Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2019
OR
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to
Commission File Number 1-7293
_________________________________________
TENET HEALTHCARE CORPORATION
(Exact name of Registrant as specified in its charter)
_________________________________________
Nevada
(State of Incorporation)
95-2557091
(IRS Employer Identification No.)
1445 Ross Avenue, Suite 1400
Dallas, TX 75202
(Address of principal executive offices, including zip code)
(469) 893-2200
(Registrant’s telephone number, including area code)
_________________________________________
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, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes x 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 (each as defined in Exchange Act Rule 12b-2).
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
At April 24, 2019, there were 103,131,661 shares of the Registrant’s common stock, $0.05 par value, outstanding.
Property and equipment, at cost, less accumulated depreciation and amortization ($5,382 at March 31, 2019 and $5,221 at December 31, 2018)
6,996
6,993
Goodwill
7,283
7,281
Other intangible assets, at cost, less accumulated amortization ($1,010 at March 31, 2019 and $1,013 at December 31, 2018)
1,675
1,731
Total assets
$
23,158
$
22,409
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt
$
158
$
182
Accounts payable
1,101
1,207
Accrued compensation and benefits
707
838
Professional and general liability reserves
224
216
Accrued interest payable
323
240
Liabilities held for sale
—
43
Other current liabilities
1,212
1,131
Total current liabilities
3,725
3,857
Long-term debt, net of current portion
14,814
14,644
Professional and general liability reserves
690
666
Defined benefit plan obligations
512
521
Deferred income taxes
36
36
Other long-term liabilities
1,268
578
Total liabilities
21,045
20,302
Commitments and contingencies
Redeemable noncontrolling interests in equity of consolidated subsidiaries
1,439
1,420
Equity:
Shareholders’ equity:
Common stock, $0.05 par value; authorized 262,500,000 shares; 151,433,339 shares issued at March 31, 2019 and 150,897,143 shares issued at December 31, 2018
7
7
Additional paid-in capital
4,748
4,747
Accumulated other comprehensive loss
(221
)
(223
)
Accumulated deficit
(2,254
)
(2,236
)
Common stock in treasury, at cost, 48,352,853 shares at March 31, 2019 and 48,359,705 shares at December 31, 2018
(2,414
)
(2,414
)
Total shareholders’ deficit
(134
)
(119
)
Noncontrolling interests
808
806
Total equity
674
687
Total liabilities and equity
$
23,158
$
22,409
See accompanying Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Description of Business and Basis of Presentation
Tenet Healthcare Corporation (together with our subsidiaries, referred to herein as “Tenet,” “we” or “us”) is a national, diversified healthcare services company. We operate regionally focused, integrated healthcare delivery networks, primarily in large urban and suburban markets. Through our subsidiaries, partnerships and joint ventures, including USPI Holding Company, Inc. (“USPI”), at March 31, 2019, we operated 65 hospitals, 23 surgical hospitals and approximately 470 outpatient centers throughout the United States. In addition, our Conifer Holdings, Inc. (“Conifer”) subsidiary provides healthcare business process services in the areas of hospital and physician revenue cycle management and value-based care solutions to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.
This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2018 (“Annual Report”). As permitted by the Securities and Exchange Commission for interim reporting, we have omitted certain notes and disclosures that substantially duplicate those in our Annual Report. For further information, refer to the audited Consolidated Financial Statements and notes included in our Annual Report. Unless otherwise indicated, all financial and statistical data included in these notes to our Condensed Consolidated Financial Statements relate to our continuing operations, with dollar amounts expressed in millions (except per-share amounts).
Effective January 1, 2019, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) using the modified retrospective transition approach as of the period of adoption. Our financial statements for periods prior to January 1, 2019 were not modified for the application of the new lease accounting standard. The main difference between the guidance in ASU 2016-02 and previous accounting principles generally accepted in the United States of America (“GAAP”) is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Upon adoption of ASU 2016-02, we recorded $822 million of right-of-use assets, net of deferred rent, associated with operating leases in investments and other assets in our condensed consolidated balance sheet, $147 million of current liabilities associated with operating leases in other current liabilities in our condensed consolidated balance sheet and $715 million of long-term liabilities associated with operating leases in other long-term liabilities in our condensed consolidated balance sheet. We also recognized $1 million of cumulative effect adjustment that decreased accumulated deficit at January 1, 2019.
Although the Condensed Consolidated Financial Statements and related notes within this document are unaudited, we believe all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. In preparing our financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and these accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable given the particular circumstances in which we operate. Actual results may vary from those estimates. Financial and statistical information we report to other regulatory agencies may be prepared on a basis other than GAAP or using different assumptions or reporting periods and, therefore, may vary from amounts presented herein. Although we make every effort to ensure that the information we report to those agencies is accurate, complete and consistent with applicable reporting guidelines, we cannot be responsible for the accuracy of the information they make available to the public.
Operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the full year. Reasons for this include, but are not limited to: overall revenue and cost trends, particularly the timing and magnitude of price changes; fluctuations in contractual allowances and cost report settlements and valuation allowances; managed care contract negotiations, settlements or terminations and payer consolidations; changes in Medicare and Medicaid regulations; Medicaid and other supplemental funding levels set by the states in which we operate; the timing of approval by the Centers for Medicare and Medicaid Services of Medicaid provider fee revenue programs; trends in patient accounts receivable collectability and associated implicit price concessions; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; impairment of long-lived assets and goodwill; restructuring charges; losses, costs and insurance recoveries related to natural disasters and other weather-related occurrences; litigation and investigation costs; acquisitions and dispositions of facilities and other assets; gains (losses) on sales, consolidation and deconsolidation of facilities; income tax rates and deferred tax asset valuation allowance activity; changes in estimates of accruals for annual incentive compensation; the timing and amounts of stock option and restricted stock unit grants to employees and directors; gains (losses) from early extinguishment of debt; and changes in occupancy levels and patient volumes. Factors that affect
service mix, revenue mix, patient volumes and, thereby, the results of operations at our hospitals and related healthcare facilities include, but are not limited to: changes in federal and state healthcare regulations; the business environment, economic conditions and demographics of local communities in which we operate; the number of uninsured and underinsured individuals in local communities treated at our hospitals; seasonal cycles of illness; climate and weather conditions; physician recruitment, retention and attrition; advances in technology and treatments that reduce length of stay; local healthcare competitors; managed care contract negotiations or terminations; the number of patients with high-deductible health insurance plans; hospital performance data on quality measures and patient satisfaction, as well as standard charges for services; any unfavorable publicity about us, or our joint venture partners, that impacts our relationships with physicians and patients; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.
Net Operating Revenues
We recognize net operating revenues in the period in which we satisfy our performance obligations under contracts by transferring our services to our customers. Net operating revenues are recognized in the amounts to which we expect to be entitled, which are the transaction prices allocated to the distinct services. Net operating revenues for our Hospital Operations and other and Ambulatory Care segments primarily consist of net patient service revenues, principally for patients covered by Medicare, Medicaid, managed care and other health plans, as well as certain uninsured patients under our Compact with Uninsured Patients (“Compact”) and other uninsured discount and charity programs. Net operating revenues for our Conifer segment primarily consist of revenues from providing revenue cycle management services to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.
Net Patient Service Revenues—We report net patient service revenues at the amounts that reflect the consideration to which we expect to be entitled in exchange for providing patient care. These amounts are due from patients, third-party payers (including managed care payers and government programs) and others, and they include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews and investigations. Generally, we bill our patients and third-party payers several days after the services are performed or shortly after discharge. Revenues are recognized as performance obligations are satisfied.
Conifer Revenues—Our Conifer segment recognizes revenue from its contracts when Conifer’s performance obligations are satisfied, which is generally as services are rendered. Revenue is recognized in an amount that reflects the consideration to which Conifer expects to be entitled.
Cash and Cash Equivalents
We treat highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents were $252 million and $411 million at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, our book overdrafts were $246 million and $288 million, respectively, which were classified as accounts payable.
At March 31, 2019 and December 31, 2018, $174 million and $177 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our captive insurance subsidiaries, and $13 million and $8 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our health plan-related businesses.
Also at March 31, 2019 and December 31, 2018, we had $84 million and $135 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $60 million and $114 million, respectively, were included in accounts payable.
The following tables provide information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018:
Gross Carrying Amount
Accumulated Amortization
Net Book Value
At March 31, 2019:
Capitalized software costs
$
1,607
$
(847
)
$
760
Trade names
102
—
102
Contracts
870
(82
)
788
Other
106
(81
)
25
Total
$
2,685
$
(1,010
)
$
1,675
Gross Carrying Amount
Accumulated Amortization
Net Book Value
At December 31, 2018:
Capitalized software costs
$
1,667
$
(858
)
$
809
Trade names
102
—
102
Contracts
871
(76
)
795
Other
104
(79
)
25
Total
$
2,744
$
(1,013
)
$
1,731
Estimated future amortization of intangibles with finite useful lives at March 31, 2019 is as follows:
Nine Months Ending
Years Ending
Later Years
December 31,
Total
2019
2020
2021
2022
2023
Amortization of intangible assets
$
998
$
103
$
129
$
115
$
98
$
89
$
464
We recognized amortization expense of $45 million and $41 million in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018, respectively.
Investments in Unconsolidated Affiliates
We control 226 of the facilities within our Ambulatory Care segment and, therefore, consolidate their results. We account for many of the facilities our Ambulatory Care segment operates (108 of 334 at March 31, 2019), as well as additional companies in which our Hospital Operations and other segment holds ownership interests, under the equity method as investments in unconsolidated affiliates and report only our share of net income as equity in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Operations.Summarized financial information for these equity method investees is included in the following table; among the equity method investees are four North Texas hospitals in which we held minority interests that were operated by our Hospital Operations and other segment through the divestiture of these investments effective March 1, 2018. For investments acquired during the reporting periods, amounts reflect 100% of the investee’s results beginning on the date of our acquisition of the investment.
The principal components of accounts receivable are shown in the table below:
March 31, 2019
December 31, 2018
Continuing operations:
Patient accounts receivable
$
2,577
$
2,427
Estimated future recoveries
151
148
Net cost reports and settlements payable and valuation allowances
18
18
2,746
2,593
Discontinued operations
(2
)
2
Accounts receivable, net
$
2,744
$
2,595
Accounts that are pursued for collection through Conifer’s business offices are maintained on our hospitals’ books and reflected in patient accounts receivable. Patient accounts receivable, including billed accounts and certain unbilled accounts, as well as estimated amounts due from third-party payers for retroactive adjustments, are receivables if our right to consideration is unconditional and only the passage of time is required before payment of that consideration is due. Estimated uncollectable amounts are generally considered implicit price concessions that are a direct reduction to patient accounts receivable rather than allowance for doubtful accounts.
We also provide charity care to patients who are unable to pay for the healthcare services they receive. Most patients who qualify for charity care are charged a per-diem amount for services received, subject to a cap. Except for the per-diem amounts, our policy is not to pursue collection of amounts determined to qualify as charity care; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for Medicaid disproportionate share hospital (“DSH”) payments. These payments are intended to mitigate our cost of uncompensated care, as well as reduced Medicaid funding levels. The following table shows our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses and which exclude the costs of our health plan businesses) of caring for our uninsured patients and charity care patients, as well as revenues attributable to Medicaid DSH and other supplemental revenues we recognized in the three months ended March 31, 2019 and 2018:
Three Months Ended March 31,
2019
2018
Estimated costs for:
Uninsured patients
$
158
$
146
Charity care patients
34
35
Total
$
192
$
181
Medicaid DSH and other supplemental revenues
$
199
$
220
We had $284 million and $277 million of receivables recorded in other current assets and investments and other assets, respectively, and $63 million and $42 million of payables recorded in other current liabilities and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheet at March 31, 2019 related to California’s provider fee program. We had $278 million and $231 million of receivables recorded in other current assets and investments and other assets, respectively, and $100 million and $42 million of payables recorded in other current liabilities and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheet at December 31, 2018 related to California’s provider fee program.
NOTE 3. CONTRACT BALANCES
Hospital Operations and Other Segment
Amounts related to services provided to patients for which we have not billed and that do not meet the conditions of unconditional right to payment at the end of the reporting period are contract assets. For our Hospital Operations and other segment, our contract assets consist primarily of services that we have provided to patients who are still receiving inpatient care in our facilities at the end of the reporting period. Our Hospital Operations and other segment’s contract assets are included in other current assets in the accompanying Condensed Consolidated Balance Sheet at March 31, 2019.The opening and closing balances of contract assets for our Hospital Operations and other segment are as follows:
Approximately 89% of our Hospital Operations and other segment’s contract assets meet the conditions for unconditional right to payment and are reclassified to patient receivables within 90 days.
Conifer Segment
Conifer enters into contracts with customers to sell revenue cycle management and other services, such as value-based care, consulting and project services. The payment terms and conditions in our customer contracts vary. In some cases, customers are invoiced in advance and (for other than fixed-price fee arrangements) a true-up to the actual fee is included on a subsequent invoice. In other cases, payment is due in arrears. In addition, some contracts contain performance incentives, penalties and other forms of variable consideration. When the timing of Conifer’s delivery of services is different from the timing of payments made by the customers, Conifer recognizes either unbilled revenue (performance precedes contractual right to invoice the customer) or deferred revenue (customer payment precedes Conifer service performance). In the following table, customers that prepay prior to obtaining control/benefit of the service are represented by deferred contract revenue until the performance obligations are satisfied. Unbilled revenue represents arrangements in which Conifer has provided services to and the customer has obtained control/benefit of services prior to the contractual invoice date. Contracts with payment in arrears are recognized as receivables in the month the service is performed.
The opening and closing balances of Conifer’s receivables, contract asset, and current and long-term contract liabilities are as follows:
Contract Liability-
Contract Liability-
Contract Asset-
Current
Long-Term
Receivables
Unbilled Revenue
Deferred Revenue
Deferred Revenue
December 31, 2018
$
42
$
11
$
61
$
20
March 31, 2019
90
11
64
20
Increase/(decrease)
$
48
$
—
$
3
$
—
January 1, 2018
$
89
$
10
$
80
$
21
March 31, 2018
99
10
78
29
Increase/(decrease)
$
10
$
—
$
(2
)
$
8
The difference between the opening and closing balances of Conifer’s contract assets and contract liabilities are primarily related to prepayments for those customers who are billed in advance, changes in estimates related to metric-based services, and up-front integration services that are typically not distinct and are, therefore, recognized over the performance obligation period to which they relate. Our Conifer segment’s receivables and contract assets are reported as part of other current assets in our accompanying Condensed Consolidated Balance Sheets, and our Conifer segment’s current and long-term contract liabilities are reported as part of other current liabilities and other long-term liabilities, respectively, in our accompanying Condensed Consolidated Balance Sheets.
The amount of revenue Conifer recognized in the three months ended March 31, 2019 and 2018 that was included in the opening current deferred revenue liability was $49 million and $60 million, respectively. This revenue consists primarily of prepayments for those customers who are billed in advance, changes in estimates related to metric-based services, and up-front integration services that are recognized over the services period.
We have elected to apply the practical expedient provided by FASB Accounting Standards Codification 340-40-25-4 and expense as incurred the incremental customer contract acquisition costs for contracts in which the amortization period of the asset that we otherwise would have recognized is one year or less. However, incremental costs incurred to obtain and fulfill customer contracts for which the amortization period of the asset that we otherwise would have recognized is longer than one year, which consist primarily of Conifer deferred contract setup costs, are capitalized and amortized on a straight-line basis over the lesser of their estimated useful lives or the term of the related contract. During the three months ended March 31, 2019 and 2018, we recognized amortization expense of $1 million and $3 million, respectively. At both March 31, 2019 and December 31, 2018, the unamortized customer contract costs were $28 million, and are presented as part of investments and other assets in the accompanying Condensed Consolidated Balance Sheets.
NOTE 4. ASSETS AND LIABILITIES HELD FOR SALE
There were no assets or liabilities classified as held for sale at March 31, 2019. In the three months ended December 31, 2017, three of our hospitals in the Chicago-area, as well as other operations affiliated with the hospitals, met the criteria to be classified as held for sale. As a result, we have classified these assets totaling $107 million as “assets held for sale” in current assets and the related liabilities of $43 million as “liabilities held for sale” in current liabilities in the accompanying Condensed Consolidated Balance Sheet at December 31, 2018. These assets and liabilities, which were in our Hospital Operations and other segment until their divestiture on January 28, 2019, were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. We recorded impairment charges of $17 million in the three months ended March 31, 2018 for the write-down of the assets held for sale to their estimated fair value, less estimated costs to sell, as a result of the planned divestiture of these assets.
The following table provides information on significant components of our business that have been disposed of since January 1, 2018:
Three Months Ended March 31,
2019
2018
Significant disposals:
Income (loss) from continuing operations, before income taxes
Chicago-area (includes a $7 million loss on sale in the 2019 period and $17 million of impairment charges in the 2018 period)
$
(12
)
$
(16
)
Philadelphia (includes a $2 million loss on sale in the 2018 period)
1
(9
)
MacNeal (includes a $98 million gain on sale in the 2018 period)
1
101
Aspen
—
3
Total
$
(10
)
$
79
NOTE 5. IMPAIRMENT AND RESTRUCTURING CHARGES, AND ACQUISITION-RELATED COSTS
During the three months ended March 31, 2019, we recorded impairment and restructuring charges and acquisition-related costs of $19 million, consisting of $1 million of impairment charges, $16 million of restructuring charges and $2 million of acquisition-related costs. Restructuring charges consisted of $7 million of employee severance costs, $1 million of contract and lease termination fees, and $8 million of other restructuring costs. Acquisition-related costs consisted of $2 million of transaction costs.
During the three months ended March 31, 2018, we recorded impairment and restructuring charges and acquisition-related costs of $47 million, consisting of $19 million of impairment charges, $25 million of restructuring charges and $3 million of acquisition-related costs. Impairment charges consisted primarily of $17 million of charges to write-down assets held for sale to their estimated fair value, less estimated costs to sell, for certain Chicago-area facilities and $2 million of other impairment charges. Restructuring charges consisted of $17 million of employee severance costs, $1 million of contract and lease termination fees, and $7 million of other restructuring costs. Acquisition-related costs consisted of $2 million of transaction costs and $1 million of acquisition integration charges. Our impairment charges for the three months ended March 31, 2018 were primarily related to our Hospital Operations and other segment.
Our impairment tests presume stable, improving or, in some cases, declining operating results in our facilities, which are based on programs and initiatives being implemented that are designed to achieve each facility’s most recent projections. If these projections are not met, or if in the future negative trends occur that impact our future outlook, impairments of long-lived assets and goodwill may occur, and we may incur additional restructuring charges, which could be material.
At March 31, 2019, our continuing operations consisted of three reportable segments, Hospital Operations and other, Ambulatory Care and Conifer. Our segments are reporting units used to perform our goodwill impairment analysis.
We periodically incur costs to implement restructuring efforts for specific operations, which are recorded in our consolidated statement of operations as they are incurred. Our restructuring plans focus on various aspects of operations, including aligning our operations in the most strategic and cost-effective structure. Certain restructuring and acquisition-related costs are based on estimates. Changes in estimates are recognized as they occur.
NOTE 6. LEASES
The following table presents the components of our right-of-use assets and liabilities related to leases and their classification in our Condensed Consolidated Balance Sheet at March 31, 2019:
Component of Lease Balances
Classification in Condensed Consolidated Balance Sheet
March 31, 2019
Assets:
Operating lease assets
Investments and other assets
$
799
Finance lease assets
Property and equipment, at cost, less accumulated depreciation and amortization
441
Total leased assets
$
1,240
Liabilities:
Operating lease liabilities:
Current
Other current liabilities
$
146
Long-term
Other long-term liabilities
714
Total operating lease liabilities
860
Finance lease liabilities:
Current
Current portion of long-term debt
141
Long-term
Long-term debt, net of current portion
224
Total finance lease liabilities
365
Total lease liabilities
$
1,225
We determine if an arrangement is a lease at inception of the contract. Our right-of-use assets represent our right to use the underlying assets for the lease term and our lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. For our Hospital Operations and other and Conifer segments, we estimate our incremental borrowing rates for our portfolio of leases using documented rates included in our recent equipment finance leases or, if applicable, recent secured debt issuances that correspond to various lease terms. We also give consideration to information obtained from our bankers, our secured debt fair value and publicly available data for instruments with similar characteristics. For our Ambulatory Care segment, we estimate an incremental borrowing rate for each center by utilizing historical and projected financial data, estimating a hypothetical credit rating using publicly available market data and adjusting the market data to reflect the effects of collateralization.
Our operating leases are primarily for real estate, including off-campus outpatient facilities, medical office buildings, and corporate and other administrative offices, as well as medical and office equipment. Our finance leases are primarily for medical equipment and information technology and telecommunications assets. Our real estate lease agreements typically have initial terms of five to 10 years, and our equipment lease agreements typically have initial terms of three years. We do not record leases with an initial term of 12 months or less (“short-term leases”) in our consolidated balance sheets.
Our real estate leases may include one or more options to renew, with renewals that can extend the lease term from five to 10 years. The exercise of lease renewal options is at our sole discretion. In general, we do not consider renewal options to be reasonably likely to be exercised, therefore renewal options are generally not recognized as part of our right-of-use assets and lease liabilities. Certain leases also include options to purchase the leased property. The useful life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The majority of our medical equipment leases have terms of three years with a bargain purchase option that is reasonably certain of exercise, so these assets are depreciated over their useful life, typically ranging from five to seven years. Similarly, some of our leases of information technology and telecommunications assets include a transfer of title and, therefore, have useful lives of 15 years.
Certain of our lease agreements for real estate include payments based on actual common area maintenance expenses and others include rental payments adjusted periodically for inflation. These variable lease payments are recognized in other operating expenses, net, but are not included in the right-of-use asset or liability balances. Our lease agreements do not contain any material residual value guarantees, restrictions or covenants.
We have elected the practical expedient that allows lessees to choose to not separate lease and non-lease components by class of underlying asset and are applying this expedient to all relevant asset classes. We have also elected the practical expedient package to not reassess at adoption (i) expired or existing contracts for whether they are or contain a lease, (ii) the lease classification of any existing leases or (iii) initial indirect costs for existing leases.
The following table presents the components of our lease expense and their classification in our Condensed Consolidated Statement of Operations for the three months ended March 31, 2019:
Classification on Condensed Consolidated
Three Months Ended
Component of Lease Expense
Statements of Operations
March 31, 2019
Operating lease expense
Other operating expenses, net
$
50
Finance lease expense:
Amortization of leased assets
Depreciation and amortization
18
Interest on lease liabilities
Interest expense
5
Total finance lease expense
23
Variable and short term-lease expense
Other operating expenses, net
34
Total lease expense
$
107
The weighted-average lease terms and discount rates for operating and finance leases are presented in the following table:
March 31, 2019
Weighted-average remaining lease term (years)
Operating leases
6.7
Finance leases
6.1
Weighted-average discount rate
Operating leases
5.2
%
Finance leases
5.5
%
Cash flow and other information related to leases is included in the following table:
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases
$
47
Operating cash outflows from finance leases
$
5
Financing cash outflows from finance leases
$
36
Right-of-use assets obtained in exchange for lease obligations: