UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2008

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

For the transition period from                      to                     

Delaware (State or Other Jurisdiction of Incorporation or Organization)		20-1538254 (I.R.S. Employer Identification No.)
103 Powell Court, Suite 200 Brentwood, Tennessee (Address Of Principal Executive Offices)		37027 (Zip Code)

(615) 372-8500
(Registrant’s Telephone Number, Including Area Code)

Title of Each Class		Name of Exchange on Which Registered
Common Stock, par value $.01 per share		NASDAQ Global Select Market
Preferred Stock Purchase Rights		NASDAQ Global Select Market

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ    No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o    No þ

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

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

     The aggregate market value of the shares of registrant’s Common Stock held by non-affiliates as of June 30, 2008, was approximately $950 million.

     As of February 17, 2009, the number of outstanding shares of the registrant’s Common Stock was 52,094,515.

     Portions of the definitive proxy statement for our 2009 annual meeting of stockholders are incorporated by reference into Part III of this report.

 

 

TABLE OF CONTENTS

PART I
Item 1.		Business			1
Item 1A.		Risk Factors			19
Item 1B.		Unresolved Staff Comments			29
Item 2.		Properties			30
Item 3.		Legal Proceedings			31
Item 4.		Submission of Matters to a Vote of Security Holders			31
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			32
Item 6.		Selected Financial Data			35
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk			75
Item 8.		Financial Statements and Supplementary Data			76
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			76
Item 9A.		Controls and Procedures			76
Item 9B.		Other Information			76
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			77
Item 11.		Executive Compensation			77
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			78
Item 13.		Certain Relationships and Related Transactions, and Director Independence			78
Item 14.		Principal Accountant Fees and Services			78
PART IV
Item 15.		Exhibits and Financial Statement Schedules			79
SIGNATURES					80
Exhibit Index					84
EX-10.8
EX-10.10
EX-10.20
EX-10.37
EX-12.1
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1.	Business.

Overview of Our Company

     LifePoint Hospitals, Inc., a Delaware corporation, acting through its subsidiaries, operates general acute care hospitals in non-urban communities in the United States. Unless the context otherwise requires, LifePoint and its subsidiaries are referred to herein as “LifePoint,” the “Company,” “we,” “our” or “us.” At December 31, 2008, our subsidiaries owned or leased 48 hospitals, having a total of 5,686 licensed beds, and serving communities in 17 states. Two of these hospitals were held for sale and classified as discontinued operations in our consolidated financial statements, and seven were owned by third parties and leased by our subsidiaries. We generated $2,336.5 million, $2,568.4 million and $2,700.8 million in revenues from continuing operations during the years ended December 31, 2006, 2007 and 2008, respectively.

     We seek to fulfill our mission of Making Communities Healthier^® by striving to (1) improve the quality and types of healthcare services available in our communities; (2) provide physicians with a positive environment in which to practice medicine, with access to necessary equipment and resources; (3) develop and provide a positive work environment for employees; (4) expand each hospital’s role as a community asset; and (5) improve each hospital’s financial performance. We expect our hospitals to be the place where patients want to come for care, where physicians want to practice medicine and where employees want to work.

Operations

     Our hospitals typically provide the range of medical and surgical services commonly available in hospitals in non-urban markets. These services include general surgery, internal medicine, obstetrics, psychiatric care, emergency room care, radiology, oncology, diagnostic care, coronary care, rehabilitation services, pediatric services, and, in some of our hospitals, specialized services such as open-heart surgery, skilled nursing and neuro-surgery. In many markets, we also provide outpatient services such as one-day surgery, laboratory, x-ray, respiratory therapy, imaging, sports medicine and lithotripsy. Like most hospitals located in non-urban markets, our hospitals do not engage in extensive medical research and medical education programs. However, two of our hospitals have an affiliation with medical schools, including the clinical rotation of medical students, and one of our hospitals owns and operates a school of health professions with a nursing program and a radiologic technology program.

     The range of services that can be offered at any of our hospitals depends significantly on the efforts, abilities and experience of the physicians on the medical staffs of our hospitals, most of whom have no long-term contractual relationship with us. Our hospitals are staffed by licensed physicians who have been admitted to the medical staffs of individual hospitals. Under state laws and other licensing standards, hospital medical staffs are generally self-governing organizations subject to ultimate oversight by the hospital’s local governing board. Each of our hospitals has a local board of trustees. These boards generally include members of the hospital’s medical staff as well as community leaders. These boards establish policies concerning medical, professional and ethical practices, monitor these practices, and are responsible for reviewing these practices in order to determine that they conform to established standards. The Company maintains quality assurance programs to support and monitor quality of care standards and to meet accreditation and regulatory requirements. The Company also monitors patient care evaluations and other quality of care assessment activities on a regular basis.

     Nurses, therapists, lab technicians, facility maintenance workers and the administrative staffs of hospitals are the majority of our employees. We are subject to federal minimum wage and hour laws and various state labor laws, and maintain a number of different employee benefit plans.

     Members of the medical staffs of our hospitals are free to serve on the medical staffs of hospitals not owned by us. Members of our medical staffs are free to terminate their affiliation with our hospitals or admit their patients to competing hospitals at any time. Although we own some physician practices and, where permitted by law, employ some physicians, the majority of the physicians who practice at our hospitals are not our employees. It is essential to our ongoing business that we attract and retain skilled employees and an appropriate number of quality physicians and other healthcare professionals in all specialties on our medical staffs.

     In our markets, physician recruitment and retention are affected by a shortage of physicians in certain sought-after specialties, the difficulties that physicians are experiencing in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance, and the challenges that can be associated with practicing medicine in small groups or independently. In order for our hospitals to be successful, we must recruit and retain a sufficient number of active, engaged and successful physicians.

     Although we believe we will continue to successfully attract and retain key employees, qualified physicians and other health care professionals, the loss of some or all of our key employees or the inability to attract or retain sufficient numbers of qualified physicians and other health care professionals could have a material adverse effect on our business, financial condition, results of operations or cash flows.

     Each of our acute care hospitals is accredited by the Joint Commission (formerly, the Joint Commission on Accreditation of Healthcare Organizations). With such accreditation, our hospitals are deemed to meet the Medicare Conditions of Participation and are, therefore, eligible to participate in government-sponsored provider programs, such as the Medicare and Medicaid programs. Bluegrass Community Hospital is designated by the Centers for Medicare and Medicaid Services (“CMS”) as a critical access hospital, and we have not sought accreditation. Bluegrass Community Hospital also participates in the Medicare program by otherwise meeting the Medicare Conditions of Paiticipation.

     We seek to operate our hospitals in a manner that positions them to compete effectively and to further our mission of making communities healthier. The operating strategies of our hospitals, however, are determined largely by local hospital leadership and are tailored to each of their respective communities. Generally, our overall operating strategy is to strive to: (1) expand the breadth of services offered at our hospitals — by adding equipment and seeking to attract specialty physicians – in an effort to attract community patients that might otherwise leave their community for healthcare; (2) recruit, attract and retain physicians interested in practicing in the rural communities where our hospitals are located; (3) responsibly manage and control the cost of supplies, improve employee productivity by adjusting staffing levels to patient volumes, and reduce or control the cost of contract labor and fees paid to physicians or physician groups for call coverage; (4) recruit, retain and develop hospital executives interested in working and living in the rural communities where our hospitals are located; and (5) negotiate favorable, facility-specific contracts with managed care and other private-pay payors. In appropriate circumstances, we may also selectively acquire hospitals or other healthcare facilities where our operating strategies can improve performance.

     In connection with our efforts to responsibly manage purchasing costs, we participate along with other healthcare companies in a group purchasing organization, HealthTrust Purchasing Group, which makes certain national supply and equipment contracts available to our facilities. We own approximately a 5.0% equity interest in this group purchasing organization at December 31, 2008.

Availability of Information

     Our website is www.lifepointhospitals.com. We make available free of charge on this website under “Investor Information — SEC Filings” our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the United States Securities and Exchange Commission (“SEC”).

Sources of Revenue

     Our hospitals receive payment for patient services from the federal government primarily under the Medicare program, state governments under their respective Medicaid programs, health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”) and other private insurers, as well as directly from patients (“self-pay”). The approximate percentages of total revenues from continuing operations from these sources during the years specified below were as follows:

		2006				2007				2008
Medicare			34.8	%			32.6	%			31.2	%
Medicaid			10.1				9.7				9.5
HMOs, PPOs and other private insurers			39.2				42.7				44.5
Self-pay			12.0				11.7				12.0
Other			3.9				3.3				2.8
			100.0	%			100.0	%			100.0	%

     Certain changes have been made to our historical sources of revenues table above. Specifically, we previously classified uninsured discounts as revenue deductions for HMOs, PPOs and other private insurers. We changed the classification of uninsured discounts to revenue deductions for self-pay revenues effective in our June 30, 2008 quarterly report on Form 10-Q for all periods previously reported. This change had no impact on our historical results of operations. Generally, these reclassifications reduced self-pay as a percentage of total revenues and increased HMOs, PPOs, and other private insurers as a percentage of total revenues. We have determined that it is more appropriate to apply uninsured discounts as revenue deductions against self-pay revenues rather than against HMOs, PPOs and other private insurers revenues.

     Patients generally are not responsible for any difference between customary hospital charges and amounts reimbursed for the services under Medicare, Medicaid, private insurance plans, HMOs or PPOs, but are responsible for services not covered by these plans, exclusions, deductibles or co-payment features of their coverage. The amount of exclusions, deductibles and co-payments generally has been increasing each year as employers have been shifting a higher percentage of healthcare costs to employees. In some states, the Medicaid program budgets have been either cut or funds diverted to other programs, which have resulted in limiting the enrollment of participants. This has resulted in higher bad debt expense at many of our hospitals during the past few years.

  Medicare

     Medicare provides hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. All of our hospitals are currently certified as providers of Medicare services. Amounts received under the Medicare program generally are often significantly less than the hospital’s customary charges for the services provided.

     With the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), which was signed into law on December 8, 2003, Congress passed sweeping changes to the Medicare program. This legislation offers a prescription drug benefit for Medicare beneficiaries and also provides a number of benefits to hospitals, particularly rural hospitals. The Deficit Reduction Act of 2005 (the “DRA”), which was signed into law on February 6, 2006, includes measures related to specialty hospitals, quality reporting and pay-for-performance, the inpatient rehabilitation 75% Rule and Medicaid cuts. The Medicare, Medicaid and SCHIP Extension Act of 2007 (the “Extension Act”) was signed into law on December 29, 2007, and affects physician payments and rehabilitation services. Additionally, CMS has continued to implement changes to various Medicare payment methodologies. The major hospital provisions of MMA, DRA and the Extension Act are discussed in the subsections below.

     Inpatient Acute Care Diagnosis Related Group Payments

     Payments from Medicare for inpatient hospital services are generally made under the prospective payment system, commonly known as “PPS.” Under PPS, our hospitals are paid a prospectively determined amount for each hospital discharge based on the patient’s diagnosis. Specifically, each diagnosis is assigned a diagnosis related group, commonly known as a “DRG.” Each DRG is assigned a payment rate that is prospectively set using national average resources used per case for treating a patient with a particular diagnosis. DRG payments do not consider the actual resources incurred by an individual hospital in providing a particular inpatient service. This DRG assignment also affects the prospectively determined capital rate paid with each DRG. DRG and capital payments are adjusted by a predetermined geographic adjustment factor assigned to the geographic area in which the hospital is located.

     The following tables list our historical Medicare DRG and capital payments for the years presented (in millions):

		Medicare				Medicare
		DRG				Capital
		Payments				Payments
2006		$	443.3			$	39.2
2007			456.5				40.5
2008			453.7				39.6

     The DRG rates are adjusted by an update factor each federal fiscal year (“FFY”), which begins on October 1. The index used to adjust the DRG rates, known as the “hospital market basket index,” gives consideration to the inflation experienced by hospitals in purchasing goods and services. The DRG rates that became effective on October 1, 2006, October 1, 2007 and October 1, 2008 represented increases of 3.4%, 3.3% and 3.6%, respectively over the previous year’s rates. Generally, however, the percentage increases in the DRG payments have been lower than the projected increase in the cost of goods and services purchased by hospitals.

     The hospital inpatient prospective payment system final rule for FFY 2008 created 745 new severity-adjusted diagnosis-related groups (“Medicare Severity DRGs” or “MS-DRGs”) to replace Medicare’s previous 538 DRGs. The rule phased in the new MS-DRGs over a two year period, so that in FY 2008 only half of the relative weight for each MS-DRG was based on the new MS-DRG relative weight and half was based on the old DRG relative weight. For FFY 2009, the relative weights are based entirely on the new MS-DRG relative weight. To offset the effect of the coding and discharge classification changes that CMS believes will occur as hospitals implement the MS-DRG system, it implemented a rule reducing Medicare payments to hospitals by 1.2% in FFY 2008 and 1.8% in both FFY 2009 and 2010. Subsequently, on September 29, 2007, President Bush signed Public Law No: 110-90, effectively decreasing these reductions for FFY 2008 and 2009 to 0.6% and 0.9%. CMS plans to conduct a “look-back” beginning in FFY 2010 and make appropriate changes to the reduction percentages based on actual claims data. CMS anticipates that the conversion to MS-DRGs will result in an increase in payments to hospitals that serve more severely ill patients and a decrease to hospitals that serve patients who are less severely ill. Although difficult to predict, the full implementation of the MS-DRG system and the other provisions of the final rule, including wage index changes, may result in our Medicare acute inpatient hospital reimbursement increasing in a range between 3.0% to 3.5% in FFY 2009.

     In order to receive the full 3.6% market basket update for FFY 2009, hospitals were required to report certain patient care quality measures. Hospitals that did not submit this data received a 2% reduction in their payment rate, resulting in a net 1.6% update for 2009. Reductions to a non-participating hospital’s rate apply only to the fiscal year involved. If the hospital subsequently joins the program, the prior reduction will not be taken into account in computing the update for that fiscal year. MMA and DRA restrict the application of these provisions to hospitals paid under the inpatient PPS. The provisions do not apply to hospitals and hospital units excluded from the inpatient PPS. For FFY 2009, our hospitals reported all quality measures required by CMS and received the full market basket update.

     MMA also made a permanent 1.6% increase in the base DRG payment rate for rural hospitals and urban hospitals in smaller metropolitan areas. In addition, MMA provided for payment relief to the wage index component of the base DRG rate. MMA lowered the percentage of the DRG subject to a wage adjustment from 71.1% to 62.0% for hospitals in areas with a wage index below the national average and from 71.1% to 69.7% for hospitals in areas with a wage index greater than the national average. A majority of our hospitals have benefited from the MMA provisions adjusting the DRG payment rates. Several provisions will continue to affect the FFY 2009 standardized amounts, including a full market basket adjusted rate for hospitals’ reporting of quality data as part of the CMS Hospital Quality Initiative and the reduction of the labor share.

     These changes are reflected in the following tables:

FFY 2009 Standard Rate for Hospitals with a Wage Index Greater than the National
Average
(69.7% Labor Share and 30.3% Nonlabor Share)

		Labor-Related				Nonlabor-Related
Full update (3.6%)		$	3,574.50			$	1,553.91
Reduced update (1.6%)		$	3,505.49			$	1,523.91

FFY 2009 Standard Rate for Hospitals with a Wage Index Less than or Equal to the
National Average
(62.0% Labor Share and 38.0% Percent Nonlabor Share)

		Labor-Related				Nonlabor-Related
Full update (3.6%)		$	3,179.61			$	1,948.80
Reduced update (1.6%)		$	3,118.23			$	1,911.17

Capital Standard
Federal Payment Rate
$424.17

     Outlier Payments

     In addition to DRG and capital payments, hospitals may qualify for payments for cases involving extraordinarily high costs when compared to average cases in the same DRG. To qualify as a cost outlier, a hospital’s cost for the case must exceed the payment rate for the DRG plus a specified amount called the fixed-loss threshold. The outlier payment is equal to 80% of the difference between the hospital’s cost for the stay and the threshold amount. The threshold is adjusted every year based on CMS’s projections of total outlier payments to make outlier reimbursement equal 5.1% of total payments. We anticipate outlier payments to increase slightly in 2009 as a result of a decrease in the outlier threshold from $22,185 to $20,045.

     Disproportionate Share Payments

     The Disproportionate Share Hospital (“DSH”) adjustment provides additional payments to hospitals that treat a high percentage of low-income patients. The adjustment is based on the hospital’s DSH patient percentage, which is the sum of the number of patient days for patients who were entitled to both Medicare Part A and Supplemental Security Income benefits, divided by the total number of Medicare Part A patient days plus the days for patients who were eligible for Medicaid divided by the total number of hospital inpatient days. Hospitals whose DSH patient percentage exceeds 15% are eligible for a DSH payment adjustment. Effective April 1, 2004, MMA raised the cap on the DSH payment adjustment percentage from 5.25% to 12.0% for rural and small urban hospitals and specified that payments to all hospitals be based on the same conversion factor, regardless of geographic location. Most of our hospitals have benefited from these provisions. Medicare DSH payments received in the aggregate by our hospitals for 2006, 2007 and 2008, were approximately $48.5 million, $53.7 million and $55.3 million, respectively.

     Wage Index and Geographic Reclassification

     Under PPS, the prospective payment rates are adjusted for the area differences in wage levels by a factor (“wage index”) reflecting the relative wage level in the geographic area compared to the national average wage level. Effective October 1, 2004 for inpatient PPS and January 1, 2005 for outpatient PPS, CMS implemented a number of changes to the wage index calculation. These changes include adopting new standards for defining labor market geographic areas based on standards for defining Core-Based Statistical Areas issued by the Office of Management and Budget. Hospitals that have been adversely affected by this new definition received a blended (50/50) wage index based on the old and new wage geographic definitions for one year. Further, CMS has applied an occupational mix adjustment factor to the wage index amounts. However, because of a court order issued on April 3, 2006, the final rates for FFY 2007 fully (i.e., at 100%) adjusted the wage indices for occupational mix.

     The Medicare Geographic Classification Review Board issues decisions concerning the geographic reclassification of hospitals as rural or urban for prospective payment purposes. Hospitals seeking reclassification, except for sole community hospitals and rural referral centers, must prove close proximity to the area in which they seek reclassification. In addition to close proximity, a hospital seeking reclassification for purposes of using another area’s wage index must prove that the hospital’s incurred wage costs are comparable to hospital wage costs in the other area.

     Inpatient Rehabilitation and the 75% Rule

     Rehabilitation hospitals and rehabilitation units in acute care hospitals meeting certain criteria established by CMS are eligible to be paid as an Inpatient Rehabilitation Facility (“IRF”) under the IRF prospective payment system (“IRF-PPS”). Payments under the IRF-PPS are made on a per discharge basis. A patient classification system is used to assign patients in IRFs into case-mix groups (“CMGs”). The IRF-PPS uses federal prospective payment rates across distinct CMGs.

     Prior to July 1, 2004, a rehabilitation hospital or unit was eligible for classification as an IRF if it could show that, during its most recent 12-month cost reporting period, it served an inpatient population of whom at least 75 percent required intensive rehabilitation services for the treatment of one or more of ten specific conditions. This became known as the “75 percent rule.”

     On May 7, 2004, CMS released a final rule entitled “Medicare Program; Changes to the Criteria for Being Classified as an Inpatient Rehabilitation Facility” (“IRF Rule”) that revised the medical condition criteria rehabilitation hospitals and units must meet. The IRF Rule also replaced the “75 percent rule” compliance threshold with a three-year transition compliance threshold of 50%, 60% and 65% for years one, two and three, respectively, that commenced with cost reporting periods beginning on or after July 1, 2004. The three-year transition period was later delayed by one year. At the end of the three-year transition period, the 75% compliance threshold would be restored. However, the Medicare, Medicaid and SCHIP Extension Act of 2007 (“MMSEA”), enacted on December 29, 2007 permanently froze the compliance threshold at 60% effective for cost reporting periods starting July 1, 2006, and allows co-morbid conditions to count toward this threshold.

     On July 31, 2008, CMS published its Medicare inpatient rehabilitation facility prospective payment system final rule for FFY 2009. The final rule increased the high-cost outlier threshold from $7,362 to $10,250 for FFY 2009. As required by the MMSEA, the rule includes a 0% market basket update for inpatient rehabilitation facility PPS payments for FY 2009.

     At December 31, 2008, 14 of our hospitals in continuing operations operated inpatient rehabilitation units. Under this program, our hospitals received an aggregate of approximately $27.4 million, $25.4 million and $25.9 million during 2006, 2007 and 2008, respectively.

     Inpatient Psychiatric

     As of December 31, 2008, we operated 14 inpatient psychiatric units. Effective for reporting periods after January 1, 2005, CMS replaced the cost-based system with a PPS for inpatient hospital services furnished in psychiatric hospitals and psychiatric units of general, acute care hospitals and critical access hospitals (“IPF PPS”). IPF PPS is a per diem prospective payment system with adjustments to account for certain patient and facility characteristics. IPF PPS contains an “outlier” policy for extraordinarily costly cases and an adjustment to a facility’s base payment if it maintains a full-service emergency department. The three-year transition to the IPF PPS is now complete and all inpatient psychiatric facilities payments will now be based entirely on the IPF PPS payment rate. CMS has established the IPF PPS payment rate in a manner intended to be budget neutral and has adopted a July 1 update cycle. In May 2008, CMS released its final IPF PPS regulation for July 1, 2008 through June 30, 2009 (“Rate Year 2009”). The rule provides a 3.2% market basket update in Rate Year 2009, but this increase is partially offset by a 0.5% reduction resulting from the transition to full PPS rates in Rate Year 2009, and a 0.1% reduction associated with the sunset of a stop-loss provision. Under this program, our hospitals received an aggregate of approximately $14.6 million, $15.0 million and $17.9 million for 2006, 2007 and 2008, respectively.

     Outpatient Payments

     The Balanced Budget Refinement Act of 1999 (“BBRA”) established a PPS for outpatient hospital services that commenced on August 1, 2000. Outpatient services are assigned ambulatory payment classifications (“APCs”), with associated specific relative weights, which are multiplied by an APC conversion factor. The APC conversion factors are $61.468, $63.694, and $66.059 for 2007, 2008, and 2009 respectively. Prior to August 1, 2000, outpatient services were paid at the lower of customary charges or on a reasonable cost basis.

     BBRA eliminated the anticipated average reduction of 5.7% for various Medicare outpatient payments under the Balanced Budget Act of 1997. Under BBRA, outpatient payment reductions for non-urban hospitals with 100 beds or less were postponed until December 31, 2003. Fifteen of our hospitals qualified for this “hold harmless” relief. Payment reductions under Medicare outpatient PPS for non-urban hospitals with greater than 100 beds and urban hospitals were mitigated through a corridor reimbursement approach, pursuant to which a percentage of such reductions were reimbursed through December 31, 2003. Substantially all of our remaining hospitals qualified for relief under this provision. MMA extended the hold harmless provision for non-urban hospitals with 100 beds or less and expanded the provision to include sole community hospitals for cost reporting periods beginning in 2004 until December 31, 2005. DRA extended these payments for three years but at a reduced amount. Payments for 2006 were 95% and for 2007 and 2008 will be 90% and 85%, respectively, of the hold harmless amount. On July 15, 2008, Congress enacted the Medicare Improvement for Patients and Providers Act (“MIPPA”), which included a provision extending hold harmless payments through 2009 at the 85% rate for both small rural hospitals and sole community hospitals.

     On October 30, 2008, CMS issued its final hospital outpatient prospective payment system rule for calendar year 2009. Among other provisions, the rule includes a 3.6% market basket update for hospitals that reported seven hospital outpatient quality measures. The annual payment update factor is reduced by 2.0 percentage points for hospitals that do not report those measures. CMS also added an additional four quality measures relating to imaging efficiency in order for hospitals to receive the full payment update in 2010. For FY 2009, our hospitals reported all quality measures required by CMS and received the full market basket update.

     The following table lists our historical Medicare outpatient payments for the years presented (in millions):

		Medicare
		Outpatient Payments
2006		$	171.6
2007			185.0
2008			190.5

     Home Health Payments

     As of December 31, 2008, we operated 12 home health agencies. Home health payments are reimbursed based on a PPS. For a two-year period beginning April 1, 2001, the Benefits Improvement and Protection Act of 2000 increased Medicare payments 10.0% for home health services furnished in specific rural areas. This provision expired on March 31, 2003. Home health PPS rates for 2003, which became effective October 1, 2002, were effectively decreased by 4.9%. The market basket rate increase for calendar year 2005 was 3.1%, which was reduced 0.8% as mandated by MMA, and resulted in a net increase of the 60-day episode of care rate of 2.3%. MMA included several changes to home health services, including a 5% additional payment for those home health services furnished in rural areas for one year, effective April 1, 2004. DRA froze 2006 Medicare payments but reinstated the 5% rural payment add-on for 2006 only. Home health agencies are required to submit data on certain quality measures and those agencies that do not submit quality data receive a 2% decrease in the market basket update. The home health market basket rate increases for FFY 2007 and 2008 were 3.3% and 3.0% respectively. The final rule for FFY 2008 created a 2.75% annual reduction in the national standardized 60-day episode payment rate through 2010 and a 2.71% reduction for 2011. On October 30, 2008, CMS issued the final Home Health Prospective Payment System rule for 2009, which included a rate increase of 2.9%.

     Medicare Bad Debt Reimbursement

     Under Medicare, the costs attributable to the deductible and coinsurance amounts which remain unpaid by the Medicare beneficiary can be added to the Medicare share of allowable costs as cost reports are filed. Hospitals generally receive interim pass-through payments during the cost report year which were determined by the fiscal intermediary from the prior cost report filing.

     Bad debts must meet the following criteria to be allowable:

	•		the debt must be related to covered services and derived from deductible and coinsurance amounts;
	•		the provider must be able to establish that reasonable collection efforts were made;
	•		the debt was actually uncollectible when claimed as worthless; and
	•		sound business judgment established that there was no likelihood of recovery at any time in the future.

     The amounts uncollectible from specific beneficiaries are to be charged off as bad debts in the accounting period in which the accounts are deemed to be worthless. In some cases, an amount previously written off as a bad debt and allocated to the program may be recovered in a subsequent accounting period. In these cases, the recoveries must be used to reduce the cost of beneficiary services for the period in which the collection is made. In determining reasonable costs for hospitals, the amount of bad debts otherwise treated as allowable costs is reduced by 30%. Under this program, our hospitals received an aggregate of approximately $16.2 million, $15.6 million and $16.4 million for 2006, 2007 and 2008, respectively.

     Recovery Audit Contractors

     In 2005, CMS began using recovery audit contractors (“RACs”) to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private auditing firms to examine Medicare claims filed by healthcare providers. Fees to the RACs are paid on a contingency basis. The RAC program began as a demonstration project in five states (New York, California, Florida, Massachusetts, and South Carolina), but was made permanent by the Tax Relief and Health Care Act of 2006. The permanent RAC program is set to begin in 23 states on March 1, 2009. We currently have facilities in nine of those states, specifically Arizona, Colorado, Florida, Indiana, Nevada, New Mexico, Texas, Utah, and Wyoming. CMS plans to have RACs in place in all 50 states by 2010.

     RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, medically unnecessary services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to a RAC program appeals process. Although we believe the claims for reimbursement submitted to the Medicare program are accurate, we cannot predict whether we will be subject to RAC audits in the future, or if audited, what the result of such audits might be.

  Medicaid

     Medicaid programs are funded by both the federal government and state governments to provide healthcare benefits to certain low-income individuals and groups. These programs and the reimbursement methodologies are administered by the states and vary from state to state and from year to year. Amounts received under the Medicaid program are often significantly less than the hospital’s customary charges for the services provided. Most state Medicaid payments are made under a PPS, fee schedule, cost reimbursement programs, or some combination of these three methods.

     Estimated revenues under various state Medicaid programs, excluding state-funded managed care programs, constituted approximately 10.1%, 9.7% and 9.5% of total revenues at our hospitals for 2006, 2007 and 2008, respectively. These payments are typically based on fixed rates determined by the individual states. We also receive disproportionate share payments under various state Medicaid programs. For 2006, 2007 and 2008, our revenue attributable to disproportionate share payments and other supplemental payments was approximately $17.6 million $19.4 million and $19.8 million, respectively.

     The increase in revenue from disproportionate share payments and other supplemental payments is primarily attributable to additional funding provided by certain states, which was made available in part by additional annual state provider taxes on certain of our hospitals and changes in classification of state programs. However, there are proposed changes to the Medicaid system that could materially reduce the amount of Medicaid payments we receive in the future.

     Many states in which we operate are facing budgetary challenges that also pose a threat to Medicaid funding levels to hospitals and other providers. We expect these challenges to continue and, perhaps, to intensify. States have adopted, or may be considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems. Such budget cuts, federal or state legislation, or other changes in the administration or interpretation of government health programs could have a material adverse effect on our financial position and results of operations.

     Congress has recently made an effort to address the financial challenges Medicaid is facing by increasing the amount of Medicaid funding available to states. On February 17, 2009, the “American Recovery and Reinvestment Act of 2009,” (“ARRA”) was enacted. Among other provisions, the ARRA provides $86.6 billion over 27 months to help states maintain and expand Medicaid enrollment. Under ARRA, each state will receive a 6.2% increase in federal Medicaid funding. At this point it is unclear how much of an impact ARRA will have on Medicaid payments in the states in which we operate.

  Annual Cost Reports

     Hospitals participating in the Medicare and some Medicaid programs, whether paid on a reasonable cost basis or under a PPS, are required to meet certain financial reporting requirements. Federal and, where applicable, state regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.

     Annual cost reports required under the Medicare and some Medicaid programs are subject to routine governmental audits. These audits may result in adjustments to the amounts ultimately determined to be payable to us under these reimbursement programs. Finalization of these audits often takes several years. Providers may appeal any final determination made in connection with an audit.

HMOs, PPOs and Other Private Insurers

     In addition to government programs, our hospitals are reimbursed by differing types of private payors including HMOs, PPOs, other private insurance companies and employers. To attract additional volume, most of our hospitals offer discounts from established charges to certain large group purchasers of healthcare services. These discount programs often limit our ability to increase charges in response to increasing costs. Generally, patients covered by HMOs, PPOs and other private insurers will be responsible for certain co-payments and deductibles.

Self-Pay and Charity/Indigent Care

     Self-pay revenues are derived from patients who do not have any form of healthcare coverage. The revenues associated with self-pay patients are generally reported at our gross charges. We evaluate these patients, after the patient’s medical condition is determined to be stable, for qualifications of Medicaid or other governmental assistance programs, as well as our local hospital’s policy for charity/indigent care. A significant portion of self-pay patients are admitted through the emergency department and often require high-acuity treatment. High-acuity treatment is more costly to provide and, therefore, results in higher billings. Over the past few years, we have seen an increase in the amount of self-pay revenues at our hospitals, which are the least collectible of all accounts.

     We provide care to certain patients that qualify under the local charity/indigent care policy at each of our hospitals. We discount a charity/indigent care patient’s charges against our revenues and do not report such discounts in our provision for doubtful accounts as it is our policy not to pursue collection of amounts related to these patients.

     The following table lists our self-pay revenues and charity/indigent care write-offs from continuing operations for the years presented (in millions):

		Self-Pay				Charity/Indigent Care				Combined
		Revenues				Write-Offs				Total
2006		$	279.7			$	40.5			$	320.2
2007			300.0				50.5				350.5
2008			324.5				53.7				378.2

Competition for Patients

     Our hospitals and other healthcare businesses operate in extremely competitive environments. Competition among healthcare providers occurs primarily at the local level. A hospital’s position within the geographic area in which it operates is affected by a number of competitive factors, including, but not limited to:

	•		the scope, breadth and quality of services a hospital offers to its patients and physicians;
	•		whether new, competitive services require the receipt of a certificate of need or other similar authorization;
	•		the number, quality and specialties of the physicians who admit and refer patients to the hospital;
	•		nurses and other health care professionals employed by the hospital or on the hospital’s staff;
	•		the hospital’s reputation;

	•		its managed care contracting relationships;
	•		its location and the location and number of competitive facilities and other health care alternatives;
	•		the physical condition of its buildings and improvements;
	•		the quality, age and state-of-the-art of its medical equipment;
	•		its parking or proximity to public transportation;
	•		the length of time it has been a part of the community;
	•		the relative convenience of the manner in which care is provided (for example, whether services are available on an outpatient basis and whether services can be obtained quickly);
	•		the choices made by the physicians on the medical staffs of our hospitals; and
	•		the charges for its services.

     Accordingly, each hospital develops its own strategies to address these competitive factors locally. In addition, tax-exempt competitors may have certain financial advantages not available to our facilities, such as endowments, charitable contributions, tax-exempt financing, and exemptions from sales, property and income taxes. In certain states, some not-for-profit hospitals are permitted by law to directly employ physicians while for-profit hospitals are prohibited from doing so.

     We also face increasing competition from other specialized care providers, including outpatient surgery, oncology, physical therapy and diagnostic centers, as well as competing services rendered in physician offices. To the extent that other providers are successful in developing specialized outpatient facilities, our market share for those specialized services will likely decrease. Some of our hospitals have developed specialized outpatient facilities where necessary to compete with these other providers. Physician competition also has increased as physicians, in some cases, have become equity owners in surgery centers and outpatient diagnostic centers, to which they refer patients.

Competition for Professionals

     Our hospitals must also compete for professional talent. A significant factor in our future success will be the ability of our hospitals to attract and retain physicians, as it is physicians who decide whether a patient is admitted to the hospital and the procedures to be performed. We seek to attract physicians by striving to employ excellent nurses, equip our hospitals with technologically advanced equipment and an attractive, up-to-date physical plant, properly maintaining the equipment and physical plant, and otherwise create an environment within which physicians prefer to practice. While physicians may terminate their association with our hospitals at any time, we believe that by striving to maintain and improve the quality of care at our hospitals and by maintaining ethical and professional standards, our hospitals will be better positioned to attract and retain qualified physicians with a variety of specialties.

     We also recruit physicians to the communities in which our hospitals are located. The types, amount and duration of assistance we can provide to recruited physicians are limited by the federal Stark physician self-referral law, federal and state anti-kickback statutes, and related regulations. For example, the Stark law requires, among other things, that recruitment assistance can only be provided to physicians who meet certain geographic and practice requirements, that the amount of assistance cannot be changed during the term, and that the recruitment payments cannot generally benefit physicians currently in practice in the community beyond recruitment costs actually incurred. In addition to these legal requirements, there is competition from other communities and facilities for these physicians, and this competition continues after the physician begins practicing in one of our communities.

     We compete with other healthcare providers in recruiting and retaining qualified management and staff personnel responsible for the day-to-day operations of each of our hospitals, including nurses and other non-physician healthcare professionals. In some markets, the scarce availability of nurses and other medical support personnel presents a significant operating issue. This shortage may require us to enhance wages and benefits to recruit and retain nurses and other medical support personnel, recruit personnel from foreign countries, and hire more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate.

Employees

     At December 31, 2008, we had approximately 21,000 employees, including approximately 5,300 part-time employees. Nurses, therapists, lab technicians, facility maintenance staff and the administrative staff of hospitals constitute the majority of our employees. Approximately 225 of our employees are subject to collective bargaining agreements. We consider our employee relations to be generally good. While some of our hospitals experience union organizing activity from time to time, we do not currently expect these efforts to materially affect our future operations.

Government Regulation

     Overview. All participants in the healthcare industry are required to comply with extensive government regulations at the federal, state and local levels. Under these laws and regulations, hospitals must meet requirements for licensure and qualify to participate in government programs, including the Medicare and Medicaid programs. These requirements relate to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, rate-setting, compliance with building codes and environmental protection laws. If we fail to comply with applicable laws and regulations, we may be subject to criminal penalties and civil sanctions, and our hospitals may lose their licenses and ability to participate in government programs. In addition, government regulations frequently change. When regulations change, we may be required to make changes in our facilities, equipment, personnel and services so that our hospitals remain licensed and qualified to participate in these programs. We believe that our hospitals are in substantial compliance with current federal, state and local regulations and standards.

     Acute care hospitals are subject to periodic inspection by federal, state and local authorities to determine their compliance with applicable regulations and requirements necessary for licensing, certification and accreditation. All of our hospitals are currently licensed under appropriate state laws and are qualified to participate in the Medicare and Medicaid programs. In addition, as of December 31, 2008, all of our acute care hospitals were accredited by The Joint Commission. The Joint Commission accreditation and deemed status with CMS indicates that a hospital satisfies the applicable health and administrative standards to participate in Medicare and Medicaid.

     Utilization Review. Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards, are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by quality improvement organizations, which review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of DRG classifications and the appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided, or assess fines and also have the authority to recommend to the Department of Health and Human Services (“DHHS”) that a provider which is in substantial noncompliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. Utilization review is also a requirement of most non-governmental managed care organizations.

     Fraud and Abuse Laws. Participation in the Medicare and/or Medicaid programs is heavily regulated by federal statutes and regulations. If a hospital fails to comply substantially with the numerous federal laws governing a facility’s activities, the hospital’s participation in the Medicare and/or Medicaid programs may be terminated and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare and/or Medicaid programs if it performs any of the following acts:

	•		making claims to Medicare and/or Medicaid for services not provided or misrepresenting actual services provided in order to obtain higher payments;
	•		paying money to induce the referral of patients or purchase of items or services where such items or services are reimbursable under a federal or state health program; or
	•		failing to provide appropriate emergency medical screening services to any individual who comes to a hospital’s campus or otherwise failing to properly treat and transfer emergency patients.

     The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal healthcare program. HIPAA created civil penalties for proscribed conduct, including upcoding and billing for medically unnecessary goods or services. HIPAA established new enforcement mechanisms to combat fraud and abuse. These new mechanisms include a bounty system, where a portion of the payments recovered is returned to the government agencies, as well as a whistleblower program. HIPAA also expanded the categories of persons that may be excluded from participation in federal and state healthcare programs.

     The anti-kickback provision of the Social Security Act prohibits the payment, receipt, offer or solicitation of anything of value, whether in cash or in kind, with the intent of generating referrals or orders for services or items covered by a federal or state healthcare program. Violations of the anti-kickback statute may be punished by criminal and civil fines, exclusion from federal and state healthcare programs, imprisonment and damages up to three times the total dollar amount involved.

     The Office of Inspector General (“OIG”) of DHHS is responsible for identifying fraud and abuse activities in government programs. In order to fulfill its duties, the OIG performs audits, investigations and inspections. In addition, it provides guidance to healthcare providers by identifying types of activities that could violate the anti-kickback statute. The OIG has identified the following hospital/physician incentive arrangements as potential violations:

	•		payment of any incentive by a hospital each time a physician refers a patient to the hospital;
	•		use of free or significantly discounted office space or equipment;
	•		provision of free or significantly discounted billing, nursing or other staff services;
	•		free training (other than compliance training) for a physician’s office staff, including management and laboratory technique training;
	•		guarantees which provide that if a physician’s income fails to reach a predetermined level, the hospital will pay any portion of the remainder;
	•		low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients to the hospital;
	•		payment of the costs for a physician’s travel and expenses for conferences;
	•		payment of services which require few, if any, substantive duties by the physician or which are in excess of the fair market value of the services rendered; or
	•		purchasing goods or services from physicians at prices in excess of their fair market value.

     We have a variety of financial relationships with physicians who refer patients to our hospitals, including employment contracts, leases, joint ventures, independent contractor agreements and professional service agreements. Physicians may also own shares of our common stock. We provide financial incentives to recruit physicians to relocate to communities served by our hospitals. These incentives for relocation include minimum revenue guarantees and, in some cases, loans. The OIG is authorized to publish regulations outlining activities and business relationships that would be deemed not to violate the anti-kickback statute. These regulations are known as “safe harbor” regulations. Failure to comply with the safe harbor regulations does not make conduct illegal, but instead the safe harbors delineate standards that, if complied with, protect conduct that might otherwise be deemed in violation of the anti-kickback statute. We seek to structure each of our arrangements with physicians to fit as closely as possible within an applicable safe harbor. However, not all of our business arrangements fit wholly within safe harbors, so we cannot guarantee that these arrangements will not be scrutinized by government authorities or, if scrutinized, that they will be determined to be in compliance with the anti-kickback statute or other applicable laws. The failure of a particular activity to comply with the safe harbor regulations does not mean that the activity violates the anti-kickback statute. We intend for all of our business arrangements to be in full compliance with the anti-kickback statute. If we violate the anti-kickback statute, we would be subject to criminal and civil penalties and/or possible exclusion from participating in Medicare, Medicaid or other governmental healthcare programs.

     The Social Security Act also includes a provision commonly known as the “Stark law.” This law prohibits physicians from referring Medicare and Medicaid patients to selected types of healthcare entities in which they or any of their immediate family members have ownership or a compensation relationship. These types of referrals are commonly known as “self referrals.” A violation of the Stark law may result in a denial of payment, require refunds to patients and the Medicare program, civil monetary penalties of up to $15,000 for each violation, civil monetary penalties of up to $100,000 for circumvention schemes, civil monetary penalties of up to $10,000 for each day that an entity fails to report required information, exclusion from participation in the Medicare and Medicaid programs and other federal programs, and additionally could result in penalties for false claims. There are ownership and compensation arrangement exceptions to the self-referral prohibition. One exception allows a physician to make a referral to a hospital if the physician owns an interest in the entire hospital, as opposed to an ownership interest in a department of the hospital. Another exception allows a physician to refer patients to a healthcare entity in which the physician has an ownership interest if the entity is located in a rural area, as defined in the statute. There are also exceptions for many of the customary financial arrangements between physicians and facilities, including employment contracts, leases and recruitment agreements. We intend for our financial arrangements with physicians to comply with the exceptions included in the Stark law and regulations. CMS issued proposed and final rules in 2007 modifying Stark law exceptions, including addressing equipment lease terms and “under arrangements” services agreements. While some changes have been implemented, other proposals remain in proposed form or have been delayed. Further, the Stark law and related regulations have been subject to little judicial interpretation to date. We anticipate that there will be further changes in the future that will require us to continue to modify our activities.

     In addition to issuing new regulations, or applying new interpretations to existing rules or regulations, CMS also seems to be significantly intensifying its scrutiny of the conduct of hospitals. CMS originally indicated its intent to require a group of 500 hospitals to submit a Disclosure of Financial Relationships Report (“DFRR”) to CMS in 2007. If issued, the DFRR is expected to require detailed information concerning each selected hospital’s ownership, investment, and compensation arrangements with physicians, including copies of contracts and an indication as to whether such contracts comply with the strict requirements of the Stark law. CMS has indicated it will distribute the DFRR to selected hospitals once the DFRR is approved by the Office of Management and Budget (“OMB”). Although final OMB approval is still pending, the deadline for public comment was January 20, 2009; therefore, the DFRR could be distributed at any time. If the DFRR is distributed, we expect that a number of our facilities may be included among those required to respond.

     Another example of intensifying scrutiny is the use by CMS of RACs, which are paid on a contingency basis, to detect Medicare overpayments not identified through existing claims review mechanisms. RACs are scheduled to begin audits in several states in 2009 and plan to be operational in every state by 2010.

     Corporate Practice of Medicine and Fee-Splitting. Some states have laws that prohibit unlicensed persons or business entities, including corporations or business organizations that own hospitals, from employing physicians. Some states also have adopted laws that prohibit direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties and rescission of business arrangements. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. We attempt to structure our arrangements with healthcare providers to comply with the relevant state laws and the few available regulatory interpretations.

     Emergency Medical Treatment and Active Labor Act. All of our facilities are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency department for treatment and, if the patient is suffering from an emergency medical condition, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patient’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program. In addition, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another hospital’s violation of the law can bring a civil suit against that other hospital.

     During 2003, CMS published a final rule clarifying a hospital’s duties under EMTALA. In the final rule, CMS clarified when a patient is considered to be on a hospital’s property for purposes of treating the person pursuant to EMTALA. CMS stated that off-campus facilities such as specialty clinics, surgery centers and other facilities that lack emergency departments should not be subject to EMTALA, but that these locations must have a plan explaining how the location should proceed in an emergency situation such as transferring the patient to the closest hospital with an emergency department. CMS further clarified that hospital-owned ambulances could transport a patient to the closest emergency department instead of to the hospital that owns the ambulance.

     CMS’s rules did not specify “on-call” physician requirements for an emergency department, but provided a subjective standard stating that “on-call” hospital schedules should meet the hospital’s and community’s needs. Although we believe that our hospitals comply with EMTALA, we cannot predict whether CMS will implement new requirements in the future and whether our hospitals will comply with any new requirements.

     Federal False Claims Act. The federal False Claims Act prohibits providers from knowingly submitting false claims for payment to the federal government. This law has been used not only by the federal government, but also by individuals who bring an action on behalf of the government under the law’s “qui tam” or “whistleblower” provisions. When a private party brings a qui tam action under the federal False Claims Act, the defendant will generally not be aware of the lawsuit until the government makes a determination whether it will intervene and take a lead in the litigation.

     Civil liability under the federal False Claims Act can be up to three times the actual damages sustained by the government plus civil penalties for each separate false claim. There are many potential bases for liability under the federal False Claims Act, including claims submitted pursuant to a referral found to violate the anti-kickback statute. Although liability under the federal False Claims Act arises when an entity knowingly submits a false claim for reimbursement to the federal government, the federal False Claims Act defines the term “knowingly” broadly. Although simple negligence generally will not give rise to liability under the federal False Claims Act, submitting a claim with reckless disregard to its truth or falsity can constitute “knowingly” submitting a false claim.

     Healthcare Reform. The healthcare industry continues to attract much legislative interest and public attention. MMA introduced changes to the Medicare program. Many of MMA’s changes went into effect January 1, 2006. MMA establishes a voluntary prescription drug benefit, provides federal subsidies to plan sponsors that provide prescription drug benefits to Medicare-eligible retirees, substantially adjusts Medicare+Choice and provides favorable payment adjustments for rural hospitals. MMA also provides favorable tax treatment for individual health savings accounts. In addition, MMA authorizes MedPAC to study the effects of home health and rural hospital reimbursement in current and anticipated reimbursement methodologies. Medicare payment methodologies have been, and can be expected to continue to be, subject to significant revisions based on cost containment and policy considerations. For example, the adoption of severity-adjusted diagnosis groups known as MS-DRGs is intended to result in higher payments to hospitals treating more severe patients, and lower payments to hospitals treating less severe patients.

     On January 20, 2009, a new President took office and the incoming administration has signaled a desire to enact substantial healthcare reform. During his campaign, President Obama consistently advocated fundamental changes to the U.S. healthcare system intended to provide coverage and access to substantially all Americans. Given the strain on federal finances caused by current economic conditions, it remains to be seen whether such major reform will be undertaken or could come quickly enough to affect our facilities in 2009.

     In recent years, Medicaid enrollment has grown as more people became eligible for the program. At the same time, healthcare costs have been rising, forcing states to address Medicaid cost-containment. Healthcare costs, demographics, erosion of employer-sponsored health coverage and potential changes in federal Medicaid policies continue to put pressure on state Medicaid programs. Policymakers in many states are evaluating the Medicaid programs in their states and considering reforms. Also, the number of persons without health insurance has risen. The federal government has recently taken steps to address some of these challenges by expanding health insurance coverage for children through the State Children’s Health Insurance Program (“SCHIP”) program and increasing federal funding of the Medicaid program as part of the ARRA. We anticipate that the federal and state governments will continue to introduce legislative proposals to modify the cost and efficiency of the healthcare delivery system to provide coverage for more or all persons.

     Conversion Legislation. Many states have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In states that do not have such legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets. These legislative and administrative efforts primarily focus on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the not-for-profit seller. These reviews and, in some instances, approval processes can add additional time to the closing of a not-for-profit hospital acquisition. Future actions by state legislators or attorneys general may seriously delay or even prevent our ability to acquire certain hospitals.

     Certificates of Need. The construction of new facilities, the acquisition or expansion of existing facilities and the addition of new services and expensive equipment at our facilities may be subject to state laws that require prior approval by state regulatory agencies. These certificate of need laws generally require that a state agency determine the public need and give approval prior to the construction or acquisition of facilities or the addition of new services. We operate hospitals in ten states that have adopted certificate of need laws — Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, Nevada, Tennessee, Virginia and West Virginia. If we fail to obtain necessary state approval, we will not be able to expand our facilities, complete acquisitions or add new services at our facilities in these states. Violation of these state laws may result in the imposition of civil sanctions or the revocation of hospital licenses. All other states in which we operate do not require a certificate of need prior to the initiation of new healthcare services. In these other states, our facilities are subject to competition from other providers who may choose to enter the market by developing new facilities or services.

     HIPAA Transaction, Privacy and Security Requirements. Federal regulations issued pursuant to HIPAA contain, among other measures, provisions that require us to implement very significant and potentially expensive new computer systems, employee training programs and business procedures. The federal regulations are intended to protect the privacy of healthcare information and encourage electronic commerce in the healthcare industry.

     Among other things, HIPAA requires healthcare facilities to use standard data formats and code sets established by DHHS when electronically transmitting information in connection with several transactions, including health claims and equivalent encounter information, healthcare payment and remittance advice and health claim status. We have implemented or upgraded computer systems utilizing a third party vendor, as appropriate, at our facilities and at our corporate headquarters to comply with the new transaction and code set regulations and have tested these systems with several of our payors.

     HIPAA also requires DHHS to issue regulations establishing standard unique health identifiers for individuals, employers, health plans and healthcare providers to be used in connection with the standard electronic transactions. DHHS published on January 23, 2004, the final rule establishing the standard for the unique health identifier for healthcare providers. Our facilities have obtained and fully implemented the use of the National Provider Identifiers required for standard transactions instead of other numerical identifiers. We have not experienced any significant payment delays during the transition to the new identifier. Our facilities have fully implemented use of the Employer Identification Number as the standard unique health identifier for employers.

     The Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) was enacted into law on February 17, 2009 as part of the ARRA. The HITECH Act contains a number of provisions that significantly expand the reach of HIPAA. For example, the law imposes varying civil monetary penalties and creates a private cause of action for HIPAA violations, extends HIPAA’s security provisions to business associates, and creates new security breach notification requirements. We may incur significant costs in implementing the policies and systems required to comply with these new requirements.

     HIPAA regulations also require our facilities to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic protected health information (“ePHI”). The security standards were designed to protect ePHI against reasonably anticipated threats or hazards to the security or integrity of the information and to protect the ePHI against unauthorized use or disclosure. We believe that the business procedures advisable for compliance with the security standards include comprehensive security risk assessments and the documentation and implementation of mitigating controls, processes and remediation for systems, devices and applications that have been identified as having the highest levels of vulnerability. This is an ongoing process as we continuously update, upgrade and implement new systems and technologies.

     DHHS has also established standards for the privacy of individually identifiable health information. These privacy standards apply to all health plans, all healthcare clearinghouses and healthcare providers, such as our facilities, that transmit health information in an electronic form in connection with standard transactions, and apply to individually identifiable information held or disclosed by a covered entity in any form. These standards impose extensive administrative requirements on our facilities and require compliance with rules governing the use and disclosure of this health information, and they require our facilities to impose these rules, by contract, on any business associate to whom we disclose such information in order for them to perform functions on our facilities’ behalf. In addition, our facilities will continue to remain subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary by state and could impose additional penalties. Compliance with these standards requires significant commitment and action by us.

     Patient Safety and Quality Improvement Act of 2005. On July 29, 2005, the President signed the Patient Safety and Quality Improvement Act of 2005, which has the goal of reducing medical errors and increasing patient safety. This legislation establishes a confidential reporting structure in which providers can voluntarily report “Patient Safety Work Product” (“PSWP”) to “Patient Safety Organizations” (“PSOs”). Under the system, PSWP is made privileged, confidential and legally protected from disclosure. PSWP does not include medical, discharge or billing records or any other original patient or provider records but does include information gathered specifically in connection with the reporting of medical errors and improving patient safety. This legislation does not preempt state or federal mandatory disclosure laws concerning information that does not constitute PSWP. PSOs will be certified by the Secretary of the DHHS for three-year periods after the Secretary develops applicable certification criteria. PSOs will analyze PSWP, provide feedback to providers and may report non-identifiable PSWP to a database. In addition, PSOs are expected to generate patient safety improvement strategies. We will monitor the progress of these voluntary reporting programs and we anticipate that we will participate in some form when the details are available.

     State Hospital Rate-Setting Activity. We currently operate two hospitals in West Virginia. The West Virginia Health Care Authority requires that requests for increases in hospital charges be submitted annually. Requests for rate increases are reviewed by the West Virginia Health Care Authority and are either approved at the amount requested, approved for lower amounts than requested, or are rejected. As a result, in West Virginia, our ability to increase our rates to compensate for increased costs per admission is limited and the operating margins for our hospitals located in West Virginia may be adversely affected if we are not able to increase our rates as our expenses increase. We can provide no assurance that other states in which we operate hospitals will not enact similar rate-setting laws in the future.

     Medical Malpractice Tort Law Reform. Medical malpractice tort law has historically been maintained at the state level. All states have laws governing medical liability lawsuits. Over half of the states have limits on damages awards. Almost all states have eliminated joint and several liability in malpractice lawsuits, and many states have established limits on attorney fees. Recently, many states had bills introduced in their legislative sessions to address medical malpractice tort reform. Proposed solutions include enacting limits on non-economic damages, malpractice insurance reform, and gathering lawsuit claims data from malpractice insurance companies and the courts for the purpose of assessing the connection between malpractice settlements and premium rates. Reform legislation has also been proposed, but not adopted, at the federal level that could preempt additional state legislation in this area.

     Environmental Regulation. Our healthcare operations generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Our operations, as well as our purchases and sales of healthcare facilities, are also subject to compliance with various other environmental laws, rules and regulations. Such compliance costs are not significant and we do not anticipate that such compliance costs will be significant in the future.

Regulatory Compliance Program

     It is our policy to conduct our business with integrity and in compliance with the law. We have in place and continue to enhance a company-wide compliance program that focuses on all areas of regulatory compliance including billing, reimbursement, cost reporting practices and contractual arrangements with referral sources.

     This regulatory compliance program is intended to help ensure that high standards of conduct are maintained in the operation of our business and that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, every employee, certain contractors involved in patient care, and coding and billing, receive initial and periodic legal compliance and ethics training. In addition, we regularly monitor our ongoing compliance efforts and develop and implement policies and procedures designed to foster compliance with the law. The program also includes a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors, designated compliance officers in our hospitals, our compliance hotline or directly to our corporate compliance office. We believe our compliance program is consistent with standard industry practices.

Risk Management and Insurance

     We retain a substantial portion of our professional and general liability risks through a self insurance reserve (“SIR”) insurance program administered in-house by our risk and insurance department with assistance from our insurance brokers. As of December 31, 2008, our SIR for professional and general liability risks is $15.0 million per claim. We maintain professional and general liability insurance with unrelated commercial insurance carriers to provide for losses in excess of the SIR.

     Our workers’ compensation program has a $2.0 million deductible for each loss in all states except for West Virginia and Wyoming. Workers’ compensation in West Virginia and Wyoming operate under state specific programs.

     We also maintain directors’ and officers’, property and other types of insurance coverage with unrelated commercial carriers. Our directors’ and officers’ liability insurance coverage for current officers and directors is a program that protects us as well as the individual director or officer. The limits provided by the directors’ and officers’ policy are based on numerous factors, including the commercial insurance market. We maintain property insurance through an unrelated commercial insurance company. We maintain large property insurance deductibles with respect to our facilities in coastal regions because of the high wind exposure and the related cost of such coverage. We have four locations that are considered a high exposure to named-storm risk and carry a deductible of 3% of their respective property values.

     We operate a captive insurance company under the name Point of Life Indemnity, Ltd. This captive insurance company which was approved by the Cayman Islands Monetary Authority and which operates as our wholly-owned subsidiary, issues malpractice insurance policies to our employed physicians and certain voluntary attending physicians.

Item 1A. Risk Factors.

     There are several factors, some beyond our control that could cause results to differ significantly from our expectations. Some of these factors are described below. Other factors, such as market, operational, liquidity, interest rate and other risks, are described elsewhere in this report (see, for example, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations). Any factor described in this report could by itself, or together with one or more factors, adversely affect our business, results of operations and/or financial condition. There may be factors not described in this report that could also cause results to differ from our expectations.

     If we do not effectively attract, recruit and retain qualified physicians, nurses, medical technicians and other healthcare professionals, our ability to deliver healthcare services efficiently will be adversely affected.

     As a general matter, only physicians on our medical staffs may direct hospital admissions and the services ordered once a patient is admitted to a hospital. As a result, our success depends significantly on the efforts, abilities and experience of the physicians on the medical staffs of our hospitals — most of whom have no long-term contractual relationship with us, having an appropriate number of physicians on our hospitals’ medical staffs, the admissions practices of these physicians and the maintenance of good relations with these physicians.

     The primary method we use to add or expand medical services is the recruitment of new physicians into our communities. The success of our recruiting efforts will depend on several factors. In general, there is a shortage of specialty care physicians. We face intense competition in the recruitment and retention of specialists because of the difficulty in convincing these individuals of the benefits of practicing or remaining in practice in non-urban communities. If the growth rate slows more significantly in the non-urban communities where our hospitals operate, then we could experience difficulty attracting and retaining physicians to practice in our communities.

     We also employed more physicians during 2008 than in prior years. We believe that physician employment by acute care hospitals has become more common in recent periods and that our experience in employing physicians is consistent with industry trends. Employed physicians could present more direct risks to us than those presented by independent members of our hospitals’ medical staffs. For example, it is more likely that we could be found liable if an employed physician commits malpractice. In light of the competition for a limited number of physicians, some are able to command significant (although fair market value) salaries. The combined costs of these salaries is significant and , if this trend continues, could have an adverse effect on our results of operations.

     Further, our ability to recruit physicians is closely regulated. For example, the types, amount, and duration of assistance we can provide to recruited physicians are limited by the federal Stark physician self-referral law, federal and state anti-kickback statutes, and related regulations. The Stark law requires, among other things, that assistance can only be provided to physicians who meet certain geographic and practice requirements, that the amount of assistance cannot be changed during the term, and that the recruitment payments cannot generally benefit physicians currently in practice in the community beyond costs actually incurred by them in the recruitment. In addition to these legal requirements, there is competition from other communities and facilities for these physicians, and this competition continues after the physician is practicing in one of our communities.

     We also compete with other healthcare providers in recruiting and retaining qualified management and staff personnel responsible for the day-to-day operations of each of our hospitals, including nurses and other non-physician healthcare professionals. In some markets, the scarce availability of nurses and other medical support personnel presents a significant operating issue. This shortage may require us to enhance wages and benefits to recruit and retain nurses and other medical support personnel, recruit personnel from foreign countries, and hire more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate. Because a significant percentage of our revenue consists of fixed, prospective payments, our ability to pass along increased labor costs is constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control our labor costs could have a material adverse effect on our financial condition or results of operations.

     The loss of certain physicians can have a disproportionate impact on certain of our hospitals.

     Generally, the top ten attending physicians within each of our facilities represent a large share of our inpatient revenues and admissions. The loss of one or more of these physicians – even if temporary - could cause a material reduction in our revenues, which could take significant time to replace given the difficulty and cost associated with recruiting and retaining physicians. We may not be able to recruit all of the physicians we have targeted. In addition, we may incur increased malpractice expense if the quality of such physicians does not meet our expectations. We believe physician attrition is one of the reasons for our recent volume declines. If we are unable to reverse this trend we expect these volume declines to continue.

     The failure of certain employers, or the closure of certain manufacturing and other facilities, can have a disproportionate impact on our hospitals.

     The economies in the non-urban communities in which our hospitals operate are often dependant on a small number of large employers, especially manufacturing or other facilities. These employers often provide income and health insurance for a disproportionately large number of community residents who may depend on our hospitals for care. The failure of one or more large employers, or the closure or substantial reduction in the number of individuals employed at manufacturing or other facilities located in or near many of the non-urban communities in which our hospitals operate, could cause affected employees to move elsewhere for employment or lose insurance coverage that was otherwise available to them. The occurrence of these events may cause a material reduction in our revenues and results of operations or impede our business strategies intended to generate organic growth and improve operating results at our hospitals.

     We may continue to see the growth of uninsured and “patient due” accounts; deterioration in the collectability of these accounts could adversely affect our results of operations and cash flows.

     The primary collection risks associated with our accounts receivable relate to the uninsured patient accounts and patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and co-payments) remain outstanding. The provision for doubtful accounts relates primarily to amounts due directly from patients. This risk has increased, and will likely continue to increase, as more individuals enroll in high deductible insurance plans or those with high co-payments or who have no insurance coverage. These trends will likely be exacerbated if general economic conditions remain challenging. These trends will also likely be exacerbated as unemployment levels in the communities in which we operate rise. As unemployment rates increase, our business strategies that intend to generate organic growth, and to improve admissions and adjusted admissions at our hospitals could become more difficult to accomplish.

     The amount of our provision for doubtful accounts is based on our assessments of historical collection trends, business and economic conditions, trends in federal and state governmental and private employer health coverage and other collection indicators. A continuation in trends that results in increasing the proportion of accounts receivable being comprised of uninsured accounts and deterioration in the collectability of these accounts could adversely affect our collections of accounts receivable, cash flows and results of operations.

     The current economic recession, along with difficult and volatile conditions in the capital and credit markets, could materially adversely affect our financial position, results of operations or cash flows, and we are unsure whether these conditions will improve in the near future.

     The United States economy is currently in a period of recession and global credit markets remain volatile. Declining consumer confidence and increased unemployment have increased concerns of prolonged economic weakness. While certain healthcare spending is considered non-discretionary and may not be significantly impacted by economic downturns, other types of healthcare spending may be adversely impacted by such conditions. When patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose to defer or forego elective surgeries and other non-emergent procedures, which are generally more profitable lines of business for hospitals. Moreover, a greater number of uninsured patients may seek care in our emergency rooms. We are unable to determine the specific impact of the current economic conditions on our business at this time, but we believe that further deterioration or a prolonged period of recession will have an adverse impact on our operations and could impact not only the healthcare decisions of our patients, but also the solvency of managed care providers and other counterparties to transactions with us.

     Our revenues will decline if federal or state programs reduce our Medicare or Medicaid payments or if managed care companies reduce reimbursement amounts. In addition, the financial condition of payors and healthcare cost containment initiatives may limit our revenues and profitability.

     In 2008, we derived 40.7% of our revenues from the Medicare and Medicaid programs. The Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the timing of payments to our facilities.

     We are unable to predict the effect of future government health care funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited or if we, or one or more of our subsidiaries’ hospitals, are excluded from participation in the Medicare or Medicaid program or any other government health care program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.

     During the past several years, healthcare payors, such as federal and state governments, insurance companies and employers, have undertaken initiatives to revise payment methodologies and monitor healthcare costs. As part of their efforts to contain healthcare costs, payors increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk relating to paying for care provided, often in exchange for exclusive or preferred participation in their benefit plans. We expect efforts to impose greater discounts and more stringent cost controls by government and other payors to continue, thereby reducing the payments we receive for our services. In addition, these payors have instituted policies and procedures to substantially reduce or limit the use of inpatient services.

     All of our hospitals are certified as providers of Medicaid services. Medicaid programs are jointly funded by federal and state governments and are administered by states under an approved plan that provides hospital and other healthcare benefits to qualifying individuals who are unable to afford care. A number of states, however, are experiencing budget problems and have adopted or are considering legislation designed to reduce their Medicaid expenditures or to provide universal coverage and additional care, including enrolling Medicaid recipients in managed care programs and imposing additional taxes on hospitals to help finance or expand states’ Medicaid systems. The ARRA includes increased federal funding for Medicaid. However, we are unable to predict at this time how this will impact states’ ability to provide Medicaid coverage in the future. It is possible that, despite Congress’ actions, budgetary pressures will force states to resort to some of the cost saving measures mentioned above. These efforts could have a material adverse effect on our business, financial condition, results of operations or cash flows.

     For example, one of our hospitals, Memorial Medical Center of Las Cruces, New Mexico (“MMC”), received approximately $33.0 million during 2008 under the New Mexico Sole Community Provider Program (the “SCPP”). While the funds made available to MMC (and other New Mexico hospitals that participate in the SCPP) are not tied directly to the cost of actual services provided, MMC is required to provide an annual report of its costs to Dona Ana County (the county primarily served by MMC). Once desired funding levels were established by Dona Ana County for 2008, the county submitted funds to the New Mexico Human Services Department (the “NMHSD”), which in turn were combined with funds sent by other New Mexico counties and then used by the NMHSD to request matching funds from the federal government. Once the federal matching dollars were made available to the state, the resulting sole community provider payment was made under the SCPP directly to MMC (and other hospitals participating in the SCPP) by the NMHSD. The payments made by the NMHSD to hospitals pursuant to the SCPP are based on formulas established with respect to each participating hospital. The SCPP was created in 1993 and has resulted in significant payments to MMC in prior years. Like many other states, there is a general concern in New Mexico that the SCPP cannot be sustained at current funding levels due to budget concerns and other factors. It seems likely, as a result, that the SCPP will soon be reconstituted. We are not able to predict what changes may be made to the SCPP, but any change in the SCPP is likely to reduce payments made to MMC.

     We are subject to increasingly stringent governmental regulation, and may be subjected to allegations that we have failed to comply with governmental regulations which could result in sanctions and even greater scrutiny that reduce our revenues and profitability.

     All participants in the healthcare industry are required to comply with many laws and regulations at the federal state and local government levels. These laws and regulations require that hospitals meet various requirements, including those relating to hospitals’ relationships with physicians and other referral sources, the adequacy and quality of medical care, equipment, personnel, operating policies and procedures, billing and cost reports, payment for services and supplies, maintenance of adequate records, privacy, compliance with building codes and environmental protection, among other matters.

     The hospital industry has seen a number of ongoing investigations related to referrals, physician recruiting practices, cost reporting and billing practices, laboratory and home healthcare services and physician ownership and joint ventures involving hospitals. Federal and state government agencies have announced heightened and coordinated civil and criminal enforcement efforts. In addition, the OIG (which is responsible for investigating fraud and abuse activities in government programs) and the U.S. Department of Justice periodically establish enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. In January 2005, the OIG issued Supplemental Compliance Program Guidance for Hospitals that focuses on hospital compliance risk areas. Some of the risk areas highlighted by the OIG include correct outpatient procedure coding, revising admission and discharge policies to reflect current CMS rules, submitting appropriate claims for supplemental payments such as pass-through costs and outlier payments and a general discussion of the fraud and abuse risks related to financial relationships with referral sources.

     Hospitals continue to be one of the primary focal areas of OIG investigations. The OIG reported savings and expected recoveries for federal health care programs of more than $20.4 billion for FY 2008, which includes one of the largest civil fraud recoveries ever against an individual hospital. It is likely that the introduction of RACs in 2009 signals additional government scrutiny of hospitals. The claims review strategies used by the RACs include review of high dollar claims, including inpatient hospital claims. During the three year RAC demonstration program, a large majority of the total amounts recovered by RACs came from hospitals.

     In public statements, governmental authorities have taken positions on issues for which little official interpretation was previously available. Some of these positions appear to be inconsistent with common practices within the industry but have not previously been challenged. Moreover, some government investigations that have in the past been conducted under the civil provisions of federal law are now being conducted as criminal investigations under the Medicare fraud and abuse laws.

     In a series of notices in 2007, CMS indicated its intent to require a group of 500 hospitals to submit a Disclosure of Financial Relationships Report to CMS. Although final OMB approval of the DFRR is still pending, the deadline for public comment was January 20, 2009; therefore, it could be distributed at any time. If the DFRR is distributed, we expect that a number of our facilities may be included among those required to respond. CMS intends to use this data to monitor compliance with the Stark law, and CMS has indicated that it may share the information with other government agencies. Many of these agencies have not previously analyzed this information and have the authority to bring enforcement actions against us. Once a hospital receives this request, the hospital will have a limited amount of time to compile a significant amount of information relating to its financial relationships with physicians, including any ownership by physicians. The hospital may be subject to substantial penalties if it is unable to assemble and report this information within the required timeframe or if CMS or any other government agency determines that the submission is inaccurate or incomplete. The hospital may be the subject of investigations or enforcement actions if a government agency determines that any of the information indicates a potential violation of law. Any such investigation or enforcement action could materially adversely affect the results of our operations.

     These activities reflect the general trend of increasing governmental scrutiny of the financial relationships between hospitals and referring physicians under the fraud and abuse laws.

     The laws and regulations with which we must comply are complex and subject to change. In the future, different interpretations or enforcement of these laws and regulations could subject our practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate our hospitals and our ability to participate in the Medicare, Medicaid and other federal and state healthcare programs.

     Finally, we are subject to various federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Our healthcare operations generate medical waste, such as pharmaceuticals, biological materials and disposable medical instruments that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Our operations are also subject to various other environmental laws, rules and regulations. Environmental regulations also may apply when we renovate or refurbish hospitals, particularly older facilities.

     Other hospitals and outpatient facilities provide services similar to those which we offer. In addition, physicians provide services in their offices that could be provided in our hospitals. These factors increase the level of competition we face and may therefore adversely affect our revenues, profitability and market share.

     Competition among hospitals and other healthcare service providers, including outpatient facilities, has intensified in recent years. We compete with other hospitals, including larger tertiary care centers located in larger metropolitan areas, and with physicians who provide services in their offices which could otherwise be provided in our hospitals. Although the hospitals with which we compete may be a significant distance away from our facilities, patients in our markets may migrate on their own to, may be referred by local physicians to, or may be encouraged by their health plan to travel to these hospitals. Furthermore, some of the hospitals with which we compete may offer more or different services than those available at our hospitals, may have more advanced equipment or a medical staff that is thought to be better qualified. Also, some of the hospitals that compete with our facilities are owned by tax-supported governmental agencies or not-for-profit entities supported by endowments and charitable contributions. These hospitals, in most instances, are also exempt from paying sales, property and income taxes.

     We also face very significant and increasing competitions from services offered by physicians (including physicians on our medical staffs) in their offices and from other specialized care providers, including outpatient surgery, oncology, physical therapy and diagnostic centers (including many in which physicians may have and ownership interest). Some of our hospitals have and will seek to develop outpatient facilities where necessary to compete effectively. However, to the extent that other providers are successful in developing outpatient facilities or physicians are able to offer additional, advanced services in their offices, our market share for these services will likely decrease in the future.

     In 2005, CMS began making public performance data relating to ten quality measures that hospitals submit in connection with their Medicare reimbursement. Since that time, CMS has on several occasions increased the number of quality measures hospitals are required to report. If these measures become a primary factor in where patients choose to receive care, and if competing hospitals have better results than our hospitals on the measures, we would expect that our patient volumes would decline. In the future, other trends toward clinical transparency may have an unanticipated impact on our competitive position and patient volume.

     Our revenues are especially concentrated in a small number of states which will make us particularly sensitive to regulatory and economic changes in those states.

     Our revenues are particularly sensitive to regulatory and economic changes in Kentucky, Virginia, New Mexico, West Virginia, Tennessee, Alabama, Louisiana, Arizona and Texas. The following table contains our revenues and revenues as a percentage of our total revenues by state for each of these states for the years presented (dollars in millions):

		Revenue Concentration by State
		Amount												% of Total Revenues
		2006				2007				2008				2006				2007				2008
Kentucky		$	404.0			$	435.4			$	465.0				17.3	%			17.0	%			17.2	%
Virginia			341.9				369.7				381.6				14.6				14.4				14.1
New Mexico			210.9				225.0				245.7				9.0				8.8				9.1
West Virginia			151.7				229.7				243.4				6.5				8.9				9.0
Tennessee			199.6				209.8				223.2				8.5				8.2				8.3
Alabama			186.5				191.0				203.2				8.0				7.4				7.5
Louisiana			170.5				189.4				194.6				7.3				7.4				7.2
Arizona			133.0				167.1				173.8				5.7				6.5				6.4
Texas			136.3				135.3				142.3				5.8				5.3				5.3

     Accordingly, any change in the current demographic, economic, competitive or regulatory conditions in the above-mentioned states could have an adverse effect on our business, financial condition, results of operations and/or prospects. Medicaid changes in these states could also have a material adverse effect on our business, financial condition, results of operations or cash flows.

     If our access to licensed information systems is interrupted or restricted, or if we are not able to integrate changes to our existing information systems or information systems of acquired hospitals, our operations could suffer.

     Our business depends significantly on effective information systems to process clinical and financial information. Information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information processing technology. We rely heavily on HCA-Information Technology and Services, Inc., (“HCA-IT”), for information systems. HCA-IT provides us with financial, clinical, patient accounting and network information services. We do not control HCA-IT’s systems, and if these systems fail or are interrupted, if our access to these systems is limited in the future or if HCA-IT develops systems more appropriate for the urban healthcare market and not suited for our hospitals, our operations could suffer. Our contract with HCA-IT, as amended, expires on December 31, 2017 (including a wind-down period) unless extended by the parties.

     HCA’s primary business is to own and operate hospitals, not to provide information systems. In addition, HCA was taken private in a leveraged buyout in November 2006. The additional debt incurred by HCA in this transaction could impact its ability to provide information systems and related support to us. During late 2008, HCA announced layoffs which included over 100 employees of HCA-IT. At this time, it remains uncertain whether these staffing reductions will impact the performance of HCA-IT under our agreements.

     System conversions are costly, time consuming and disruptive for physicians and employees. Should we decide or be required to convert away from systems provided by HCA-IT, such implementation would be very costly and could have a material adverse effect on our business, financial condition, results of operations or cash flows.

     In addition, as new information systems are developed in the future, we will need to integrate them into our existing systems. Evolving industry and regulatory standards, such as HIPAA regulations, may require changes to our information systems in the future. We may not be able to integrate new systems or changes required to our existing systems or systems of acquired hospitals in the future effectively or on a cost-efficient basis.

     An element of our long-term business strategy is growth through the acquisition of additional acute care hospitals. Our acquisition activity requires transitions from, and the integration of, various information systems that are used by the hospitals we acquire. If we experience difficulties with the integration of the information systems of acquired hospitals, we could suffer, among other things, operational disruptions and increases in administrative expenses.

     We have substantial indebtedness and we may incur significant amounts of additional indebtedness in the future which could affect our ability to finance operations and capital expenditures, pursue desirable business opportunities or successfully operate our business in the future.

     As of December 31, 2008, our consolidated debt was approximately $1,516.7 million. We also have the ability to incur significant amounts of additional indebtedness, subject to the conditions imposed by the terms of our credit agreements an the agreements or indentures governing any additional indebtedness that we incur in the future. Our credit facility contains an uncommitted “accordion” feature that permits us to borrow at a later date additional aggregate principal amounts of up to $650.0 million under the term A and the term B loan components and up to $411.6 million under the revolving loan component, subject to the receipt of commitments and the satisfaction of other conditions. Our ability to repay or refinance our indebtedness will depend upon our future ability to monetize our interests in our hospital assets and our operating performance, which may be affected by general economic, financial, competitive, regulatory, business and other factors beyond our control.

     Although we believe that our future operating cash flow, together with available financing arrangements, will be sufficient to fund our operating requirements, our leverage and debt service obligations could have important consequences, including the following:

	•		Under our credit facility, we are required to satisfy and maintain specified financial ratios and tests. Failure to comply with these obligations may cause an event of default which, if not cured or waived, could required us to repay substantial indebtedness immediately. Moreover, if debt repayment is accelerated, we will be subject to higher interest rates on our debt obligations as a result of these covenants and our credit ratings may be adversely impacted.
	•		We may be vulnerable in the event of downturns and adverse changes in the general economy or our industry. Specific examples of industry changes that could have an adverse impact on our cash flow include the implementation by the government of further limitations on reimbursement under Medicare and Medicaid.
	•		We may have difficulty obtaining additional financing at favorable interest rates to meet our requirements for working capital, capital expenditures, acquisitions, general corporate or other purposes.
	•		We will be required to dedicate a substantial portion of our cash flow to the payment of principal and interest on indebtedness, which will reduce the amount of funds available for operations, capital expenditures and future acquisitions.
	•		Any borrowings we incur at variable interest rates expose us to increases in interest rates generally.
	•		A breach of any of the restrictions or covenants in our debt agreements could cause a cross-default under other debt agreements. We may be required to pay our indebtedness immediately if we default on any of the numerous financial or other restrictive covenants contained in the debt agreements. It is not certain whether we will have, or will be able to obtain, sufficient funds to make these accelerated payments. If any senior debt is accelerated, our assets may not be sufficient to repay such indebtedness and our other indebtedness.

•

In the event of a default, we may be forced to pursue one or more alternative strategies, such as restructuring or refinancing our indebtedness, selling assets, reducing or delaying capital expenditures or seeking additional equity capital. There can be no assurances that any of these strategies could be effected on satisfactory terms, if at all, or that sufficient funds could be obtained to make these accelerated payments.

     We may be subject to liabilities because of malpractice and related legal claims brought against our hospitals. If we become subject to these claims, we could be required to pay significant damages, which may not be covered by insurance.

     We may be subject to medical malpractice lawsuits and other legal actions arising out of the operations of our owned and leased hospitals. These actions may involve large claims and significant defense costs. In an effort to resolve one or more of these matters, we may choose to negotiate a settlement. Amounts we pay to settle any of these matters may be material. To mitigate a portion of this risk, we maintain professional malpractice liability and general liability insurance coverage for these potential claims in amounts above our SIR level that we believe to be appropriate for our operations. However, some of these claims could exceed the scope of the coverage in effect, or coverage of particular claims could be denied.

     We maintain professional and general liability insurance with unrelated commercial insurance carriers to provide for losses in excess of our SIR amount. As a result, one or more successful claims against us that are within our SIR amounts could have an adverse effect on our results of operations, cash flows, financial condition or liquidity. In addition, we operate a wholly-owned captive insurance company under the name Point of Life Indemnity, Ltd., which, issues malpractice insurance policies to our employed physicians and certain voluntary attending physicians.

     Additionally, we experienced unfavorable claims development results recently, which are reflected in our professional and general liability costs. Insurance coverage in the future may not continue to be available at a cost allowing us to maintain adequate levels of insurance with acceptable SIR level amounts. One or more of our insurance carriers may become insolvent and unable to fulfill its obligation to defend, pay or reimburse us when that obligation becomes due. In addition, physicians using our hospitals may be unable to obtain insurance on acceptable terms.

     Our revenues and volume trends may be adversely affected by certain factors over which we have no control.

     Our revenues and volume trends are dependent on many factors, including physicians’ clinical decisions and availability, payor programs shifting to a more outpatient-based environment, whether or not certain services are offered, seasonal and severe weather conditions, including the effects of extreme low temperatures, hurricanes and tornados, earthquakes, current local economic and demographic changes, the intensity and timing of yearly flu outbreaks. In addition, technological developments and pharmaceutical improvements may reduce the demand for healthcare services or the profitability of the services we offer.

     If our fair value declines, a material non-cash charge to earnings from impairment of our goodwill could result.

     At December 31, 2008, we had approximately $1,516.5 million of goodwill on our consolidated balance sheet. We expect to recover the carrying value of this goodwill through our future cash flows. We evaluate annually, based on our fair value, whether the carrying value of our goodwill is impaired. If the carrying value of our goodwill is impaired, we may incur a material non-cash charge to earnings.

     We may have difficulty acquiring hospitals on favorable terms and, because of regulatory scrutiny, acquiring not-for-profit entities.

     One element of our business strategy is expansion through the acquisition of acute care hospitals in non-urban markets. We face significant competition to acquire other attractive non-urban hospitals, and we may not find suitable acquisitions on favorable terms. Our primary competitors for acquisitions have included for-profit and tax-exempt hospitals and hospital systems, and privately capitalized start-up companies. Buyers with a strategic desire for any particular hospital — for example, a hospital located near existing hospitals or those who will realize economic synergies — have demonstrated an ability and willingness to pay premium prices for hospitals. Strategic buyers, as a result, can present a competitive barrier to our acquisition efforts.

     Even if we are able to identify an attractive candidate, we may not be able to obtain financing, if necessary, for any acquisitions or joint ventures that we might make or may be required to borrow at higher rates and on less favorable terms. We may incur or assume additional indebtedness as a result of acquisitions. Our failure to acquire non-urban hospitals consistent with our growth plans could prevent us from increasing our revenues.

     The cost of an acquisition could result in a dilutive effect on our results of operations, depending on various factors, including the amount paid for the acquisition, the acquired hospital’s results of operations, allocation of purchase price, effects of subsequent legislation and limitations on rate increases. In the past, we have occasionally experienced temporary delays in improving the operating margins or effectively integrating the operations of our acquired hospitals. In the future, if we are unable to improve the operating margins of acquired hospitals, operate them profitably or effectively integrate their operations, we may be unable to achieve our growth strategy.

     In recent years, the legislatures and attorneys general of several states have become more interested in sales of hospitals by tax-exempt entities. This heightened scrutiny may increase the cost and difficulty, or prevent the completion, of transactions with tax-exempt organizations in the future.

     We may encounter numerous business risks in acquiring additional hospitals and may have difficulty operating and integrating those hospitals. As a result, we may be unable to achieve our growth strategy.

     We may be unable to timely and effectively integrate any hospitals that we acquire with our ongoing operations. We may experience delays in implementing operating procedures and systems in newly acquired hospitals. Integrating an acquired hospital could be expensive and time consuming and could disrupt our ongoing business, negatively affect cash flow and distract management and other key personnel. In addition, acquisition activity requires transitions from, and the integration of, operations and, usually, information systems that are used by acquired hospitals. We will rely heavily on HCA-IT for information systems integration as part of a contractual arrangement for information technology services. We may not be successful in causing HCA-IT to convert our newly acquired hospitals’ information systems in a timely manner.

     In addition, businesses we have acquired, or businesses we may acquire may have unknown or contingent liabilities for past activities of acquired businesses, including liabilities for failure to comply with healthcare laws and regulations, medical and general professional liabilities, worker’s compensation liabilities, previous tax liabilities and unacceptable business practices. Although we have historically obtained, and we intend to continue to obtain, contractual indemnification from sellers covering these matters, any indemnification obtained from sellers may be insufficient to cover material claims or liabilities for past activities of acquired businesses.

     If we do not continually enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment, our ability to maintain and expand our markets may be adversely affected.

     Technological advances, including with respect to computer-assisted tomography scanner (CTs), magnetic resonance imaging (MRIs) and positron emission tomography scanner (PETs) equipment continue to evolve. In addition, the manufacturers of such equipment often provide incentives to try to increase their sales, including providing favorable financing to higher credit risk organizations. In an effort to compete, we must continually assess our equipment needs and upgrade our equipment as a result of technological improvements. We believe that the direction of the patient flow correlates directly to the level and intensity of such diagnostic equipment.

     We may be subjected to actions brought by the government under anti-fraud and abuse provisions or by individuals on the government’s behalf under the False Claims Act’s “qui tam” or whistleblower provisions.

     We are subject to the anti-kickback statute, which prohibits some business practices and relationships related to items or services reimbursable under Medicare, Medicaid and other federal healthcare programs. For example, the anti-kickback statute prohibits healthcare service providers from paying or receiving remuneration to induce or arrange for the referral of patients or purchase of items or services covered by a federal or state healthcare program. If regulatory authorities determine that any of our hospitals’ arrangements violate the anti-kickback statute, we could be subject to liabilities under the Social Security Act, including:

	•		criminal penalties;
	•		civil monetary penalties; and/or
	•		exclusion from participation in Medicare, Medicaid or other federal healthcare programs, any of which could impair our ability to operate one or more of our hospitals profitably.

     Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. Defendants found to be liable under the False Claims Act may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties ranging between $5,500 and $11,000 for each separate false claim.

     There are many potential bases for liability under the False Claims Act. Liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government. The False Claims Act defines the term “knowingly” broadly. Although simple negligence will not give rise to liability under the False Claims Act, submitting a claim with reckless disregard for its truth or falsity constitutes a “knowing” submission under the False Claims Act and, therefore, will give rise to liability.

     In some cases, whistleblowers or the federal government have taken the position that providers who allegedly have violated other statutes, such as the anti-kickback statute and the Stark law, have thereby submitted false claims under the False Claims Act. In addition, a number of states have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court. We are required to provide information to our employees and certain contractors about state and federal false claims laws and whistleblower provisions and protections.

     Although we intend and will endeavor to conduct our business in compliance with all applicable federal and state fraud and abuse laws, many of these laws are broadly worded and may be interpreted or applied in ways that cannot be predicted. Therefore, we cannot assure you that our arrangements or business practices will not be subject to government scrutiny or be found to be in compliance with applicable fraud and abuse laws.

     Certificate of need laws and regulations regarding licenses, ownership and operation may impair our future expansion in some states.

     Some states require prior approval for the purchase, construction and expansion of healthcare facilities, based on the state’s determination of need for additional or expanded healthcare facilities or services. Ten states in which we operate hospitals, including the recently acquired Rockdale Medical Center in Georgia, require a certificate of need for capital expenditures exceeding a prescribed amount, changes in bed capacity or services, and for certain other planned activities. We may not be able to obtain certificates of need required for expansion activities in the future. In addition, all of the states in which we operate facilities require hospitals and most healthcare providers to maintain one or more licenses. If we fail to obtain any required certificate of need or license, our ability to operate or expand operations in those states could be impaired.

     In states without certificate of need laws, competing providers of healthcare services are able to expand and construct facilities without the need for significant regulatory approval.

     In the nine states in which we operate that do not require certificates of need for the purchase, construction and expansion of healthcare facilities or services, competing healthcare providers face low barriers to entry and expansion. If competing providers of healthcare services are able to purchase, construct or expand healthcare facilities without the need for regulatory approval, we may face decreased market share and revenues in those markets.

     Different interpretations of accounting principles could have a material adverse effect on our results of operations or financial condition.

     Generally accepted accounting principles are complex, continually evolving and may be subject to varied interpretation by us, our independent registered public accounting firm and the SEC. Such varied interpretations could result from differing views related to specific facts and circumstances. Differences in interpretation of generally accepted accounting principles could have a material adverse effect on our results of operations or financial condition.

     Our stock price has been and may continue to be volatile; any significant decline may result in litigation.

     The trading price of our common stock has been and may continue to be subject to wide fluctuations. This may result in stockholder lawsuits, which could divert management’s time away from operations and could result in higher legal fees and proxy costs.

     Our stock price may fluctuate in response to the results or our operations and to a number of events and factors, including:

	•		actual or anticipated quarterly variations in operating results, particularly if they differ from investors’ expectations;
	•		changes in financial estimates and recommendations by securities analysts;
	•		changes in government regulations including those relating to reimbursement and operational policies and procedures;
	•		the operating and stock price performance of other companies that investors may deem comparable;
	•		changes in overall economic factors in our markets;
	•		news reports relating to trends or events in our markets; and
	•		issues associated with integration of the hospitals that we acquire.

     Broad market and industry fluctuations may adversely affect the price of our common stock, regardless of our operating performance.

     As a result of the above factors, we could be subjected to potential stockholder lawsuits. Such lawsuits are time consuming and expensive. Among other things, such lawsuits divert management’s time and attention from operations. Such lawsuits also force us to incur substantial legal fees and proxy costs in defending our position.

Item 1B.		Unresolved Staff Comments.

     We have no material unresolved written comments from the staff of the SEC regarding our periodic or current reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) that were issued more than 180 days prior to the end of our 2008 fiscal year.

Item 2.		Properties.

     The following table presents certain information with respect to our hospitals as of December 31, 2008:

Acquisition/Opening/

Licensed

Operational

Hospital

City

Lease Date

Beds

Status

Alabama

Andalusia Regional Hospital

Andalusia

HCA Spin-Off(a)

100

Own

Lakeland Community Hospital

Haleyville

December 1, 2002

50

Own

Northwest Medical Center

Winfield

December 1, 2002

71

Own

Russellville Hospital

Russellville

October 3, 2002

100

Own

Vaughan Regional Medical Center

Selma

April 15, 2005

175

Own

Arizona

Havasu Regional Medical Center

Lake Havasu City

April 15, 2005

181

Own

Valley View Medical Center

Ft. Mohave

November 8, 2005

66

Own

Colorado

Colorado Plains Medical Center

Fort Morgan

April 15, 2005

50

Lease

Florida

Putnam Community Medical Center

Palatka

June 16, 2000

141

Own

Indiana

Starke Memorial Hospital (“Starke”) (b)

Knox

April 15, 2005

53

Lease

Kansas

Western Plains Medical Complex

Dodge City

HCA Spin-Off(a)

99

Own

Kentucky

Bluegrass Community Hospital

Versailles

January 2, 2001

25

Own

Bourbon Community Hospital

Paris

HCA Spin-Off(a)

58

Own

Georgetown Community Hospital

Georgetown

HCA Spin-Off(a)

75

Own

Jackson Purchase Medical Center

Mayfield

HCA Spin-Off(a)

107

Own

Lake Cumberland Regional Hospital

Somerset

HCA Spin-Off(a)

259

Own

Logan Memorial Hospital

Russellville

HCA Spin-Off(a)

92

Own

Meadowview Regional Medical Center

Maysville

HCA Spin-Off(a)

101

Own

Spring View Hospital

Lebanon

October 1, 2003

75

Own

Louisiana

Acadian Medical Center

Eunice

April 15, 2005

52

Own

Doctors’ Hospital of Opelousas (“Opelousas”) (b)

Opelousas

April 15, 2005

171

Own

Minden Medical Center

Minden

April 15, 2005

159

Own

River Parishes Hospital

LaPlace

July 1, 2004

106

Own

Teche Regional Medical Center

Morgan City

April 15, 2005

149

Lease

Ville Platte Medical Center

Ville Platte

December 1, 2001

95

Own

Mississippi

Bolivar Medical Center

Cleveland

April 15, 2005

200

Lease

Nevada

Northeastern Nevada Regional Hospital

Elko

April 15, 2005

75

Own

New Mexico

Los Alamos Medical Center

Los Alamos

April 15, 2005

47

Own

Memorial Medical Center of Las Cruces

Las Cruces

April 15, 2005

286

Lease

Tennessee

Athens Regional Medical Center

Athens

October 1, 2001

118

Own

Crockett Hospital

Lawrenceburg

HCA Spin-Off(a)

107

Own

Emerald-Hodgson Hospital

Sewanee

HCA Spin-Off(a)

41

Own

Hillside Hospital

Pulaski

HCA Spin-Off(a)

95

Own

Livingston Regional Hospital

Livingston

HCA Spin-Off(a)

114

Own

Southern Tennessee Medical Center

Winchester

HCA Spin-Off(a)

157

Own

Texas

Ennis Regional Medical Center

Ennis

April 15, 2005

60

Lease

Palestine Regional Medical Center

Palestine

April 15, 2005

150

Own

Parkview Regional Hospital

Mexia

April 15, 2005

59

Lease

Utah

Ashley Regional Medical Center

Vernal

HCA Spin-Off(a)

39

Own

Castleview Hospital

Price

HCA Spin-Off(a)

84

Own

Acquisition/Opening/

Licensed

Operational

Hospital

City

Lease Date

Beds

Status

Virginia

Clinch Valley Medical Center

Richlands

July 1, 2006

175

Own

Danville Regional Medical Center

Danville

July 1, 2005

350

Own

Memorial Hospital of Martinsville and Henry County

Martinsville

April 15, 2005

220

Own

Wythe County Community Hospital

Wytheville

June 1, 2005

100

Lease

West Virginia

Logan Regional Medical Center

Logan

December 1, 2002

140

Own

Raleigh General Hospital

Beckley

July 1, 2006

300

Own

Wyoming

Lander Regional Hospital

Lander

July 1, 2000

89

Own

Riverton Memorial Hospital

Riverton

HCA Spin-Off(a)

70

Own

5,686

     We operate medical office buildings in conjunction with many of our hospitals. We own the majority of these medical office buildings. These office buildings are primarily occupied by physicians who practice at our hospitals. Our corporate headquarters are located in approximately 130,000 square feet of leased space in Brentwood, Tennessee. Our corporate headquarters, hospitals and other facilities are suitable for their respective uses and are generally adequate for our present needs.

Item 3.		Legal Proceedings.

     We are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, medical malpractice, breach of contracts, wrongful restriction of or interference with physicians’ staff privileges and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages that may not be covered by insurance. We are currently not a party to any pending or threatened proceeding, which, in management’s opinion, would have a material adverse effect on our business, financial condition or results of operations.

Item 4.		Submission of Matters to a Vote of Security Holders.

     We had no matters submitted to a vote of the stockholders during the quarter ended December 31, 2008.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information for Common Stock

     Our common stock is listed on the NASDAQ Global Select Market under the symbol “LPNT.” The high and low sales prices per share of our common stock were as follows for the periods presented:

		High				Low
2007
First Quarter		$	38.49			$	32.74
Second Quarter			40.80				35.91
Third Quarter			40.49				27.38
Fourth Quarter			32.50				28.10
2008
First Quarter		$	30.75			$	23.76
Second Quarter			33.25				27.28
Third Quarter			35.94				27.85
Fourth Quarter			31.79				16.92
2009
First Quarter (through February 17, 2009)		$	25.06			$	21.20

     On February 17, 2009, the last reported sales price for our common stock on the NASDAQ Global Select Market was $23.60 per share.

Stockholders

     As of February 17, 2009, there were 52,094,515 shares of our common stock held by 10,463 holders of record.

Dividends

     We have never declared or paid cash dividends on our common stock. We intend to retain future earnings to finance the growth and development of our business and, accordingly, do not currently intend to declare or pay any cash dividends on our common stock. Our board of directors will evaluate our future earnings, results of operations, financial condition and capital requirements in determining whether to declare or pay cash dividends. Delaware law prohibits us from paying any dividends unless we have capital surplus or net profits available for this purpose. In addition, our credit facilities impose restrictions on our ability to pay dividends.

Recent Sales of Unregistered Securities

     None.

Recent Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     In November 2007, our Board of Directors authorized the repurchase of up to $150.0 million of outstanding shares of our common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints and other factors. Our stock repurchase program expired on November 26, 2008. We repurchased approximately 1.4 million shares for an aggregate purchase price, including commissions, of approximately $41.2 million with a weighted average purchase price of $30.35 per share during the year ended December 31, 2007. We repurchased approximately 3.8 million shares for an aggregate purchase price, including commissions, of approximately $103.7 million with a weighted average purchase price of $26.57 per share during the year ended December 31, 2008. As of December 31, 2008, we had repurchased in the aggregate, approximately 5.2 million shares at an aggregate purchase price, including commissions, of approximately $144.9 million with an average purchase price of $27.56 per share. We have designated these shares as treasury stock.

     We redeem shares from employees upon vesting of our 1998 Long-Term Incentive Plan (“LTIP”) and Management Stock Purchase Plan (“MSPP”) stock awards for minimum statutory tax withholding purposes. We redeemed approximately 0.1 million shares upon vesting of certain LTIP and MSPP shares for an aggregate price of approximately $2.4 million during the year ended December 31, 2008. There were no redemptions during the years end December 31, 2006 and 2007 because there were no LTIP or MSPP shares that vested during these years. We have designated these shares as treasury stock.

     The following table summarizes our share repurchase activity by month during the years ended December 31, 2007 and 2008:

														Approximate
										Total Number				Dollar Value
										of Shares				of Shares that
										Purchased as				May Yet Be
						Weighted				Part of a				Purchased
		Total Number				Average				Publicly				Under the
		of Shares				Price Paid				Announced				Program
Period		Purchased				per Share				Program				(In millions)
December 1, 2007 to December 31, 2007			1,356,487			$	30.35				1,356,487			$	108.8
January 1, 2008 to January 31, 2008			—			$	—				—			$	108.8
February 1, 2008 to February 29, 2008			1,865,280			$	25.12				1,865,280			$	62.0
March 1, 2008 to March 31, 2008			1,132,500			$	25.20				1,132,500			$	33.4
April 1, 2008 to April 30, 2008			77,532			$	28.37				—			$	33.4
May 1, 2008 to May 31, 2008			548,039			$	31.37				548,039			$	16.2
June 1, 2008 to June 30, 2008			359,424			$	31.08				359,424			$	5.1
July 1, 2008 to July 31, 2008			1,727			$	28.76				—			$	5.1
August 1, 2008 to August 31, 2008			—			$	—				—			$	5.1
September 1, 2008 to September 30, 2008			556			$	33.28				—			$	5.1
October 1, 2008 to October 31, 2008			—			$	—				—			$	5.1
November 1, 2008 to November 30, 2008			—			$	—				—			$	—
December 1, 2008 to December 31, 2008			4,611			$	21.22				—			$	—
Total			5,346,156			$	27.56				5,261,730			$	—

Equity Compensation Plan Information

     The following table provides aggregate information as of December 31, 2008, with respect to shares of common stock that may be issued under our existing equity compensation plans, including our LTIP, our Outside Directors Stock and Incentive Compensation Plan (the “ODSICP”) and our MSPP:

Number of Securities

Number of Securities

Available for Future

to be Issued Upon

Weighted-Average

Issuance Under Equity

Exercise of Outstanding

Exercise Price of

Compensation Plans

Options, Warrants and

Outstanding Options,

(Excluding Securities

Rights

Warrants and Rights

Reflected in Column (a))

Plan Category

(a)

(b)

(c)

Equity Compensation Plans Approved by Security Holders

4,807,142

(1)

$

30.13

(2)

3,776,437

(3)

Equity Compensation Plans not Approved by Security Holders

None

None

None

Total

4,807,142

$

30.13

3,776,437

	•		4,665,973 shares of common stock to be issued upon exercise of outstanding stock options granted under the LTIP;
	•		131,587 shares of common stock to be issued upon exercise of outstanding stock options granted under the ODSICP;
	•		9,582 shares of common stock to be issued upon the vesting of deferred stock units outstanding under the ODSICP

(2)		Upon vesting, deferred stock units and restricted stock units are settled for shares of common stock on a one-for-one basis. Accordingly, the deferred stock units and restricted stock units have been excluded for purposes of computing the weighted-average exercise price.
(3)		Includes the following:

	•		3,591,770 shares of common stock available for issuance under the LTIP;
	•		97,893 shares of common stock available for issuance under the MSPP; and
	•		86,774 shares of common stock available for issuance under the ODSCIP.

Item 6.		Selected Financial Data.

     The table below contains our selected financial data for, or as of the end of, each of the five years ended December 31, 2008. The selected financial data is derived from our audited consolidated financial statements. In April 2005, we completed a merger with Province Healthcare Company (“Province”) (the “Province Business Combination”). The results of operations of Province are included in our results of operations beginning April 16, 2005. The timing of this and other acquisitions and divestitures completed during the years presented affects the comparability of the selected financial data. The selected financial data excludes the operations as well as assets and liabilities of our discontinued operations in our consolidated financial statements. Additionally, we have recognized certain transaction and debt retirement costs during certain of the periods presented that affected the comparability of the selected financial data. You should read this table in conjunction with the consolidated financial statements and related notes included elsewhere in this report and in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

		Years Ended December 31,
		2004				2005				2006				2007				2008
		(In millions, except per share amounts)
Statement of Operations Data:
Revenues		$	982.8			$	1,762.7			$	2,336.5			$	2,568.4			$	2,700.8
Income from continuing operations			85.9				77.2				144.2				127.7				138.2
Income from continuing operations per share:
Basic		$	2.32			$	1.54			$	2.59			$	2.27			$	2.63
Diluted		$	2.18			$	1.51			$	2.56			$	2.23			$	2.58
Weighted average shares outstanding:
Basic			37.0				50.1				55.6				56.2				52.5
Diluted			42.8				53.2				56.3				57.2				53.5
Cash dividends declared per share			—				—				—				—				—
Balance Sheet Data (as of end of year):
Working capital		$	159.9			$	275.5			$	377.9			$	373.6			$	376.2
Property and equipment, net			495.5				1,221.9				1,305.4				1,383.0				1,416.0
Total assets			890.4				3,224.6				3,638.3				3,635.9				3,680.3
Long-term debt, including amounts due within one year			221.0				1,514.1				1,668.6				1,517.2				1,516.7
Stockholders’ equity			509.5				1,287.8				1,450.0				1,544.2				1,578.6

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

     We recommend that you read this discussion together with our consolidated financial statements and related notes included elsewhere in this report. Unless otherwise indicated, all relevant financial and statistical information included herein relates to our continuing operations.

     We make forward-looking statements in this report, other reports and in statements we file with the SEC and/or release to the public. In addition, our senior management makes forward-looking statements orally to analysts, investors, the media and others. Broadly speaking, forward-looking statements include projections of our revenues; net income; earnings per share; capital expenditures; cash flows; debt repayments; interest rates; operating statistics and data or other financial items; descriptions of plans or objectives of our management for future operations; services or growth plans including acquisitions, divestitures, business strategies and initiatives; interpretations of Medicare and Medicaid laws and regulations and their effect on our business; and descriptions of assumptions underlying or relating to any of the foregoing.

     In this report, for example, we make forward-looking statements discussing our expectations about:  future financial performance and condition; future liquidity and capital resources; repurchases of our common stock; future cash flows; existing and future debt and equity structure; compliance with debt covenants; our strategic goals; future acquisitions and dispositions; our business strategy and operating philosophy, including the manner in which potential acquisitions or divestitures are evaluated; supply and information technology costs; changes in interest rates; our compliance with new and existing laws and regulations; the performance of counterparties to our agreements, our plans as to the payment of dividends; industry and general economic trends; taxes and tax rates; the efforts of insurers and other payors, healthcare providers and others to contain healthcare costs; reimbursement changes; patient volumes and related revenues; future capital expenditures; expected changes in certain expenses; the impact of changes in our critical accounting estimates; claims and legal actions relating to professional liabilities and other matters; the impact and applicability of new accounting standards; staffing issues relating to nurses and other clinical personnel; and physician recruiting and retention.

     Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as “can,” “could,” “may,” “should,” “believe,” “will,” “would,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “intend,” “target,” “continue” or similar expressions. Do not unduly rely on forward-looking statements, which give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made. We do not undertake any obligation to update our forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.

     There are several factors, some beyond our control that could cause results to differ significantly from our expectations. Some of these factors are described in Part I, Item 1A. Risk Factors. Other factors, such as market, operational, liquidity, interest rate and other risks, are described elsewhere in this section and Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Any factor described in this report could by itself, or together with one or more factors, adversely affect our business, results of operations and/or financial condition. There may be factors not described in this report that could also cause results to differ from our expectations.

Overview

     We operate general acute care hospitals in non-urban communities in the United States. At December 31, 2008, we owned or leased through subsidiaries 48 hospitals, having a total of 5,686 licensed beds, and serving communities in 17 states. Two of these hospitals were held for sale and classified as discontinued operations in our consolidated financial statements, and seven were owned by third parties and leased by our subsidiaries. Effective February 1, 2009, we acquired Rockdale Medical Center (“RMC”), a 138-bed acute care hospital located in Conyers, Georgia (approximately 25 miles outside of Atlanta, Georgia). The financial results of RMC are not included in our financial statements or results of operations for the periods described in this report.

     We generate revenues primarily through hospital services offered at our facilities. We generated $2,336.5 million, $2,568.4 million and $2,700.8 million in revenues from continuing operations during 2006, 2007 and 2008, respectively. In 2008, we derived 40.7% of our revenues from the Medicare and Medicaid programs. Payments made to our hospitals pursuant to the Medicare and Medicaid programs for services rendered rarely exceed our costs for such services. As a result, we rely largely on payments made by private or commercial payors, together with certain limited services provided to Medicare recipients, to generate an operating profit.

     Our hospitals typically provide the range of medical and surgical services commonly available in hospitals in non-urban markets, although the services provided at any specific hospital depend on factors such as community need for the service, whether physicians necessary to operate the service line safely are members of the medical staff of that hospital, whether the service might be economically viable, and any contractual or CON obligations that might exist.

     Competitive and Regulatory Environment

     The environment in which our hospitals operate is extremely competitive. We face competition from other acute care hospitals, including larger tertiary hospitals located in larger markets and/or affiliated with universities; specialty hospitals that focus on one or a small number of very lucrative service lines but that are not required to operate emergency departments; stand-alone centers at which surgeries or diagnostic tests can be performed; and physicians on the medical staffs of our hospitals. In many cases, our competitors focus on the service lines that offer the highest margins. By doing so, our competitors can potentially draw the best-paying business out of our hospitals. This, in turn, can reduce the overall operating profit of our hospitals as we are often obligated to offer service lines that operate at a loss or that have much lower profit margins. We continue to see growth in this general shift of lower acuity procedures to outpatient settings. We have also seen the shift of increasingly complex procedures from the inpatient to the outpatient setting.

     The competition from physicians on the medical staffs of our hospitals can be especially challenging. Within their offices, physicians may provide a vast range of services that would otherwise be provided by acute care hospitals. Physicians also have a high level of influence with respect to where their patients receive healthcare services and have the sole authority to order tests. As a result of declining reimbursements to physicians, and as a result of these unique competitive advantages, we believe that physicians often provide high margin services in their offices to patients whose insurance plans pay reimbursement rates much higher than those set by Medicare or Medicaid. This trend has likely offset to some extent our efforts to improve equivalent admission rates at many of our hospitals.

     Our hospitals also face extreme competition in their efforts to recruit and retain physicians on their medical staffs. It is widely recognized that the U.S. has a shortage of physicians in certain practice areas, including specialists such as cardiologists and orthopedists, in various areas of the country.

     The environment in which our hospitals operate is very highly regulated and the penalties for noncompliance are severe. We are required to comply with extensive, extremely complicated and overlapping government regulations at the federal, state and local levels. These regulate every aspect of how our hospitals conduct their operations, from what service lines must be offered in order to be licensed as an acute care hospital, to whether our hospitals may employ physicians to how (and whether) our hospitals may receive payments pursuant to the Medicare and Medicaid programs. The failure to comply with these laws and regulations can result in severe penalties including criminal penalties and civil sanctions, and the loss of our ability to receive reimbursements through the Medicare and Medicaid programs.

     Not only are our hospitals heavily regulated, the rules, regulations and laws to which they are subject often change, with little or no notice, and they are often interpreted and applied differently by various regulatory agencies with authority to enforce such requirements. Each change or conflicting interpretation may require our hospitals to make changes in their facilities, equipment, personnel or services, and may also require that standard operating policies and procedures be re-written and re-implemented. The cost of complying with such laws is a very significant component of our overall expenses. Further, this expense has grown in recent periods due to the requirements of new regulations and the severity of the penalties associated with non-compliance and management believes compliance expenses will continue to grow in the foreseeable future.

     The hospital industry is also enduring a period where the costs of providing care are rising faster than reimbursement rates. This places a premium on efficient operation, the ability to reduce or control costs and the need to leverage the benefits of our organization across all of our hospitals.

     The regulatory, enforcement and reimbursement environment could change substantially during 2009. Although President Obama has said that healthcare reform is among his administration’s highest priorities, the details and timing of any such reform are unknown.

     Business Strategy

     We seek to fulfill our mission of Making Communities Healthier^® by striving to improve the quality and types of healthcare services available in our communities, provide physicians with a positive environment in which to practice medicine, with access to necessary equipment and resources, develop and provide a positive work environment for employees, expand each hospital’s role as a community asset, and improve each hospital’s financial performance. We expect our hospitals to be the place where patients want to come for care, where physicians want to practice medicine and where employees want to work.

     In many of our markets, a portion of patients who require the services available at acute care hospitals leave our markets to receive such care. This fact presents an opportunity for growth, and we are working with the hospitals in communities where this phenomenon exists to implement new, or better implement existing strategies.

     We believe that growth opportunities remain in our existing markets. Growth at our hospitals is dependent in part on how successful our hospitals are in their efforts to recruit physicians to their respective medical staffs, whether such physicians are active members of such medical staffs over a long period of time and whether and to what extent members of our hospitals’ medical staffs admit patients to our hospitals. During 2008, we refined our recruiting process in an effort to better identify and focus on those physicians most likely to desire to practice in our communities, to better tailor our communications to the physicians who want to practice in non-urban communities. During 2009, we will continue to strive to improve our recruiting and retention efforts including centralizing at our corporate office many of the recruiting functions and efforts that have in the past been performed by vendors on a contract basis.

     The quality of healthcare services provided at our hospitals, and the perceived quality of such services, is an increasingly important factor to patients when deciding where to seek care and to physicians when deciding where to practice. Because in virtually every case the core measure scores ascribed to our hospitals are determined based on the practice behaviors of the physicians on our medical staffs, we have implemented new strategies to work with medical staff members to improve these scores. Management believes that our efforts in this regard during 2008 were, on average, successful. The core measure scores at some of our largest hospitals continue to be below our company average and our expectations. We will continue to work with our medical staff members to seek to improve our the core measure scores of our hospitals.

     We also believe that growth can also be achieved as we add new service lines in our existing markets, invest in new technologies desired by physicians and patients, and demonstrate the quality of the care provided in our facilities. For the past two years, we have undertaken redesigned operating reviews of our hospitals to pinpoint new service lines or technologies that could reduce the outmigration of patients leaving our markets to receive health care services. Where needed service lines have been identified, we have focused on recruiting the physicians necessary to correctly operate such service lines. Physicians affiliated with our hospitals also seem to be interested in admitting patients to hospitals with active hospitalist programs. As a result, our hospitals have responded by introducing or strengthening hospitalists programs where appropriate. Our hospitals have taken other steps, such as structured efforts to solicit input from medical staff members and to promptly respond to legitimate unmet physicians needs, to limit or offset the impact of outmigration and to grow.

     While responsibly managing our operating expenses, we have also made significant, targeted investments at our hospitals to add new technologies, modernize facilities and expand the services available. These investments should assist in our efforts to attract and retain physicians, to offset outmigration of patients and to make our hospitals more desirable to our employees and potential patients.

     We also continue to strive to improve our operating performance by improving on our revenue cycle processes, making an even higher level of purchases through our group purchasing organization, operating more efficiently and effectively, and working to appropriately standardize our policies, procedures and practices across all of our affiliated hospitals. We also believe that being positioned as the sole acute care hospital in virtually all of our communities has allowed us, and will continue to allow us, in many cases to negotiate preferred reimbursement rates with commercial insurance payors.

     Additional Growth

     Effective February 1, 2009, we acquired RMC, a 138-bed acute care hospital located in Conyers, Georgia (approximately 25 miles outside of Atlanta, Georgia). During 2008, RMC generated net revenues of approximately $120 million, which are not included in our financial results. We believe that, through group purchasing efforts and the implementation of other initiatives, RMC’s operating performance will improve during 2009 and subsequent years.

     The acquisition of RMC is consistent with our stated goal of seeking to acquire one to three complimentary hospitals a year. Our intention is to acquire well-positioned hospitals in growing areas of the U.S. that we believe are fairly priced and that could benefit from our management and strategic initiatives. We believe that this growth by strategic acquisition can supplement the growth we believe we can generate organically in our existing markets.

     Revenue Sources

     Our hospitals generate revenues by providing healthcare services to our patients. Depending upon the patient’s medical insurance coverage, we are paid for these services by governmental Medicare and Medicaid programs, commercial insurance, including managed care organizations, and directly by the patient. The amounts we are paid for providing healthcare services to our patients vary depending upon the payor. Governmental payors generally pay significantly less than the hospital’s customary charges for the services provided.

     Revenues from governmental payors, such as Medicare and Medicaid, are controlled by complex rules and regulations that stipulate the amount a hospital is paid for providing healthcare services. Our compliance with these rules and regulations requires an extensive effort to ensure we remain eligible to participate in these governmental programs. In addition, these rules and regulations are subject to frequent changes as a result of legislative and administrative action on both the federal and the state levels. For these reasons, revenues from governmental programs change frequently and require us to monitor regularly the environment in which these governmental programs operate.

     Revenues from HMOs, PPOs and other private insurers are subject to contracts and other arrangements that require us to discount the amounts we customarily charge for healthcare services. These discounted arrangements often limit our ability to increase charges in response to increasing costs. We actively negotiate with these payors to seek to maintain or increase the pricing of our healthcare services. Insured patients are generally not responsible for any difference between customary hospital charges and the amounts received from commercial insurance payors. However, insured patients are responsible for payments not covered by insurance, such as exclusions, deductibles and co-payments.

     Self-pay revenues are primarily generated through the treatment of uninsured patients. Our hospitals experienced an increase in self-pay revenues during recent years.

Results of Operations

     The following definitions apply throughout the remaining portion of Management’s Discussion and Analysis of Financial Condition and Results of Operations:

Admissions. Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to our hospitals and used by management and investors as a general measure of inpatient volume.

bps. Basis point change.

Continuing operations. Continuing operations information excludes the operations of hospitals that are held for sale and disposed of.

Emergency room visits. Represents the total number of hospital-based emergency room visits.

Equivalent admissions. Management and investors use equivalent admissions as a general measure of combined inpatient and outpatient volume. We compute equivalent admissions by multiplying admissions (inpatient volume) by the outpatient factor (the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue). The equivalent admissions computation “equates” outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume.

Net revenue days outstanding. We compute net revenue days outstanding by dividing our accounts receivable net of allowance for doubtful accounts, by our revenue per day. Our revenue per day is calculated by dividing our quarterly revenues, including revenues for held for sale / disposed of hospitals, by the number of calendar days in the quarter.

ESOP. Employee stock ownership plan. The ESOP is a defined contribution retirement plan that covered substantially all of our employees through December 31, 2008.

Medicare case mix index. Refers to the acuity or severity of illness of an average Medicare patient at our hospitals.

N/A. Not applicable.

N/M. Not meaningful.

Outpatient surgeries. Outpatient surgeries are those surgeries that do not require admission to our hospitals.

Operating Results Summary

     The following tables present summaries of results of operations for the three months ended December 31, 2007 and 2008 and for the years ended December 31, 2006, 2007 and 2008 (dollars in millions):

		Three Months Ended December 31,
		2007								2008
						% of								% of
		Amount				Revenues				Amount				Revenues
Revenues		$	643.4				100.0	%		$	674.9				100.0	%
Salaries and benefits			253.6				39.4				267.9				39.7
Supplies			88.8				13.8				93.3				13.8
Other operating expenses			117.9				18.3				127.6				19.0
Provision for doubtful accounts			79.1				12.3				78.5				11.6
Depreciation and amortization			32.2				5.0				34.3				5.1
Interest expense, net			21.8				3.4				21.8				3.2
			593.4				92.2				623.4				92.4
Income from continuing operations before minority interests and income taxes			50.0				7.8				51.5				7.6
Minority interests in earnings of consolidated entities			0.2				–				0.6				0.1
Income from continuing operations before income taxes			49.8				7.8				50.9				7.5
Provision for income taxes			18.1				2.9				17.7				2.6
Income from continuing operations		$	31.7				4.9	%		$	33.2				4.9	%

		Years Ended December 31,
		2006								2007								2008
						% of								% of								% of
		Amount				Revenues				Amount				Revenues				Amount				Revenues
Revenues		$	2,336.5				100.0	%		$	2,568.4				100.0	%		$	2,700.8				100.0	%
Salaries and benefits			918.0				39.3				1,006.1				39.2				1,065.4				39.4
Supplies			326.1				14.0				352.2				13.7				372.6				13.8
Other operating expenses			397.4				17.0				464.0				18.0				499.8				18.5
Provision for doubtful accounts			250.0				10.7				307.0				12.0				313.2				11.6
Depreciation and amortization			105.4				4.5				129.4				5.0				132.1				4.9
Interest expense, net			100.8				4.3				94.5				3.7				88.0				3.3
Impairment loss			–				–				–				–				1.2				–
			2,097.7				89.8				2,353.2				91.6				2,472.3				91.5
Income from continuing operations before minority interests and income taxes			238.8				10.2				215.2				8.4				228.5				8.5
Minority interests in earnings of consolidated entities			1.4				–				1.7				0.1				2.2				0.1
Income from continuing operations before income taxes			237.4				10.2				213.5				8.3				226.3				8.4
Provision for income taxes			93.2				4.0				85.8				3.3				88.1				3.3
Income from continuing operations		$	144.2				6.2	%		$	127.7				5.0	%		$	138.2				5.1	%

For the Three Months Ended December 31, 2007 and 2008

Revenues

     The 4.9% increase in our revenues for the three months ended December 31, 2008, compared to the same period last year, was primarily the result of an increase in our revenues per equivalent admission. Revenues per equivalent admission increased 5.7% to $7,390 during the three months ended December 31, 2008, compared to $6,992 during the same period last year. This increase is largely a result of changes in the acuity of our patients; service mix changes related to volume growth in higher reimbursement outpatient diagnostic services, including CTs, MRIs and cardiac catheterization; the impact of favorable commercial pricing, inclusive of improvements in third party payor contracting; and benefits associated with Medicare’s hospital market basket updates.

     Revenues during the three months ended December 31, 2008, were negatively impacted by declines in equivalent admissions. Equivalent admissions of 91,321 for the three months ended December 31, 2008, declined 0.7% as compared to the same period last year, as a result of fewer admissions and overall declines in our inpatient surgeries and emergency room visits. During the year ended December 31, 2008, we experienced a shift from inpatient admissions to outpatient observations for a portion of our patient population, which contributed to our decline in equivalent admissions. Although we experienced equivalent admission declines, our volume improved in certain aspects of our business, such as in outpatient diagnostic services, including CT imaging and laboratory services.

     The following table shows the key drivers of our revenues for the periods presented:

		Three Months Ended												%
		December 31,								Increase				Increase
		2007				2008				(Decrease)				(Decrease)
Admissions			46,756				45,674				(1,082	)			(2.3	)%
Equivalent admissions			92,011				91,321				(690	)			(0.7	)
Revenues per equivalent admission		$	6,992			$	7,390			$	398				5.7
Medicare case mix index			1.28				1.28				–				–
Average length of stay (days)			4.3				4.4				0.1				2.3
Inpatient surgeries			13,982				13,312				(670	)			(4.8	)
Outpatient surgeries			35,525				36,059				534				1.5
Emergency room visits			215,128				210,159				(4,969	)			(2.3	)
Outpatient factor			1.97				2.00				0.03				1.5

     The following table shows the sources of our revenues by payor for the periods presented, expressed as a percentage of total revenues, including adjustments to estimated reimbursement amounts:

		Three Months
		Ended
		December 31,
		2007				2008
Medicare			32.2	%			30.7	%
Medicaid			9.5				9.0
HMOs, PPOs and other private insurers			43.5				45.4
Self-Pay			11.4				12.1
Other			3.4				2.8
			100.0	%			100.0	%

     The table above is inclusive of certain changes we have made to our historical practices regarding sources of revenues. Specifically, we previously classified uninsured discounts as revenue deductions for HMOs, PPOs and other private insurers. We changed the classification of uninsured discounts to revenue deductions for self-pay revenues effective in our June 30, 2008 quarterly report on Form 10-Q for all periods previously reported. This change had no impact on our historical results of operations. Generally, these reclassifications reduced self-pay as a percentage of total revenues and increased HMOs, PPOs, and other private insurers as a percentage of total revenues. We have determined that it is more appropriate to apply uninsured discounts as revenue deductions against self-pay revenues rather than against HMOs, PPOs and other private insurers revenues.

Expenses

Salaries and Benefits

     The following table summarizes our salaries and benefits expenses for the periods presented (dollars in millions, except for salaries and benefits per equivalent admission):

		Three Months Ended December 31,
						% of								% of				Increase				% Increase
		2007				Revenues				2008				Revenues				(Decrease)				(Decrease)
Salaries and benefits:
Salaries, wages, benefits and contract labor		$	247.3				38.4	%		$	262.0				38.8	%		$	14.7				5.9	%
Stock-based compensation			6.3				1.0				5.9				0.9				(0.4	)			(6.7	)
		$	253.6				39.4	%		$	267.9				39.7	%		$	14.3				5.6	%
Man-hours per equivalent admission			91.9				N/A				94.0				N/A				2.1				2.3	%
Salaries and benefits per equivalent admission		$	2,612				N/A			$	2,754				N/A			$	142				5.4	%

     For the three months ended December 31, 2008, our salaries and benefits expense of $267.9 million increased to 39.7% as a percentage of revenues as compared to 39.4% in the same period last year. This increase was a result of annual compensation increases for our employees, plus the impact of an increasing number of employed physicians within our hospitals. Additionally, we experienced an overall increase in our benefit costs, most notably within our medical benefit component. These increases were partially offset by improvements in our contract labor costs as well as a slight decline in our stock-based compensation expense during the period. Our stock-based compensation expense decline for the three months ended December 31, 2008, was due to the absence of a forfeiture rate methodology change that was recorded in the same period last year. As we continue to employ an increasing number of medical professionals including physicians, we expect that salaries and benefits as a percentage of revenues will also increase.

Supplies

     The following table summarizes our supplies expense for the periods presented (dollars in millions, except for supplies per equivalent admission):

		Three Months Ended December 31,
						% of								% of				Increase				% Increase
		2007				Revenues				2008				Revenues				(Decrease)				(Decrease)
Supplies		$	88.8				13.8	%		$	93.3				13.8	%		$	4.5				5.2	%
Supplies per equivalent admission		$	966				N/A			$	1,022				N/A			$	56				5.8	%

     For the three months ended December 31, 2008, supplies expense of $93.3 million increased 5.2%, as compared to $88.8 million in the same period last year. Similarly, our supplies per equivalent admission increased 5.8% to $1,022, as compared to $966 in the same period last year. Supplies per equivalent admission increased as a result of a higher utilization of more expensive supplies in areas such as orthopedics, cardiac devices and spine and bone. In addition, our pharmacy and laboratory supply expenses increased over the 2007 period as we experienced an increased utilization of more expensive drugs and blood products. Additionally, our other general supplies costs incurred price increases resulting in an increase in our overall supply costs.

Other Operating Expenses

     The following table summarizes our other operating expenses for the periods presented (dollars in millions):

		Three Months Ended December 31,
						% of								% of				Increase				% Increase
		2007				Revenues				2008				Revenues				(Decrease)				(Decrease)
Professional fees		$	15.7				2.4	%		$	17.6				2.6	%		$	1.9				12.4	%
Utilities			11.7				1.8				12.9				1.9				1.2				10.8
Repairs and maintenance			14.1				2.2				14.7				2.2				0.6				3.8
Rents and leases			6.4				1.0				6.1				0.9				(0.3	)			(4.7	)
Insurance			7.4				1.2				10.7				1.6				3.3				44.8
Physician recruiting			4.7				0.7				5.8				0.9				1.1				23.1
Contract services			34.7				5.4				34.9				5.2				0.2				0.9
Non-income taxes			8.2				1.3				10.0				1.5				1.8				19.1
Other			15.0				2.3				14.9				2.2				(0.1	)			(0.5	)
		$	117.9				18.3	%		$	127.6				19.0	%		$	9.7				8.2	%

     For the three months ended December 31, 2008, our other operating expenses of $127.6 million increased by $9.7 million or 8.2%, as compared to $117.9 million in the same period last year. The $9.7 million increase in other operating expenses for the three months ended December 31, 2008, was primarily the result of increases in professional fees, utilities, insurance, physician recruiting and non-income taxes.

     Our expense for professional fees paid to hospital-based physicians increased $1.9 million or 12.4% to $17.6 million during the three months ended December 31, 2008. As a shortage of physicians continues to become more acute, we have experienced increasing professional fees in areas such as anesthesiology and emergency room physician coverage. Also, an increasing number of physicians are demanding that our hospitals retain hospitalists and that they be paid for call coverage in excess of what they are obligated to provide in order to maintain active staff status at our hospitals. We expect these trends to continue and that professional fees as a percentage of revenue will climb in future periods.

     Our utilities expense increased for the three months ended December 31, 2008 as compared to the same period last year as a result of higher energy costs experienced nationally. We anticipate a moderation in the overall level of increase in our utility costs during 2009.

     The increase in our insurance expense during the three months ended December 31, 2008, as compared to the same period last year, was the result of a change in our professional and general liability claims accrual, as we reduced the discount factor from 5.0% to 4.0% during the three months ended December 31, 2008. As a result of the decrease in the discount factor, our professional and general liability claims expense increased by approximately $2.4 million for the three months ended December 31, 2008.

     Physician recruiting expense increased 23.1% to $5.8 million in the three months ended December 31, 2008, as compared to the same period last year. The increase is primarily the result of an increase in the amortization expense associated with a greater number of physician minimum revenue guarantees outstanding and an increase in recruiting fees paid. To attract and retain qualified physicians, hospitals in small communities are increasingly required to guarantee that these physicians will meet or exceed negotiated minimum income levels. We expect to experience an increasing number of physician minimum revenue guarantee arrangements and, accordingly, we anticipate higher recruiting fees and increases to the amortization expense associated with the physician minimum revenue guarantee intangible asset during 2009.

     Non-income taxes increased during the three months ended December 31, 2008, as compared to the same period last year, as a result of the absence of certain sale, use and property tax credits recorded in the 2007 period.

Provision for Doubtful Accounts

     The following table summarizes our provision for doubtful accounts and related key indicators for the periods presented (dollars in millions):

		Three Months Ended December 31,
						% of								% of				Increase				% Increase
		2007				Revenues				2008				Revenues				(Decrease)				(Decrease)
Provision for doubtful accounts		$	79.1				12.3	%		$	78.5				11.6	%		$	(0.6	)			(0.8	)%
Related Key Indicators:
Charity care write-offs		$	11.0				0.7	%		$	13.7				0.8	%		$	2.7				23.5	%
Self-pay revenues, net of charity care write-offs and uninsured discounts		$	73.2				11.4	%		$	81.6				12.1	%		$	8.4				11.5	%
Net revenue days outstanding (at end of period)			42.4				N/A				42.4				N/A				—				—	%

     Our provision for doubtful accounts of $78.5 million, or 11.6% of revenues, for the three months ended December 31, 2008, decreased slightly from $79.1 million, or 12.3% of revenues, as recognized in same period last year. The 70 bps improvement as a percentage of revenues is due to our strategic efforts leading to improved cash collections. Specifically, we experienced an increase in both up-front cash collections and collections related to insured receivables for the three months ended December 31, 2008, as compared to the same period last year. The decrease in our provision for doubtful accounts was partially offset by an increase in our charity care write-offs that were primarily attributable to an increase in our self-pay revenues. We do not report charity care in our revenues or in our provision for doubtful accounts as it is our policy not to pursue collections of amounts related to these patients. Overall, net revenue days outstanding remained unchanged at 42.4 days as of December 31, 2008 as compared to December 31, 2007. The provision and allowance for doubtful accounts are critical accounting estimates and are further discussed in “Critical Accounting Estimates.”

Depreciation and Amortization

     Our depreciation and amortization expense increased $2.1 million for the three months ended December 31, 2008 to $34.3 million, or 5.1% of revenues, as compared to $32.2 million, or 5.0% of revenues, in the same period last year. The increase in our depreciation and amortization expense is largely a result of capital improvement projects completed during 2008, normal replacement costs of facilities and equipment and the amortization of separately identifiable intangible assets such as non-compete agreements.

Interest Expense

     Our interest expense of $21.8 million or 3.2% of revenues, for the three months ended December 31, 2008 was comparable to $21.8 million, or 3.4% of revenues, for the same period last year. As a result of a recently issued accounting pronouncement, FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), we must compute and recognize additional interest expense on our convertible debt instruments beginning in 2009. FSP APB 14-1 requires retrospective application for all periods presented. We estimate that the impact of this new accounting standard will increase our interest expense by $21.1 million during 2009. For a further discussion of our debt and corresponding interest rates, see “Liquidity and Capital Resources — Debt.”

Minority Interests in Earnings of Consolidated Entities

     Minority interests in earnings of consolidated entities were $0.6 million for the three months ended December 31, 2008. Minority interests in earnings of consolidated entities represents the allocable portion of income or loss of our less than 100% owned entities that we control to which the minority interest holders are entitled based upon their portion of certain of the subsidiaries that they own.

Provision for Income Taxes

     The provision for income taxes was $17.7 million, or 2.6% of revenues for the three months ended December 31, 2008, as compared to $18.1 million, or 2.9% of revenue for the same period last year. The decline in the tax provision was primarily the result of reductions in our long-term income tax liability as certain statutes of limitation lapses occurred during for the three months ended December 31, 2008. This reduction was partially offset by significant increases in our deferred tax valuation allowance during the same period.

For the Years Ended December 31, 2007 and 2008

Revenues

     The 5.2% increase in our revenues for 2008 as compared to 2007, was primarily the result of an increase in our revenues per equivalent admission. Revenues per equivalent admission increased 5.8% to $7,192, as compared to $6,795 in 2007. This increase is largely a result of changes in the acuity of our patients; service mix changes related to volume growth in higher reimbursement outpatient diagnostic services, including CTs; MRIs and cardiac catheterization; the impact of favorable commercial pricing, inclusive of improvements in third party payor contracting and benefits associated with Medicare’s hospital market basket updates. Additionally, we experienced favorable adjustments to our estimated reimbursement settlements that increased revenues by $7.1 million and $8.0 million for the years ended December 31, 2008 and 2007, respectively.

     Revenues during 2008 were negatively impacted by declines in our equivalent admissions. Equivalent admissions of 375,539 for 2008 declined 0.6%, as compared to 377,994 for 2007, as a result of fewer admissions and overall declines in our inpatient surgeries. Although many of our hospitals experienced widespread flu outbreaks in February and March of 2008, the resulting increase in our emergency room visits did not fully offset our total decline in equivalent admissions for the year. During 2008, our volumes were negatively impacted by the temporary closure of three of our hospitals in Louisiana, as a result of Hurricane Gustav, as well as the permanent closure of certain unprofitable service lines at a few of our hospitals. Additionally, during 2008 we experienced a shift from inpatient admissions to outpatient observations for a portion of our patient population, which further contributed to the decline in equivalent admissions. Although we experienced equivalent admission declines, our volume improved in certain aspects of our business, such as in outpatient diagnostic services, including CT imaging and laboratory services.

     The following table shows the key drivers of our revenues for the periods presented:

		Years Ended
		December 31,
										Increase				% Increase
		2007				2008				(Decrease)				(Decrease)
Admissions			191,778				188,713				(3,065	)			(1.6	)%
Equivalent admissions			377,994				375,539				(2,455	)			(0.6	)
Revenues per equivalent admission		$	6,795			$	7,192			$	397				5.8
Medicare case mix index			1.24				1.27				0.03				2.4
Average length of stay (days)			4.3				4.3				–				–
Inpatient surgeries			56,732				54,775				(1,957	)			(3.4	)
Outpatient surgeries			144,438				145,041				603				0.4
Emergency room visits			868,960				873,862				4,902				0.6
Outpatient factor			1.97				1.99				0.02				1.0

     The following table shows the sources of our revenues by payor for the periods presented, expressed as a percentage of total revenues, including adjustments to estimated reimbursement amounts:

		Years Ended
		December 31,
		2007				2008
Medicare			32.6	%			31.2	%
Medicaid			9.7				9.5
HMOs, PPOs and other private insurers			42.7				44.5
Self-Pay			11.7				12.0
Other			3.3				2.8
			100.0	%			100.0	%

     The table above is inclusive of certain changes we have made to our historical practices regarding sources of revenues. Specifically, we previously classified uninsured discounts as revenue deductions for HMOs, PPOs and other private insurers. We changed the classification of uninsured discounts to revenue deductions for self-pay revenues effective in our June 30, 2008 quarterly report on Form 10-Q for all periods previously reported. This change had no impact on our historical results of operations. Generally, these reclassifications reduced self-pay as a percentage of total revenues and increased HMOs, PPOs, and other private insurers as a percentage of total revenues. We have determined that it is more appropriate to apply uninsured discounts as revenue deductions against self-pay revenues rather than against HMOs, PPOs and other private insurers revenues.

Expenses

Salaries and Benefits

     The following table summarizes our salaries and benefits expenses for the periods presented (dollars in millions, except for salaries and benefits per equivalent admission):

		Years Ended December 31,
						% of								% of				Increase				% Increase
		2007				Revenues				2008				Revenues				(Decrease)				(Decrease)
Salaries and benefits:
Salaries, wages, benefits and contract labor		$	987.4				38.5	%		$	1,041.9				38.5	%		$	54.5				5.5	%
Stock-based compensation			18.7				0.7				23.5				0.9				4.8				25.6
		$	1,006.1				39.2	%		$	1,065.4				39.4	%		$	59.3				5.9	%
Man-hours per equivalent admission			89.5				N/A				90.9				N/A				1.4				1.6	%
Salaries and benefits per equivalent admission		$	2,529				N/A			$	2,662				N/A			$	133				5.3	%