 2016, our operating results included pre-tax gains (losses) of less than $0.1 million and $(1.2) million, respectively, related to Cherokee, and pre-tax losses of $(1.0) million and $(3.8) million for the nine months ended September 30, 2017 and 2016, respectively. In addition to the above, we recorded a $0.2 million gain on the sale in the nine months ended September 30, 2017.

Effective December 31, 2016, we sold 56-bed Barrow Regional Medical Center and its affiliated outpatient facilities (“Barrow”), located in Winder, Georgia, for $6.6 million. For the three months ended September 30, 2017 and 2016, the Company’s operating results included pre-tax losses of $0.4 million and $3.1 million, respectively, related to Barrow and pre-tax losses of $1.3 million and $8.4 million for the nine months ended September 30, 2017 and 2016, respectively.

Effective December 1, 2016, we sold 64-bed Sandhills Regional Medical Center and its affiliated outpatient facilities (“Sandhills”), located in Hamlet, North Carolina, for $7.2 million. For the three months ended September 30, 2017 and 2016, the

Company’s operating results included pre-tax gains (losses) of $(0.4) million and $(1.9) million, respectively, related to Sandhills, and less than $0.1 million and $(3.4) million for the nine months ended September 30, 2017 and 2016, respectively.

Affordable Care Act

The Affordable Care Act, as currently structured, mandates that substantially all U.S. citizens maintain health insurance coverage, while expanding access to coverage through a combination of private sector health insurance reforms and public program expansion. In recent years, most of the states that have experienced the greatest reductions in rates of uninsured individuals have been those that expanded Medicaid coverage and established healthcare insurance exchanges at the state level. The outcome of the 2016 federal elections cast considerable uncertainty on the future of the Affordable Care Act, and it is unclear whether the trend of increased coverage will continue. In addition, several private health insurers have withdrawn from the healthcare insurance exchanges for the 2018 enrollment period, and the presidential administration has taken steps, including ending cost-sharing subsidies that were previously available to insurers, which may threaten the stability of those marketplaces. Government efforts to change, alter the implementation of, or repeal the Affordable Care Act may have an adverse effect on our business, results of operations, cash flow, capital resources and liquidity.

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, which began in January 2014 but was approved by CMS in late 2014, expired on December 31, 2016. The California Department of Health Care Services (“DHCS”) submitted the Phase V hospital quality assurance fee program package on March 30, 2017 to the Centers for Medicare & Medicaid Services (“CMS”) for its review and approval of the overall program structure and the fees or provider tax rates for the program period January 1, 2017 through June 30, 2019, and the fee-for-service (“FFS”) inpatient and outpatient upper payments limits (“UPL”) for each of the state fiscal years in the period January 1, 2017 through June 30, 2019. CMS has not yet issued the required approvals for the Phase V program.

According to the California Hospital Association, the rate packages will be submitted to CMS for approval on a state fiscal year basis, with tentative submission dates as follows:

•

Under the traditional “pass-through” methodology, which represents the historical utilization:

➢

For the short state fiscal year period January 1, 2017 through June 30, 2017, the package should be submitted by May 15, 2018.

➢

For the state fiscal year July 1, 2017 through June 30, 2018, the package should be submitted by May 31, 2018.

➢

For the final state fiscal year in the program period of July 1, 2018 through June 30, 2019, the package should be submitted by October 31, 2018.

•

Under the new “directed” payment methodology, which is subject to current utilization;

➢

For the state fiscal year July 1, 2017 through June 30, 2018, the package should be submitted by May 31, 2018.

➢

For the final state fiscal year in the program period of July 1, 2018 through June 30, 2019, the package should be submitted by October 31, 2018.

CMS review of managed care rates is expected to take at least six months. DHCS expects traditional pass-through payments to be paid to plans about 60 days after CMS approval, as they are lump sum payments based on historical utilization. The new directed payments will not be paid to the plans until approximately nine months after completions of each state fiscal year, because these lump sum payments will be based on current utilization gathered from the encounter data file. Therefore, DHCS must allow ample run-out time to gather the utilization data and calculate how much each hospital and health plan should receive.

As with every iteration of the hospital quality assurance fee program, there are numerous new issues to resolve. Since the program’s inception, FFS payments have been estimated for each program period using a consistent methodology and trending approach. CMS has approved the FFS payments developed with this methodology and made federal payments to the state of California. Now, CMS requires that DHCS retrospectively reconcile the “estimated” UPL for a state fiscal year to the “actual” UPL, beginning with fiscal years 2015-2016 and 2016-2017, even though those years have already been approved and paid. The reconciliation process requires states to recalculate the UPL using data that is no older than two years. CMS, in its review of those years, is questioning the approach used to estimate the amounts and the method to trend the amounts forward. This has two major

implications. First, CMS will not review the 2017 hospital quality assurance fee program UPL amounts until the reconciliation is resolved. Second, there is a risk of the hospital quality assurance fee program having paid too much in supplemental payments in the last program than what reconciled UPL would support. The amount of overpayment is estimated at $1 billion, but potentially more if CMS further changes the methodology.

This means that hospitals may have received more in the prior program than what CMS now says was allowed, and the negative amount would shift to the new program period. There is however, more money owed to hospitals in the prior program that has been approved by CMS but not yet paid to DHCS to hospitals. For state fiscal years 2013-2014 and 2014-2015, CMS recently approved an enhanced federal match for FFS expansion population, totaling about $680 million for the years approved. DHCS is retaining these funds to offset the reconciliation of the UPL overpayments to hospitals. In addition to the $680 million that CMS approved, the 2015-2016 and 2016-2017 fiscal year amounts are expected to potentially result in full coverage of the UPL overpayment.

CMS has indicated that going forward it will only approve one fiscal year at a time for the UPL amounts using data that is no older than two years. Of the total payments received for all hospitals, our portion only represents 0.55% of the total payments. We are still estimating that our net impact over the 30 month period will be $55.3 million. While uncertainties regarding the timing and amount of payment under the HQAF program exist, our estimates of cash collections at this time, including previous programs, will be $35.0 million in 2018, $19.9 million in 2019 and $15.5 million in 2020. On October 16, 2017, we received $30.9 million in cash for the 2015-2016 fiscal year program period.

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.

The 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. 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 Department of Health and Human Services Office of Inspector General (“OIG”), the 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 limited stand-alone operating history and have experienced net losses in each of the quarters subsequent to the Spin-off from CHS. See “— Liquidity and Capital Resources – Financial Outlook” for information on the CS Amendment and other factors impacting our future earnings projections.

Prior to our separation from CHS, QHC did not operate as a separate company and stand-alone financial statements were not historically prepared; however, QHC was comprised of certain stand-alone legal entities for which discrete financial information was available under CHS’ ownership. Our accompanying consolidated and combined financial statements include amounts and disclosures for QHC that have been derived from the consolidated financial statements and accounting records of CHS for the periods prior to the Spin-off in combination with the amounts and disclosures related to the stand-alone financial statements and accounting records of QHC after the Spin-off. See Note 16 — Related Party Transactions in the accompanying financial statements for additional information on the carve-out of financial information from CHS.

The statement of income for the nine months ended September 30, 2016 includes expense allocations for the period prior to the Spin-off for certain corporate functions provided by CHS to QHC, including, but not limited to, executive and divisional management, employee benefits administration, treasury, accounting, risk management, audit, legal, procurement, human resources, information technology support and other administrative support services. These expenses were allocated to QHC based on direct usage or benefit where identifiable, with the remainder allocated to QHC using ratios based on revenues, expenses or licensed beds. Following the

Spin-off, we began performing corporate functions using internal resources or purchased services, certain of which are required to be provided by CHS pursuant to the transition services agreements and other ancillary agreements.

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 management advisory and consulting services are provided. We report these revenues at their net realizable value. 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 the 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 allowances. 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. Our contractual allowances are impacted by the timing and ability of CHS to monitor the classification and collection of our patient accounts receivable. Billings and collections are outsourced to CHS under the transition services agreements that were put in place in connection with the Spin-off. See Note 16 — Related Party Transactions in the accompanying financial statements for additional information on these agreements. 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 with the purpose of maximizing our collection efforts.

The following tables provide a summary of our net operating revenues, before the provision for bad debts, for the three and nine months ended September 30, 2017 and 2016, and on a sequential basis for the current quarter, by payor source (dollars in thousands):

	Three Months Ended September 30,
	2017						2016
	$ Amount		% of Total				$ Amount		% of Total

Medicare	$	167,287		30.0		%	$	162,753		26.6		%
Medicaid		94,571		17.0		%		125,679		20.5		%
Managed care and commercial		213,637		38.3		%		239,461		39.1		%
Self-pay		58,935		10.6		%		60,079		9.8		%
Non-patient		23,417		4.1		%		24,579		4.0		%
Total net operating revenues, before the provision for bad debts	$	557,847		100.0		%	$	612,551		100.0		%


	Nine Months Ended September 30,
	2017						2016
	$ Amount			% of Total			$ Amount			% of Total

Medicare	$	502,747			29.0	%	$	505,836			27.7	%
Medicaid		298,580			17.2	%		342,030			18.7	%
Managed care and commercial		683,642			39.6	%		714,340			39.2	%
Self-pay		173,325			10.0	%		184,004			10.1	%
Non-patient		72,713			4.2	%		78,988			4.3	%
Total net operating revenues, before the provision for bad debts	$	1,731,007			100.0	%	$	1,825,198			100.0	%


	Three Months Ended
	September 30, 2017						June 30, 2017
	$ Amount			% of Total			$ Amount			% of Total

Medicare	$	167,287			30.0	%	$	160,167			27.4	%
Medicaid		94,571			17.0	%		107,341			18.3	%
Managed care and commercial		213,637			38.3	%		238,448			40.7	%
Self-pay		58,935			10.6	%		55,310			9.5	%
Non-patient		23,417			4.1	%		23,949			4.1	%
Total net operating revenues, before the provision for bad debts	$	557,847			100.0	%	$	585,215			100.0	%

Our net operating revenues, before the provision for bad debts, for the Medicaid payor source were negatively impacted $11.5 million and $33.9 million for the three and nine months ended September 30, 2017, respectively, and $11.3 million for the three months ended June 30, 2017 due to our inability to accrue for the California HQAF program in 2017 pending CMS approval.

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 allowances in the same period.

Electronic Health Record Incentive Payments

Pursuant to the Health Information Technology for Economic and Clinical Health (“HITECH”) Act, we are eligible to receive incentive payments under the Medicare and Medicaid programs related to our hospitals and physician clinics that demonstrate meaningful use of certified electronic health record (“EHR”) technology. These payments are available for a maximum period of five

or six years, depending on the program. If we fail to demonstrate meaningful use, we are subject to payment reductions. We incur both capital expenditures and operating expenses in connection with the implementation of EHR technology initiatives. The amount and timing of these expenditures does not directly correlate with the timing of the receipt of EHR payments or the recognition of EHR incentives as earned. We record EHR incentives in our statements of income as a reduction to our operating costs and expenses. As we move toward our full implementation of certified EHR technology, our EHR incentives will decline and ultimately end. For the three months ended September 30, 2017 and 2016, our EHR incentives earned were $0.3 million and $1.3 million, respectively, and $4.5 million and $9.8 million for the nine months ended September 30, 2017 and 2016, respectively. We anticipate that we will earn approximately $5 million of EHR incentives for the full year 2017.

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 of the net realizable amount of our patient revenues due from third-party payors is subject to complexities, including interpretations of governmental regulations and payor-specific contractual agreements that are frequently changing. The Medicare and Medicaid programs, which are the payor sources for the majority 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 allowances are recorded in the period services are performed and the patient’s method of payment is verified. Estimates for contractual allowances 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 allowances are recorded in the periods in which they become known and may be subject to further revisions. All hospital contractual allowance calculations are reviewed on a monthly basis by management to ensure reasonableness and accuracy.

We use a third-party automated contractual allowance system to calculate our contractual allowances each month. Contractual allowances are calculated utilizing historical paid claims data by payor source, which is uploaded into the system each month. The key assumptions used by the system to calculate the current period estimated contractual allowances are derived on a payor-specific basis from the estimated contractual reimbursement percentage and historical paid claims data. The automated contractual allowance system does not include patient account level information, as it estimates an average contractual allowance for each payor source. Due to the complexities involved in the contractual allowance estimates, 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 months ended September 30, 2017 would have changed by $20.9 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, 2017, patient accounts receivable, net would have changed by $20.9 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 allowances in our statements of income and record these amounts as due from and due to third-party payors on our balance sheets. Contractual allowance adjustments related to previous program reimbursements and final cost report settlements favorably (unfavorably) impacted net operating revenues $2.5 million and $(0.8) million during the three months ended September 30, 2017 and 2016, respectively, and $2.5 million and $(5.2) million during the nine months ended September 30, 2017 and 2016, 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. These programs have participation costs, referred to as fees or provider taxes. We record these costs in due to third-party payors on our balance sheets. After a state supplemental program is approved and fully authorized, we recognize the reimbursement payments due to us from state supplemental payment programs in the periods amounts are estimable and revenue collection is reasonably assured. These amounts are recorded in operating revenues as favorable contractual allowances and the costs we incur under these programs are recorded as other operating expenses. We record the revenues as favorable contractual allowance 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, 2017 and 2016, and on a sequential basis for the current quarter (in thousands):

	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,		September 30,		September 30,		September 30,		September 30,		June 30,
	2017		2016		2017		2016		2017		2017

Medicaid revenues	$	46,866	$	54,688	$	138,544	$	162,009	$	46,866	$	46,381
Provider taxes and other expenses		16,523		19,559		50,646		57,590		16,523		17,230
Reimbursements attributable to state supplemental payment programs, net of expenses	$	30,343	$	35,129	$	87,898	$	104,419	$	30,343	$	29,151

The California Department of Health Care Services implemented 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 Phase IV of the program, covering the period January 2014 through December 2016, we recognized $11.5 million of Medicaid revenues and $2.7 million of provider taxes for the three months ended September 30, 2016, and $33.9 million of Medicaid revenues and $8.2 million of provider taxes for the nine months ended September 30, 2016. We have not recognized any revenues related to the HQAF program in 2017.

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. However, Phase IV of the program expired on December 31, 2016 and CMS has not yet issued approvals, including waiver of certain healthcare-tax related rules, for Phase V of the program. Consistent with the first four phases of the HQAF Program, we will not recognize any revenues under the new program until CMS completes the approval process. HQAF funding levels are based in part on Medi-Cal utilization. As a result, changes in coverage of individuals under the Medi-Cal program could affect the revenues and cash flows of our California hospitals under future phases of the HQAF Program. We are currently estimating the 2017-2019 HQAF Program will be approved in the fourth quarter of 2017 and that our revenues will be approximately $22 million for the year ended December 31, 2017, all of which we anticipate will be recorded in the fourth quarter. We cannot provide any assurances of the amount of revenues our hospitals may receive from or the timing of CMS’ approval of the 2017-2019 HQAF Program, the timing of the related cash flows, or that Phase V of the program will be approved at all.

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

	September 30,		December 31,
	2017		2016

Amounts due from third-party payors:
Previous program reimbursements and final cost report settlements	$	22,120	$	23,876
State supplemental payment programs		76,658		92,359
Total amounts due from third-party payors	$	98,778	$	116,235

Amounts due to third-party payors:
Previous program reimbursements and final cost report settlements	$	31,467	$	33,366
State supplemental payment programs		5,844		9,171
Total amounts due to third-party payors	$	37,311	$	42,537

Provision for Bad Debts and Allowance for Doubtful Accounts

The following table provides a summary of patient accounts receivable, before contractual allowances, discounts and allowance for doubtful accounts, by payor source (dollars in thousands):

	September 30, 2017					December 31, 2016
	$ Amount		% of Total			$ Amount		% of Total

Third-parties	$	2,068,705		77.4	%	$	1,930,103		74.6	%
Self-pay		605,002		22.6	%		656,373		25.4	%
Total patient accounts receivable, gross	$	2,673,707		100.0	%	$	2,586,476		100.0	%

Substantially all of our accounts receivable are related to providing healthcare services to patients at our hospitals and outpatient service 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 deductibles and co-payments. 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 estimate our allowance for doubtful accounts by reserving a percentage of all self-pay patient receivables without regard to aging category, based on collection history. The allowance percentage is based on a model that considers historical write-off activity and is adjusted for expected recoveries and any anticipated changes in trends. Our ability to estimate the allowance for doubtful accounts 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. For our insured receivables, which are non-self-pay receivables, we estimate the allowance for doubtful accounts based on historical collection rates for the uncontractualized portion of all accounts aging over 365 days from the date of patient discharge, reduced by an estimate for expected recoveries. Generally, these non-self-pay accounts receivable aged over 365 days represent an immaterial percentage of our total patient accounts receivable on our balance sheets. We believe that we collect substantially all of our third-party insured receivables, which include receivables from governmental agencies.

Collections are impacted by the economic ability of patients to pay and the effectiveness of CHS’ billing and collection efforts, including their current policies on billings, accounts receivable payor classifications, collections, and our own efforts to further attempt collection. As previously stated, billings and collections are outsourced to CHS under the transition services agreements that were put in place with the Spin-off. See Note 16 — Related Party Transactions in the accompanying financial statements for additional information on these agreements. Significant changes in payor mix, economic conditions or trends in federal and state governmental healthcare coverage, among other things, could affect our collection levels and are considered in our estimate of the allowance for doubtful accounts each period. We also continually review our overall allowance adequacy by monitoring historical cash collections experience, revenue trends by payor classification and days revenue outstanding.

Our policy is to write off gross accounts receivable if the balance is under $10.00 or when such amounts are placed with outside 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 approximately $443.8 million and $420.3 million of past due patient account balances at September 30, 2017 and December 31, 2016, respectively, being pursued by secondary collection agencies, excluding accounts being pursued by PASI under the transition services agreement. 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 our gross accounts receivable or our allowance for doubtful accounts. Collections of any account balances previously written off are recognized as a reduction to bad debt expense when received. However, we take into consideration estimated collections of these future amounts written-off in evaluating the reasonableness of our allowance for doubtful accounts.

For self-pay receivables, the total amount of contractual allowances, discounts and the allowance for doubtful accounts that reduces these receivables to their net carrying value was $529.9 million and $571.7 million as of September 30, 2017 and December 31, 2016, respectively. If our self-pay receivables being pursued by secondary collection agencies were included in both gross self-pay receivables and the allowance for doubtful accounts above, the allowance for doubtful accounts related to self-pay receivables as a percentage of gross self-pay receivables would have been 92.2% and 92.1% at September 30, 2017 and December 31, 2016, 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 months ended September 30, 2017 would have changed by $5.9 million. If we applied a 1% differential to our estimate of the allowance for doubtful accounts related to self-pay receivables as of September 30, 2017, our patient accounts receivable, net would have changed by $6.1 million.

Days revenue outstanding related to patients accounts receivable, excluding amounts recorded as due to third-party payors, was 74 days and 68 days as of September 30, 2017 and December 31, 2016, respectively. The increase was primarily related to an increase in insurance receivables which are covered under the Shared Services Center Transition Services Agreement, and also due to delays in the collection of our Illinois receivables. The portion of our allowance for doubtful accounts representing an adjustment for expected recoveries of self-pay receivables aged over 365 days that have been placed with outside collection agencies was 6 days as of September 30, 2017.

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 our 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.

The reduction in the fair value of our hospital reporting unit and the resulting impairment charges recorded during 2016 reduced the carrying value of the hospital reporting unit goodwill to its implied fair value as determined in step two of the goodwill impairment test at the evaluation date. This increases the risk that future declines in fair value could result in goodwill impairment. The determination of fair value in our goodwill impairment analysis is based on an estimate of fair value for each reporting unit utilizing known and estimated inputs at the evaluation date. Some of those inputs include, but are not limited to, the most recent price of our common stock or fair value of long-term debt, estimates of future revenue and expense growth, estimated market multiples, expected capital expenditures, income tax rates, and costs of invested capital. Future estimates of fair value could be adversely affected if the actual outcome of one or more of these assumptions changes materially in the future, including further decline in our stock price or fair value of long-term debt, lower than expected hospital volumes, or increased operating costs. Such changes impacting the calculation of fair value could result in a material impairment charge in the future.

During the three months ended September 30, 2017, we evaluated the fair value of hospitals classified as held for sale and evaluated other hospitals intended for 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 intangible assets and $0.6 million of goodwill impairment. During the three months ended June 30, 2017, we recognized $12.9 million of impairment to property and equipment of certain hospitals in our Potential Divestitures Group for which we have received letters of intent. During the three months ended March 31, 2017, management made a decision to classify certain additional 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 intangible assets and $1.4 million of goodwill impairment. See Note 3 — Impairment of Long-Lived Assets and Goodwill in our accompanying financial statements for information on our 2016 impairment charges.

Workers’ Compensation and Professional and General Liability Insurance Reserve

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 workers’ compensation and professional and general 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 incurred but not report 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 balance sheets. See Note 17 — Commitments and Contingencies in our accompanying financial statements for tables that summarize the receivables and liabilities associated with these insurance reserves as of September 30, 2017 and December 31, 2016.

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 on 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 — Income Taxes in our accompanying financial statements for additional information on the use of the separate return method of accounting for income taxes that we used during the carve-out period.

New Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Accounting for Goodwill Impairment, which simplifies the accounting for goodwill impairments 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 over goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The ASU is effective for our annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact this guidance may have on our results of operations, financial position and cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, which was issued to simplify some of the accounting guidance for share-based compensation. Among the areas impacted by the amendments in this ASU are the accounting for income taxes related to share-based payments, accounting for forfeitures, classification of awards as equity or liabilities and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We adopted this ASU on January 1, 2017. The adoption of this ASU had no material impact on our results of operations, financial position and cash flows.

transactions. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and permits the use of either a full or modified retrospective approach upon adoption. We expect to adopt this ASU on January 1, 2019. We utilize a number of leases to support our operations. As such, the adoption of this ASU is expected to have a significant impact on our financial position. We are currently evaluating the quantitative and qualitative impact the adoption of this ASU will have on our operations, policies and procedures. We are additionally evaluating any modifications to our leasing strategy in response to the requirements of this standard.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides for a single comprehensive principles-based model for the recognition of revenue across all industries using a five-step model to recognize revenue from customer contracts. The new standard significantly expands disclosures about the nature, amount, timing, and uncertainty of revenues and cash flows as well as certain additional quantitative and qualitative disclosures. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016, and permits the use of either a full or modified retrospective approach upon adoption. In preparation for adoption of the ASU, we have established an implementation team that is evaluating the current impact the new standard will have on our revenue recognition policies, procedures, financial position, results of operations, cash flows, financial disclosures and control framework. Specifically, we are quantifying the impact on our results of operations, financial position and cash flows in order to determine which method, either full or modified retrospective, to use upon adoption. We are using a program management approach for the various revenue streams to accomplish the revenue, financial reporting and organizational impact analysis according to project milestones to ensure a systematic and timely process that will allow consideration of impact findings in the selection and implementation of a transition method. We cannot reasonably estimate at this time the quantitative impact that the adoption of this accounting standard will have on our consolidated financial statements. We note that industry guidance continues to develop and that further guidance regarding third-party reimbursements and other reimbursement programs unique to the healthcare industry may be issued in later 2017, which may impact our evaluation. In addition to new and expanded disclosures, we anticipate that the most significant impact will be to the presentation of the income statement, as the provision for doubtful accounts will be recorded as a direct reduction to revenues and will not be presented as a separate line item.

Results of Operations

A summary of our results of operations, including certain operating and financial data for the three and nine months ended September 30, 2017 and 2016, and on a sequential basis for the current quarter, is included below. The definitions of certain terms used throughout “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” follows:

Consolidated and Combined. Our financial statements include amounts and disclosures related to the stand-alone financial statements and accounting records of QHC after the Spin-off (“consolidated”) in combination with amounts and disclosures that have been derived for the businesses comprising QHC from the consolidated financial statements and accounting records of CHS for the periods prior to the completion of the Spin-off (“combined”). Any references to our financial statements, financial data and operating data refer to our consolidated and combined financial statements unless otherwise noted.

Same-facility. Same-facility financial and operating data, as presented in the comparative discussions herein, excludes hospitals that were sold 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, 2017 and 2016, and the three months ended June 30, 2017, which are reported herein, have been adjusted to exclude the operating results of Sandhills, Barrow, Cherokee, Trinity, Lock Haven and Sunbury which we sold on December 1, 2016, December 31, 2016, March 31, 2017, June 30, 2017, September 30, 2017 and September 30, 2017, respectively.

Bps Variance. In certain tables and discussions below, we have included a variance column that represents the subtraction of the basis points in the prior period percentage of revenues column from the basis points in the current period percentage of revenues column.

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.

Continuing Hospitals Group. The Continuing Hospitals Group consists of twenty-four hospitals which we currently intend to continue to operate as part of our core business.

Divestitures Group. The Divestitures Group, as of September 30, 2017, includes all hospitals that had been divested by us through September 30, 2017. The Divestitures Group includes Barrow, Sandhills, Cherokee, Trinity, Lock Haven and Sunbury. This group of hospitals has certain ongoing operations during the wind-down process related to the assets and liabilities which were not part of the hospital sales, typically accounts receivable collections or write-offs, prior period contractual adjustments associated with the Medicare and Medicaid programs through final cost report settlement and certain minimal operating expenses.

Potential Divestitures Group. The Potential Divestitures Group, as of September 30, 2017, includes eight hospitals that management has identified for potential divestiture over the next twelve to fifteen month period. This group includes L.V. Stabler, which was sold on October 31, 2017. We will continue to evaluate other hospitals for potential divestiture.

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

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

Days 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, transaction costs related to the Spin-off, and severance costs for post-spin headcount reductions. 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.

Adjusted EBITDA, Adjusted for Divestitures. Adjusted EBITDA, Adjusted for Divestitures, also a non-GAAP financial measure, is further retrospectively adjusted to exclude the effect of EBITDA of the Divestitures Group. We present 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 the results of operations.

Adjusted EBITDA, Adjusted for Potential Divestitures. Adjusted EBITDA, Adjusted for Potential Divestitures, also a non-GAAP financial measure, is Adjusted EBITDA, Adjusted for Divestitures, and further retrospectively adjusted to exclude the effect of EBITDA of the Potential Divestitures Group. We present Adjusted EBITDA, Adjusted for Potential Divestitures because management believes this measure provides investors and other users of our financial statements with additional information about how management assesses the results of operations.

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

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,
	2017						2016
				% of						% of
	$ Amount			Revenues			$ Amount			Revenues

Operating revenues, net of contractual allowances and discounts	$	557,847					$	612,551
Provision for bad debts		58,545						68,612
Net operating revenues		499,302			100.0	%		543,939			100.0	%
Operating costs and expenses:
Salaries and benefits		251,780			50.4	%		266,812			49.1	%
Supplies		58,657			11.7	%		64,013			11.8	%
Other operating expenses		145,357			29.2	%		154,878			28.3	%
Depreciation and amortization		20,735			4.2	%		28,234			5.2	%
Rent		12,377			2.5	%		12,823			2.4	%
Electronic health records incentives earned		(287	)		(0.1	)%		(1,336	)		(0.2	)%
Legal, professional and settlement costs		2,050			0.4	%		488			0.1	%
Impairment of long-lived assets and goodwill		5,261			1.1	%		—			—	%
Loss (gain) on sale of hospitals, net		79			—	%		—			—	%
Transaction costs related to the Spin-off		173			—	%		532			0.1	%
Total operating costs and expenses		496,182			99.4	%		526,444			96.8	%
Income (loss) from operations		3,120			0.6	%		17,495			3.2	%
Interest expense, net		32,216			6.4	%		28,028			5.1	%
Income (loss) before income taxes		(29,096	)		(5.8	)%		(10,533	)		(1.9	)%
Provision for (benefit from) income taxes		(542	)		(0.1	)%		(4,081	)		(0.7	)%
Net income (loss)		(28,554	)		(5.7	)%		(6,452	)		(1.2	)%
Less: Net income (loss) attributable to noncontrolling interests		637			0.1	%		507			0.1	%
Net income (loss) attributable to Quorum Health Corporation	$	(29,191	)		(5.8	)%	$	(6,959	)		(1.3	)%

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

	Three Months Ended September 30,
	2017			2016

Net income (loss)	$	(28,554	)	$	(6,452	)
Interest expense, net		32,216			28,028
Provision for (benefit from) income taxes		(542	)		(4,081	)
Depreciation and amortization		20,735			28,234
EBITDA		23,855			45,729
Legal, professional and settlement costs		2,050			488
Impairment of long-lived assets and goodwill		5,261			—
Loss (gain) on sale of hospitals, net		79			—
Transaction costs related to the Spin-off		173			532
Post-spin headcount reductions		850			—
Adjusted EBITDA		32,268			46,749
Negative EBITDA of divested hospitals		4,670			7,023
Adjusted EBITDA, Adjusted for Divestitures		36,938			53,772
Negative EBITDA (EBITDA) of potential divestitures		(1,761	)		(7,874	)
Adjusted EBITDA, Adjusted for Potential Divestitures	$	35,177		$	45,898

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,
	2017		2016		$ Variance			% Variance

Consolidated and combined:
Net patient revenues, before the provision for bad debts	$	534,430	$	587,972	$	(53,542	)		(9.1	)%
Provision for bad debts		58,545		68,612		(10,067	)		(14.7	)%
Total net patient revenues		475,885		519,360		(43,475	)		(8.4	)%
Non-patient revenues		23,417		24,579		(1,162	)		(4.7	)%
Total net operating revenues	$	499,302	$	543,939	$	(44,637	)		(8.2	)%
Net patient revenues per adjusted admission	$	8,756	$	8,753	$	3			—	%
Net operating revenues per adjusted admission	$	9,187	$	9,168	$	19			0.2	%

Same-facility:
Net patient revenues, before the provision for bad debts	$	521,263	$	536,322	$	(15,059	)		(2.8	)%
Provision for bad debts		54,858		58,552		(3,694	)		(6.3	)%
Total net patient revenues		466,405		477,770		(11,365	)		(2.4	)%
Non-patient revenues		23,222		23,977		(755	)		(3.1	)%
Total net operating revenues	$	489,627	$	501,747	$	(12,120	)		(2.4	)%
Net patient revenues per adjusted admission	$	8,841	$	9,105	$	(264	)		(2.9	)%
Net operating revenues per adjusted admission	$	9,281	$	9,562	$	(281	)		(2.9	)%

The following table provides information related to our net operating revenues, before the provision for bad debts, by payor source (dollars in thousands):

	Three Months Ended September 30,
	2017					2016					2017 vs 2016
	$ Amount		% of Total			$ Amount		% of Total			$ Variance			bps Variance

Consolidated and combined:
Medicare	$	167,287		30.0	%	$	162,753		26.6	%	$	4,534			3.4	%
Medicaid		94,571		17.0	%		125,679		20.5	%		(31,108	)		(3.5	)%
Managed care and commercial		213,637		38.3	%		239,461		39.1	%		(25,824	)		(0.8	)%
Self-pay		58,935		10.6	%		60,079		9.8	%		(1,144	)		0.8	%
Non-patient		23,417		4.1	%		24,579		4.0	%		(1,162	)		0.1	%
Total net operating revenues, before the provision for bad debts	$	557,847		100.0	%	$	612,551		100.0	%	$	(54,704	)

Same-facility:
Medicare	$	163,004		29.9	%	$	148,086		26.4	%	$	14,918			3.5	%
Medicaid		91,631		16.8	%		118,070		21.1	%		(26,439	)		(4.3	)%
Managed care and commercial		209,126		38.4	%		219,817		39.2	%		(10,691	)		(0.8	)%
Self-pay		57,503		10.6	%		50,349		9.0	%		7,154			1.6	%
Non-patient		23,222		4.3	%		23,977		4.3	%		(755	)		—	%
Total net operating revenues, before the provision for bad debts	$	544,486		100.0	%	$	560,299		100.0	%	$	(15,813	)

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

	Three Months Ended September 30,
	2017		2016		Variance			% Variance

Consolidated and combined:
Number of licensed beds at end of period		3,051		3,578		(527	)		(14.7	)%
Admissions		21,646		23,503		(1,857	)		(7.9	)%
Adjusted admissions		54,350		59,333		(4,983	)		(8.4	)%
Emergency room visits		163,986		184,166		(20,180	)		(11.0	)%
Medicare case mix index		1.43		1.37		0.06			4.4	%

Same-facility:
Number of licensed beds at end of period		3,051		3,051		—			—	%
Admissions		21,155		21,195		(40	)		(0.2	)%
Adjusted admissions		52,755		52,471		284			0.5	%
Emergency room visits		158,337		162,608		(4,271	)		(2.6	)%
Medicare case mix index		1.43		1.38		0.05			3.6	%

Net operating revenues for the three months ended September 30, 2017 decreased $44.6 million compared to the three months ended September 30, 2016, consisting of a $43.5 million decrease in net patient revenues and a $1.2 million decrease in non-patient revenues. Our net patient revenues, before the provision for bad debts, decreased $53.5 million, or 9.1%, consisting of a $38.5 million decline from the Divestitures Group, a $9.0 million decline in the Potential Divestitures Group and a $6.0 million decline in the Continuing Hospitals Group. Our net patient revenues, before the provision for bad debts, of the Continuing Hospitals Group do not include any revenues from the California HQAF program in the 2017 period due to the pending approval by CMS of the program for the 2017-2019 period. The three months ended September 30, 2016 included revenues of $11.5 million from this program. On a same-facility basis, net patient revenues per adjusted admission were negatively impacted $218 due to our inability to accrue for the California HQAF program. Excluding this item, net patient revenues of the Continuing Hospitals Group increased $5.5 million, consisting of a $12.4 million increase from volumes, offset by a $6.9 million decrease from payor rates. On a consolidated basis, admissions and adjusted admissions declined 7.9% and 8.4%, respectively, for the three months ended September 30, 2017 compared to the same 2016 period. For the Continuing Hospitals Group, admissions and adjusted admissions increased 1.3% and 3.2%, respectively, for the three months ended September 30, 2017 compared to the same 2016 period. Non-patient revenues decreased $1.2 million in the 2017 period compared to the 2016 period, primarily related to our management advisory and consulting services business.

Provision for Bad Debts

The provision for bad debts decreased $10.1 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to a $6.4 million decrease related to the Divestitures Group.

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,
	2017		2016		$ Variance			% Variance

Salaries and benefits	$	251,780	$	266,812	$	(15,032	)		(5.6	)%
Hospital operations salaries and benefits	$	229,410	$	241,549	$	(12,139	)		(5.0	)%
Hospital operations salaries and benefits per adjusted admission	$	4,221	$	4,071	$	150			3.7	%
Hospital operations man-hours per adjusted admission		106.3		104.1		2.2			2.1	%

Salaries and benefits decreased $15.0 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Salaries and benefits declined $17.4 million related to the Divestitures Group and $2.6 million related to the Potential Divestitures Group. These declines were offset by an increase of $7.9 million for the Continuing Hospitals Group primarily resulting from increased physician salaries as the number of employed physicians increased. The portion of our salaries and benefits expenses related to corporate functions was $9.8 million and $10.4 million in the three months ended September 30, 2017 and 2016, respectively, which included $2.4 million and $2.8 million of stock-based compensation for these respective periods.

Supplies

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

	Three Months Ended September 30,
	2017		2016		$ Variance			% Variance

Supplies	$	58,657	$	64,013	$	(5,356	)		(8.4	)%
Supplies per adjusted admission	$	1,079	$	1,079	$	—			—	%

Supplies expense decreased $5.4 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Supplies expense declined $4.2 million related to the Divestitures Group and $2.4 million related to the Potential Divestitures Group. Supplies expense of the Continuing Hospitals Group increased $1.2 million, primarily resulting from an increase in implant costs as a result of increased orthopedic surgeries.

Other Operating Expenses

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

	Three Months Ended September 30,
	2017		2016		$ Variance			% Variance

Purchased services	$	40,716	$	44,242	$	(3,526	)		(8.0	)%
Taxes and insurance		24,929		24,690		239			1.0	%
Medical specialist fees		27,254		27,811		(557	)		(2.0	)%
Transition services agreements		15,468		18,094		(2,626	)		(14.5	)%
Repairs and maintenance		10,166		9,611		555			5.8	%
Utilities		7,853		8,369		(516	)		(6.2	)%
Other miscellaneous operating expenses		18,971		22,061		(3,090	)		(14.0	)%
Total other operating expenses	$	145,357	$	154,878	$	(9,521	)		(6.1	)%

Other operating expenses decreased $9.5 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Other operating expenses declined $12.3 million related to the Divestitures Group and declined $2.7 million related to provider taxes included in the 2016 period with no comparable expense in the 2017 period related to the California HQAF program, which has not yet been approved by CMS for the 2017-2019 program period. The remaining increase in other operating expenses primarily related to $2.3 million of New Mexico gross receipts tax refunds net of related fees recorded in the 2016 period with no comparable reduction in expense in the 2017 period. During the three months ended September 30, 2017 and 2016, we recognized $7.8 million and $8.0 million, respectively, of Illinois income tax credits. We received the cash associated with the 2017 period Illinois income tax credits in the three months ended September 30, 2017 and received the cash associated with the 2016 period in the fourth quarter of 2016. We are disputing in arbitration, among other issues and actions, certain charges and lack of performance of various obligations under the transition services agreements with our former Parent.

Depreciation and Amortization

Depreciation and amortization expense decreased $7.5 million during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. This decrease was primarily due to the overall reduction in our long-lived assets due to divestitures, impairment charges reducing the asset bases of our long-lived assets and the discontinuation of depreciation and amortization related to long-lived assets upon being reclassified as held for sale.

Rent

Rent expense decreased $0.4 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. As a percentage of net operating revenues, rent expense was comparable for these periods.

Electronic Health Records Incentives Earned

Electronic health records incentives earned decreased $1.0 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 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 — Electronic Health Records Incentives Earned in the accompanying financial statements for additional information on EHR.

Legal, Professional and Settlement Costs

Legal, professional and settlement costs increased $1.6 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 primarily due to costs related to the shareholder class action lawsuit and costs associated with our dispute in arbitration, among other issues and actions, of certain charges and lack of performance of various obligations under the transition services agreements with our former Parent. Legal, professional and settlement costs include legal costs and related settlements, if any, associated with regulatory claims, government investigations into reimbursement payments, claims related to QHR contracts and costs of projects approved by the Board.

Impairment of Long-Lived Assets and Goodwill

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

Loss (Gain) on Sale of Hospitals, Net

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 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,
	2017		2016			$ Variance			% Variance

Senior Credit Facility:
Revolving Credit Facility	$	98	$	124		$	(26	)		(21.0	)%
Term Loan Facility		17,512		15,179			2,333			15.4	%
ABL Credit Facility		638		120			518			431.7	%
Senior Notes		11,631		11,626			5			—	%
Amortization of debt issuance costs and discounts		2,067		1,692			375			22.2	%
All other interest expense (income), net		270		(713	)		983			(137.9	)%
Total interest expense, net	$	32,216	$	28,028		$	4,188			14.9	%

Interest expense, net increased $4.2 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Following the Spin-off, interest expense is calculated based on the terms of our credit agreements and senior notes. The effective interest rates for our Term Loan Facility and Senior Notes were approximately 8.8% and 12.5%, respectively, at September 30, 2017 and 7.6% and 12.5%, respectively, at September 30, 2016. Our Senior Credit Facility was amended on April 11, 2017, which increased the interest rate terms on our Term Loan Facility. See Liquidity and Capital Resources below and Note 7 — Long-Term Debt in the accompanying financial statements for additional information on our indebtedness.

Provision for (Benefit from) Income Taxes

The benefit from income taxes was $0.5 million for the three months ended September 30, 2017 and $4.1 million for the three months ended September 30, 2016. Our effective tax rates were 1.9% and 38.7% for these respective periods. The decrease in our effective tax rate for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016 was primarily due to recording a valuation allowance against the deferred tax assets arising from our pre-tax loss in the 2017 period that are not more likely than not to be recognized. We began recording a valuation allowance against our deferred tax assets in the fourth quarter of 2016.

Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to noncontrolling interests was $0.6 million and $0.5 million in the three months ended September 30, 2017 and 2016, respectively. As a percentage of net operating revenues, it was relatively flat.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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,
	2017						2016
				% of						% of
	$ Amount			Revenues			$ Amount			Revenues

Operating revenues, net of contractual allowances and discounts	$	1,731,007					$	1,825,198
Provision for bad debts		173,919						201,971
Net operating revenues		1,557,088			100.0	%		1,623,227			100.0	%
Operating costs and expenses:
Salaries and benefits		781,691			50.2	%		788,560			48.6	%
Supplies		186,591			12.0	%		191,810			11.8	%
Other operating expenses		466,394			29.9	%		482,526			29.8	%
Depreciation and amortization		63,441			4.1	%		90,854			5.6	%
Rent		36,631			2.4	%		37,917			2.3	%
Electronic health records incentives earned		(4,516	)		(0.3	)%		(9,791	)		(0.6	)%
Legal, professional and settlement costs		6,519			0.4	%		6,176			0.4	%
Impairment of long-lived assets and goodwill		21,461			1.4	%		250,400			15.4	%
Loss (gain) on sale of hospitals, net		(5,112	)		(0.3	)%		—			—	%
Transaction costs related to the Spin-off		204			—	%		5,444			0.3	%
Total operating costs and expenses		1,553,304			99.8	%		1,843,896			113.6	%
Income (loss) from operations		3,784			0.2	%		(220,669	)		(13.6	)%
Interest expense, net		90,204			5.8	%		84,756			5.2	%
Income (loss) before income taxes		(86,420	)		(5.6	)%		(305,425	)		(18.8	)%
Provision for (benefit from) income taxes		(86	)		(0.1	)%		(50,320	)		(3.1	)%
Net income (loss)		(86,334	)		(5.5	)%		(255,105	)		(15.7	)%
Less: Net income (loss) attributable to noncontrolling interests		1,048			0.1	%		1,917			0.1	%
Net income (loss) attributable to Quorum Health Corporation	$	(87,382	)		(5.6	)%	$	(257,022	)		(15.8	)%

	Nine Months Ended September 30,
	2017			2016

Net income (loss)	$	(86,334	)	$	(255,105	)
Interest expense, net		90,204			84,756
Provision for (benefit from) income taxes		(86	)		(50,320	)
Depreciation and amortization		63,441			90,854
EBITDA		67,225			(129,815	)
Legal, professional and settlement costs		6,519			6,176
Impairment of long-lived assets and goodwill		21,461			250,400
Loss (gain) on sale of hospitals, net		(5,112	)		—
Transaction costs related to the Spin-off		204			5,444
Post-spin headcount reductions		2,543			—
Adjusted EBITDA		92,840			132,205
Negative EBITDA of divested hospitals		13,563			18,468
Adjusted EBITDA, Adjusted for Divestitures		106,403			150,673
Negative EBITDA (EBITDA) of potential divestitures		3,618			(12,840	)
Adjusted EBITDA, Adjusted for Potential Divestitures	$	110,021		$	137,833

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,
	2017		2016		$ Variance			% Variance

Consolidated and combined:
Net patient revenues, before the provision for bad debts	$	1,658,294	$	1,746,210	$	(87,916	)		(5.0	)%
Provision for bad debts		173,919		201,971		(28,052	)		(13.9	)%
Total net patient revenues		1,484,375		1,544,239		(59,864	)		(3.9	)%
Non-patient revenues		72,713		78,988		(6,275	)		(7.9	)%
Total net operating revenues	$	1,557,088	$	1,623,227	$	(66,139	)		(4.1	)%
Net patient revenues per adjusted admission	$	8,897	$	8,672	$	225			2.6	%
Net operating revenues per adjusted admission	$	9,333	$	9,116	$	217			2.4	%

Same-facility:
Net patient revenues, before the provision for bad debts	$	1,582,148	$	1,587,642	$	(5,494	)		(0.3	)%
Provision for bad debts		161,149		169,663		(8,514	)		(5.0	)%
Total net patient revenues		1,420,999		1,417,979		3,020			0.2	%
Non-patient revenues		71,744		77,267		(5,523	)		(7.1	)%
Total net operating revenues	$	1,492,743	$	1,495,246	$	(2,503	)		(0.2	)%
Net patient revenues per adjusted admission	$	9,026	$	9,022	$	4			—	%
Net operating revenues per adjusted admission	$	9,481	$	9,514	$	(33	)		(0.3	)%

The following table provides information related to our net operating revenues, before the provision for bad debts, by payor source (dollars in thousands):

	Nine Months Ended September 30,
	2017					2016					2017 v 2016
	$ Amount		% of Total			$ Amount		% of Total			$ Variance			bps Variance

Consolidated and combined:
Medicare	$	502,747		29.0	%	$	505,836		27.7	%	$	(3,089	)		1.3	%
Medicaid		298,580		17.2	%		342,030		18.7	%		(43,450	)		(1.5	)%
Managed care and commercial		683,642		39.6	%		714,340		39.2	%		(30,698	)		0.4	%
Self-pay		173,325		10.0	%		184,004		10.1	%		(10,679	)		(0.1	)%
Non-patient		72,713		4.2	%		78,988		4.3	%		(6,275	)		(0.1	)%
Total net operating revenues, before the provision for bad debts	$	1,731,007		100.0	%	$	1,825,198		100.0	%	$	(94,191	)

Same-facility:
Medicare	$	478,098		28.9	%	$	457,947		27.5	%	$	20,151			1.4	%
Medicaid		285,467		17.3	%		320,690		19.3	%		(35,223	)		(2.0	)%
Managed care and commercial		653,258		39.6	%		655,853		39.4	%		(2,595	)		0.2	%
Self-pay		165,326		10.0	%		153,152		9.2	%		12,174			0.8	%
Non-patient		71,744		4.2	%		77,267		4.6	%		(5,523	)		(0.4	)%
Total net operating revenues, before the provision for bad debts	$	1,653,893		100.0	%	$	1,664,909		100.0	%	$	(11,016	)

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

	Nine Months Ended September 30,
	2017		2016		$ Variance			% Variance

Consolidated and combined:
Number of licensed beds at end of period		3,051		3,578		(527	)		(14.7	)%
Admissions		67,572		72,113		(4,541	)		(6.3	)%
Adjusted admissions		166,841		178,062		(11,221	)		(6.3	)%
Emergency room visits		504,500		551,401		(46,901	)		(8.5	)%
Medicare case mix index		1.42		1.37		0.05			3.6	%

Same-facility:
Number of licensed beds at end of period		3,051		3,051		—			—	%
Admissions		64,347		64,906		(559	)		(0.9	)%
Adjusted admissions		157,440		157,171		269			0.2	%
Emergency room visits		475,062		487,286		(12,224	)		(2.5	)%
Medicare case mix index		1.42		1.38		0.04			2.9	%

Net operating revenues decreased $66.1 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, consisting of a decrease of $59.9 million in net patient revenues and a $6.2 million decrease in non-patient revenues. Our net patient revenues, before the provision for bad debts, decreased $87.9 million, or 5.0%, consisting of an $82.4 million decline in the Divestitures Group, a $12.8 million decline in the Potential Divestitures Group and a $7.3 million increase in the Continuing Hospitals Group. Our net patient revenues, before the provision for bad debts, of the Continuing Hospitals Group do not include any revenues from the California HQAF program in the 2017 period due to the pending approval by CMS of the program for the 2017-2019 period. The nine months ended September 30, 2016 included revenues of $33.9 million from this program. On a same-facility basis, net patient revenues per adjusted admission were negatively impacted $215 due to our inability to accrue for the California HQAF program. Excluding this item, net patient revenues of the Continuing Hospitals Group increased $41.2 million, consisting of $23.7 million from volumes and $17.5 million from payor rates. On a consolidated basis, admissions and adjusted admissions declined 6.3% for the nine months ended September 30, 2017 when compared to the same 2016 period. For the Continuing Hospitals Group, admissions and adjusted admissions increased 0.7% and 2.0%, respectively, for the nine months ended September 30, 2017 when compared to the same 2016 period. Non-patient revenues decreased $6.3 million in the 2017 period compared to the 2016 period, primarily related to our management advisory and consulting services business.

Provision for Bad Debts

The provision for bad debts decreased $28.1 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to a $19.5 million decrease related to the Divestitures Group and a $3.5 million reduction in the reserve for aged accounts greater than 365 days recorded in the second quarter of 2017.

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,
	2017		2016		$ Variance			% Variance

Salaries and benefits	$	781,691	$	788,560	$	(6,869	)		(0.9	)%
Hospital operations salaries and benefits	$	711,250	$	726,430	$	(15,180	)		(2.1	)%
Hospital operations salaries and benefits per adjusted admission	$	4,263	$	4,080	$	183			4.5	%
Hospital operations man-hours per adjusted admission		105.2		103.4		1.8			1.8	%

Salaries and benefits decreased $6.9 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Salaries and benefits declined $34.7 million related to the Divestitures Group and $3.6 million related to the Potential Divestitures Group. These declines were offset by an increase of $23.1 million for the Continuing Hospitals Group primarily resulting from increased physician salaries as the number of employed physicians increased. The portion of our salaries and benefits expenses related to the corporate office was $29.8 million and $17.1 million in the nine months ended September 30, 2017 and 2016, respectively, which included $7.7 million and $4.7 million of stock-based compensation for these respective periods. Prior to the Spin-off, management fees were allocated to QHC for corporate functions of CHS and were included in other operating expenses. The increase in corporate salaries and benefits as a result of the Spin-off was partially offset by a reduction in corporate and QHR salaries

and benefits in the 2017 period when compared to the post-spin portion of the 2016 period due to headcount reductions in November 2016 and May 2017.

Supplies

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

	Nine Months Ended September 30,
	2017		2016		$ Variance			% Variance

Supplies	$	186,591	$	191,810	$	(5,219	)		(2.7	)%
Supplies per adjusted admission	$	1,118	$	1,077	$	41			3.8	%

Supplies expense decreased $5.2 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Supplies expense declined $7.8 million related to the Divestitures Group and $3.0 million related to the Potential Divestitures Group. Supplies expense of the Continuing Hospitals Group increased $5.6 million, primarily due to an increase in adjusted admissions of 2.0% for the nine months ended September 30, 2017 compared to the same 2016 period which resulted in increased implant costs. We also experienced a decline in rebates and administrative fee reimbursements from the renegotiated contract with our group purchasing organization in connection with the Spin-off.

Other Operating Expenses

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

	Nine Months Ended September 30,
	2017		2016		$ Variance			% Variance

Purchased services	$	130,155	$	133,316	$	(3,161	)		(2.4	)%
Taxes and insurance		92,782		94,257		(1,475	)		(1.6	)%
Medical specialist fees		84,605		77,343		7,262			9.4	%
Transition services agreements and allocations from Parent		47,736		52,192		(4,456	)		(8.5	)%
Repairs and maintenance		31,368		31,577		(209	)		(0.7	)%
Utilities		21,245		22,525		(1,280	)		(5.7	)%
Management fees from Parent		—		11,792		(11,792	)		(100.0	)%
Other miscellaneous operating expenses		58,503		59,524		(1,021	)		(1.7	)%
Total other operating expenses	$	466,394	$	482,526	$	(16,132	)		(3.3	)%

Other operating expenses decreased $16.1 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Other operating expenses declined $24.6 million as a result of the Divestitures Group and declined $8.2 million related to provider taxes included in the 2016 period with no comparable expense in the 2017 period related to the California HQAF program, which has not yet been approved by CMS. The remaining increase in other operating expenses, excluding the Divestitures Group, primarily related to a $3.6 million increase in contract labor and a $9.0 million increase in medical specialist fees primarily due to new contracts related to emergency room services and subsidies to various third parties, including hospitalists. Additionally, $2.3 million of New Mexico gross receipts tax refunds, net of related fees, were recorded in the 2016 period with no comparable reduction in expense in the 2017 period. During the nine months ended September 30, 2017 and 2016, we recognized $7.8 million and $8.0 million, respectively, of Illinois income tax credits. We received the 2017 period Illinois income tax credits in the three months ended September 30, 2017 and received the 2016 amount in the fourth quarter of 2016. We are disputing in arbitration, among other issues and actions, certain charges and lack of performance of various obligations under the transition services agreements with our former Parent.

Depreciation and Amortization

Depreciation and amortization expense decreased $27.4 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This decrease was primarily due to the overall reduction in our long-lived assets due to divestitures, impairment charges reducing the asset bases of our long-lived assets and the discontinuation of depreciation and amortization related to long-lived assets upon being reclassified as held for sale.

Rent

Rent expense decreased $1.3 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. As a percentage of net operating revenues, rent expense was comparable for these periods.

Electronic Health Records Incentives Earned

Electronic health records incentives earned decreased $5.3 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 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 — Electronic Health Records Incentives Earned in the accompanying financial statements for additional information on EHR.

Legal, Professional and Settlement Costs

Legal, professional and settlement costs increased $0.3 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. These costs include legal costs and related settlements, if any, associated with regulatory claims, government investigations into reimbursement payments, claims associated with QHR contracts and costs of projects approved by the Board.

Impairment of Long-Lived Assets and Goodwill

We recognized $21.5 million of impairment to long-lived assets in the nine months ended September 30, 2017. In the first quarter of 2017, we classified additional hospitals as held for sale. As part of this process, we evaluated the estimated relative fair value of all hospitals classified as held for sale in relation to the overall fair value of our 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 recorded impairments of $1.1 million to property and equipment, $0.8 million to capitalized software costs and $1.4 million to goodwill. In the second quarter of 2017, we recognized $12.9 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. In the third quarter of 2017, we recognized $5.3 million of impairment to long-lived assets and goodwill of certain hospitals which we have identified as potential divestiture candidates and for which we have received letters of intent.

We recognized impairment of $250.4 million to long-lived assets in the nine months ended September 30, 2016, consisting of $41.0 million to property and equipment, $4.4 million to capitalized software assets and $205.0 million to goodwill. See Note 3 — Impairment of Long-Lived Assets and Goodwill in the accompanying financial statements for additional information on impairment.

Loss (Gain) on Sale of Hospitals, Net

We recognized a $5.1 million gain on the sale of hospitals, net in the nine months ended September 30, 2017. This net gain primarily related to the $5.2 million gain on the sale of Trinity in the second quarter of 2017. See Note 4 — Divestitures in the accompanying financial statements for additional information on divestitures.

Interest Expense, Net

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

	Nine Months Ended September 30,
	2017			2016			$ Variance			% Variance

Senior Credit Facility:
Revolving Credit Facility	$	429		$	209		$	220			105.3	%
Term Loan Facility		48,795			25,611			23,184			90.5	%
ABL Credit Facility		1,507			202			1,305			646.0	%
Senior Notes		34,886			20,540			14,346			69.8	%
Amortization of debt issuance costs and discounts		6,271			2,883			3,388			117.5	%
All other interest expense (income), net		(1,684	)		(503	)		(1,181	)		234.8	%
Total interest expense, net from long-term debt		90,204			48,942			41,262			84.3	%
Due to Parent, net		—			35,814			(35,814	)		(100.0	)%
Total interest expense, net	$	90,204		$	84,756		$	5,448			6.4	%

Interest expense, net increased $5.4 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Following the Spin-off, interest expense is calculated based on the terms of our credit agreements and senior notes. The effective interest rates for our Term Loan Facility and Senior Notes were approximately 8.8% and 12.5%, respectively, at September 30, 2017 and 7.6% and 12.5%, respectively, at September 30, 2016. Our Senior Credit Facility was amended on April 11, 2017, which increased the interest rate terms on our Term Loan Facility. Additionally, for the portion of the 2016 period prior to the Spin-off, we were charged interest on the amounts due to CHS at various rates ranging from 4% to 7%. Interest computations on this indebtedness were based on the outstanding balance of Due to Parent, net at the end of each month. This debt with CHS was extinguished on April 29, 2016. See Liquidity and Capital Resources below and Note 7 — Long-Term Debt in the accompanying financial statements for additional information on our indebtedness.

Provision for (Benefit from) Income Taxes

The benefit from income taxes was $0.1 million for the nine months ended September 30, 2017 and $50.3 million for the nine months ended September 30, 2016. Our effective tax rates were 0.1% and 16.5% for these respective periods. The decrease in our effective tax rate for the nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016 was primarily due to recording a valuation allowance against the deferred tax assets arising from our pre-tax loss in the 2017 period that are not more likely than not to be recognized. We began recording a valuation allowance against our deferred tax assets in the fourth quarter of 2016.

Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to noncontrolling interests was $1.0 million and $1.9 million in the nine months ended September 30, 2017 and 2016, respectively. As a percentage of net operating revenues, it was relatively flat.

Three Months Ended September 30, 2017 Compared to Three Months Ended June 30, 2017

We have disclosed a comparison of our operating results on a sequential basis for the current quarter because we believe that this information is meaningful due to our divestiture activity.

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, 2017						June 30, 2017
				% of						% of
	$ Amount			Revenues			$ Amount			Revenues

Operating revenues, net of contractual allowances and discounts	$	557,847					$	585,215
Provision for bad debts		58,545						55,069
Net operating revenues		499,302			100.0	%		530,146			100.0	%
Operating costs and expenses:
Salaries and benefits		251,780			50.4	%		265,309			50.0	%
Supplies		58,657			11.7	%		64,112			12.1	%
Other operating expenses		145,357			29.2	%		157,613			29.8	%
Depreciation and amortization		20,735			4.2	%		20,586			3.9	%
Rent		12,377			2.5	%		12,152			2.3	%
Electronic health records incentives earned		(287	)		(0.1	)%		(1,777	)		(0.3	)%
Legal, professional and settlement costs		2,050			0.4	%		3,934			0.7	%
Impairment of long-lived assets and goodwill		5,261			1.1	%		12,900			2.4	%
Loss (gain) on sale of hospitals, net		79			—	%		(4,321	)		(0.8	)%
Transaction costs related to the Spin-off		173			—	%		—			—	%
Total operating costs and expenses		496,182			99.4	%		530,508			100.1	%
Income (loss) from operations		3,120			0.6	%		(362	)		(0.1	)%
Interest expense, net		32,216			6.4	%		30,458			5.7	%
Income (loss) before income taxes		(29,096	)		(5.8	)%		(30,820	)		(5.8	)%
Provision for (benefit from) income taxes		(542	)		(0.1	)%		(245	)		—	%
Net income (loss)		(28,554	)		(5.7	)%		(30,575	)		(5.8	)%
Less: Net income (loss) attributable to noncontrolling interests		637			0.1	%		55			—	%
Net income (loss) attributable to Quorum Health Corporation	$	(29,191	)		(5.8	)%	$	(30,630	)		(5.8	)%

	Three Months Ended
	September 30, 2017			June 30, 2017

Net income (loss)	$	(28,554	)	$	(30,575	)
Interest expense, net		32,216			30,458
Provision for (benefit from) income taxes		(542	)		(245	)
Depreciation and amortization		20,735			20,586
EBITDA		23,855			20,224
Legal, professional and settlement costs		2,050			3,934
Impairment of long-lived assets and goodwill		5,261			12,900
Loss (gain) on sale of hospitals, net		79			(4,321	)
Transaction costs related to the Spin-off		173			—
Post-spin headcount reductions		850			1,693
Adjusted EBITDA		32,268			34,430
Negative EBITDA of divested hospitals		4,670			6,652
Adjusted EBITDA, Adjusted for Divestitures		36,938			41,082
Negative EBITDA (EBITDA) of potential divestitures		(1,761	)		(174	)
Adjusted EBITDA, Adjusted for Potential Divestitures	$	35,177		$	40,908

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, 2017		June 30, 2017		$ Variance			% Variance

Consolidated:
Net patient revenues, before the provision for bad debts	$	534,430	$	561,266	$	(26,836	)		(4.8	)%
Provision for bad debts		58,545		55,069		3,476			6.3	%
Total net patient revenues		475,885		506,197		(30,312	)		(6.0	)%
Non-patient revenues		23,417		23,949		(532	)		(2.2	)%
Total net operating revenues	$	499,302	$	530,146	$	(30,844	)		(5.8	)%
Net patient revenues per adjusted admission	$	8,756	$	9,099	$	(343	)		(3.8	)%
Net operating revenues per adjusted admission	$	9,187	$	9,529	$	(342	)		(3.6	)%

Same-facility:
Net patient revenues, before the provision for bad debts	$	521,263	$	534,341	$	(13,078	)		(2.4	)%
Provision for bad debts		54,858		50,265		4,593			9.1	%
Total net patient revenues		466,405		484,076		(17,671	)		(3.7	)%
Non-patient revenues		23,222		23,647		(425	)		(1.8	)%
Total net operating revenues	$	489,627	$	507,723	$	(18,096	)		(3.6	)%
Net patient revenues per adjusted admission	$	8,841	$	9,236	$	(395	)		(4.3	)%
Net operating revenues per adjusted admission	$	9,281	$	9,688	$	(407	)		(4.2	)%

The following table provides information related to our net operating revenues, before the provision for bad debts, by payor source (dollars in thousands):

	Three Months Ended
	September 30, 2017					June 30, 2017					Third Quarter vs Second Quarter
	$ Amount		% of Total			$ Amount		% of Total			$ Variance			bps Variance

Consolidated:
Medicare	$	167,287		30.0	%	$	160,167		27.4	%	$	7,120			2.6	%
Medicaid		94,571		17.0	%		107,341		18.3	%		(12,770	)		(1.3	)%
Managed care and commercial		213,637		38.3	%		238,448		40.7	%		(24,811	)		(2.4	)%
Self-pay		58,935		10.6	%		55,310		9.5	%		3,625			1.1	%
Non-patient		23,417		4.1	%		23,949		4.1	%		(532	)		—	%
Total net operating revenues, before the provision for bad debts	$	557,847		100.0	%	$	585,215		100.0	%	$	(27,368	)

Same-facility:
Medicare	$	163,004		29.9	%	$	151,873		27.2	%	$	11,131			2.7	%
Medicaid		91,631		16.8	%		102,511		18.4	%		(10,880	)		(1.6	)%
Managed care and commercial		209,126		38.4	%		226,880		40.7	%		(17,754	)		(2.3	)%
Self-pay		57,503		10.6	%		53,078		9.5	%		4,425			1.1	%
Non-patient		23,222		4.3	%		23,647		4.2	%		(425	)		0.1	%
Total net operating revenues, before the provision for bad debts	$	544,486		100.0	%	$	557,989		100.0	%	$	(13,503	)

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

	Three Months Ended
	September 30, 2017		June 30, 2017		Variance			% Variance

Consolidated:
Number of licensed beds at end of period		3,051		3,168		(117	)		(3.7	)%
Admissions		21,646		22,270		(624	)		(2.8	)%
Adjusted admissions		54,350		55,634		(1,284	)		(2.3	)%
Emergency room visits		163,986		167,575		(3,589	)		(2.1	)%
Medicare case mix index		1.43		1.43		—			—	%

Same-facility:
Number of licensed beds at end of period		3,051		3,051		—			—	%
Admissions		21,155		21,198		(43	)		(0.2	)%
Adjusted admissions		52,755		52,410		345			0.7	%
Emergency room visits		158,337		156,877		1,460			0.9	%
Medicare case mix index		1.43		1.44		(0.01	)		(0.7	)%

Net operating revenues decreased $30.8 million for the three months ended September 30, 2017 compared to the three months ended June 31, 2017, consisting of a $30.3 million decrease in net patient revenues and a $0.5 million decrease in non-patient revenues. Our net patient revenues, before the provision for bad debts, decreased $26.8 million, or 4.8%, consisting of a $13.7 million decline in the Divestitures Group, a $7.7 million decline in the Potential Divestitures Group and a $5.4 million decline in the Continuing Hospitals Group. This decrease in the Continuing Hospitals Group consisted of a $5.4 million increase from volumes, offset by a $10.8 million decrease from payor rates. On a consolidated basis, admissions and adjusted admissions declined 2.8% and 2.3%, respectively, for the three months ended September 30, 2017 when compared to the second quarter of 2017. For the Continuing Hospitals Group, admissions increased 0.1% and adjusted admissions increased 1.4% for the three months ended September 30, 2017 when compared to the second quarter of 2017.

Provision for Bad Debts

The provision for bad debts increased $3.5 million for the three months ended September 30, 2017 compared to the three months ended June 30, 2017, primarily due to a $3.5 million reduction in the reserve for aged accounts greater than 365 days in the second quarter of 2017, with no comparable adjustment in the third quarter of 2017.

Salaries and Benefits

The following table provides information related to our salaries and benefits expenses (dollars in thousands):

	Three Months Ended
	September 30, 2017		June 30, 2017		$ Variance			% Variance

Salaries and benefits	$	251,780	$	265,309	$	(13,529	)		(5.1	)%
Hospital operations salaries and benefits	$	229,410	$	240,459	$	(11,049	)		(4.6	)%
Hospital operations salaries and benefits per adjusted admission	$	4,221	$	4,322	$	(101	)		(2.3	)%
Hospital operations man-hours per adjusted admission		106.3		105.6		0.7			0.6	%

Salaries and benefits decreased $13.5 million for the three months ended September 30, 2017 compared to the three months ended June 30, 2017. Salaries and benefits declined $7.7 million related to the Divestitures Group and $2.2 million related to the Potential Divestitures Group primarily resulting from decreased adjusted admissions of 1.2% for the three months ended September 30, 2017 compared to the three months ended June 30, 2017. Salaries and benefits related to the Continuing Hospitals Group and our corporate functions decreased $2.3 million, primarily resulting from a decrease in discretionary benefits.

Supplies

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

	Three Months Ended
	September 30, 2017		June 30, 2017		$ Variance			% Variance

Supplies	$	58,657	$	64,112	$	(5,455	)		(8.5	)%
Supplies per adjusted admission	$	1,079	$	1,152	$	(73	)		(6.3	)%

Supplies expense decreased $5.5 million for the three months ended September 30, 2017 compared to the three months ended June 30, 2017, primarily due to decreases of $2.3 million related to the Divestitures Group and $2.4 million related to the Potential Divestitures Group.

Other Operating Expenses

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

	Three Months Ended
	September 30, 2017		June 30, 2017		$ Variance			% Variance

Purchased services	$	40,716	$	43,843	$	(3,127	)		(7.1	)%
Taxes and insurance		24,929		33,610		(8,681	)		(25.8	)%
Medical specialist fees		27,254		28,888		(1,634	)		(5.7	)%
Transition services agreements		15,468		15,986		(518	)		(3.2	)%
Repairs and maintenance		10,166		9,759		407			4.2	%
Utilities		7,853		6,727		1,126			16.7	%
Other miscellaneous operating expenses		18,971		18,800		171			0.9	%
Total other operating expenses	$	145,357	$	157,613	$	(12,256	)		(7.8	)%

Other operating expenses decreased $12.3 million for the three months ended September 30, 2017 compared to the three months ended June 30, 2017. Other operating expenses declined $4.7 million as a result of the Divestitures Group. The remaining decline is primarily due to $7.8 million of Illinois income tax credits in the three months ended September 30, 2017 with no comparable reduction in expense for the three months ended June 30, 2017. We are disputing in arbitration, among other issues and actions, certain charges and lack of performance of various obligations under the transition services agreements with our former Parent.

Depreciation and Amortization

Depreciation and amortization expense increased $0.1 million during the three months ended September 30, 2017 compared to the three months ended June 30, 2017. We placed in service a portion of the capital expenditures for our new patient tower and expanded surgical capacity at McKenzie-Willamette Medical Center. This increase to depreciation was mostly offset by impacts from divestitures and impairment of long-lived assets.

Rent

Rent expense increased $0.2 million during the three months ended September 30, 2017 compared to the three months ended June 30, 2017. As a percentage of net operating revenues, rent expense was comparable for these periods.

Electronic Health Records Incentives Earned

Electronic health records incentives earned decreased $1.5 million for the three months ended September 30, 2017 compared to the three months ended June 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 — Electronic Health Records Incentives Earned in the accompanying financial statements for additional information on EHR.

Legal, Professional and Settlement Costs

Legal, professional and settlement costs decreased $1.9 million for the three months ended September 30, 2017 compared to the three months ended June 30, 2017 primarily due to the amendment of our Term Loan Facility in the second quarter, with no comparable expenses in the third quarter of 2017.

Impairment of Long-Lived Assets and Goodwill

We recognized $5.3 million of impairment to long-lived assets in the three months ended September 30, 2017 and $12.9 million of impairment in the three months ended June 30, 2017, as previously discussed.

Loss (Gain) on Sale of Hospitals, Net

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. In the three months ended June 30, 2017, we recognized a $4.3 million gain on the sale of hospitals, net primarily related to the sale of Trinity. See Note 4 — Divestitures in the accompanying 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, 2017		June 30, 2017			$ Variance			% Variance

Senior Credit Facility:
Revolving Credit Facility	$	98	$	192		$	(94	)		(49.0	)%
Term Loan Facility		17,512		16,642			870			5.2	%
ABL Credit Facility		638		613			25			4.1	%
Senior Notes		11,631		11,629			2			—	%
Amortization of debt issuance costs and discounts		2,067		2,224			(157	)		(7.1	)%
All other interest expense (income), net		270		(842	)		1,112			(132.1	)%
Total interest expense, net	$	32,216	$	30,458		$	1,758			5.8	%

Interest expense, net increased $1.8 million for the three months ended September 30, 2017 compared to the three months ended June 30, 2017. The increase primarily resulted from a reduction in capitalized interest related to placing into service a portion of our new patient tower at McKenzie-Willamette Medical Center, our hospital in Springfield, Oregon. See Liquidity and Capital Resources below and Note 7 — Long-Term Debt in the accompanying financial statements for additional information on our indebtedness.

Provision for (Benefit from) Income Taxes

The benefit from income taxes was $0.5 million for the three months ended September 30, 2017 and $0.2 million for the three months ended June 30, 2017. Our effective tax rates were 1.9% and 0.8% for these respective periods. The increase in our effective tax rate for the three months ended September 30, 2017 when compared to the three months ended June 30, 2017 was primarily due to the reversal of deferred tax assets and liabilities related to divestitures.

Net Income (Loss) Attributable to Noncontrolling Interests

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

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 business strategy includes an ongoing strategic review of our hospitals based on analysis of financial performance, current competitive conditions, expected demographic trends, joint venture opportunities, capital allocation requirements and specific state reimbursements and payment methodologies. As part of this strategy, we are actively engaging in initiatives, among others, to divest underperforming hospitals, reduce our debt and refine our portfolio to a more sustainable group of hospitals with higher operating margins. We had proceeds of $13.8 million from the sale of two hospitals in December 2016, proceeds of $4.3 million from the sale of one hospital as of March 31, 2017, proceeds of $15.9 million from the sale of one hospital as of June 30, 2017 and proceeds of $9.1 million from the sale of two hospitals as of September 30, 2017. We have targeted an additional eight hospitals that we intend to divest in the next twelve to fifteen months. For the nine months ended September 30, 2017, we experienced net operating losses of $41.4 million from the fourteen hospitals in the Divestitures Group and the Potential Divestitures Group. Additionally, we had proceeds of $2.8 million from the sale of one hospital on October 31, 2017, which was included in the Potential Divestitures Group as of September 30, 2017.

Our financial statements have been prepared under the assumption that we will continue as a going concern. We have limited stand-alone operating history and have experienced net losses each quarter since the Spin-off. The net losses have been primarily due to impairment charges related to our hospital operations business, the negative impact of a fourth quarter of 2016 change in estimate related to the collectability of patient accounts receivable, higher than expected operating costs since the Spin-off associated with the transition services agreements with CHS and other third-party contracts in comparison to the allocated costs from CHS during the carve-out period prior to the Spin-off, and due to the net operating losses from the group of fourteen hospitals in the Divestitures Group and the Potential Divestitures Group.

On December 31, 2016, we adopted ASU No. 2014-15, Presentation of Financial Statements — Going Concern, which requires management to evaluate if there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern. As a result of adopting ASU No. 2014-15, management was required to evaluate our ability to comply with the Secured Net Leverage Ratio (as defined in the CS Agreement) under our Senior Credit Facility, as defined below, for one year following the issuance of the financial statements for the year ended December 31, 2016. Although we were in compliance with our financial covenants as of December 31, 2016, the new standard requires management to base its evaluation about our ability to continue to comply with those covenants on results and events considered “probable” of occurring considering historical results, implemented plans, and executed agreements as of the date the financial statements are issued. In light of (i) our historical net operating results; (ii) delays in the approval by CMS of the California HQAF program for the 2017-2019 program period, which impacts us due to our inability to recognize any earned revenues until CMS approval of the program has been issued; and (iii) the amount of net operating losses from hospitals we intend to divest, management sought and completed an amendment to certain provisions of our Senior Credit Facility.

On April 11, 2017, we executed the CS Amendment to, among other things, raise the maximum Secured Net Leverage Ratio, as defined in the CS Agreement, to 4.75x from 4.25x for the period July 1, 2017 to December 31, 2018 (which was previously 4.25x for the period July 1, 2017 to June 30, 2018), at which point it drops to 4.00x for the remainder of the agreement. The CS Amendment also provides for additional Consolidated EBITDA add backs under the covenant calculations for certain items. For additional details of the CS Amendment, see “—Long-Term Debt” below. Management concluded that the CS Amendment alleviated any substantial doubt about our ability to continue as a going concern for the one year period following the issuance of our financial statements for the nine month period ended September 30, 2017 in this Quarterly Report on Form 10-Q. We are actively engaged in initiatives to divest underperforming hospitals and outpatient facilities, for which proceeds will be used to pay down the term loan under our senior credit facility.

Statements of Cash Flows

Prior to the Spin-off, our cash activity was managed through Due to Parent, net under CHS’ cash management program and interest on our indebtedness with CHS was accumulated in Due to Parent, net. Following the Spin-off, we own and manage our own cash depository and disbursement bank accounts and have borrowing capacity, as well as principal and interest obligations, under our new debt structure.

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

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

	Three Months Ended September 30,
	2017			2016			$ Variance

Net cash provided by (used in) operating activities	$	9,744		$	(427	)	$	10,171
Net cash provided by (used in) investing activities		(5,479	)		(25,067	)		19,588
Net cash provided by (used in) financing activities		(10,934	)		(4,573	)		(6,361	)
Net change in cash and cash equivalents	$	(6,669	)	$	(30,067	)	$	23,398

Net cash provided by operating activities was $9.7 million for the three months ended September 30, 2017 compared to net cash used in operating activities of $0.4 million for the three months ended September 30, 2016, a $10.2 million increase. This increase in cash flows from operating activities was primarily due to the receipt of cash in the third quarter of 2017 for the 2017 Illinois income tax credits of $7.8 million; whereas, the 2016 Illinois income tax credits of $8.0 million were recognized in the third quarter of 2016 and the related cash was received in the fourth quarter of 2016.

Net cash used in investing activities was $5.5 million in the three months ended September 30, 2017 compared to net cash used in investing activities of $25.1 million in the three months ended September 30, 2016, a $19.6 million decrease. Our expenditures for property and equipment decreased $11.7 million, primarily due to the reduction in our hospital portfolio due to divestitures and due to $3.3 million lower spending on the patient tower and expanded surgical capacity project at our Springfield, Oregon hospital which is expected to be completed in late 2018. We also had $9.1 million of proceeds from hospital sales in the 2017 period with no comparable cash inflow in the 2016 period.

Net cash used in financing activities was $10.9 million for the three months ended September 30, 2017 compared to net cash used in financing activities of $4.6 million in the three months ended September 30, 2016, a $6.4 million decrease. In the 2017 period, we utilized the proceeds from the sale of Trinity to make a $4.2 million payment on our Term Loan Facility. We also made net repayments of $5.0 million on our revolving credit facilities and distributed cash of $1.2 million related to the buyout of shares from minority interest partners associated with Trinity. In the 2016 period, we paid down the Term Loan Facility by $2.2 million, made other debt repayments of $1.0 million and paid $1.1 million in debt issuance costs associated with the Spin-off financing transactions.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

	Nine Months Ended September 30,
	2017			2016			$ Variance

Net cash provided by (used in) operating activities	$	789		$	60,766		$	(59,977	)
Net cash provided by (used in) investing activities		(29,521	)		(60,676	)		31,155
Net cash provided by (used in) financing activities		19,013			23,882			(4,869	)
Net change in cash and cash equivalents	$	(9,719	)	$	23,972		$	(33,691	)

Net cash provided by operating activities was $0.8 million for the nine months ended September 30, 2017 compared to net cash provided by operating activities of $60.8 million for the nine months ended September 30, 2016, a $60.0 million decrease. This decrease in cash flows from operating activities was primarily due to interest payments on our indebtedness, which increased $27.9 million. In the 2017 period, we made $79.7 million of interest payments, primarily associated with our revolving credit facilities and Senior Notes, compared to $51.8 million in the 2016 period. The remaining decrease for the 2017 period when compared to the 2016 period generally related to increased operating costs in comparison to the allocated costs from CHS prior to the Spin-off and lower operating margins associated with hospitals we have targeted for divestiture, partially offset by the Illinois income tax credits received in the third quarter of 2017, as discussed above.

Net cash used in investing activities was $29.5 million in the nine months ended September 30, 2017 compared to net cash used in investing activities of $60.7 million in the nine months ended September 30, 2016, a $31.2 million decrease. This decrease was primarily attributable to $29.2 million of proceeds from hospital sales in the 2017 period with no comparable cash inflow in the 2016 period. Our expenditures for property and equipment were $5.8 million lower in the 2017 period when compared to the 2016 period, primarily due to the reduction in our hospital portfolio as a result of our divestiture activity. We had increased spending of $4.1 million on the patient tower and expanded surgical capacity project at our Springfield, Oregon hospital when comparing the 2017 period to the 2016 period. In addition, we incurred costs of $1.9 million to acquire five ancillary outpatient businesses in the 2017 period and had minimal acquisition costs in the 2016 period.

Net cash provided by financing activities was $19.0 million in the nine months ended September 30, 2017 and net cash provided by financing activities was $23.9 million in the nine months ended September 30, 2016, a $4.9 million increase. In the 2017 period, we utilized proceeds from the sales of Barrow, Cherokee and Trinity to make $15.0 million of payments on our Term Loan Facility. We had net borrowings of $45.0 million on our revolving credit facilities, incurred $3.1 million of debt issuance costs related to the April 11, 2017 amendment to our Senior Credit Facility and distributed cash of $1.2 million related to the buyout of shares from minority interest partners associated with Trinity. The additional borrowings in 2017 were the result of the increases in days revenue outstanding primarily related to Medicaid and state employee accounts in the state of Illinois, the delay in payments from the California HQAF program and the collection efforts at the CHS collection centers. In the 2016 period, we completed the financing transactions related to the Spin-off which resulted in cash from borrowings of $1.3 billion, cash settlement of Due to Parent with CHS of $1.2 billion and cash outflow of $29.1 million for debt issuance costs. Additionally, we paid $4.4 million on the Term Loan Facility in the 2016 period. We had a net cash inflow of $25.2 million related to transactions with CHS which were processed through Due to Parent, net prior to the Spin-off with no comparable activity in the 2017 period.

Capital Expenditures

Capital expenditures for property, equipment and software were $56.8 million and $61.7 million for the nine months ended September 30, 2017 and 2016, respectively. In addition, we had $6.4 million and $15.7 million of capital expenditures related to property and equipment accrued in accounts payable at September 30, 2017 and December 31, 2016, respectively. Capital expenditures during each of the nine months ended September 30, 2017 and 2016 primarily related to the patient tower project, as described below, and to purchases of equipment and minor renovations at our hospitals and investments in information systems infrastructure. Our capital expenditures for property and equipment have been decreasing primarily due to the divested hospitals. In the 2016 period, we also had costs related to furniture and fixtures for our corporate office.

We are building a new patient tower and expanding the surgical capacity at McKenzie-Willamette Medical Center, our hospital in Springfield, Oregon. We incurred costs of $6.5 million and $9.8 million during the three months ended September 30, 2017 and 2016, respectively, and costs of $31.1 million and $27.0 million during the nine months ended September 30, 2017 and 2016, respectively, related to this project. As of September 30, 2017, we have incurred a total of $79.9 million of costs for this project, of which $75.3 million has been placed into service as of September 30, 2017. The total estimated cost for this project, including equipment costs, is estimated to be approximately $105 million. The project is expected to be completed in late 2018. As of September 30, 2017, we have no other material capital commitments.

Capital Resources

Our net working capital as of September 30, 2017 and December 31, 2016 was $290.5 million and $272.6 million, respectively. The $17.9 million net increase was primarily due to a decrease in discretionary benefits in the 2017 period compared to the 2016 period.

Long-Term Debt

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

	Nine Months Ended September 30, 2017
														Assets
	Total								Debt					Acquired		Total
	Debt at			Borrowings,					Issuance					Under		Debt
	Beginning			Excluding					Costs					Capital		at End
	of Period			Discounts		Repayments			Payments			Amortization		Leases		of Period

Senior Credit Facility:
Revolving Credit Facility, maturing 2021	$	—		$	39,000	$	(39,000	)	$	—		$	—	$	—	$	—
Term Loan Facility, maturing 2022		868,419			—		(15,032	)		—			—		—		853,387
ABL Credit Facility, maturing 2021		—			394,000		(349,000	)		—			—		—		45,000
Senior Notes, maturing 2023		400,000			—		—			—			—		—		400,000
Unamortized debt issuance costs and discounts		(48,764	)		—		—			(3,119	)		6,271		—		(45,612	)
Capital lease obligations		25,588			—		(940	)		—			—		54		24,702
Other debt		1,582			247		(545	)		—			—		—		1,284
Total debt		1,246,825			433,247		(404,517	)		(3,119	)		6,271		54		1,278,761
Less: Current maturities of long-term debt		(5,683	)														(1,887	)
Total long-term debt	$	1,241,142		$	433,247	$	(404,517	)	$	(3,119	)	$	6,271	$	54	$	1,276,874

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

	September 30, 2017
			% of
	$ Amount		Total Debt

Fixed	$	425,986		32.2	%
Variable		898,387		67.8	%
Total debt, excluding unamortized debt issuance costs and discounts	$	1,324,373		100.0	%

Senior Credit Facility

On April 29, 2016, we entered into a credit agreement, among us, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent. On April 11, 2017, we executed an agreement with our Senior Credit Facility lenders to amend certain provisions of our Senior Credit Facility, as described below.

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. As of September 30, 2017 and December 31, 2016, we had a Secured Net Leverage Ratio of 4.24 to 1.00 and 3.93 to 1.00, respectively, implying additional borrowing capacity of $108.7 million as of September 30, 2017. 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 January 1, 2017 to December 31, 2018, among other provisions. The CS Amendment raised the maximum Secured Net Leverage Ratio required of us to remain in compliance, and also changed the calculation of compliance for specified periods.

		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 December 31, 2018		4.75 to 1.00
Period from January 1, 2019 and thereafter		4.00 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 also affects other terms of the CS Agreement as follows:

•

Through December 31, 2018, we are required to use asset sales proceeds to make mandatory redemptions under the Term Loan Facility. After December 31, 2018, we are required to use asset sale proceeds to make mandatory redemptions under the Term Loan Facility to the extent those proceeds are not expected to be reinvested within 15 months.

•

Through December 31, 2018, we may 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, is 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 allowed to incur Permitted Additional Debt, as defined in the CS Agreement, as long as our Total Leverage Ratio, adjusted for the Permitted Additional Debt, is below 4.50 to 1.00. After December 31, 2018, we may incur Permitted Additional Debt, 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 8.79% as of September 30, 2017. Interest 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.

As of September 30, 2017, we had no amounts outstanding on the Revolving Credit Facility. In addition, we had $10.2 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, 2017, we had a borrowing capacity under our Revolving Credit Facility of $77.3 million.

ABL Credit Facility

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. The UBS Agreement provides for a $125 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”). As of September 30, 2017, we had $45.0 million outstanding on the ABL Credit Facility and borrowing capacity of $80.0 million.

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. There were no changes to the USB Agreement that impacts our interest or covenant calculations associated with the ABL Credit Facility.

The ABL Credit Facility has a maturity date of April 29, 2021, subject to customary acceleration events and repayment, extension or refinancing. Interest 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.

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 and 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, 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, 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, 2017.

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 are 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 “Exchange Offer.” The Exchange Notes are substantially identical to the Initial 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, 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 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 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 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,
	2017			2016

Debt issuance costs	$	32,265		$	29,146
Debt discounts		24,536			24,536
Total debt issuance costs and discounts		56,801			53,682
Less: Amortization of debt issuance costs and discounts		(11,189	)		(4,918	)
Total unamortized debt issuance costs and discounts	$	45,612		$	48,764

Capital Lease Obligations and Other Debt

Our debt from capital lease obligations primarily relates to our corporate office in Brentwood, Tennessee. As of September 30, 2017, this capital lease obligation was $18.1 million. The remainder of our capital lease obligations primarily 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, 2017

Remainder of 2017	$	466
2018		1,807
2019		7,814
2020		10,293
2021		10,356
Thereafter		1,293,637
Total debt, excluding unamortized debt issuance costs and discounts	$	1,324,373

Redeemable and Non-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 in our accompanying financial statements. 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.

During the third quarter, we redeemed shares valued at $3.5 million from minority interest partners related to our divested hospital, Trinity, which included cash distributions of $1.2 million related to the dissolution of the partnership. As of September 30, 2017, we had redeemable noncontrolling interests of $1.6 million and non-redeemable noncontrolling interests of $13.1 million.

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. As of September 30, 2017, we had outstanding principal amount of debt, excluding unamortized debt issuance costs and discounts, of $898.4 million which was subject to variable rates of interest. If the interest rate on our variable rate long-term debt outstanding as of September 30, 2017, after taking into consideration the 1% floor on our Term Loan Facility, was 100 basis points higher for the duration of a nine-month period, our net income (loss) would have decreased by $6.8 million or $0.24 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

Our Chief Executive Officer and Chief Financial Officer, with the participation of other members of management, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities and Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluations, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective (at the reasonable assurance level) to ensure that the information required to be included in this report has been recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that the information required to be included in this report was accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting during the three months ended September 30, 2017 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

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 CIA with 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 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 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. The legal matters referenced below are also discussed in Note 17 — Commitments and Contingencies to the accompanying 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.

Government Investigations

•

Tooele, Utah – Physician Compensation. On May 5, 2016, our hospital in Tooele, Utah received a Civil Investigative Demand (“CID”) from the Office of the United States Attorney in Salt Lake City, Utah concerning allegations that the hospital and clinic corporation submitted or caused to be submitted false claims to the government for services referred by physicians with whom the hospital and clinic had inappropriate financial relationships, which allegedly violated federal law. The CID requested records and documentation concerning physician compensation. Because this matter remains at a preliminary stage, there are not sufficient facts available to assess what the outcome may be or to determine any estimate of the amount of loss or range of loss. We are fully cooperating with this investigation.

•

Blue Island, Illinois – Patient Status. On October 9, 2015, our hospital in Blue Island, Illinois received a CID from the Office of the United States Attorney in Chicago, Illinois concerning allegations of upcoding observation and other outpatient services and improperly falsifying inpatient admission orders. To date, the hospital has produced a significant amount of documents in response to requests for emails, medical records, and documentation concerning status change from observation to inpatient, and the government has taken CID testimony from former hospital employees. We are unable to predict the outcome of this investigation. However, it is reasonably possible that we may incur a loss in connection with this investigation. We are unable to reasonably estimate the amount or range of such reasonably possible loss given that the investigation is still ongoing. Under some circumstances, losses incurred in connection with an adverse resolution in this investigation could be material. We are fully cooperating with this investigation.

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 withheld by us pursuant to two transition services agreements. 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 payment of approximately $6 million relating to two of the transition services agreements. We intend to vigorously contest the charges as not payable to CHS under the transition services agreements and have made a counterclaim for substantial damages we believe we have suffered as a result of the transition services agreements and other actions taken by CHS in connection with the Spin-off. The matter is at a preliminary stage and we cannot assess the likelihood of a material adverse outcome at this time. The parties expect to engage in a mediation process and the arbitration has been scheduled for June 18-29, 2018.

•

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 and certain of our 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 QHC 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 Securities Exchange Act of 1934 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, Community Health Systems, Inc., Wayne T. Smith and W. Larry Cash. On June 23, 2017, we filed a motion to dismiss, which Plaintiffs opposed on August 22, 2017. 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 motion to dismiss is still pending and discovery is stayed pending resolution of the motion to dismiss. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could be material.

•

plaintiffs’ damages and QHR offsets, was tried July 24 through August 7, 2017, and no decision has been received to date. The United Tort Claimants (“UTC”) have made new and yet unproven allegations during trial that they contend warrant additional liability for QHR. QHR believes that the UTC’s contentions are without merit and are vigorously defending against them. The New Mexico state court has set March 8, 2018 as the trial date for plaintiffs’ claims against QHR. QHR’s insurer, Lexington Insurance Company, is providing a defense in these cases, subject to a reservation of rights. Lexington has sued QHR in Williamson County, Tennessee seeking a declaration that plaintiffs’ claims and the cost of defending QHR are not covered by Lexington. (Lexington Insurance Company v. Quorum Health Resources, LLC, et al. (Williamson County, Tennessee Chancery Court)). No trial date has been set for Lexington’s claim against QHR to nullify insurance coverage, which QHR also is vigorously defending. A court hearing is pending regarding Lexington's claim for reimbursement of defense costs incurred in the UTC actions, and no decision has been received. 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 proceedings with respect to the merits of the New Mexico state court action, the availability and extent of insurance coverage and damages are not sufficiently advanced. 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 us and certain of our officers and directors and CHS and certain 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 are vigorously defending ourselves in this matter. Given the early stage of this matter, there are not sufficient facts available to reasonably assess the potential outcome of this matter or reasonably assess any estimate of the amount or range of any potential outcome.

Corporate Integrity Agreement

On August 4, 2014, CHS became subject to the terms of a five-year Corporate Integrity Agreement (“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 same terms of the CHS CIA commencing on the date of the Spin-off 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;

•

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 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 made 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 QHC must 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 have been no material changes to the risk factors discussed in the 2016 Annual Report on Form 10-K.

Item 6. Exhibits

No.		Description

10.1		Form of Change in Control Severance Agreement by and between Quorum Health Corporation and each of Michael Culotta, Shaheed Koury, R. Harold McCard, Jr. and Matthew Hayes (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 29, 2017) (File No. 001-37500).

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.

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/ Thomas D. Miller
		Thomas D. Miller
		President, Chief Executive Officer
		and Director
		(principal executive officer)

By:		/s/ Michael J. Culotta
		Michael J. Culotta
		Executive Vice President and
		Chief Financial Officer
		(principal financial officer and principal accounting officer)

By:		/s/ Stanley E. Hunt
		Stanley E. Hunt
		Senior Vice President and Corporate Controller

Date: November 8, 2017

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Readability	H.S. sophomore Avg

Quorum Health (QHCCQ) 10-Q2017 Q3 Quarterly report

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