HCA Healthcare, Inc. (HCA) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The accompanying consolidated financial statements present certain information with respect to the financial position, results of operations and cash flows of HCA Healthcare, Inc. which should be read in conjunction with the following discussion and analysis. The terms “HCA,” “Company,” “we,” “our,” or “us,” as used herein, refer to HCA Healthcare, Inc. and its affiliates. The term “affiliates” means direct and indirect subsidiaries of HCA Healthcare, Inc. and partnerships and joint ventures in which such subsidiaries are partners.

Forward-Looking Statements

This annual report on Form
10-K
includes certain disclosures that contain “forward-looking statements,” within the meaning of the federal securities laws, which involve risks and uncertainties. Forward-looking statements include statements regarding expected share-based compensation expense, expected capital expenditures, expected dividends, expected share repurchases, expected net claim payments and all other statements that do not relate solely to historical or current facts, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “initiative” or “continue.” These forward-looking statements are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control, which could significantly affect current plans and expectations and our future financial position and results of operations. These factors include, but are not limited to, (1) developments related to
COVID-19,
including, without limitation, the length and severity of the pandemic and the spread of virus strains with new epidemiological characteristics; the volume of canceled or rescheduled procedures and the volume of
COVID-19
patients cared for across our health systems; measures we are taking to respond to the
COVID-19
pandemic; the impact and terms of government and administrative regulation and stimulus and relief measures (including the Families First Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the Paycheck Protection Program and Health Care Enhancement Act, the Consolidated Appropriations Act, 2021, the American Rescue Plan Act of 2021 (“ARPA”) and other enacted and potential future legislation) and whether various stimulus and relief programs continue or new similar programs are enacted in the future; changes in revenues due to declining patient volumes, changes in payer mix and deteriorating macroeconomic conditions (including increases in uninsured and underinsured patients); potential increased expenses related to labor, supply chain or other expenditures; workforce disruptions, including the impact of any current or future vaccine mandates; supply shortages and disruptions; and the timing, availability and adoption of effective medical treatments and vaccines (including boosters), (2) the impact of our substantial indebtedness and the ability to refinance such indebtedness on acceptable terms, as well as risks associated with disruptions in the financial markets and the business of financial institutions as the result of the
COVID-19
pandemic, which could impact us from a financial perspective, (3) the impact of current and future federal and state health reform initiatives and possible changes to other federal, state or local laws and regulations affecting the health care industry, including, but not limited to, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act”), and the effects of additional changes to the Affordable Care Act, its implementation, or interpretation (including through executive orders and court challenges), and proposals to expand coverage of federally-funded insurance programs as an alternative to private insurance or establish a single-payer system (such reforms often referred to as “Medicare for All”), and also including any such laws or governmental regulations which are adopted in response to the
COVID-19
pandemic, (4) the effects related to the implementation of sequestration spending reductions required under the Budget Control Act of 2011, related legislation extending these reductions, and those required under the

Pay-As-You-Go

Act of 2010 (“PAYGO Act”) as a result of the federal budget deficit impact of the ARPA, and the potential for future deficit reduction legislation that may alter these spending reductions, which include cuts to Medicare payments, or

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Forward-Looking Statements (continued)

create additional spending reductions, (5) increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts, (6) the ability to achieve operating and financial targets, and attain expected levels of patient volumes and control the costs of providing services, (7) possible changes in Medicare, Medicaid and other state programs, including Medicaid supplemental payment programs or Medicaid waiver programs, that may impact reimbursements to health care providers and insurers and the size of the uninsured or underinsured population, (8) increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel, (9) the highly competitive nature of the health care business, (10) changes in service mix, revenue mix and surgical volumes, including potential declines in the population covered under third-party payer agreements, the ability to enter into and renew third-party payer provider agreements on acceptable terms and the impact of consumer-driven health plans and physician utilization trends and practices, (11) the efforts of health insurers, health care providers, large employer groups and others to contain health care costs, (12) the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures, (13) the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities, (14) changes in accounting practices, (15) changes in general economic conditions nationally and regionally in our markets, including inflation and economic and business conditions (and the impact thereof on the economy, financial markets and banking industry) resulting from the
COVID-19
pandemic, (16) the emergence of and effects related to other pandemics, epidemics and infectious diseases, (17) future divestitures which may result in charges and possible impairments of long-lived assets, (18) changes in business strategy or development plans, (19) delays in receiving payments for services provided, (20) the outcome of pending and any future tax audits, disputes and litigation associated with our tax positions, (21) potential adverse impact of known and unknown government investigations, litigation and other claims that may be made against us, (22) the impact of potential cybersecurity incidents or security breaches, (23) our ongoing ability to demonstrate meaningful use of certified electronic health record (“EHR”) technology and the impact of interoperability requirements, (24) the impact of natural disasters, such as hurricanes and floods, or similar events beyond our control, (25) changes in U.S. federal, state, or foreign tax laws including interpretive guidance that may be issued by taxing authorities or other standard setting bodies, and (26) other risk factors described in this annual report on Form
10-K.
As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report, which forward-looking statements reflect management’s views only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

COVID-19
Pandemic

On March 11, 2020, the World Health Organization designated
COVID-19
as a global pandemic. Patient volumes and the related revenues for most of our services were significantly impacted during the latter portion of the first quarter and the first half of the second quarter of 2020 and have continued to be impacted as various policies were implemented by federal, state and local governments in response to the
COVID-19
pandemic. During the second quarter of 2021, our patient volumes improved as the effects of the pandemic moderated and certain pandemic-related restrictions and policies were eased. For the remainder of 2021, our patient volumes exhibited consistent growth over the prior year, with the exception of inpatient surgeries, and included a resurgence of
COVID-19
admissions and the
re-imposition
of pandemic-related restrictions in certain markets. We believe the extent of the
COVID-19
pandemic’s impact on our operating results and financial condition has

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COVID-19
Pandemic (continued)

been and will continue to be driven by many factors, most of which are beyond our control and ability to forecast. Because of these uncertainties, we cannot estimate how long or to what extent the pandemic will impact our operations.

2021 Operations Summary

Net income attributable to HCA Healthcare, Inc. totaled $6.956 billion, or $21.16 per diluted share, for 2021, compared to $3.754 billion, or $10.93 per diluted share, for 2020. The 2021 results include gains on sales of facilities of $1.620 billion, or $3.69 per diluted share, and losses on retirement of debt of $12 million, or $0.03 per diluted share. The 2020 results include losses on sales of facilities of $7 million, or $0.02 per diluted share, and losses on retirement of debt of $295 million, or $0.66 per diluted share. The 2020 results also include $60 million, or $0.13 per diluted share, of employee retention payroll tax credits, as provided for by the CARES Act. Revenues for 2021 and 2020, respectively, include $33 million, or $0.07 per diluted share, and $55 million, or $0.12 per diluted share, related to the settlement of Medicare outlier calculations for prior periods. Revenues for 2020 also include $69 million, or $0.15 per diluted share, related to the resolution of transaction price differences regarding certain services performed in prior periods. During 2021 and 2020, we recorded reductions to the provision for professional liability risks of $87 million, or $0.20 per diluted share, and $112 million, or $0.25 per diluted share, respectively. Our provisions for income taxes for 2021 and 2020 include tax benefits of $119 million, or $0.36 per diluted share, and $92 million, or $0.27 per diluted share, respectively, related to employee equity award settlements. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 328.752 million shares and 343.605 million shares for the years ended December 31, 2021 and 2020, respectively. During 2021, we repurchased 37.812 million shares of our common stock.

Revenues increased to $58.752 billion for 2021 from $51.533 billion for 2020. Revenues increased 14.0% and 14.4%, respectively, on a consolidated basis and on a same facility basis for 2021, compared to 2020. The consolidated revenues increase can be primarily attributed to the combined impact of a 6.8% increase in revenue per equivalent admission and a 6.8% increase in equivalent admissions. The same facility revenues increase resulted primarily from the combined impact of a 6.3% increase in revenue per equivalent admission and a 7.6% increase in equivalent admissions.

During 2021, consolidated admissions increased 4.0% and same facility admissions increased 4.8%, compared to 2020. Inpatient surgical volumes declined 0.1% on a consolidated basis and increased 0.4% on a same facility basis during 2021, compared to 2020. Outpatient surgical volumes increased 14.2% on a consolidated basis and increased 14.1% on a same facility basis during 2021, compared to 2020. Emergency room visits increased 13.8% on a consolidated basis and increased 15.1% on a same facility basis during 2021, compared to 2020.

The estimated cost of total uncompensated care declined $133 million for 2021, compared to 2020. Consolidated and same facility uninsured admissions declined 4.4% and 3.5%, respectively, and consolidated and same facility uninsured emergency room visits declined 7.8% and 6.3%, respectively, for 2021, compared to 2020.

Interest expense totaled $1.566 billion for 2021, compared to $1.584 billion for 2020. The $18 million decline in interest expense for 2021 was due to a decline in the average effective interest rate.

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2021 Operations Summary (continued)

Cash flows from operating activities declined $273 million, from $9.232 billion for 2020 to $8.959 billion for 2021. The decline in cash flows from operating activities was related to a negative change in working capital items of $1.781 billion, primarily from an increase in accounts receivable, offset by the increase in net income, excluding the non-cash impact of losses and gains on sales of facilities, losses on retirement of debt and depreciation and amortization.

Business Strategy

We are committed to providing the communities we serve with high quality, cost-effective health care while growing our business and creating long-term value for our stockholders. We strive to be the provider system of choice in the communities we serve and to support our operations with unique enterprise capabilities and

best-in-class

economies of scale. To achieve these objectives, we align our efforts around the following growth agenda:

Grow Our Presence in Existing Markets.

We believe we are well positioned in a number of large and growing markets that will allow us the opportunity to generate long-term, attractive growth through the expansion of our presence in these markets. We plan to continue recruiting and strategically collaborating with the physician community and developing comprehensive service lines such as cardiology, neurology, oncology, orthopedics and women’s services. Additional components of our growth strategy include providing access and convenience through developing various outpatient facilities, including, but not limited to surgery centers, urgent care clinics, freestanding emergency care facilities, imaging centers and home health and hospice services, as well as seeking to improve coordination of care and patient retention across our markets.

Achieve Industry-Leading Performance in Clinical, Operational and Satisfaction Measures.

Achieving high levels of patient safety, patient satisfaction and clinical quality are central goals of our business. To achieve these goals, we have implemented a number of initiatives including infection reduction initiatives, hospitalist programs, advanced health information technology and evidence-based medicine programs. We routinely analyze operational practices from our best-performing hospitals to identify ways to implement organization-wide performance improvements and reduce clinical variation. We believe these initiatives will continue to improve patient care, help us achieve cost efficiencies and favorably position us in an environment where our constituents are increasingly focused on quality, efficacy and efficiency.

Recruit and Employ Physicians to Meet the Need for High Quality Health Services.

We depend on the quality and dedication of the health care providers and other team members who serve at our facilities. We believe a critical component of our growth strategy is our ability to successfully recruit and strategically collaborate with physicians and other professionals to provide high quality care. We attract and retain physicians by providing high quality, convenient facilities with advanced technology, by expanding our specialty services and by building our outpatient operations. We believe our continued investment in the employment, recruitment and retention of physicians will improve the quality of care at our facilities.

Continue to Leverage Our Scale and Market Positions to Grow the Company.

We believe there is significant opportunity to continue to grow our company by fully leveraging the scale and scope of our organization. We continue to invest in initiatives such as care navigators, clinical data exchange and centralized patient transfer operations, which will enable us to improve coordination of care and patient retention across our markets. We believe our centrally managed business processes and ability to leverage cost-saving practices

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Business Strategy (continued)

across our extensive network will enable us to continue to manage costs effectively. We continue to invest in our Parallon subsidiary group to leverage key components of our support infrastructure, including revenue cycle management, health care group purchasing, supply chain management and staffing functions.

Pursue a Disciplined Development Strategy.

We continue to believe there are significant growth opportunities in our markets. We will continue to provide financial and operational resources to analyze and develop our
in-market
opportunities. To complement our
in-market
growth agenda, we intend to focus on selectively developing and acquiring new hospitals, outpatient facilities and other health care service providers. We believe the challenges faced by the hospital industry may continue to spur consolidation, and we believe our size, scale, national presence and access to capital will position us well to participate in any such consolidation.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from these estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenues

Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from payers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The estimated reimbursement amounts are made on a payer-specific basis and are recorded based on the best information available regarding management’s interpretation of the applicable laws, regulations and contract terms. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals. We have invested significant resources to refine and improve our billing systems and the information system data used to make contractual allowance estimates. We have developed standardized calculation processes and related employee training programs to improve the utility of our patient accounting systems.

Patients treated at hospitals for
non-elective
care, who have income at or below 400% of the federal poverty level, are eligible for charity care, and we limit the patient responsibility amounts for these patients to a percentage of their annual household income, computed on a sliding scale based upon their annual income and the applicable percentage of the federal poverty level. Patients treated at hospitals for
non-elective
care, who have income above 400% of the federal poverty level, are eligible for certain other discounts which limit the patient responsibility amounts for these patients to a percentage of their annual household income, computed on a sliding scale based upon their annual income and the applicable percentage of the federal poverty level. We apply additional discounts to limit patient responsibility for certain emergency services. The federal poverty level is

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Critical Accounting Policies and Estimates (continued)

Revenues (continued)

established by the federal government and is based on income and family size. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. We may attempt to provide assistance to uninsured patients to help determine whether they may qualify for Medicaid, other federal or state assistance, or charity care. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.

Implicit price concessions relate primarily to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the age of those accounts. Accounts are written off when all reasonable collection efforts have been performed. The estimates for implicit price concessions are based upon management’s assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical writeoffs and collections at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and writeoff data. We believe our quarterly updates to the estimated implicit price concession amounts at each of our hospital facilities provide reasonable estimates of our revenues and valuations of our accounts receivable. These routine, quarterly changes in estimates have not resulted in material adjustments to the valuations of our accounts receivable or

period-to-period

comparisons of our revenues.

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

Management expects a continuation of the challenges related to the collection of the patient due accounts. Adverse changes in the percentage of our patients having adequate health care coverage, increases in patient responsibility amounts under certain health care coverages, general economic conditions, patient accounting service center operations, payer mix, or trends in federal, state, and private employer health care coverage could affect the collection of accounts receivable, cash flows and results of operations.

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Critical Accounting Policies and Estimates (continued)

Professional Liability Claims

We, along with virtually all health care providers, operate in an environment with professional liability risks. Our facilities are insured by our insurance subsidiary for losses up to $75 million per occurrence, subject, in most cases, to a $15 million per occurrence self-insured retention. The insurance subsidiary has obtained reinsurance for professional liability risks generally above a retention level of either $25 million or $35 million per occurrence, depending on the jurisdiction for the related claim. We purchase excess insurance on an occurrence reported basis for losses in excess of amounts insured by our insurance subsidiary. Provisions for losses related to professional liability risks were $453 million, $435 million and $497 million for the years ended December 31, 2021, 2020 and 2019, respectively. During 2021, 2020 and 2019, we recorded reductions to the provision for professional liability risks of $87 million, $112 million and $50 million, respectively, due to the receipt of updated actuarial information.

Reserves for professional liability risks represent the estimated ultimate cost of all reported and unreported losses incurred through the respective consolidated balance sheet dates. The estimated ultimate cost includes estimates of direct expenses and fees paid to outside counsel and experts, but does not include the general overhead costs of our insurance subsidiary or corporate office. Individual case reserves are established based upon the particular circumstances of each reported claim and represent our estimates of the future costs that will be paid on reported claims. Case reserves are reduced as claim payments are made and are adjusted upward or downward as our estimates regarding the amounts of future losses are revised. Once the case reserves for known claims are determined, information is stratified by loss layers and retentions, accident years, reported years, and geographic location of our hospitals. Several actuarial methods are employed to utilize this data to produce estimates of ultimate losses and reserves for incurred but not reported claims, including: paid and incurred extrapolation methods utilizing paid and incurred loss development to estimate ultimate losses; frequency and severity methods utilizing paid and incurred claims development to estimate ultimate average frequency (number of claims) and ultimate average severity (cost per claim); and Bornhuetter-Ferguson methods which add expected development to actual paid or incurred experience to estimate ultimate losses. These methods use our company-specific historical claims data and other information. Company-specific claim reporting and payment data collected over an approximate
20-year
period is used in our reserve estimation process. This company-specific data includes information regarding our business, including historical paid losses and loss adjustment expenses, historical and current case loss reserves, actual and projected hospital statistical data, professional liability retentions for each policy year, geographic information and other data.

Reserves and provisions for professional liability risks are based upon actuarially determined estimates. The estimated reserve ranges, net of amounts receivable under reinsurance contracts, were $1.752 billion to $2.098 billion at December 31, 2021 and $1.710 billion to $2.050 billion at December 31, 2020. Our estimated reserves for professional liability claims may change significantly if future claims differ from expected trends. We perform sensitivity analyses which model the volatility of key actuarial assumptions and monitor our reserves for adequacy relative to all our assumptions in the aggregate. Based on our analysis, we believe the estimated professional liability reserve ranges represent the reasonably likely outcomes for ultimate losses. We consider the number and severity of claims to be the most significant assumptions in estimating reserves for professional liabilities. A 2.5% change in the expected frequency trend could be reasonably likely and would increase the reserve estimate by $22 million or reduce the reserve estimate by $21 million. A 2.5% change in the expected claim severity trend could be reasonably likely and would increase the reserve estimate by $107 million or reduce the reserve estimate by $98 million. We believe adequate reserves have been recorded for our professional liability claims; however, due to the complexity of the claims, the extended period of time to resolve

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Critical Accounting Policies and Estimates (continued)

Professional Liability Claims (continued)

the claims and the wide range of potential outcomes, our ultimate liability for professional liability claims could change by more than the estimated sensitivity amounts and could change materially from our current estimates.

The reserves for professional liability risks cover approximately 2,100 and 2,300 individual claims at December 31, 2021 and 2020, respectively, and estimates for unreported potential claims. The time period required to resolve these claims can vary depending upon the jurisdiction and whether the claim is settled or litigated. The average time period between the occurrence and final resolution for our professional liability claims is approximately four years, although the facts and circumstances of each individual claim can result in an

occurrence-to-resolution

timeframe that varies from this average. The estimation of the timing of payments beyond a year can vary significantly.

Reserves for professional liability risks were $2.022 billion and $1.963 billion at December 31, 2021 and 2020, respectively. The current portion of these reserves, $508 million and $477 million at December 31, 2021 and 2020, respectively, is included in “other accrued expenses.” Obligations covered by reinsurance and excess insurance contracts are included in the reserves for professional liability risks, as we remain liable to the extent reinsurers and excess insurance carriers do not meet their obligations. Reserves for professional liability risks (net of $55 million and $39 million receivable under reinsurance and excess insurance contracts at December 31, 2021 and 2020, respectively) were $1.967 billion and $1.924 billion at December 31, 2021 and 2020, respectively. The estimated total net reserves for professional liability risks at December 31, 2021 and 2020 are comprised of $874 million and $833 million, respectively, of case reserves for known claims and $1.093 billion and $1.091 billion, respectively, of reserves for incurred but not reported claims.

Changes in our professional liability reserves, net of reinsurance recoverable, for the years ended December 31, are summarized in the following table (dollars in millions):

Income Taxes

We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences that arise from the recognition of items in different periods for tax and accounting purposes. Deferred tax assets generally represent the tax effects of amounts expensed in our income statement for which tax deductions will be claimed in future periods. Interest

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Income Taxes (continued)

and penalties payable to taxing authorities are included as a component of our provision for income taxes. We have elected to treat taxes incurred on global intangible
low-taxed
income as a period expense.

Although we believe we have properly reported taxable income and paid taxes in accordance with applicable laws, federal, state or foreign taxing authorities may challenge our tax positions upon audit. Significant judgment is required in determining and assessing the impact of uncertain tax positions. We report a liability for unrecognized tax benefits from uncertain tax positions taken or expected to be taken in our income tax returns. During each reporting period, we assess the facts and circumstances related to uncertain tax positions. If the realization of unrecognized tax benefits is deemed probable based upon new facts and circumstances, the estimated liability and the provision for income taxes are reduced in the current period. Final audit results may vary from our estimates.

Results of Operations

Revenue/Volume Trends

Our revenues depend upon inpatient occupancy levels, the ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charge and negotiated payment rates for such services. Gross charges typically do not reflect what our facilities are actually paid. Our facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from gross charges. We do not pursue collection of amounts related to patients who meet our guidelines to qualify for charity care; therefore, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care.

Revenues increased 14.0% to $58.752 billion for 2021 from $51.533 billion for 2020 and increased 0.4% for 2020 from $51.336 billion for 2019. The increase in revenues in 2021 can be primarily attributed to the combined impact of a 6.8% increase in revenue per equivalent admission and a 6.8% increase in equivalent admissions compared to the prior year. The increase in revenues in 2020 can be primarily attributed to the net impact of a 10.5% increase in revenue per equivalent admission offset by a 9.2% decline in equivalent admissions compared to the prior year.

Same facility revenues increased 14.4% for the year ended December 31, 2021 compared to the year ended December 31, 2020 and declined 0.1% for the year ended December 31, 2020 compared to the year ended December 31, 2019. The 14.4% increase for 2021 can be primarily attributed to the combined impact of a 6.3% increase in revenue per equivalent admission and a 7.6% increase in equivalent admissions. The 0.1% decline for 2020 can be primarily attributed to the net impact of a 9.3% decline in same facility equivalent admissions offset by a 10.1% increase in same facility revenue per equivalent admission.

Consolidated admissions increased 4.0% during 2021 compared to 2020 and declined 4.7% during 2020 compared to 2019. Consolidated surgeries increased 8.9% during 2021 compared to 2020 and declined 10.9% during 2020 compared to 2019. Consolidated emergency room visits increased 13.8% during 2021 compared to 2020 and declined 18.7% during 2020 compared to 2019.

Same facility admissions increased 4.8% during 2021 compared to 2020 and declined 4.8% during 2020 compared to 2019. Same facility surgeries increased 9.0% during 2021 compared to 2020 and declined 10.7%

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Results of Operations (continued)

Revenue/Volume Trends (continued)

during 2020 compared to 2019, primarily driven by the pandemic-related impact on outpatient surgeries. Same facility emergency room visits increased 15.1% during 2021 compared to 2020 and declined 18.8% during 2020 compared to 2019. During the second quarter of 2021, our patient volumes improved as the effects of the pandemic moderated and certain pandemic-related restrictions and policies were eased. For the remainder of 2021, our patient volumes exhibited consistent growth over the prior year, with the exception of inpatient surgeries, and included a resurgence of
COVID-19
admissions.

Same facility uninsured emergency room visits declined 6.3% and same facility uninsured admissions declined 3.5% during 2021 compared to 2020. Same facility uninsured emergency room visits declined 21.0% and same facility uninsured admissions declined 7.0% during 2020 compared to 2019. The decline in uninsured admissions in 2021, compared to 2020, was primarily due to the reimbursement received, as provided for under the Families First Coronavirus Response Act and subsequent legislation, for uninsured patients diagnosed with
COVID-19
and the resulting classification of those patients as an insured admission, as well as general declines in patient volumes resulting from the pandemic’s impact on our operations. The decline in uninsured admissions in 2020, compared to 2019, was primarily due to general declines in patient volumes resulting from the pandemic’s impact on our operations.

The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and insurers and the uninsured for the years ended December 31, 2021, 2020 and 2019 are set forth below.

The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, and managed care and insurers for the years ended December 31, 2021, 2020 and 2019 are set forth below.

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Results of Operations (continued)

Revenue/Volume Trends (continued)

At December 31, 2021, we owned and operated 46 hospitals and 30 surgery centers in the state of Florida. Our Florida facilities’ revenues totaled $13.670 billion, $11.442 billion and $11.494 billion for the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, we owned and operated 45 hospitals and 35 surgery centers in the state of Texas. Our Texas facilities’ revenues totaled $15.344 billion, $13.528 billion and $13.101 billion for the years ended December 31, 2021, 2020 and 2019, respectively. During 2021, 2020 and 2019, 56% of our admissions for each year and 49%, 49% and 48%, respectively, of our revenues were generated by our Florida and Texas facilities. Uninsured admissions in Florida and Texas represented 72% of our uninsured admissions each year during 2021, 2020 and 2019.

We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. In December 2017, the Centers for Medicare & Medicaid Services (“CMS”) announced that it would phase out federal matching funds for Designated State Health Programs under waivers granted under Section 1115 of the Social Security Act. The Texas Healthcare Transformation and Quality Improvement Program (“Texas Waiver Program”) currently operates pursuant to a Medicaid waiver. Without an extension, the waiver would expire September 30, 2022. While the lawsuit is pending, the Texas Health and Human Services Commission (“Texas HHSC”) has re-submitted its application to extend the Texas Waiver Program. Our Texas Medicaid revenues included Medicaid supplemental waiver payments of $534 million, $599 million and $416 million during 2021, 2020 and 2019, respectively. Additionally, the Texas HHSC’s proposed directed payment program has not yet been renewed for the current program year that began September 1, 2021. Our supplemental Medicaid revenues from the directed payment program have been, and will continue to be, negatively impacted until the Texas HHSC and CMS finalize certain components of the program.

In addition, we receive supplemental payments in several other states. We are aware these supplemental payment programs are currently being reviewed by CMS and certain state agencies, and that some states have made waiver requests to CMS to replace their existing supplemental payment programs. It is possible these reviews and waiver requests will result in the restructuring of such supplemental payment programs and could result in the payment programs being reduced or eliminated. Because deliberations about these programs are ongoing, we are unable to estimate the financial impact the program structure modifications, if any, may have on our results of operations.

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Results of Operations (continued)

Operating Results Summary

The following are comparative summaries of operating results and certain operating data for the years ended December 31, 2021, 2020 and 2019 (dollars in millions):

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Results of Operations (continued)

Operating Results Summary (continued)

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Results of Operations (continued)

Key Performance Indicators

We present certain metrics and statistical information that management uses when assessing our results of operations. We believe this information is useful to investors as it provides insight to how management evaluates operational performance and trends between reporting periods. Information on how these metrics and statistical information are defined is provided in the previous tables summarizing operating results and operating data.

Years Ended December 31, 2021 and 2020

Net income attributable to HCA Healthcare, Inc. totaled $6.956 billion, or $21.16 per diluted share, for 2021, compared to $3.754 billion, or $10.93 per diluted share, for 2020. The 2021 results include gains on sales of facilities of $1.620 billion, or $3.69 per diluted share, and losses on retirement of debt of $12 million, or $0.03 per diluted share. The 2020 results include losses on sales of facilities of $7 million, or $0.02 per diluted share, and losses on retirement of debt of $295 million, or $0.66 per diluted share. The 2020 results also include $60 million, or $0.13 per diluted share, of employee retention payroll tax credits, as provided for by the CARES Act. Revenues for 2021 and 2020, respectively, include $33 million, or $0.07 per diluted share, and $55 million, or $0.12 per diluted share, related to the settlement of Medicare outlier calculations for prior periods. Revenues for 2020 also include $69 million, or $0.15 per diluted share, related to the resolution of transaction price differences regarding certain services performed in prior periods. During 2021 and 2020, we recorded reductions to the provision for professional liability risks of $87 million, or $0.20 per diluted share, and $112 million, or $0.25 per diluted share, respectively. Our provisions for income taxes for 2021 and 2020 include tax benefits of $119 million, or $0.36 per diluted share, and $92 million, or $0.27 per diluted share, respectively, related to employee equity award settlements. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 328.752 million shares and 343.605 million shares for the years ended December 31, 2021 and 2020, respectively. During 2021, we repurchased 37.812 million shares of our common stock.

During 2021, consolidated admissions increased 4.0% and same facility admissions increased 4.8% compared to 2020. Consolidated inpatient surgeries declined 0.1% and same facility inpatient surgeries increased 0.4% during 2021 compared to 2020. Emergency room visits increased 13.8% on a consolidated basis and increased 15.1% on a same facility basis during 2021 compared to 2020.

Revenues increased 14.0% to $58.752 billion for 2021 from $51.533 billion for 2020. The increase in revenues was primarily due to the combined impact of a 6.8% increase in revenue per equivalent admission and a 6.8% increase in equivalent admissions compared to 2020. Same facility revenues increased 14.4% due primarily to the combined impact of a 6.3% increase in revenue per equivalent admission and a 7.6% increase in equivalent admissions compared to 2020.

Salaries and benefits, as a percentage of revenues, were 45.6% in 2021 and 46.3% in 2020. Salaries and benefits per equivalent admission increased 5.1% in 2021 compared to 2020. Same facility labor rate increases averaged 7.5% for 2021 compared to 2020 primarily due to an increased utilization of contract, overtime and other premium rate labor costs during 2021 to support our clinical staff and address the surges of
COVID-19
cases during 2021. Share-based compensation expense was $440 million in 2021 and $362 million in 2020.

Supplies, as a percentage of revenues, were 16.1% in 2021 and 16.2% in 2020. Supply costs per equivalent admission increased 6.1% in 2021 compared to 2020. Supply costs per equivalent admission increased 3.4% for

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Results of Operations (continued)

Years Ended December 31, 2021 and 2020 (continued)

medical devices, 6.6% for pharmacy supplies and 8.4% for general medical and surgical items in 2021 compared to 2020. The increase in pharmacy supplies is primarily related to COVID-19 therapies used in the surges of COVID-19 cases during 2021, and the increase in general medical and surgical items is primarily related to increased utilization of PPE and COVID-19 testing supplies.

Other operating expenses, as a percentage of revenues, were 17.0% in 2021 and 18.1% in 2020. Other operating expenses are primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Provisions for losses related to professional liability risks were $453 million and $435 million for 2021 and 2020, respectively. During 2021 and 2020, we recorded reductions of $87 million, or $0.20 per diluted share, and $112 million, or $0.25 per diluted share, respectively, to our provision for professional liability risks related to the receipt of updated actuarial information.

Equity in earnings of affiliates was $113 million for 2021 and $54 million for 2020. The $59 million increase relates primarily to improved operating results of three equity method investments (two physician practices and a freestanding surgery center).

Depreciation and amortization, as a percentage of revenues, were 4.9% in 2021 and 5.3% in 2020. Depreciation expense was $2.826 billion for 2021 and $2.693 billion for 2020. The increase of $133 million in depreciation expense relates primarily to capital expenditures at our existing facilities (same facility depreciation expense increased $128 million).

Interest expense declined to $1.566 billion for 2021 from $1.584 billion for 2020. The $18 million decline in interest expense was due to a decline in the average effective interest rate. Our average debt balance was $32.109 billion for 2021 compared to $31.940 billion for 2020. The average interest rate for our long-term debt was 4.9% for 2021 and 5.0% for 2020.

Gains on sales of facilities were $1.620 billion for 2021, and losses on sales of facilities were $7 million for 2020. The gains on sales of facilities for 2021 are primarily related to the sales of five hospitals in Georgia and other health care entity investments.

During June 2021, we issued $2.350 billion aggregate principal amount of senior secured notes comprised of $850 million aggregate principal amount of 2 3/8% notes due 2031 and $1.500 billion aggregate principal amount of 3 1/2% notes due 2051 (the “June 2021 Notes”). We also amended and restated our senior secured revolving credit facility and our senior secured asset-based revolving credit facility, including increasing availability under the asset-based revolving credit facility to $4.500 billion, extending the maturity date on both facilities to June 30, 2026 and entering into $2.000 billion of new term loan facilities (the “Credit Agreement Transactions”). We used the net proceeds from the June 2021 Notes and the Credit Agreement Transactions to retire $3.657 billion of term loan facilities. The pretax loss on retirement of debt was $12 million. During February 2020, we issued $2.700 billion aggregate principal amount of 3.50% senior unsecured notes due 2030. During March 2020, we used the net proceeds for the redemption of all $1.000 billion outstanding aggregate principal amount of HCA Healthcare, Inc.’s 6.25% senior notes due 2021 and, together with available funds, for the redemption of all $2.000 billion outstanding aggregate principal amount of HCA Inc.’s 7.50% senior notes due 2022. The pretax loss on retirement of debt was $295 million.

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Results of Operations (continued)

Years Ended December 31, 2021 and 2020 (continued)

The effective tax rates were 23.3% and 21.7% for 2021 and 2020, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provisions for income taxes for 2021 and 2020 include tax benefits of $119 million and $92 million, respectively, related to employee equity award settlements. Excluding the effect of these adjustments, the effective tax rates for 2021 and 2020 would have been 24.6% and 23.7%, respectively.

Net income attributable to noncontrolling interests increased from $633 million for 2020 to $765 million for 2021. The increase in net income attributable to noncontrolling interests related primarily to the partnership operations of two of our Texas markets and our surgery center partnerships.

For results of operations comparisons relating to years ending December 31, 2020 and 2019, refer to our annual report on Form
10-K,
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2020, filed with the Securities and Exchange Commission on February 19, 2021.

Liquidity and Capital Resources

Our primary cash requirements are paying our operating expenses, servicing our debt, capital expenditures on our existing properties, acquisitions of hospitals and health care entities, repurchases of our common stock, dividends to stockholders and distributions to noncontrolling interests. Our primary cash sources are cash flows from operating activities, issuances of debt and equity securities and sales of hospitals and health care entities.

Cash provided by operating activities totaled $8.959 billion in 2021 compared to $9.232 billion in 2020 and $7.602 billion in 2019. The $273 million decline in cash provided by operating activities for 2021, compared to 2020, was related to a negative change in working capital items of $1.781 billion, primarily from an increase in accounts receivable, offset by the increase in net income, excluding the non-cash impact of losses and gains on sales of facilities, losses on retirement of debt and depreciation and amortization. The $1.630 billion increase in cash provided by operating activities for 2020, compared to 2019, was primarily related to the increase in net income, excluding losses and gains on sales of facilities and losses on retirement of debt, of $330 million and positive changes in working capital items of $1.366 billion, primarily from the increase in accounts payable and accrued expenses and the collection of accounts receivable. During 2020, we deferred $688 million of Social Security taxes as allowed for under the CARES Act. Half of these taxes were paid in January 2022 and the remainder will be paid in 2023. Working capital totaled $3.960 billion at December 31, 2021 and $3.629 billion at December 31, 2020. Cash payments for interest and income taxes increased $1.075 billion for 2021 compared to 2020 and declined $154 million for 2020 compared to 2019.

Cash used in investing activities was $2.643 billion, $3.393 billion and $5.720 billion in 2021, 2020 and 2019, respectively. Excluding acquisitions, capital expenditures were $3.577 billion in 2021, $2.835 billion in 2020 and $4.158 billion in 2019. We expended $1.105 billion, $568 million and $1.682 billion for acquisitions of hospitals and health care entities during 2021, 2020 and 2019, respectively. In response to the risks the
COVID-19
pandemic presents to our business, we reduced certain planned projects and capital expenditures during 2020. Planned capital expenditures are expected to approximate $4.2 billion in 2022. At December 31, 2021, there were projects under construction which had an estimated additional cost to complete and equip over

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Liquidity and Capital Resources (continued)

the next five years of approximately $4.239 billion. We expect to finance capital expenditures with internally generated and borrowed funds. Sales of hospitals and health care entities increased $2.092 billion for 2021, compared to 2020, primarily related to the proceeds from our sales of five hospitals in Georgia and other health care entity investments.

Cash used in financing activities totaled $6.655 billion in 2021, $4.677 billion in 2020 and $1.771 billion in 2019. During 2021, we had a net increase of $3.255 billion in our indebtedness, paid dividends of $624 million and paid $8.215 billion for repurchases of common stock. During 2020, we made net payments of $3.217 billion related to our indebtedness, paid dividends of $153 million and paid $441 million for repurchases of our common stock. During 2019, we had a net increase of $567 million in our indebtedness, paid dividends of $550 million and paid $1.031 billion for repurchases of our common stock. During 2021, 2020 and 2019, we made distributions to noncontrolling interests of $749 million, $626 million and $542 million, respectively.

We, or our affiliates, may in the future repurchase portions of our debt or equity securities, subject to certain limitations, from time to time in either the open market or through privately negotiated transactions, in accordance with applicable SEC and other legal requirements. The timing, prices, and sizes of purchases depend upon prevailing trading prices, general economic and market conditions, and other factors, including applicable securities laws.

During January 2020 and 2019, our Board of Directors authorized share repurchase programs for up to $4 billion ($2 billion for each authorization) of our outstanding common stock. During February 2021, our Board of Directors authorized an additional $6 billion for share repurchases of the Company’s outstanding common stock. The January 2020 and 2019 authorizations were completed during 2021, and at December 31, 2021, there was $586 million of share repurchase authorization that remained available under the February 2021 authorization. During January 2022, our Board of Directors authorized an additional $8 billion for share repurchases of the Company’s outstanding common stock. Funds for the repurchase of debt or equity securities have, and are expected to, come primarily from cash generated from operations and borrowed funds.

During 2021, our Board of Directors declared four quarterly dividends of $0.48 per share, or $1.92 per share in the aggregate, on our common stock. On January 26, 2022, our Board of Directors declared a quarterly dividend of $0.56 per share on our common stock payable on March 31, 2022 to stockholders of record at the close of business on March 17, 2022. The timing and amount of future cash dividends will vary based on a number of factors, including future capital requirements for strategic transactions, share repurchases and investing in our existing markets, the availability of financing on acceptable terms, debt service requirements, changes to applicable tax laws or corporate laws, changes to our business model and periodic determinations by our Board of Directors that cash dividends are in the best interest of stockholders and are in compliance with all applicable laws and agreements of the Company.

In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($3.640 billion as of December 31, 2021 and $3.258 billion as of January 31, 2022) and anticipated access to public and private debt and equity markets.

Investments of our insurance subsidiaries, held to maintain statutory equity levels and to provide liquidity to pay claims, totaled $541 million and $504 million at December 31, 2021 and 2020, respectively. The insurance subsidiary maintained net reserves for professional liability risks of $154 million and $188 million at

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Liquidity and Capital Resources (continued)

December 31, 2021 and 2020, respectively. Our facilities are insured by our insurance subsidiary for losses up to $75 million per occurrence; however, this coverage is subject, in most cases, to a $15 million per occurrence self-insured retention. Net reserves for the self-insured professional liability risks retained were $1.813 billion and $1.736 billion at December 31, 2021 and 2020, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $497 million. We estimate that approximately $448 million of the expected net claim payments during the next 12 months will relate to claims subject to the self-insured retention.

Financing Activities

We are a highly leveraged company with significant debt service requirements. Our debt totaled $34.579 billion and $31.004 billion at December 31, 2021 and 2020, respectively. Our interest expense was $1.566 billion for 2021 and $1.584 billion for 2020.

During June 2021, we issued $2.350 billion aggregate principal amount of senior secured notes comprised of $850 million aggregate principal amount of 2 3/8% notes due 2031 and $1.500 billion aggregate principal amount of 3 1/2% notes due 2051 (the “June 2021 Notes”). We also amended and restated our senior secured revolving credit facility and our senior secured asset-based revolving credit facility, including increasing availability under the asset-based revolving credit facility to $4.500 billion, extending the maturity date on both facilities to June 30, 2026 and entering into $2.000 billion of new term loan facilities (the “Credit Agreement Transactions”). We used the net proceeds from the June 2021 Notes and the Credit Agreement Transactions to retire $3.657 billion of term loan facilities.

Management believes that cash flows from operations, amounts available under our senior secured credit facilities and our anticipated access to public and private debt markets will be sufficient to meet expected liquidity needs for the foreseeable future.

Summarized Financial Information

HCA Inc., a direct wholly-owned subsidiary of HCA Healthcare, Inc., is the primary obligor under a substantial portion of our indebtedness, including our senior secured credit facilities, senior secured notes and senior unsecured notes. The senior secured notes and senior unsecured notes issued by HCA Inc. are fully and unconditionally guaranteed on an unsecured basis by HCA Healthcare, Inc. The senior secured credit facilities and senior secured notes are fully and unconditionally guaranteed on a senior secured basis by substantially all existing and future, direct and indirect, 100% owned material domestic subsidiaries that are “Unrestricted Subsidiaries” under our Indenture dated December 16, 1993 (except for certain special purpose subsidiaries that only guarantee and pledge their assets under our senior secured asset-based revolving credit facility). For a list of subsidiary guarantors, see Exhibit 22 to this annual report on Form
10-K.

The subsidiary guarantees rank senior in right of payment to all subordinated indebtedness of each subsidiary guarantor, equally in right of payment with all senior indebtedness of the subsidiary guarantor and are structurally subordinated in right of payment to all indebtedness and other liabilities of any
non-guarantor
subsidiaries of the subsidiary guarantors (other than indebtedness and liabilities owed to one of the subsidiary guarantors). The subsidiary guarantees are secured by first-priority liens on the subsidiary guarantors’ assets, subject to certain exceptions, that secure our senior secured cash flow credit facility on a first-priority basis. The

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Summarized Financial Information (continued)

subsidiary guarantees are secured by second-priority liens on the subsidiary guarantors’ assets that secure our senior secured asset-based revolving credit facility on a first-priority basis and our senior secured cash flow credit facility on a second-priority basis.

The subsidiary guarantees may be automatically and unconditionally released and discharged upon certain customary events, including in the event such guarantee is released under our senior secured credit facilities. The indentures governing the senior secured notes include a “savings clause” intended to limit each subsidiary guarantor’s obligations as necessary to prevent the guarantee from constituting a fraudulent conveyance under applicable law, which could reduce a subsidiary guarantor’s liability on its guarantee to zero. For further information regarding the guarantees, refer to the applicable indentures that are filed as exhibits to this annual report on Form
10-K.

Summarized financial information is presented on a combined basis and transactions between the combining entities have been eliminated. Financial information for nonguarantor entities has been excluded. The summarized operating results information for the year ended December 31, 2021 and the summarized balance sheet information at December 31, 2021, for HCA Healthcare, Inc., HCA Inc. and the subsidiary guarantors (the Parent, Subsidiary Issuer and Subsidiary Guarantors) follow (dollars in millions):

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Liquidity and Capital Resources (continued)

Summarized Financial Information (continued)

The first-priority liens securing the subsidiary guarantees discussed above include liens on (i) substantially all of the capital stock of substantially all wholly owned first-tier subsidiaries of HCA Inc. or of subsidiary guarantors (but limited to 65% of the stock of any such wholly owned first-tier subsidiary that is a foreign subsidiary), subject to certain limited exceptions, and (ii) substantially all indebtedness owing to HCA Inc. or to the subsidiary guarantors, including any and all intercompany indebtedness owed by HCA Healthcare, Inc. or any subsidiary thereof to HCA Inc., or any subsidiary guarantor. For a list of affiliates whose securities are pledged as collateral for the senior secured notes, see Exhibit 22 to this annual report on Form
10-K.

Under the first lien intercreditor agreement, the administrative agent for the lenders under the cash flow credit facility, subject to the occurrence of certain events, has the exclusive right to direct foreclosures and take other actions with respect to these liens, and the trustee for the senior secured notes has no right to take any such actions. In certain circumstances, including upon certain events of default under the senior secured credit facilities and the senior secured notes, the collateral agent in respect of the cash flow credit facility and the senior secured notes could proceed against the collateral granted to it to secure such indebtedness, including the aforementioned pledged capital stock and pledged indebtedness, and require such collateral to be delivered to the collateral agent to the extent not already in its possession for purposes of perfecting the lien on such assets. For further information regarding the collateral, including events or circumstances that may require delivery of the collateral, refer to the applicable indentures, the first lien intercreditor agreement, the cash flow credit agreement and the pledge agreement that are filed as exhibits to this annual report on Form
10-K.

There is no trading market for any of HCA Healthcare, Inc.’s affiliates whose securities are pledged as collateral for the senior secured notes.

Rule
13-02
of Regulation
S-X
requires the presentation of summarized financial information of the combined affiliates whose securities are pledged as collateral for the senior secured notes unless such information is not material. The rule provides that such information is not material if the assets, liabilities and results of operations of the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts presented in the consolidated financial statements of the Registrant. Healthtrust, Inc. — The Hospital Company (“Healthtrust”) is the first-tier subsidiary of HCA Inc., and the common stock of Healthtrust is pledged as collateral for the senior secured notes. Due to the corporate structure relationship of HCA Healthcare, Inc. and Healthtrust, all of HCA Healthcare, Inc.’s operating subsidiaries, including all other affiliates whose securities are pledged as collateral for the senior secured notes, are also subsidiaries of Healthtrust. The corporate structure relationship, combined with the application of push-down accounting in Healthtrust’s consolidated financial statements related to HCA Healthcare Inc.’s debt and financial instruments, mean that the assets, liabilities and results of operations of Healthtrust (and, therefore, of the combined affiliates whose securities are pledged as collateral for the senior secured notes) are not materially different than the corresponding amounts presented in the financial statements of HCA Healthcare, Inc. As a result, summarized financial information of affiliates whose securities are pledged as collateral for the senior secured notes is not required to be presented under Rule
13-02.

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Market Risk

We are exposed to market risk related to changes in market values of securities. Our insurance subsidiaries held $541 million of investment securities at December 31, 2021. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. At December 31, 2021, we had a net unrealized gain of $16 million on the insurance subsidiaries’ investment securities.

We are exposed to market risk related to market illiquidity. Investments in debt and equity securities of our insurance subsidiaries could be impaired by the inability to access the capital markets. Should the insurance subsidiaries require significant amounts of cash in excess of normal cash requirements to pay claims and other expenses on short notice, we may have difficulty selling these investments in a timely manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. We may be required to recognize credit-related impairments on our investment securities in future periods should issuers default on interest payments or should the fair market valuations of the securities deteriorate due to ratings downgrades or other issue-specific factors.

We are also exposed to market risk related to changes in interest rates, and we periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are designated as cash flow hedges, are included in other comprehensive income.

With respect to our interest-bearing liabilities, approximately $4.240 billion of long-term debt at December 31, 2021 was subject to variable rates of interest, while the remaining balance in long-term debt of $30.339 billion at December 31, 2021 was subject to fixed rates of interest. Both the general level of interest rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the federal funds rate plus 0.50% and (2) the prime rate of Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period. The applicable margin for borrowings under the senior secured credit facilities may fluctuate according to a leverage ratio. The average effective interest rate for our long-term debt was 4.9% for 2021 and 5.0% for 2020.

The estimated fair value of our total long-term debt was $38.541 billion at December 31, 2021. The estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities. Based on a hypothetical 1% increase in interest rates, the potential annualized reduction to future pretax earnings would be approximately $42 million. To mitigate the impact of fluctuations in interest rates, we generally target a majority of our debt portfolio to be maintained at fixed rates.

We are exposed to currency translation risk related to our foreign operations. We currently do not consider the market risk related to foreign currency translation to be material to our consolidated financial statements or our liquidity.

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Market Risk (continued)

Financial Instruments

Derivative financial instruments are employed to manage risks, including interest rate exposures, and are not used for trading or speculative purposes. We recognize derivative instruments, such as interest rate swap agreements, in the consolidated balance sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders’ equity, as a component of other comprehensive income, depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge. Gains and losses on derivatives designated as cash flow hedges, to the extent they are effective, are recorded in other comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged items when they occur.

The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses resulting from the early termination of interest rate swap agreements are deferred and amortized as adjustments to expense over the remaining period of the debt originally covered by the terminated swap.

Tax Examinations

The Internal Revenue Service (“IRS”) was conducting an examination of the Company’s 2016, 2017 and 2018 federal income tax returns and the 2019 return for one affiliated partnership at December 31, 2021. We are also subject to examination by state and foreign taxing authorities. Management believes HCA Healthcare, Inc., its predecessors, subsidiaries and affiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS, state and foreign taxing authorities, and final resolution of any disputes will not have a material, adverse effect on our results of operations or financial position. However, if payments due upon final resolution of any issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position.

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