e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
(Mark One)
   
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended March 31, 2010
 
or
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from          to          
 
Commission file number 1-11239
 
HCA Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware   75-2497104
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
     
One Park Plaza
Nashville, Tennessee
(Address of principal executive offices)
  37203
(Zip Code)
 
(615) 344-9551
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No 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 o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
 
     
Class of Common Stock
 
Outstanding at April 30, 2010
 
Voting common stock, $.01 par value
  94,633,300 shares
 


 

 
HCA INC.
 
Form 10-Q
March 31, 2010
 
             
        Page of
        Form 10-Q
 
Part I.   Financial Information        
Item 1.   Financial Statements (Unaudited):        
    Condensed Consolidated Income Statements — for the quarters ended March 31, 2010 and 2009     3  
    Condensed Consolidated Balance Sheets — March 31, 2010 and December 31, 2009     4  
    Condensed Consolidated Statements of Cash Flows — for the quarters ended March 31, 2010 and 2009     5  
    Notes to Condensed Consolidated Financial Statements     6  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     25  
Item 3.   Quantitative and Qualitative Disclosures About Market Risk     47  
Item 4.   Controls and Procedures     47  
           
Part II.   Other Information        
Item 1.   Legal Proceedings     47  
Item 1A.   Risk Factors     48  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     54  
Item 6.   Exhibits     55  
Signatures     56  
 EX-31.1
 EX-31.2
 EX-32


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HCA INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 2010 AND 2009
Unaudited
(Dollars in millions)
 
                 
    2010     2009  
 
Revenues
  $ 7,544     $ 7,431  
                 
Salaries and benefits
    3,072       2,923  
Supplies
    1,200       1,210  
Other operating expenses
    1,202       1,102  
Provision for doubtful accounts
    564       807  
Equity in earnings of affiliates
    (68 )     (68 )
Depreciation and amortization
    355       353  
Interest expense
    516       471  
Losses on sales of facilities
          5  
Impairments of long-lived assets
    18       9  
                 
      6,859       6,812  
                 
Income before income taxes
    685       619  
Provision for income taxes
    209       187  
                 
Net income
    476       432  
Net income attributable to noncontrolling interests
    88       72  
                 
Net income attributable to HCA Inc. 
  $ 388     $ 360  
                 
 
See accompanying notes.


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HCA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in millions)
 
                 
    March 31,
    December 31,
 
    2010     2009  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 388     $ 312  
Accounts receivable, less allowance for doubtful accounts of $4,519 and $4,860
    3,878       3,692  
Inventories
    794       802  
Deferred income taxes
    1,181       1,192  
Other
    497       579  
                 
      6,738       6,577  
                 
Property and equipment, at cost
    24,766       24,669  
Accumulated depreciation
    (13,514 )     (13,242 )
                 
      11,252       11,427  
                 
Investments of insurance subsidiary
    1,146       1,166  
Investments in and advances to affiliates
    851       853  
Goodwill
    2,561       2,577  
Deferred loan costs
    411       418  
Other
    1,132       1,113  
                 
    $ 24,091     $ 24,131  
                 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
               
Accounts payable
  $ 1,199     $ 1,460  
Accrued salaries
    893       849  
Other accrued expenses
    1,498       1,158  
Long-term debt due within one year
    981       846  
                 
      4,571       4,313  
                 
Long-term debt
    25,874       24,824  
Professional liability risks
    1,058       1,057  
Income taxes and other liabilities
    1,742       1,768  
                 
Equity securities with contingent redemption rights
    144       147  
                 
Stockholders’ deficit:
               
Common stock $0.01 par; authorized 125,000,000 shares; outstanding 94,626,100 shares in 2010 and 94,637,400 shares in 2009
    1       1  
Capital in excess of par value
    291       226  
Accumulated other comprehensive loss
    (479 )     (450 )
Retained deficit
    (10,126 )     (8,763 )
                 
Stockholders’ deficit attributable to HCA Inc. 
    (10,313 )     (8,986 )
Noncontrolling interests
    1,015       1,008  
                 
      (9,298 )     (7,978 )
                 
    $ 24,091     $ 24,131  
                 
 
See accompanying notes.


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HCA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2010 AND 2009
Unaudited
(Dollars in millions)
 
                 
    2010     2009  
 
Cash flows from operating activities:
               
Net income
  $ 476     $ 432  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Changes in operating assets and liabilities
    (838 )     (1,111 )
Provision for doubtful accounts
    564       807  
Depreciation and amortization
    355       353  
Income taxes
    280       41  
Losses on sales of facilities
          5  
Impairments of long-lived assets
    18       9  
Amortization of deferred loan costs
    20       21  
Share-based compensation
    8       7  
Pay-in-kind interest
          39  
Other
    18       12  
                 
Net cash provided by operating activities
    901       615  
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (214 )     (337 )
Acquisition of hospitals and health care entities
    (21 )     (38 )
Disposition of hospitals and health care entities
    24       5  
Change in investments
    29       76  
Other
    1       6  
                 
Net cash used in investing activities
    (181 )     (288 )
                 
Cash flows from financing activities:
               
Issuance of long-term debt
    1,387       300  
Net change in revolving credit facilities
    1,339       (335 )
Repayment of long-term debt
    (1,510 )     (339 )
Distributions to noncontrolling interests
    (83 )     (55 )
Payment of debt issuance costs
    (25 )     (14 )
Payment of cash distribution to stockholders
    (1,751 )      
Other
    (1 )     7  
                 
Net cash used in financing activities
    (644 )     (436 )
                 
Change in cash and cash equivalents
    76       (109 )
Cash and cash equivalents at beginning of period
    312       465  
                 
Cash and cash equivalents at end of period
  $ 388     $ 356  
                 
Interest payments
  $ 374     $ 344  
Income tax (refunds) payments, net
  $ (71 )   $ 146  
 
See accompanying notes.


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
 
NOTE 1 —  INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Merger, Recapitalization and Reporting Entity
 
On November 17, 2006, HCA Inc. completed its merger (the “Merger”) with Hercules Acquisition Corporation, pursuant to which the Company was acquired by Hercules Holding II, LLC (“Hercules Holding”), a Delaware limited liability company owned by a private investor group comprised of affiliates of Bain Capital Partners, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity (each a “Sponsor”), affiliates of Citigroup Inc. and Bank of America Corporation (the “Sponsor Assignees”) and affiliates of HCA founder, Dr. Thomas F. Frist Jr., (the “Frist Entities,” and together with the Sponsors and the Sponsor Assignees, the “Investors”) and by members of management and certain other investors. The Merger, the financing transactions related to the Merger and other related transactions are collectively referred to in this quarterly report as the “Recapitalization.” The Merger was accounted for as a recapitalization in our financial statements, with no adjustments to the historical basis of our assets and liabilities. As a result of the Recapitalization, our outstanding capital stock is owned by the Investors, certain members of management and key employees. On April 29, 2008, we registered our common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, thus subjecting us to the reporting requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended. Our common stock is not traded on a national securities exchange.
 
HCA Inc. is a holding company whose affiliates own and operate hospitals and related health care entities. The term “affiliates” includes direct and indirect subsidiaries of HCA Inc. and partnerships and joint ventures in which such subsidiaries are partners. At March 31, 2010, these affiliates owned and operated 154 hospitals, 98 freestanding surgery centers and facilities which provided extensive outpatient and ancillary services. Affiliates of HCA are also partners in joint ventures that own and operate eight hospitals and eight freestanding surgery centers which are accounted for using the equity method. The Company’s facilities are located in 20 states and England. The terms “HCA,” “Company,” “we,” “our” or “us,” as used in this quarterly report on Form 10-Q, refer to HCA Inc. and its affiliates unless otherwise stated or indicated by context.
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. In accordance with Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”), references in this report to net income attributable to HCA Inc. and stockholders’ deficit attributable to HCA Inc. do not include noncontrolling interests (previously reported as “minority interests”), which we now report separately. The implementation of ASC 810 also results in the cash flow impact of distributions to and certain other transactions with noncontrolling interests that were previously classified within operating activities, being classified within financing activities. Such treatment is consistent with the view that, under ASC 810, transactions between HCA Inc. and noncontrolling interests are considered to be equity transactions.
 
The majority of our expenses are “cost of revenue” items. Costs that could be classified as general and administrative would include our corporate office costs, which were $38 million and $37 million for the quarters ended March 31, 2010 and 2009, respectively. Operating results for the quarter ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2009.
 
Certain prior year amounts have been reclassified to conform to the current year presentation.


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 2 —  INCOME TAXES
 
At March 31, 2010, we were contesting before the Appeals Division of the Internal Revenue Service (“IRS”), certain claimed deficiencies and adjustments proposed by the IRS in connection with its examination of the 2003 and 2004 federal income tax returns for HCA and eight affiliates that are treated as partnerships for federal income tax purposes (“affiliated partnerships”). The disputed items include the timing of recognition of certain patient service revenues and our method for calculating the tax allowance for doubtful accounts.
 
Six taxable periods of HCA and its predecessors ended in 1997 through 2002 and the 2002 taxable year of four affiliated partnerships, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, were pending before the IRS Examination Division as of March 31, 2010.
 
We expect the IRS Examination Division will complete its audit of HCA’s 2005 and 2006 federal income tax returns and will begin an audit of the 2007, 2008 and 2009 federal income tax returns for HCA and one or more affiliated partnerships during 2010.
 
Our liability for unrecognized tax benefits was $550 million, including accrued interest of $137 million as of March 31, 2010 ($628 million and $156 million, respectively, as of December 31, 2009). The reduction in our liability for unrecognized tax benefits was principally based on new information received related to tax positions taken in prior years. Unrecognized tax benefits of $201 million ($236 million as of December 31, 2009) would affect the effective rate, if recognized. The liability for unrecognized tax benefits does not reflect deferred tax assets of $71 million ($77 million as of December 31, 2009) related to deductible interest and state income taxes or a refundable deposit of $104 million, which is recorded in noncurrent assets. The provision for income taxes reflects reductions of $15 million and $20 million in interest expense related to taxing authority examinations for the quarters ended March 31, 2010 and 2009, respectively.
 
Depending on the resolution of the IRS disputes, the completion of examinations by federal, state or international taxing authorities, or the expiration of statutes of limitation for specific taxing jurisdictions, we believe it is reasonably possible our liability for unrecognized tax benefits may significantly increase or decrease within the next 12 months. However, we are currently unable to estimate the range of any possible change.
 
NOTE 3 —  INVESTMENTS OF INSURANCE SUBSIDIARY
 
A summary of our insurance subsidiary’s investments at March 31, 2010 and December 31, 2009 follows (dollars in millions):
 
                                 
    March 31, 2010  
          Unrealized
       
    Amortized
    Amounts     Fair
 
    Cost     Gains     Losses     Value  
 
Debt securities:
                               
States and municipalities
  $ 648     $ 29     $ (2 )   $ 675  
Auction rate securities
    336             (3 )     333  
Asset-backed securities
    40             (1 )     39  
Money market funds
    249                   249  
                                 
      1,273       29       (6 )     1,296  
Equity securities
    8             (1 )     7  
                                 
    $ 1,281     $ 29     $ (7 )     1,303  
                                 
Amounts classified as current assets
                            (157 )
                                 
Investment carrying value
                          $ 1,146  
                                 
 


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 3 —  INVESTMENTS OF INSURANCE SUBSIDIARY (continued)
 
                                 
    December 31, 2009  
          Unrealized
       
    Amortized
    Amounts     Fair
 
    Cost     Gains     Losses     Value  
 
Debt securities:
                               
States and municipalities
  $ 668     $ 30     $ (3 )   $ 695  
Auction rate securities
    401             (5 )     396  
Asset-backed securities
    43             (1 )     42  
Money market funds
    176                   176  
                                 
      1,288       30       (9 )     1,309  
Equity securities
    8       1       (2 )     7  
                                 
    $ 1,296     $ 31     $ (11 )     1,316  
                                 
Amounts classified as current assets
                            (150 )
                                 
Investment carrying value
                          $ 1,166  
                                 
 
At March 31, 2010 and December 31, 2009, the investments of our insurance subsidiary were classified as “available-for-sale.” Changes in temporary unrealized gains and losses are recorded as adjustments to other comprehensive income. At March 31, 2010 and December 31, 2009, $92 million and $100 million, respectively, of our investments were subject to restrictions included in insurance bond collateralization and assumed reinsurance contracts.
 
Scheduled maturities of investments in debt securities at March 31, 2010 were as follows (dollars in millions):
 
                 
    Amortized
    Fair
 
    Cost     Value  
 
Due in one year or less
  $ 295     $ 296  
Due after one year through five years
    298       312  
Due after five years through ten years
    186       197  
Due after ten years
    118       119  
                 
      897       924  
Auction rate securities
    336       333  
Asset-backed securities
    40       39  
                 
    $ 1,273     $ 1,296  
                 
 
The average expected maturity of the investments in debt securities at March 31, 2010 was 3.1 years, compared to the average scheduled maturity of 10.8 years. Expected and scheduled maturities may differ because the issuers of certain securities have the right to call, prepay or otherwise redeem such obligations prior to the scheduled maturity date. The average expected maturities for our auction rate and asset-backed securities were derived from valuation models of expected cash flows and involved management’s judgment. The average expected maturities for our auction rate and asset-backed securities at March 31, 2010 were 4.3 years and 5.9 years, respectively, compared to average scheduled maturities of 25.1 years and 25.7 years, respectively.

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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 4 —  LONG-TERM DEBT
 
A summary of long-term debt at March 31, 2010 and December 31, 2009, including related interest rates at March 31, 2010, follows (dollars in millions):
 
                 
    March 31,
    December 31,
 
    2010     2009  
 
Senior secured asset-based revolving credit facility (effective interest rate of 1.7%)
  $ 1,825     $ 715  
Senior secured revolving credit facility (effective interest rate of 2.0%)
    229        
Senior secured term loan facilities (effective interest rate of 6.7%)
    7,594       8,987  
Senior secured first lien notes (effective interest rate of 8.4%)
    4,071       2,682  
Other senior secured debt (effective interest rate of 7.0%)
    345       362  
                 
First lien debt
    14,064       12,746  
                 
Senior secured cash-pay notes (effective interest rate of 9.7%)
    4,501       4,500  
Senior secured toggle notes (effective interest rate of 10.0%)
    1,578       1,578  
                 
Second lien debt
    6,079       6,078  
                 
Senior unsecured notes (effective interest rate of 7.1%)
    6,712       6,846  
                 
Total debt (average life of six years, rates averaging 7.4%)
    26,855       25,670  
Less amounts due within one year
    981       846  
                 
    $ 25,874     $ 24,824  
                 
 
During February 2009, we issued $310 million aggregate principal amount of 97/8% senior secured second lien notes due 2017 at a price of 96.673% of their face value, resulting in $300 million of gross proceeds. During April 2009, we issued $1.500 billion aggregate principal amount of 81/2% senior secured first lien notes due 2019 at a price of 96.755% of their face value, resulting in $1.451 billion of gross proceeds. During August 2009, we issued $1.250 billion aggregate principal amount of 77/8% senior secured first lien notes due 2020 at a price of 98.254% of their face value, resulting in $1.228 billion of gross proceeds.
 
During March 2010, we issued $1.400 billion aggregate principal amount of 71/4% senior secured first lien notes due 2020 at a price of 99.095% of their face value, resulting in $1.387 billion of gross proceeds. After the payment of related fees and expenses, we used the proceeds from these 2009 and 2010 debt issuances to repay outstanding indebtedness under our senior secured term loan facilities.
 
NOTE 5 —  FINANCIAL INSTRUMENTS
 
Interest Rate Swap Agreements
 
We have entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates. These swap agreements involve the exchange of fixed and variable rate interest payments between two parties based on common notional principal amounts and maturity dates. Pay-fixed interest rate swaps effectively convert LIBOR indexed variable rate obligations to fixed interest rate obligations. Pay-variable interest rate swaps effectively convert fixed interest rate obligations to LIBOR indexed variable rate obligations. The net interest payments, based on the notional amounts in these agreements, generally match the timing of the related liabilities, for the interest rate swap agreements which have been designated as cash flow hedges. The notional amounts of the swap agreements represent amounts used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis.


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 5 —  FINANCIAL INSTRUMENTS (continued)
 

Interest Rate Swap Agreements (continued)
 
During March 2010, the application of the net proceeds from our issuance of $1.400 billion aggregate principal amount of 71/4% senior secured first lien notes to repay variable rate debt resulted in our remaining outstanding variable rate indebtedness being less than the notional amounts of the related pay-fixed interest rate swaps, which had been designated as cash flow hedges. Therefore, we dedesignated $1.400 billion notional amount of our pay-fixed interest rate swaps and entered into $1.400 billion notional amount of pay-variable interest rate swaps, which we expect to produce approximately offsetting changes in fair value through the swap maturity dates.
 
The following table sets forth our interest rate swap agreements, which have been designated as cash flow hedges, at March 31, 2010 (dollars in millions):
 
                         
    Notional
          Fair
 
    Amount     Maturity Date     Value  
 
Pay-fixed interest rate swaps
  $ 7,100       November 2011     $ (448 )
Pay-fixed interest rate swaps (starting November 2011)
    2,000       December 2016       (24 )
 
Certain of our interest rate swaps are not designated as hedges, and changes in fair value are recognized in results of operations. The following table sets forth our interest rate swap agreements, which were not designated as hedges, at March 31, 2010 (dollars in millions):
 
                         
    Notional
      Fair
    Amount   Maturity Date   Value
 
Pay-fixed interest rate swap
  $ 500       March 2011     $ (12 )
Pay-variable interest rate swap
    500       March 2011        
Pay-fixed interest rate swap
    900       November 2011       (56 )
Pay-variable interest rate swap
    900       November 2011       (1 )
 
During the next 12 months, we estimate $368 million will be reclassified from other comprehensive income (“OCI”) to interest expense.
 
Cross Currency Swaps
 
The Company and certain subsidiaries have incurred obligations and entered into various intercompany transactions where such obligations are denominated in currencies, other than the functional currencies of the parties executing the trade. In order to mitigate the currency exposure risks and better match the cash flows of our obligations and intercompany transactions with cash flows from operations, we entered into various cross currency swaps. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.
 
Certain of our cross currency swaps are not designated as hedges, and changes in fair value are recognized in results of operations. The following table sets forth our cross currency swap agreement which was not designated as a hedge at March 31, 2010 (amounts in millions):
 
                         
    Notional
      Fair
    Amount   Maturity Date   Value
 
Euro — United States Dollar currency swap
    351 Euro       December 2011     $ 45  
 
The following table sets forth our cross currency swap agreements, which have been designated as cash flow hedges, at March 31, 2010 (amounts in millions):
 
                         
    Notional
      Fair
    Amount   Maturity Date   Value
 
GBP — United States Dollar currency swaps
    100 GBP       November 2010     $ (24 )


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 5 —  FINANCIAL INSTRUMENTS (continued)
 
Derivatives— Results of Operations
 
The following tables present the effect on our results of operations of our interest rate and cross currency swaps for the quarter ended March 31, 2010 (dollars in millions):
 
                         
          Location of Loss
    Amount of Loss
 
    Amount of Loss
    Reclassified from
    Reclassified from
 
    Recognized in OCI on
    Accumulated OCI
    Accumulated OCI
 
Derivatives in Cash Flow Hedging Relationships
  Derivatives, Net of Tax     into Operations     into Operations  
 
Interest rate swaps
  $ 67       Interest expense     $ 95  
Cross currency swaps
    7       Interest expense        
                         
    $ 74             $ 95  
                         
 
                 
    Location of Loss
  Amount of Loss
    Recognized in
  Recognized in
    Operations on
  Operations on
Derivatives Not Designated as Hedging Instruments
  Derivatives   Derivatives
 
Interest rate swaps
    Other operating expense     $ 1  
Cross currency swap
    Other operating expense       34  
 
Credit-risk-related Contingent Features
 
We have agreements with each of our derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of March 31, 2010, we have not been required to post any collateral related to these agreements. If we had breached these provisions at March 31, 2010, we would have been required to settle our obligations under the agreements at their aggregate, estimated termination value of $586 million.
 
NOTE 6 —  ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
 
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements.
 
ASC 820 emphasizes fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 6 —  ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)
 
of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
Cash Traded Investments
 
Our cash traded investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Certain types of cash traded instruments are classified within Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include auction rate securities (“ARS”) and limited partnership investments. The transaction price is initially used as the best estimate of fair value.
 
Our wholly-owned insurance subsidiary had investments in municipal, tax-exempt ARS, which are backed by student loans substantially guaranteed by the federal government, of $333 million ($336 million par value) at March 31, 2010. We do not currently intend to attempt to sell the ARS as the liquidity needs of our insurance subsidiary are expected to be met by other investments in its investment portfolio. These securities continue to accrue and pay interest semi-annually based on the failed auction maximum rate formulas stated in their respective Official Statements. During 2009 and the first quarter of 2010, certain issuers and their broker/dealers redeemed or repurchased $172 million and $65 million, respectively, of our ARS at par value. The valuation of these securities involved management’s judgment, after consideration of market factors and the absence of market transparency, market liquidity and observable inputs. Our valuation models derived a fair market value compared to tax-equivalent yields of other student loan backed variable rate securities of similar credit worthiness and similar effective maturities.
 
Derivative Financial Instruments
 
We have entered into interest rate and cross currency swap agreements to manage our exposure to fluctuations in interest rates and foreign currency risks. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates and implied volatilities. To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
 
Although we have determined the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments were not significant to the overall valuation of our derivatives at March 31, 2010. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy at March 31, 2010.


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 6 —  ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)
 
Fair Value Summary
 
The following table summarizes our assets and liabilities measured at fair value on a recurring basis as of March 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in millions):
 
                                 
          Fair Value Measurements Using  
          Quoted Prices in
             
          Active Markets for
             
          Identical Assets
    Significant Other
    Significant
 
          and Liabilities
    Observable Inputs
    Unobservable Inputs
 
    Fair Value     (Level 1)     (Level 2)     (Level 3)  
 
Assets:
                               
Investments of insurance subsidiary:
                               
Debt securities:
                               
States and municipalities
  $ 675     $     $ 675     $  
Auction rate securities
    333                   333  
Asset-backed securities
    39             39        
Money market funds
    249       249              
                                 
      1,296       249       714       333  
Equity securities
    7       2       4       1  
                                 
Investments of insurance subsidiary
    1,303       251       718       334  
Less amounts classified as current assets
    (157 )     (157 )            
                                 
    $ 1,146     $ 94     $ 718     $ 334  
                                 
Cross currency swap (Other assets)
  $ 45     $     $ 45     $  
Liabilities:
                               
Interest rate swaps (Income taxes and other liabilities)
    541             541        
Cross currency swaps (Income taxes and other liabilities)
    24             24        
 
The following table summarizes the activity related to the auction rate and equity securities investments of our insurance subsidiary, which have fair value measurements based on significant unobservable inputs (Level 3), during the quarter ended March 31, 2010 (dollars in millions):
 
         
Asset balances at December 31, 2009
  $ 397  
Unrealized gains included in other comprehensive income
    2  
Settlements
    (65 )
         
Asset balances at March 31, 2010
  $ 334  
         
 
The estimated fair value of our long-term debt was $27.007 billion and $25.659 billion at March 31, 2010 and December 31, 2009, respectively, compared to carrying amounts aggregating $26.855 billion and $25.670 billion, respectively. The estimates of fair value are generally based upon the quoted market prices or quoted market prices for similar issues of long-term debt with the same maturities.
 
NOTE 7 —  CONTINGENCIES
 
We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 7 —  CONTINGENCIES (continued)
 
such lawsuits, claims or legal and regulatory proceedings could have a material, adverse effect on our results of operations or financial position in a given period.
 
We are subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants may seek punitive damages against us which may not be covered by insurance. It is management’s opinion that the ultimate resolution of these pending claims and legal proceedings will not have a material, adverse effect on our results of operations or financial position.
 
NOTE 8 —  COMPREHENSIVE INCOME AND CAPITAL STRUCTURE
 
The components of comprehensive income, net of related taxes, for the quarters ended March 31, 2010 and 2009 are only attributable to HCA Inc. and are as follows (dollars in millions):
 
                 
    2010     2009  
 
Net income attributable to HCA Inc. 
  $ 388     $ 360  
Change in fair value of derivative instruments
    (12 )     (8 )
Change in fair value of available-for-sale securities
    1       4  
Foreign currency translation adjustments
    (21 )     (2 )
Defined benefit plans
    3       2  
                 
Comprehensive income
  $ 359     $ 356  
                 
 
The components of accumulated other comprehensive loss, net of related taxes, are as follows (dollars in millions):
 
                 
    March 31,
    December 31,
 
    2010     2009  
 
Change in fair value of derivative instruments
  $ (367 )   $ (355 )
Change in fair value of available-for-sale securities
    15       14  
Foreign currency translation adjustments
    (24 )     (3 )
Defined benefit plans
    (103 )     (106 )
                 
Accumulated other comprehensive loss
  $ (479 )   $ (450 )
                 
 
The changes in stockholders’ deficit, including changes in stockholders’ deficit attributable to HCA Inc. and changes in equity attributable to noncontrolling interests are as follows (dollars in millions):
 
                                                         
    Equity (Deficit) Attributable to HCA Inc.              
                Capital in
    Accumulated
          Equity
       
    Common Stock     Excess of
    Other
          Attributable to
       
    Shares
    Par
    Par
    Comprehensive
    Retained
    Noncontrolling
       
    (000)     Value     Value     Loss     Deficit     Interests     Total  
 
Balances, December 31, 2009
    94,637     $ 1     $ 226     $ (450 )   $ (8,763 )   $ 1,008     $ (7,978 )
Net income
                            388       88       476  
Other comprehensive loss
                      (29 )                 (29 )
Distributions
                            (1,751 )     (83 )     (1,834 )
Share-based benefit plans
    (11 )           41                         41  
Other
                24                   2       26  
                                                         
Balances, March 31, 2010
    94,626     $ 1     $ 291     $ (479 )   $ (10,126 )   $ 1,015     $ (9,298 )
                                                         


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 8 —  COMPREHENSIVE INCOME AND CAPITAL STRUCTURE (continued)
 
On January 27, 2010, our Board of Directors declared a distribution to the Company’s stockholders and holders of vested stock options. The distribution was $17.50 per share and vested stock option, or $1.751 billion in the aggregate. The distribution was paid on February 5, 2010 to holders of record on February 1, 2010. The distribution was funded using funds available under our existing senior secured credit facilities and approximately $100 million of cash on hand. Pursuant to the terms of our stock option plans, the holders of nonvested stock options received a $17.50 per share reduction to the exercise price of their share-based awards.
 
NOTE 9 —  SEGMENT AND GEOGRAPHIC INFORMATION
 
We operate in one line of business, which is operating hospitals and related health care entities. During the quarters ended March 31, 2010 and 2009, approximately 25% and 24%, respectively, of our patient revenues related to patients participating in the fee-for-service Medicare program.
 
Our operations are structured into three geographically organized groups: the Eastern Group includes 48 consolidating hospitals located in the Eastern United States, the Central Group includes 45 consolidating hospitals located in the Central United States and the Western Group includes 55 consolidating hospitals located in the Western United States. We also operate six consolidating hospitals in England, and these facilities are included in the Corporate and other group.
 
Adjusted segment EBITDA is defined as income before depreciation and amortization, interest expense, losses on sales of facilities, impairments of long-lived assets, income taxes and noncontrolling interests. We use adjusted segment EBITDA as an analytical indicator for purposes of allocating resources to geographic areas and assessing their performance. Adjusted segment EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. Adjusted segment EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from adjusted segment EBITDA are significant components in understanding and assessing financial performance. Because adjusted segment EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, adjusted segment EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. The geographic distributions of our revenues, equity in earnings of affiliates, adjusted segment EBITDA and


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 9 —  SEGMENT AND GEOGRAPHIC INFORMATION (continued)
 
depreciation and amortization for the quarters ended March 31, 2010 and 2009 are summarized in the following table (dollars in millions):
 
                 
    2010     2009  
 
Revenues:
               
Central Group
  $ 1,764     $ 1,803  
Eastern Group
    2,233       2,275  
Western Group
    3,308       3,151  
Corporate and other
    239       202  
                 
    $ 7,544     $ 7,431  
                 
Equity in earnings of affiliates:
               
Central Group
  $ (1 )   $ (1 )
Eastern Group
    (1 )      
Western Group
    (67 )     (67 )
Corporate and other
    1        
                 
    $ (68 )   $ (68 )
                 
Adjusted segment EBITDA:
               
Central Group
  $ 342     $ 351  
Eastern Group
    440       433  
Western Group
    791       733  
Corporate and other
    1       (60 )
                 
    $ 1,574     $ 1,457  
                 
Depreciation and amortization:
               
Central Group
  $ 87     $ 88  
Eastern Group
    91       90  
Western Group
    144       144  
Corporate and other
    33       31  
                 
    $ 355     $ 353  
                 
                 
Adjusted segment EBITDA
  $ 1,574     $ 1,457  
Depreciation and amortization
    355       353  
Interest expense
    516       471  
Losses on sales of facilities
          5  
Impairments of long-lived assets
    18       9  
                 
Income before income taxes
  $ 685     $ 619  
                 


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 10 —  ACQUISITIONS, DISPOSITIONS AND IMPAIRMENT OF LONG-LIVED ASSETS
 
During the quarters ended March 31, 2010 and 2009, we paid $21 million and $38 million, respectively, to acquire nonhospital health care entities.
 
During the quarter ended March 31, 2010, we received proceeds of $24 million related to sales of real estate investments and the proceeds were equal to the carrying amounts. During the quarter ended March 31, 2009, we received proceeds of $5 million and recognized a net pretax loss of $5 million related to sales of hospital facilities and other investments.
 
During the quarter ended March 31, 2010, we recorded charges of $18 million to adjust the values of real estate and other investments in our Eastern, Western and Corporate and Other Groups to estimated fair value. During the quarter ended March 31, 2009, we recorded a charge of $9 million to adjust the value of real estate investments in our Central Group to estimated fair value.


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 11 —  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
 
Our senior secured credit facilities and senior secured notes are fully and unconditionally guaranteed by substantially all existing and future, direct and indirect, wholly-owned material domestic subsidiaries that are “Unrestricted Subsidiaries” under our Indenture dated December 16, 1993 (except for certain special purpose subsidiaries that only guarantee and pledge their assets under our senior secured asset-based revolving credit facility).
 
Our summarized condensed consolidating balance sheets at March 31, 2010 and December 31, 2009 and condensed consolidating statements of income and cash flows for the quarters ended March 31, 2010 and 2009, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, follow:
 
HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 2010
(Dollars in millions)
 
                                         
                Subsidiary
             
    Parent
    Subsidiary
    Non-
          Condensed
 
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
Revenues
  $     $ 4,374     $ 3,170     $     $ 7,544  
                                         
Salaries and benefits
          1,826       1,246             3,072  
Supplies
          690       510             1,200  
Other operating expenses
    2       638       562             1,202  
Provision for doubtful accounts
          358       206             564  
Equity in earnings of affiliates
    (811 )     (27 )     (41 )     811       (68 )
Depreciation and amortization
          195       160             355  
Interest expense
    648       (115 )     (17 )           516  
Impairments of long-lived assets
          15       3             18  
Management fees
          (118 )     118              
                                         
      (161 )     3,462       2,747       811       6,859  
                                         
Income before income taxes
    161       912       423       (811 )     685  
Provision for income taxes
    (227 )     313       123             209  
                                         
Net income
    388       599       300       (811 )     476  
Net income attributable to noncontrolling interests
          15       73             88  
                                         
Net income attributable to HCA Inc. 
  $ 388     $ 584     $ 227     $ (811 )   $ 388  
                                         


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 11 —  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 2009
(Dollars in millions)
 
                                         
                Subsidiary
             
    Parent
    Subsidiary
    Non-
          Condensed
 
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
Revenues
  $     $ 4,393     $ 3,038     $     $ 7,431  
                                         
Salaries and benefits
          1,755       1,168             2,923  
Supplies
          721       489             1,210  
Other operating expenses
    5       617       480             1,102  
Provision for doubtful accounts
          508       299             807  
Equity in earnings of affiliates
    (705 )     (24 )     (44 )     705       (68 )
Depreciation and amortization
          196       157             353  
Interest expense
    542       (66 )     (5 )           471  
Losses (gains) on sales of facilities
          7       (2 )           5  
Impairments of long-lived assets
          9                   9  
Management fees
          (116 )     116              
                                         
      (158 )     3,607       2,658       705       6,812  
                                         
Income before income taxes
    158       786       380       (705 )     619  
Provision for income taxes
    (202 )     270       119             187  
                                         
Net income
    360       516       261       (705 )     432  
Net income attributable to noncontrolling interests
          14       58             72  
                                         
Net income attributable to HCA Inc. 
  $ 360     $ 502     $ 203     $ (705 )   $ 360  
                                         


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 11 —  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA INC.
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2010
(Dollars in millions)
 
                                         
                Subsidiary
             
    Parent
    Subsidiary
    Non-
          Condensed
 
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
                                       
Current assets:
                                       
Cash and cash equivalents
  $     $ 80     $ 308     $     $ 388  
Accounts receivable, net
          2,253       1,625             3,878  
Inventories
          481       313             794  
Deferred income taxes
    1,181                         1,181  
Other
          182       315             497  
                                         
      1,181       2,996       2,561             6,738  
                                         
Property and equipment, net
          6,880       4,372             11,252  
Investments of insurance subsidiary
                1,146             1,146  
Investments in and advances to affiliates
          247       604             851  
Goodwill
          1,635       926             2,561  
Deferred loan costs
    411                         411  
Investments in and advances to subsidiaries
    22,641                   (22,641 )      
Other
    988       16       128             1,132  
                                         
    $ 25,221     $ 11,774     $ 9,737     $ (22,641 )   $ 24,091  
                                         
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
                                       
Current liabilities:
                                       
Accounts payable
  $     $ 727     $ 472     $     $ 1,199  
Accrued salaries
          559       334             893  
Other accrued expenses
    622       274       602             1,498  
Long-term debt due within one year
    942       10       29             981  
                                         
      1,564       1,570       1,437             4,571  
                                         
Long-term debt
    25,476       96       302             25,874  
Intercompany balances
    7,205       (10,805 )     3,600              
Professional liability risks
                1,058             1,058  
Income taxes and other liabilities
    1,145       431       166             1,742  
                                         
      35,390       (8,708 )     6,563             33,245  
Equity securities with contingent redemption rights
    144                         144  
                                         
Stockholders’ (deficit) equity attributable to HCA Inc. 
    (10,313 )     20,371       2,270       (22,641 )     (10,313 )
Noncontrolling interests
          111       904             1,015  
                                         
      (10,313 )     20,482       3,174       (22,641 )     (9,298 )
                                         
    $ 25,221     $ 11,774     $ 9,737     $ (22,641 )   $ 24,091  
                                         


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 11 —  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2009
(Dollars in millions)
 
                                         
                Subsidiary
             
    Parent
    Subsidiary
    Non-
          Condensed
 
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
                                       
Current assets:
                                       
Cash and cash equivalents
  $     $ 95     $ 217     $     $ 312  
Accounts receivable, net
          2,135       1,557             3,692  
Inventories
          489       313             802  
Deferred income taxes
    1,192                         1,192  
Other
    81       148       350             579  
                                         
      1,273       2,867       2,437             6,577  
                                         
Property and equipment, net
          7,034       4,393             11,427  
Investments of insurance subsidiary
                1,166             1,166  
Investments in and advances to affiliates
          244       609             853  
Goodwill
          1,641       936             2,577  
Deferred loan costs
    418                         418  
Investments in and advances to subsidiaries
    21,830                   (21,830 )      
Other
    963       19       131             1,113  
                                         
    $ 24,484     $ 11,805     $ 9,672     $ (21,830 )   $ 24,131  
                                         
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
                                       
Current liabilities:
                                       
Accounts payable
  $     $ 908     $ 552     $     $ 1,460  
Accrued salaries
          542       307             849  
Other accrued expenses
    282       293       583             1,158  
Long-term debt due within one year
    802       9       35             846  
                                         
      1,084       1,752       1,477             4,313  
                                         
Long-term debt
    24,427       103       294             24,824  
Intercompany balances
    6,636       (10,387 )     3,751              
Professional liability risks
                1,057             1,057  
Income taxes and other liabilities
    1,176       421       171             1,768  
                                         
      33,323       (8,111 )     6,750             31,962  
Equity securities with contingent redemption rights
    147                         147  
                                         
Stockholders’ (deficit) equity attributable to HCA Inc. 
    (8,986 )     19,787       2,043       (21,830 )     (8,986 )
Noncontrolling interests
          129       879             1,008  
                                         
      (8,986 )     19,916       2,922       (21,830 )     (7,978 )
                                         
    $ 24,484     $ 11,805     $ 9,672     $ (21,830 )   $ 24,131  
                                         


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 11 —  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2010
(Dollars in millions)
 
                                         
                Subsidiary
             
    Parent
    Subsidiary
    Non-
          Condensed
 
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
Cash flows from operating activities:
                                       
Net income
  $ 388     $ 599     $ 300     $ (811 )   $ 476  
Adjustments to reconcile net income to net cash provided by operating activities:
                                       
Changes in operating assets and liabilities
    116       (670 )     (284 )           (838 )
Provision for doubtful accounts
          358       206             564  
Depreciation and amortization
          195       160             355  
Income taxes
    280                         280  
Impairments of long-lived assets
          15       3             18  
Amortization of deferred loan costs
    20                         20  
Share-based compensation
    8                         8  
Equity in earnings of affiliates
    (811 )                 811        
Other
    18                         18  
                                         
Net cash provided by operating activities
    19       497       385             901  
                                         
Cash flows from investing activities:
                                       
Purchase of property and equipment
          (53 )     (161 )           (214 )
Acquisition of hospitals and health care entities
          (21 )                 (21 )
Disposition of hospitals and health care entities
          23       1             24  
Change in investments
          7       22             29  
Other
          (3 )     4             1  
                                         
Net cash used in investing activities
          (47 )     (134 )           (181 )
                                         
Cash flows from financing activities:
                                       
Issuance of long-term debt
    1,387                         1,387  
Net change in revolving credit facilities
    1,339                         1,339  
Repayment of long-term debt
    (1,496 )     (11 )     (3 )           (1,510 )
Distributions to noncontrolling interests
          (33 )     (50 )           (83 )
Changes in intercompany balances with affiliates, net
    532       (421 )     (111 )            
Payment of debt issuance costs
    (25 )                       (25 )
Payment of cash distribution to stockholders
    (1,751 )                       (1,751 )
Other
    (5 )           4             (1 )
                                         
Net cash used in financing activities
    (19 )     (465 )     (160 )           (644 )
                                         
Change in cash and cash equivalents
          (15 )     91             76  
Cash and cash equivalents at beginning of period
          95       217             312  
                                         
Cash and cash equivalents at end of period
  $     $ 80     $ 308     $     $ 388  
                                         


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 11 —  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2009
(Dollars in millions)
 
                                         
                Subsidiary
             
    Parent
    Subsidiary
    Non-
          Condensed
 
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
Cash flows from operating activities:
                                       
Net income
  $ 360     $ 516     $ 261     $ (705 )   $ 432  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                       
Changes in operating assets and liabilities
    75       (706 )     (480 )           (1,111 )
Provision for doubtful accounts
          508       299             807  
Depreciation and amortization
          196       157             353  
Income taxes
    41                         41  
Losses on sales of facilities
          1       4             5  
Impairments of long-lived assets
          9                   9  
Amortization of deferred loan costs
    21                         21  
Share-based compensation
    7                         7  
Pay-in-kind interest
    39                         39  
Equity in earnings of affiliates
    (705 )                 705        
Other
    4       12       (4 )           12  
                                         
Net cash provided by (used in) operating activities
    (158 )     536       237             615  
                                         
Cash flows from investing activities:
                                       
Purchase of property and equipment
          (177 )     (160 )           (337 )
Acquisition of hospitals and health care entities
          (38 )                 (38 )
Disposition of hospitals and health care entities
          1       4             5  
Change in investments
          (4 )     80             76  
Other
                6             6  
                                         
Net cash used in investing activities
          (218 )     (70 )           (288 )
                                         
Cash flows from financing activities:
                                       
Issuance of long-term debt
    300                         300  
Net change in revolving credit facilities
    (335 )                       (335 )
Repayment of long-term debt
    (285 )     (1 )     (53 )           (339 )
Distributions to noncontrolling interests
          (21 )     (34 )           (55 )
Payment of debt issuance costs
    (14 )                       (14 )
Changes in intercompany balances with affiliates, net
    492       (304 )     (188 )            
Other
                7             7  
                                         
Net cash provided by (used in) financing activities
    158       (326 )     (268 )           (436 )
                                         
Change in cash and cash equivalents
          (8 )     (101 )           (109 )
Cash and cash equivalents at beginning of period
          134       331             465  
                                         
Cash and cash equivalents at end of period
  $     $ 126     $ 230     $     $ 356  
                                         


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HCA INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 12 —  SUBSEQUENT EVENTS
 
On May 5, 2010, our Board of Directors declared a distribution to the Company’s existing stockholders and holders of vested stock options. The distribution will be $5.00 per share and vested stock option, or approximately $500 million in the aggregate. The distribution is expected to be paid on May 14, 2010 to holders of record on May 6, 2010. The distribution is expected to be funded using funds available under our existing senior secured credit facilities. Pursuant to the terms of our stock option plans, the holders of nonvested stock options will receive a $5.00 per share reduction to the exercise price of their share-based awards.
 
On May 5, 2010, our Board of Directors granted approval for the Company to file with the Securities and Exchange Commission a registration statement on Form S-1 relating to a proposed initial public offering of its common stock. We expect to file the Form S-1 on or about May 7, 2010. We intend to use the anticipated net proceeds to repay certain of our existing indebtedness, as will be determined prior to our offering, and for general corporate purposes. Upon completion of the offering and in connection with our termination of the management agreement we have with affiliates of the Investors, we will be required to pay a termination fee based upon the net present value of our future obligations under the management agreement.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
This quarterly report on Form 10-Q includes certain disclosures which contain “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words like “may,” “believe,” “will,” “should,” “seek,” “approximately,” “intend,” “expect,” “project,’’ “estimate,” “anticipate,” “plan,” “initiative” or “continue.” These forward-looking statements are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control, that could significantly affect current plans and expectations and our future financial position and results of operations. These factors include, but are not limited to, (1) the ability to recognize the benefits of the Recapitalization, (2) the impact of the substantial indebtedness incurred to finance the Recapitalization and the ability to refinance such indebtedness on acceptable terms, (3) the passage of the Health Reform Law and the enactment of additional federal or state health care reform and changes in federal, state or local laws or regulations affecting the health care industry, (4) increases, particularly in the current economic downturn, in the amount and risk of collectibility of uninsured accounts, and deductibles and copayment amounts for insured accounts, (5) the ability to achieve operating and financial targets, attain expected levels of patient volumes and control the costs of providing services, (6) possible changes in the Medicare, Medicaid and other state programs, including Medicaid supplemental payments pursuant to upper payment limit (“UPL”) programs, that may impact reimbursements to health care providers and insurers, (7) the highly competitive nature of the health care business, (8) changes in revenue mix, including potential declines in the population covered under managed care agreements due to the current economic downturn, and the ability to enter into and renew managed care provider agreements on acceptable terms, (9) the efforts of insurers, health care providers and others to contain health care costs, (10) the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures, (11) increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel, (12) the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities, (13) changes in accounting practices, (14) changes in general economic conditions nationally and regionally in our markets, (15) future divestitures which may result in charges, (16) changes in business strategy or development plans, (17) delays in receiving payments for services provided, (18) the outcome of pending and any future tax audits, appeals and litigation associated with our tax positions, (19) potential liabilities and other claims that may be asserted against us, and (20) other risk factors described in our annual report on Form 10-K for the year ended December 31, 2009. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report, which forward-looking statements reflect management’s views only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
 
Health Care Reform
 
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, “Health Reform Law”) will change how health care services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid Disproportionate Share Hospital payments, and the establishment of programs where reimbursement is tied to quality and integration. In addition, the new law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement.
 
Expanded Coverage
 
Based on the Congressional Budget Office (“CBO”) and the Centers for Medicare & Medicaid Services (“CMS”) estimates, by 2019, the Health Reform Law will expand coverage to 32 to 34 million additional


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Health Care Reform (Continued)
 
individuals (resulting in coverage of an estimated 94% of the legal U.S. population). This increased coverage will occur through a combination of public program expansion and private sector health insurance and other reforms.
 
Medicaid Expansion
 
The primary public program coverage expansion will occur through changes in Medicaid, and to a lesser extent, expansion of the Children’s Health Insurance Program (“CHIP”). The most significant changes will expand the categories of individuals eligible for Medicaid coverage and permit individuals with relatively higher incomes to qualify. The federal government reimburses the majority of a state’s Medicaid expenses, and it conditions its payment on the state meeting certain requirements. The federal government currently requires that states provide coverage for only limited categories of low-income adults under 65 years old (e.g., women who are pregnant, and the blind or disabled). In addition, the income level required for individuals and families to qualify for Medicaid varies widely from state to state.
 
The Health Reform Law materially changes the requirements for Medicaid eligibility. Commencing January 1, 2014, all state Medicaid programs are required to provide, and the federal government will subsidize, Medicaid coverage to virtually all adults under 65 years old with incomes at or under 133% of the federal poverty level (“FPL”). This expansion will create a minimum Medicaid eligibility threshold that is uniform across states. Further, the Health Reform Law also requires states to apply a “5% income disregard” to the Medicaid eligibility standard, so that Medicaid eligibility will effectively be extended to those with incomes up to 138% of the FPL. These new eligibility requirements will expand Medicaid and CHIP coverage by an estimated 16 to 18 million persons nationwide. A disproportionately large percentage of the new Medicaid coverage is likely to be in states that currently have relatively low income eligibility requirements.
 
As Medicaid is a joint federal and state program, the federal government provides states with “matching funds” in a defined percentage, known as the federal medical assistance percentage (“FMAP”). Beginning in 2014, states will receive an enhanced FMAP for the individuals enrolled in Medicaid pursuant to the Health Reform Law. The FMAP percentage is as follows: 100% for calendar years 2014 through 2016; 95% for 2017; 94% in 2018; 93% in 2019; and 90% in 2020 and thereafter.
 
The Health Reform Law also provides that the federal government will subsidize states that create non-Medicaid plans for residents whose incomes are greater than 133% of the FPL but do not exceed 200% of the FPL. Approved state plans will be eligible to receive federal funding. The amount of that funding per individual will be equal to 95% of subsidies that would have been provided for that individual had he or she enrolled in a health plan offered through an American Health Benefit Exchange (“Exchange”), as discussed below.
 
Historically, states often have attempted to reduce Medicaid spending by limiting benefits and tightening Medicaid eligibility requirements. Effective March 23, 2010, the Health Reform Law requires states to at least maintain Medicaid eligibility standards established prior to the enactment of the law for adults until January 1, 2014 and for children until October 1, 2019. States with budget deficits may, however, seek exemptions from this requirement, but only to address eligibility standards that apply to adults making more than 133% of the FPL.
 
Private Sector Expansion
 
The expansion of health coverage through the private sector as a result of the Health Reform Law will occur through new requirements on health insurers, employers and individuals. Commencing January 1, 2014, health insurance companies will be prohibited from imposing annual coverage limits, dropping coverage, excluding persons based upon pre-existing conditions or denying coverage for any individual who is willing to pay the premiums for such coverage. Effective January 1, 2011, each health plan must keep its annual non-medical costs lower than 15% of premium revenue for the group market and lower than 20% in the small group and individual markets or rebate its enrollees the amount spent in excess of the percentage. In addition, effective September 23,


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Table of Contents

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Health Care Reform (Continued)
 
2010, health insurers will not be permitted to deny coverage to children based upon a pre-existing condition and must allow dependent care coverage for children up to 26 years old.
 
Larger employers will be subject to new requirements and incentives to provide health insurance benefits to their full time employees. Effective January 1, 2014, employers with 50 or more employees that do not offer health insurance will be held subject to a penalty if an employee obtains coverage through an Exchange if the coverage is subsidized by the government. The employer penalties will range from $2,000 to $3,000 per employee, subject to certain thresholds and conditions.
 
The Health Reform Law uses various means to induce individuals who do not have health insurance to obtain coverage. By January 1, 2014, individuals will be required to maintain health insurance for a minimum defined set of benefits or pay a tax penalty. The penalty in most cases is $95 in 2014, $325 in 2015, $695 in 2016, and indexed to a cost of living adjustment in subsequent years. The Internal Revenue Service (“IRS”), in consultation with the Department of Health and Human Services (“HHS”), is responsible for enforcing the tax penalty, although the Health Reform Law limits the availability of certain IRS enforcement mechanisms. In addition, for individuals and families below 400% of the FPL, the cost of obtaining health insurance will be subsidized by the federal government. Those with lower incomes will be eligible to receive greater subsidies. It is anticipated that those at the lowest income levels will have the majority of their premiums subsidized by the federal government, in some cases in excess of 95% of the premium amount.
 
To facilitate the purchase of health insurance by individuals and small employers, each state must establish an Exchange by January 1, 2014. Based on CBO and CMS estimates, between 29 and 31 million individuals will obtain their health insurance coverage through an Exchange by 2019. Of that amount, an estimated 16 million will be individuals who were previously uninsured, and 13 to 15 million will be individuals who switched from their prior insurance coverage to a plan obtained through the Exchange. The Health Reform Law requires that the Exchanges be designed to make the process of evaluating, comparing and acquiring coverage simple for consumers. For example, each state’s Exchange must maintain an internet website through which consumers may access health plan ratings that are assigned by the state based on quality and price, view governmental health program eligibility requirements and calculate the actual cost of health coverage. Health insurers participating in the Exchange must offer a set of minimum benefits to be defined by HHS and may offer more benefits. Health insurers must offer at least two, and up to five, levels of plans that vary by the percentage of medical expenses that must be paid by the enrollee. These levels are referred to as platinum, gold, silver, bronze and catastrophic plans, with gold and silver being the two mandatory levels of plans. Each level of plan must require the enrollee to share the following percentages of medical expenses up to the deductible/co-payment limit: platinum, 10%; gold, 20%; silver, 30%; bronze, 40%; and catastrophic, 100%. Health insurers may establish varying deductible/co-payment levels, up to the statutory maximum (estimated to be between $6,000 and $7,000 for an individual). The health insurers must cover 100% of the amount of medical expenses in excess of the deductible/co-payment limit. For example, an individual making 100% to 200% of the FPL will have co-payments and deductibles reduced to about one-third of the amount payable by those with the same plan with incomes at or above 400% of the FPL.
 
Public Program Spending
 
The Health Reform Law provides for Medicare, Medicaid and other federal health care program spending reductions between 2010 and 2019. The CBO estimates that these will include $156 billion in Medicare fee-for-service market basket and productivity reimbursement reductions for all providers, the majority of which will come from hospitals; CMS sets this estimate at $233 billion. The CBO estimates also include an additional $36 billion in reductions of Medicare and Medicaid disproportionate share funding ($22 billion for Medicare and $14 billion for Medicaid). CMS estimates include an additional $64 billion in reductions of Medicare and Medicaid disproportionate share funding, with $50 billion of the reductions coming from Medicare.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Health Care Reform (Continued)
 
Payments for Hospitals and Ambulatory Surgery Centers (“ASCs”)
 
Inpatient Market Basket and Productivity Adjustment.  Under the Medicare program, hospitals receive reimbursement under a prospective payment system (“PPS”) for general, acute care hospital inpatient services. CMS establishes fixed PPS payment amounts per inpatient discharge based on the patient’s assigned Medicare severity diagnosis-related group (“MS-DRG”). These MS-DRG rates are updated each federal fiscal year, which begins October 1, using an index (the “market basket”) that takes into account inflation experienced by hospitals and other entities outside the health care industry in purchasing goods and services.
 
The Health Reform Law provides for three types of annual reductions in the market basket. The first is a general reduction of a specified percentage each federal fiscal year starting in 2010 and extending through 2019. These reductions are as follows: federal fiscal year 2010, 0.25% for discharges occurring on or after April 1, 2010; 2011 (0.25%); 2012 (0.1%); 2013 (0.1%); 2014 (0.3%); 2015 (0.2%); 2016 (0.2%); 2017 (0.75%); 2018 (0.75%); and 2019 (0.75%).
 
The second type of reduction to the market basket is a “productivity adjustment” that will be implemented by HHS beginning in federal fiscal year 2012. The amount of that reduction will be the projected nationwide productivity gains over the preceding 10 years. To determine the projection, HHS will use the Bureau of Labor Statistics (“BLS”) 10-year moving average of changes in specified economy-wide productivity (the BLS data is typically a few years old). The Health Reform Law does not contain guidelines for HHS to use in projecting the productivity figure. Based upon the latest available data, federal fiscal year 2012 market basket reductions resulting from this productivity adjustment are likely to range from 1% to 1.4%.
 
The third type of reduction is in connection with the value-based purchasing program discussed in more detail below. Beginning in federal fiscal year 2013, CMS will reduce the inpatient PPS payment amount for all discharges by the following: 1% for 2013; 1.25% for 2014; 1.5% for 2015; 1.75% for 2016; and 2% for 2017 and subsequent years. For each federal fiscal year, the total amount collected from these reductions will be pooled and used to fund payments to hospitals that satisfy certain quality metrics. While some or all of these reductions may be recovered if a hospital satisfies these quality metrics, the recovery amounts may be delayed.
 
If the aggregate of the three market basket reductions described above is more than the annual market basket adjustments made to account for inflation, there will be a reduction in the MS-DRG rates paid to hospitals. For example, if market basket increases to account for inflation would result in a 2% market basket update and the aggregate Health Reform Law market basket adjustments would result in a 3% reduction, then the rates paid to a hospital for inpatient services would be 1% less than rates paid for the same services in the prior year.
 
Quality-Based Payment Adjustments and Reductions for Inpatient Services.  The Health Reform Law establishes or expands three provisions to promote value-based purchasing and to link payments to quality and efficiency. First, in federal fiscal year 2013, HHS is directed to implement a value-based purchasing program for inpatient hospital services. This program will reward hospitals that meet certain quality performance standards established by HHS. The Health Reform Law provides HHS considerable discretion over the value-based purchasing program. For example, HHS will have the authority to determine the quality performance measures, the standards hospitals must achieve in order to meet the quality performance measures, and the methodology for calculating payments to hospitals that meet the required quality threshold. HHS will also determine how much money each hospital will receive from the pool of dollars created by the reductions related to the value-based purchasing program as described above. Because the Health Reform Law provides that the pool will be fully distributed, hospitals that meet or exceed the quality performance standards set by HHS will receive greater reimbursement under the value-based purchasing program than they would have otherwise. On the other hand, hospitals that do not achieve the necessary quality performance will receive reduced Medicare inpatient hospital payments.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Health Care Reform (Continued)
 
Second, beginning in federal fiscal year 2013, inpatient payments will be reduced if a hospital experiences “excessive readmissions” within a 30-day period of discharge for heart attack, heart failure, pneumonia or other conditions designated by HHS. Hospitals with what HHS defines as “excessive readmissions” for these conditions will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard. Each hospital’s performance will be publicly reported by HHS. HHS has the discretion to determine what “excessive readmissions” means, the amount of the payment reduction and other terms and conditions of this program.
 
Third, reimbursement will be reduced based on a facility’s hospital acquired condition (“HAC”) rates. An HAC is a condition that is acquired by a patient while admitted as an inpatient in a hospital, such as a surgical site infection. Beginning in federal fiscal year 2015, hospitals that rank in the top 25% nationally of HACs for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments. In addition, effective July 1, 2011, the Health Reform Law prohibits the use of federal funds under the Medicaid program to reimburse providers for medical services provided to treat HACs.
 
Outpatient Market Basket and Productivity Adjustment.  Hospital outpatient services paid under PPS are classified into ambulatory payment classifications (“APCs”). The APC payment rates are updated each calendar year based on the market basket. The first two market basket changes outlined above— the general reduction and the productivity adjustment — apply to outpatient services as well as inpatient services, although these are applied on a calendar year basis. The percentage changes specified in the Health Reform Law summarized above as the general reduction for inpatients — e.g., 0.2% in 2015— are the same for outpatients.
 
Medicare and Medicaid Disproportionate Share Hospital (“DSH”) Payments.  The Medicare DSH program provides for additional payments to hospitals that treat a disproportionate share of low-income patients. Under the Health Reform Law, beginning in federal fiscal year 2014, Medicare DSH payments will be reduced to 25% of the amount they otherwise would have been absent the new law. The remaining 75% of the amount that would otherwise be paid under Medicare DSH will be effectively pooled, and this pool will be reduced further each year by a formula that reflects reductions in the national level of uninsured who are under 65 years of age. In other words, the greater the level of coverage for the uninsured nationally, the more the Medicare DSH payment pool will be reduced. Each hospital will then be paid, out of the reduced DSH payment pool, an amount allocated based upon its level of uncompensated care.
 
It is difficult to predict the full impact of the Medicare DSH reductions, and CBO and CMS estimates differ by $38 billion. The Health Reform Law does not mandate what data source HHS must use to determine the reduction, if any, in the uninsured population nationally. In addition, the Health Reform Law does not contain a definition of “uncompensated care.” As a result, it is unclear how a hospital’s share of the Medicare DSH payment pool will be calculated. CMS could use the definition of “uncompensated care” used in connection with hospital cost reports. However, in July 2009, CMS proposed material revisions to the definition of “uncompensated care” used for cost report purposes. Those revisions would exclude certain significant costs that had historically been covered, such as unreimbursed costs of Medicaid services. CMS has not issued a final rule, and the Health Reform Law does not require HHS to use this definition, even if finalized, for DSH purposes. How CMS ultimately defines “uncompensated care” for purposes of these DSH funding provisions could have a material effect on a hospital’s Medicare DSH reimbursements.
 
In addition to Medicare DSH funding, hospitals that provide care to a disproportionately high number of low-income patients may receive Medicaid DSH payments. The federal government distributes federal Medicaid DSH funds to each state based on a statutory formula. The states then distribute the DSH funding among qualifying hospitals. Although Federal Medicaid law defines some level of hospitals that must receive Medicaid DSH funding, states have broad discretion to define additional hospitals that also may qualify for Medicaid DSH payments and the amount of such payments. The Health Reform Law will reduce funding for the Medicaid DSH hospital program in federal fiscal years 2014 through 2020 by the following amounts: 2014 ($500 million); 2015 ($600 million); 2016 ($600 million); 2017


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Health Care Reform (Continued)
 
($1.8 billion); 2018 ($5 billion); 2019 ($5.6 billion); and 2020 ($4 billion). How such cuts are allocated among the states, and how the states allocate these cuts among providers, have yet to be determined.
 
Accountable Care Organizations (“ACOs”).  The Health Reform Law requires HHS to establish a Medicare Shared Savings Program that promotes accountability and coordination of care through the creation of ACOs. Beginning no later than January 1, 2012, the program will allow providers (including hospitals), physicians and other designated professionals and suppliers to form ACOs and voluntarily work together to invest in infrastructure and redesign delivery processes to achieve high quality and efficient delivery of services. The program is intended to produce savings as a result of improved quality and operational efficiency. ACOs that achieve quality performance standards established by HHS will be eligible to share in a portion of the amounts saved by the Medicare program. HHS has significant discretion to determine key elements of the program, including what steps providers must take to be considered an ACO, how to decide if Medicare program savings have occurred, and what portion of such savings will be paid to ACOs. In addition, HHS will determine to what degree hospitals, physicians and other eligible participants will be able to form and operate an ACO without violating certain existing laws, including the Civil Monetary Penalty Law, the Anti-kickback Statute and the Stark Law. However, the Health Reform Law does not authorize HHS to waive other laws that may impact the ability of hospitals and other eligible participants to participate in ACOs, such as antitrust laws.
 
Bundled Payment Pilot Programs.  The Health Reform Law requires HHS to establish a five-year, voluntary national bundled payment pilot program for Medicare services beginning no later than January 1, 2013. Under the program, providers would agree to receive one payment for services provided to Medicare patients for certain medical conditions or episodes of care. HHS will have the discretion to determine how the program will function. For example, HHS will determine what medical conditions will be included in the program and the amount of the payment for each condition. In addition, the Health Reform Law provides for a five-year bundled payment pilot program for Medicaid services to begin January 1, 2012. HHS will select up to eight states to participate based on the potential to lower costs under the Medicaid program while improving care. State programs may target particular categories of beneficiaries, selected diagnoses or geographic regions of the state. The selected state programs will provide one payment for both hospital and physician services provided to Medicaid patients for certain episodes of inpatient care. For both pilot programs, HHS will determine the relationship between the programs and restrictions in certain existing laws, including the Civil Monetary Penalty Law, the Anti-kickback Statute, the Stark Law and the HIPAA privacy, security and transaction standard requirements. However, the Health Reform Law does not authorize HHS to waive other laws that may impact the ability of hospitals and other eligible participants to participate in the pilot programs, such as antitrust laws.
 
Ambulatory Surgery Centers.  The Health Reform Law reduces reimbursement for ASCs through a productivity adjustment to the market basket similar to the productivity adjustment for inpatient and outpatient hospital services, beginning in federal fiscal year 2011.
 
Medicare Managed Care (Medicare Advantage or “MA”).  Under the MA program, the federal government contracts with private health plans to provide inpatient and outpatient benefits to beneficiaries who enroll in such plans. Nationally, approximately 22% of Medicare beneficiaries have elected to enroll in MA plans. Effective in 2014, the Health Reform Law requires MA plans to keep annual administrative costs lower than 15% of annual premium revenue. The Health Reform Law reduces, over a three year period, premium payments to the MA Plans such that CMS’ managed care per capita premium payments are, on average, equal to traditional Medicare. As a result of these changes, payments to MA plans will be reduced by $138 to $145 billion between 2010 and 2019. These reductions to MA plan premium payments may cause some plans to raise premiums or limit benefits, which in turn might cause some Medicare beneficiaries to terminate their MA coverage and enroll in traditional Medicare.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Health Care Reform (Continued)
 
Specialty Hospital Limitations
 
Over the last decade, we have faced significant competition from hospitals that have physician ownership. The Health Reform Law prohibits newly created physician-owned hospitals from billing for Medicare patients referred by their physician owners. As a result, the new law will effectively prevent the formation of physician-owned hospitals after December 31, 2010. While the new law grandfathers existing physician-owned hospitals, it does not allow these hospitals to increase the percentage of physician ownership and significantly restricts their ability to expand services.
 
Program Integrity and Fraud and Abuse
 
The Health Reform Law makes several significant changes to health care fraud and abuse laws, provides additional enforcement tools to the government, increases cooperation between agencies by establishing mechanisms for the sharing of information and enhances criminal and administrative penalties for non-compliance. For example, the Health Reform Law: (1) provides $350 million in increased federal funding over the next 10 years to fight health care fraud, waste and abuse; (2) expands the scope of the Recovery Audit Contractor (“RAC”) program to include MA plans and Medicaid; (3) authorizes HHS, in consultation with the Office of Inspector General of HHS (“OIG”), to suspend Medicare and Medicaid payments to a provider of services or a supplier “pending an investigation of a credible allegation of fraud;” (4) provides Medicare contractors with additional flexibility to conduct random prepayment reviews; and (5) tightens up the rules for returning overpayments made by governmental health programs and expands False Claims Act liability to include failure to timely repay identified overpayments.
 
Impact of Health Reform Law on the Company
 
The expansion of health insurance coverage under the Health Reform Law may result in a material increase in the number of patients using our facilities who have either private or public program coverage. In addition, a disproportionately large percentage of the new Medicaid coverage is likely to be in states that currently have relatively low income eligibility requirements. Two such states are Texas and Florida, where about one-half of the Company’s licensed beds are located. The Company also has a significant presence in other relatively low income eligibility states, including Georgia, Kansas, Louisiana, Missouri, Oklahoma and Virginia. Further, the Health Reform Law provides for a value-based purchasing program, the establishment of ACOs and bundled payment pilot programs, which will create possible sources of additional revenue.
 
However, it is difficult to predict the size of the potential revenue gains to the Company as a result of these elements of the Health Reform Law, because of uncertainty surrounding a number of material factors, including the following:
 
  •  how many previously uninsured individuals will obtain coverage as a result of the Health Reform Law (while the CBO estimates 32 million, CMS estimates almost 34 million; both agencies made a number of assumptions to derive that figure, including how many individuals will ignore substantial subsidies and decide to pay the penalty rather than obtain health insurance and what percentage of people in the future will meet the new Medicaid income eligibility requirements);
 
  •  what percentage of the newly insured patients will be covered under the Medicaid program and what percentage will be covered by private health insurers;
 
  •  the extent to which states will enroll new Medicaid participants in managed care programs;
 
  •  the pace at which insurance coverage expands, including the pace of different types of coverage expansion;
 
  •  the change, if any, in the volume of inpatient and outpatient hospital services that are sought by and provided to previously uninsured individuals;


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Health Care Reform (Continued)
 
 
  •  the rate paid to hospitals by private payers for newly covered individuals, including those covered through the newly created Exchanges and those who might be covered under the Medicaid program under contracts with the state;
 
  •  the rate paid by state governments under the Medicaid program for newly covered individuals;
 
  •  how the value-based purchasing and other quality programs will be implemented;
 
  •  the percentage of individuals in the Exchanges who select the high deductible plans, since health insurers offering those kinds of products have traditionally sought to pay lower rates to hospitals;
 
  •  whether the net effect of the Health Reform Law, including the prohibition on excluding individuals based on pre-existing conditions, the requirement to keep medical costs lower than a specified percentage of premium revenue, other health insurance reforms and the annual fee applied to all health insurers, will be to put pressure on the bottom line of health insurers, which in turn might cause them to seek to reduce payments to hospitals with respect to both newly insured individuals and their existing business; and
 
  •  the possibility that implementation of provisions expanding health insurance coverage will be delayed or even blocked due to court challenges or revised or eliminated as a result of efforts to repeal or amend the new law.
 
On the other hand, the Health Reform Law provides for significant reductions in the growth of Medicare spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to quality and integration. Since approximately 40% of our revenues in 2009 were from Medicare and Medicaid, reductions to these programs may significantly impact the Company and could offset any positive effects of the Health Reform Law. It is difficult to predict the size of the revenue reductions to Medicare and Medicaid spending, because of uncertainty regarding a number of material factors, including the following:
 
  •  the amount of overall revenues the Company will generate from Medicare and Medicaid business when the reductions are implemented;
 
  •  whether reductions required by the Health Reform Law will be changed by statute prior to becoming effective;
 
  •  the size of the Health Reform Law’s annual productivity adjustment to the market basket beginning in 2012 payment years;
 
  •  the amount of the Medicare DSH reductions that will be made, commencing in federal fiscal year 2014;
 
  •  the allocation to our hospitals of the Medicaid DSH reductions, commencing in federal fiscal year 2014;
 
  •  what the losses in revenues will be, if any, from the Health Reform Law’s quality initiatives;
 
  •  how successful ACOs, in which we participate, will be at coordinating care and reducing costs;
 
  •  the scope and nature of potential changes to Medicare reimbursement methods, such as an emphasis on bundling payments or coordination of care programs;
 
  •  whether the Company’s revenues from UPL programs will be adversely affected, because there may be fewer indigent, non-Medicaid patients for whom the Company provides services pursuant to UPL programs; and
 
  •  reductions to Medicare payments CMS may impose for “excessive readmissions.”
 
Because of the many variables involved, we are unable to predict the net effect on the Company of the expected increases in insured individuals using our facilities, the reductions in Medicare spending and reductions in Medicare and Medicaid DSH funding, and numerous other provisions in the law that may affect the Company.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
First Quarter 2010 Operations Summary
 
Net income attributable to HCA Inc. totaled $388 million for the quarter ended March 31, 2010, compared to $360 million for the quarter ended March 31, 2009. Revenues increased to $7.544 billion in the first quarter of 2010 from $7.431 billion in the first quarter of 2009. First quarter 2010 results include impairments of long-lived assets of $18 million. First quarter 2009 results include losses on sales of facilities of $5 million and impairments of long-lived assets of $9 million.
 
Revenues increased 1.5% on a consolidated basis and on a same facility basis for the quarter ended March 31, 2010 compared to the quarter ended March 31, 2009. The increase in consolidated revenues can be attributed to the combined impact of a 0.6% increase in revenue per equivalent admission and a 0.9% increase in equivalent admissions. The same facility revenues increase resulted from the combined impact of a 0.4% increase in same facility revenue per equivalent admission and a 1.1% increase in same facility equivalent admissions.
 
During the quarter ended March 31, 2010, consolidated admissions and same facility admissions increased 0.7% and 0.9%, respectively, compared to the quarter ended March 31, 2009. Inpatient surgeries declined 0.1% on a consolidated basis and declined 0.4% on a same facility basis during the quarter ended March 31, 2010, compared to the quarter ended March 31, 2009. Outpatient surgeries declined 1.9% on a consolidated basis and declined 1.8% on a same facility basis during the quarter ended March 31, 2010, compared to the quarter ended March 31, 2009. Emergency department visits increased 0.5% on a consolidated basis and increased 1.0% on a same facility basis during the quarter ended March 31, 2010, compared to the quarter ended March 31, 2009.
 
For the quarter ended March 31, 2010, the provision for doubtful accounts declined $243 million to 7.5% of revenues, from 10.9% of revenues for the quarter ended March 31, 2009. The self-pay revenue deductions for charity care and uninsured discounts increased $55 million and $418 million (we increased our uninsured discount percentages during August 2009), respectively, during the first quarter of 2010, compared to the first quarter of 2009. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, uninsured discounts and charity care, was 23.5% for the first quarter of 2010, compared to 22.4% for the first quarter of 2009. Same facility uninsured admissions increased 6.8% and same facility uninsured emergency room visits decreased 1.6% for the quarter ended March 31, 2010, compared to the quarter ended March 31, 2009.
 
The increases in the self-pay revenue deductions result in reductions to both the provision for doubtful accounts and revenues, and were the primary contributing factors to the lower growth rates we experienced in revenues and revenue per equivalent admission during the quarter ended March 31, 2010.
 
Interest expense increased $45 million to $516 million for the quarter ended March 31, 2010, from $471 million for the quarter ended March 31, 2009. The additional interest expense was due primarily to an increase in the average effective interest rate.
 
Cash flows from operating activities increased $286 million, from $615 million for the first quarter of 2009 to $901 million for the first quarter of 2010. The increase related primarily to income tax payments, as we received a net refund of $71 million in the first quarter of 2010 and made net payments of $146 million in the first quarter of 2009.
 
Results of Operations
 
Revenue/Volume Trends
 
Our revenues depend upon inpatient occupancy levels, the ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charge and negotiated payment rates for such services. Gross charges typically do not reflect what our facilities are actually paid. Our facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon the cost of providing services, predetermined rates per diagnosis,


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Revenue/Volume Trends (continued)
 
fixed per diem rates or discounts from gross charges. We do not pursue collection of amounts related to patients who meet our guidelines to qualify for charity care; therefore, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care that are similar to the discounts provided to many local managed care plans.
 
Revenues increased 1.5% from $7.431 billion in the first quarter of 2009 to $7.544 billion in the first quarter of 2010. The increase in consolidated revenues can be attributed to the combined impact of a 0.6% increase in revenue per equivalent admission and a 0.9% increase in equivalent admissions. Same facility revenues increased 1.5% from $7.381 billion in the first quarter of 2009 to $7.491 billion in the first quarter of 2010. The increase in same facility revenues can be attributed to the combined impact of a 0.4% increase in same facility revenue per equivalent admission and a 1.1% increase in same facility equivalent admissions. The increases in the self-pay revenue deductions result in reductions to both the provision for doubtful accounts and revenues, and were the primary contributing factors to the lower growth rates we experienced in revenues and revenue per equivalent admission during the quarter ended March 31, 2010.
 
Consolidated admissions and same facility admissions increased 0.7% and 0.9%, respectively, in the first quarter of 2010, compared to the first quarter of 2009. Consolidated outpatient surgeries declined 1.9% and same facility outpatient surgeries declined 1.8% in the first quarter of 2010, compared to the first quarter of 2009. Consolidated inpatient surgeries declined 0.1% and same facility inpatient surgeries declined 0.4% in the first quarter of 2010, compared to the first quarter of 2009. Emergency department visits increased 0.5% on a consolidated basis and increased 1.0% on a same facility basis during the quarter ended March 31, 2010, compared to the quarter ended March 31, 2009.
 
Same facility uninsured admissions increased by 1,601 admissions, or 6.8%, in the first quarter of 2010, compared to the first quarter of 2009. Same facility uninsured admissions in 2009, compared to 2008, increased 0.2% in the fourth quarter of 2009, increased 8.2% in the third quarter of 2009, increased 10.4% in the second quarter of 2009 and declined 0.1% in the first quarter of 2009.
 
The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters ended March 31, 2010 and 2009 are set forth in the following table.
 
                 
    2010     2009  
 
Medicare
    35 %     35 %
Managed Medicare
    11       10  
Medicaid
    9       9  
Managed Medicaid
    7       7  
Managed care and other insurers
    32       33  
Uninsured
    6       6  
                 
      100 %     100 %
                 


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Revenue/Volume Trends (continued)
 
The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters ended March 31, 2010 and 2009 are set forth in the following table.
 
                 
    2010     2009  
 
Medicare
    32 %     33 %
Managed Medicare
    9       8  
Medicaid
    9       7  
Managed Medicaid
    4       4  
Managed care and other insurers
    44       44  
Uninsured
    2       4  
                 
      100 %     100 %
                 
 
At March 31, 2010, we had 73 hospitals in the states of Texas and Florida. During the first quarter of 2010, 58% of our admissions and 52% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 64% of our uninsured admissions during the first quarter of 2010.
 
We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. We have increased the indigent care services we provide in several communities in the state of Texas, in affiliation with other hospitals. Hospitals receiving Medicaid supplemental payments may include those that are providing additional indigent care services. Such payments must be within the federal UPL established by federal regulation. Our Texas Medicaid revenues included $169 million and $63 million during the first quarters of 2010 and 2009, respectively, of Medicaid supplemental payments pursuant to UPL programs.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 
Operating Results Summary
 
The following are comparative summaries of results from operations for the quarters ended March 31, 2010 and 2009 (dollars in millions):
 
                                 
    2010     2009  
    Amount     Ratio     Amount     Ratio  
 
Revenues
  $ 7,544       100.0     $ 7,431       100.0  
                                 
Salaries and benefits
    3,072       40.7       2,923       39.3  
Supplies
    1,200       15.9       1,210       16.3  
Other operating expenses
    1,202       15.9       1,102       14.8  
Provision for doubtful accounts
    564       7.5       807       10.9  
Equity in earnings of affiliates
    (68 )     (0.9 )     (68 )     (0.9 )
Depreciation and amortization
    355       4.8       353       4.8  
Interest expense
    516       6.8       471       6.3  
Losses on sales of facilities
                5       0.1  
Impairments of long-lived assets
    18       0.2       9       0.1  
                                 
      6,859       90.9       6,812       91.7  
                                 
Income before income taxes
    685       9.1       619       8.3  
Provision for income taxes
    209       2.8       187       2.5  
                                 
Net income
    476       6.3       432       5.8  
Net income attributable to noncontrolling interests
    88       1.1       72       1.0  
                                 
Net income attributable to HCA Inc. 
  $ 388       5.2     $ 360       4.8  
                                 
% changes from prior year:
                               
Revenues
    1.5 %             4.3 %        
Income before income taxes
    10.6               80.1          
Net income attributable to HCA Inc. 
    8.1               111.6          
Admissions(a)
    0.7               (1.4 )        
Equivalent admissions(b)
    0.9               1.5          
Revenue per equivalent admission
    0.6               2.8          
Same facility % changes from prior year(c):
                               
Revenues
    1.5               4.6          
Admissions(a)
    0.9               (0.9 )        
Equivalent admissions(b)
    1.1               1.9          
Revenue per equivalent admission
    0.4               2.7          
 
 
(a) Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.
 
(b) Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and then dividing the resulting amount by gross inpatient revenues. The equivalent admissions computation “equates” outpatient revenues to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume.
 
(c) Same facility information excludes the operations of hospitals and their related facilities which were either acquired or divested during the current and prior period.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Operating Results Summary (continued)
 
Supplemental Non-GAAP Disclosures
Operating Measures on a Cash Revenues Basis
(Dollars in millions)
 
The results from operations presented on a cash revenues basis for the quarters ended March 31, 2010 and 2009 follow:
                                                 
    2010     2009  
          Non-GAAP
                Non-GAAP
       
          % of Cash
    GAAP % of
          % of Cash
    GAAP % of
 
          Revenues
    Revenues
          Revenues
    Revenues
 
    Amount     Ratios(b)     Ratios(b)     Amount     Ratios(b)     Ratios(b)  
 
Revenues
  $ 7,544               100.0     $ 7,431               100.0  
Provision for doubtful accounts
    564                       807                  
                                                 
Cash revenues(a)
    6,980       100.0               6,624       100.0          
                                                 
Salaries and benefits
    3,072       44.0       40.7       2,923       44.1       39.3  
Supplies
    1,200       17.2       15.9       1,210       18.3       16.3  
Other operating expenses
    1,202       17.3       15.9       1,102       16.6       14.8  
                                                 
% changes from prior year:
                                               
Revenues
    1.5 %                                        
Cash revenues
    5.4                                          
Revenue per equivalent admission
    0.6                                          
Cash revenue per equivalent admission
    4.5                                          
 
 
(a) Cash revenues is defined as reported revenues less the provision for doubtful accounts. We use cash revenues as an analytical indicator for purposes of assessing the effect of uninsured patient volumes, adjusted for the effect of both the revenue deductions related to uninsured accounts (charity care and uninsured discounts) and the provision for doubtful accounts (which relates primarily to uninsured accounts), on our revenues and certain operating expenses, as a percentage of cash revenues. Variations in the revenue deductions related to uninsured accounts generally have the inverse effect on the provision for doubtful accounts. We increased our uninsured discount percentages during August 2009 and the resulting effects, for the first quarter of 2010, were an increase in uninsured discounts of $418 million and a decline in the provision for doubtful accounts of $243 million, compared to the first quarter of 2009. Cash revenues is commonly used as an analytical indicator within the health care industry. Cash revenues should not be considered as a measure of financial performance under generally accepted accounting principles. Because cash revenues is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, cash revenues, as presented, may not be comparable to other similarly titled measures of other health care companies.
 
(b) Salaries and benefits, supplies and other operating expenses, as a percentage of cash revenues (a non-GAAP financial measure), present the impact on these ratios due to the adjustment of deducting the provision for doubtful accounts from reported revenues and results in these ratios being non-GAAP financial measures. We believe these non-GAAP financial measures are useful to investors to provide disclosures of our results of operations on the same basis as that used by management. Management uses this information to compare certain operating expense categories as a percentage of cash revenues. Management finds this information useful to evaluate certain expense category trends without the influence of whether adjustments related to revenues for uninsured accounts are recorded as revenue adjustments (charity care and uninsured discounts) or operating expenses (provision for doubtful accounts), and thus the expense category trends are generally analyzed as a percentage of cash revenues. These non-GAAP financial measures should not be considered alternatives to GAAP financial measures. We believe this supplemental information provides management and the users of our financial statements with useful information for period-to-period comparisons. Investors are encouraged to use GAAP measures when evaluating our overall financial performance.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 
 
Quarters Ended March 31, 2010 and 2009
 
Net income attributable to HCA Inc. totaled $388 million for the first quarter of 2010 compared to $360 million for the first quarter of 2009. Revenues increased 1.5% due to the combined impact of revenue per equivalent admission growth of 0.6% and an increase of 0.9% in equivalent admissions for the first quarter of 2010 compared to the first quarter of 2009. Cash revenues (reported revenues less the provision for doubtful accounts) increased 5.4% for the first quarter of 2010 compared to the first quarter of 2009.
 
For the first quarter of 2010, consolidated admissions and same facility admissions increased 0.7% and 0.9%, respectively, compared to the first quarter of 2009. Outpatient surgical volumes declined 1.9% on a consolidated basis and declined 1.8% on a same facility basis during the first quarter of 2010, compared to the first quarter of 2009. Consolidated inpatient surgeries declined 0.1% and same facility inpatient surgeries declined 0.4% in the first quarter of 2010, compared to the first quarter of 2009. Emergency department visits increased 0.5% on a consolidated basis and increased 1.0% on a same facility basis during the quarter ended March 31, 2010, compared to the quarter ended March 31, 2009.
 
Salaries and benefits, as a percentage of revenues, were 40.7% in the first quarter of 2010 and 39.3% in the first quarter of 2009. Salaries and benefits, as a percentage of cash revenues, were 44.0% in the first quarter of 2010 and 44.1% in the first quarter of 2009. Salaries and benefits per equivalent admission increased 4.2% in the first quarter of 2010 compared to the first quarter of 2009. Same facility labor rate increases averaged 2.7% for the first quarter of 2010 compared to the first quarter of 2009.
 
Supplies, as a percentage of revenues, were 15.9% in the first quarter of 2010 and 16.3% in the first quarter of 2009. Supplies, as a percentage of cash revenues, were 17.2% in the first quarter of 2010 and 18.3% in the first quarter of 2009. Supply cost per equivalent admission declined 1.7% in the first quarter of 2010 compared to the first quarter of 2009. Supply costs per equivalent admission increased 3.0% for medical devices, 4.3% for blood products and 4.8% for general medical and surgical items and declined 7.2% for pharmacy supplies in the first quarter of 2010 compared to the first quarter of 2009.
 
Other operating expenses, as a percentage of revenues, increased to 15.9% in the first quarter of 2010 compared to 14.8% in the first quarter of 2009. Other operating expenses, as a percentage of cash revenues, increased to 17.3% in the first quarter of 2010 compared to 16.6% in the first quarter of 2009. Other operating expenses is primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Other operating expenses include $90 million and $39 million of indigent care costs in certain Texas markets during the first quarters of 2010 and 2009, respectively, and this increase is the primary component of the overall increase in other operating expenses. Provisions for losses related to professional liability risks were $56 million and $45 million for the first quarters of 2010 and 2009, respectively.
 
Provision for doubtful accounts declined $243 million, from $807 million in the first quarter of 2009 to $564 million in the first quarter of 2010, and as a percentage of revenues, declined to 7.5% in the first quarter of 2010 compared to 10.9% in the first quarter of 2009. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients. The combined self-pay revenue deductions for charity care and uninsured discounts increased $473 million during the first quarter of 2010, compared to the first quarter of 2009. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, uninsured discounts and charity care, was 23.5% for the first quarter of 2010, compared to 22.4% for the first quarter of 2009. To quantify the total impact of and trends related to uninsured accounts, we believe it is beneficial to review the related revenue deductions and the provision for doubtful accounts in combination, rather than separately. At March 31, 2010, our allowance for doubtful accounts represented approximately 94% of the $4.833 billion total patient due accounts receivable balance. The patient due accounts receivable balance represents the estimated uninsured portion of our accounts receivable.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Quarters Ended March 31, 2010 and 2009 (continued)
 
Equity in earnings of affiliates was $68 million in each of the first quarters of 2010 and 2009. Equity in earnings of affiliates relates primarily to our Denver, Colorado market joint venture.
 
Depreciation and amortization increased $2 million, from $353 million in the first quarter of 2009 to $355 million in the first quarter of 2010.
 
Interest expense increased from $471 million in the first quarter of 2009 to $516 million in the first quarter of 2010 primarily due to an increase in the average effective interest rate. Our average debt balance was $26.314 billion for the first quarter of 2010 compared to $26.794 billion for the first quarter of 2009. The average effective interest rate for our long term debt increased from 7.1% for the quarter ended March 31, 2009 to 8.0% for the quarter ended March 31, 2010.
 
During the first quarter of 2010, no gains or losses on sales of facilities were recognized. During the first quarter of 2009, we recorded a net loss on sales of facilities and other investments of $5 million.
 
During the first quarter of 2010, we recorded asset impairment charges of $18 million to adjust the values of real estate and other investments to estimated fair value. During the first quarter of 2009, we recorded an asset impairment charge of $9 million to adjust the value of certain real estate investments to estimated fair value.
 
The effective tax rate was 35.0% and 34.1% for the first quarters of 2010 and 2009, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships.
 
Net income attributable to noncontrolling interests increased from $72 million for the first quarter of 2009 to $88 million for the first quarter of 2010. The increase in net income attributable to noncontrolling interests related primarily to growth in operating results of hospital joint ventures in two Texas markets.
 
Liquidity and Capital Resources
 
Cash provided by operating activities totaled $901 million in the first quarter of 2010 compared to $615 million in the first quarter of 2009. The $286 million increase in cash provided by operating activities in the first quarter of 2010 compared to the first quarter of 2009 related primarily to a $239 million decrease in income taxes and a $44 million increase in net income. We made $303 million and $490 million in combined interest and net tax payments in the first quarters of 2010 and 2009, respectively. Working capital totaled $2.167 billion at March 31, 2010 and $2.264 billion at December 31, 2009. The net decline in working capital at March 31, 2010 compared to December 31, 2009 is due primarily to an increase in the current portion of long-term debt.
 
Cash used in investing activities was $181 million in the first quarter of 2010 compared to $288 million in the first quarter of 2009. Excluding acquisitions, capital expenditures were $214 million in the first quarter of 2010 and $337 million in the first quarter of 2009. We expended $21 million and $38 million for acquisitions of nonhospital health care facilities during the first quarters of 2010 and 2009, respectively. Capital expenditures are expected to approximate $1.500 billion in 2010. At March 31, 2010, there were projects under construction which had estimated additional costs to complete and equip over the next five years of approximately $1.230 billion. We expect to finance capital expenditures with internally generated and borrowed funds. We received $24 million and $5 million from sales of hospitals and health care entities during the first quarters of 2010 and 2009, respectively. We received cash flows from our investments of $29 million and $76 million in the first quarters of 2010 and 2009, respectively.
 
Cash used in financing activities totaled $644 million during the first quarter of 2010 compared to $436 million during the first quarter of 2009. During the first quarter of 2010, cash flows used in financing activities included payment of a cash distribution to stockholders of $1.751 billion, increases in net borrowings of $1.216 billion, payments of debt issuance costs of $25 million and distributions to noncontrolling interests of $83 million. During


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Liquidity and Capital Resources (continued)
 
the first quarter of 2009, cash flows used in financing activities included reductions in net borrowings of $374 million, payment of debt issuance costs of $14 million and distributions to noncontrolling interests of $55 million.
 
We are a highly leveraged company with significant debt service requirements. Our debt totaled $26.855 billion at March 31, 2010. Our interest expense was $516 million for the first quarter of 2010 and $471 million for the first quarter of 2009. The increase in interest expense is due primarily to an increase in the average effective interest rate.
 
In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($1.851 billion and $1.816 billion available as of March 31, 2010 and April 30, 2010, respectively) and anticipated access to public and private debt markets.
 
Investments of our professional liability insurance subsidiary, to maintain statutory equity and pay claims, totaled $1.303 billion and $1.316 billion at March 31, 2010 and December 31, 2009, respectively. The insurance subsidiary maintained net reserves for professional liability risks of $588 million and $590 million at March 31, 2010 and December 31, 2009, respectively. Our facilities are insured by our wholly-owned insurance subsidiary for losses up to $50 million per occurrence; however, since January 2007, this coverage is subject to a $5 million per occurrence self-insured retention. Net reserves for the self-insured professional liability risks retained were $698 million and $679 million at March 31, 2010 and December 31, 2009, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $250 million. We estimate that approximately $100 million of the expected net claim payments during the next 12 months will relate to claims in the self-insured retention.
 
On January 27, 2010, our Board of Directors declared a distribution to the Company’s stockholders and holders of vested stock options. The distribution was $17.50 per share and vested stock option, or $1.751 billion in the aggregate. The distribution was paid on February 5, 2010 to holders of record on February 1, 2010. The distribution was funded using funds available under our existing senior secured credit facilities and approximately $100 million of cash on hand.
 
During February 2009, we issued $310 million aggregate principal amount of 97/8% senior secured second lien notes due 2017 at a price of 96.673% of their face value, resulting in $300 million of gross proceeds. During April 2009, we issued $1.500 billion aggregate principal amount of 81/2% senior secured first lien notes due 2019 at a price of 96.755% of their face value, resulting in $1.451 billion of gross proceeds. During August 2009, we issued $1.250 billion aggregate principal amount of 77/8% senior secured first lien notes due 2020 at a price of 98.254% of their face value, resulting in $1.228 billion of gross proceeds. During March 2010, we issued $1.400 billion aggregate principal amount of 71/4% senior secured first lien notes due 2020 at a price of 99.095% of their face value, resulting in $1.387 billion of gross proceeds. After the payment of related fees and expenses, we used the proceeds from these debt issuances to repay outstanding indebtedness under our senior secured term loan facilities.
 
On April 6, 2010, we entered into an amendment of our senior secured term loan B facility extending the maturity of $2.0 billion of loans from November 17, 2013 to March 31, 2017 and to increase the ABR margin and LIBOR margin with respect to such extended term loans to 2.25% and 3.25%, respectively.
 
On May 5, 2010, our Board of Directors declared a distribution to the Company’s stockholders and holders of vested stock options. The distribution will be $5.00 per share and vested stock option, or approximately $500 million in the aggregate. The distribution is expected to be paid on May 14, 2010, to holders of record on May 6, 2010. The distribution is expected to be funded using funds available under our existing senior secured credit facilities.
 
Management believes that cash flows from operations, amounts available under our senior secured credit facilities and our anticipated access to public and private debt markets will be sufficient to meet expected liquidity needs during the next twelve months.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Liquidity and Capital Resources (continued)
 
Market Risk
 
We are exposed to market risk related to changes in market values of securities. The investments in debt and equity securities of our wholly-owned insurance subsidiary were $1.296 billion and $7 million, respectively, at March 31, 2010. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. At March 31, 2010, we had a net unrealized gain of $22 million on the insurance subsidiary’s investment securities.
 
We are exposed to market risk related to market illiquidity. Liquidity of the investments in debt and equity securities of our wholly-owned insurance subsidiary could be impaired by the inability to access the capital markets. Should the wholly-owned insurance subsidiary require significant amounts of cash in excess of normal cash requirements to pay claims and other expenses on short notice, we may have difficulty selling these investments in a timely manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. At March 31, 2010, our wholly-owned insurance subsidiary had invested $333 million ($336 million par value) in municipal, tax-exempt student loan auction rate securities (“ARS”) that continue to experience market illiquidity since February 2008 when multiple failed auctions occurred due to a severe credit and liquidity crisis in the capital markets. It is uncertain if auction-related market liquidity will resume for these securities. We may be required to recognize other-than-temporary impairments on these long-term investments in future periods should issuers default on interest payments or should the fair market valuations of the securities deteriorate due to ratings downgrades or other issue specific factors.
 
We are also exposed to market risk related to changes in interest rates, and we periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are designated as cash flow hedges, are included in other comprehensive income, and changes in the fair value of derivatives which have not been designated as hedges are recorded in operations.
 
With respect to our interest-bearing liabilities, approximately $2.550 billion of long-term debt at March 31, 2010 was subject to variable rates of interest, while the remaining balance in long-term debt of $24.305 billion at March 31, 2010 was subject to fixed rates of interest. Both the general level of interest rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the federal funds rate plus 0.50% and (2) the prime rate of Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period. The applicable margin for borrowings under the senior secured credit facilities may fluctuate according to a leverage ratio, with the exception of term loan B where the margin is static. The average effective interest rate for our long-term debt increased from 7.1% for the quarter ended March 31, 2009 to 8.0% for the quarter ended March 31, 2010.
 
The estimated fair value of our total long-term debt was $27.007 billion at March 31, 2010. The estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities. Based on a hypothetical 1% increase in interest rates, the potential annualized reduction to future pretax earnings would be approximately $26 million. To mitigate the impact of fluctuations in interest rates, we generally target a portion of our debt portfolio to be maintained at fixed rates.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Liquidity and Capital Resources (continued)
 

Market Risk (continued)
 
Our international operations and foreign currency denominated loans expose us to market risks associated with foreign currencies. In order to mitigate the currency exposure related to foreign currency denominated debt service obligations, we have entered into cross currency swap agreements. A cross currency swap is an agreement between two parties to exchange a stream of principal and interest payments in one currency for a stream of principal and interest payments in another currency over a specified period. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.
 
Pending IRS Disputes
 
At March 31, 2010, we were contesting before the IRS Appeals Division, certain claimed deficiencies and adjustments proposed by the IRS in connection with its examinations of the 2003 and 2004 federal income returns for HCA and eight affiliates that are treated as partnerships for federal income tax purposes. The disputed items include the timing of recognition of certain patient service revenues and our method for calculating the tax allowance for doubtful accounts.
 
Six taxable periods of HCA and its predecessors ended in 1997 through 2002 and the 2002 taxable year of four affiliated partnerships, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, were pending before the IRS Examination Division as of March 31, 2010.
 
The IRS completed its audit of HCA’s 2005 and 2006 federal income tax returns in April 2010. We will contest certain deficiencies and adjustments proposed by the IRS Examination Division in connection with this audit, including the timing of recognition of certain patient service revenues, before the IRS Appeals Division. We anticipate the IRS will begin an audit of the 2007, 2008 and 2009 federal income tax returns for HCA and one or more affiliated partnerships during 2010.
 
Management believes that HCA, its predecessors, subsidiaries and affiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS and that final resolution of these disputes will not have a material, adverse effect on our results of operations or financial position. However, if payments due upon final resolution of these issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Operating Data
 
                 
    2010     2009  
 
CONSOLIDATING
               
Number of hospitals in operation at:
               
March 31
    154       155  
June 30
            155  
September 30
            155  
December 31
            155  
Number of freestanding outpatient surgical centers in operation at:
               
March 31
    98       97  
June 30
            97  
September 30
            97  
December 31
            97  
Licensed hospital beds at(a):
               
March 31
    38,719       38,763  
June 30
            38,793  
September 30
            38,829  
December 31
            38,839  
Weighted average licensed beds(b):
               
Quarter:
               
First
    38,687       38,811  
Second
            38,817  
Third
            38,829  
Fourth
            38,843  
Year
            38,825  
Average daily census(c):
               
Quarter:
               
First
    21,696       21,701  
Second
            20,577  
Third
            20,087  
Fourth
            20,256  
Year
            20,650  
Admissions(d):
               
Quarter:
               
First
    398,900       396,200  
Second
            387,400  
Third
            387,600  
Fourth
            385,300  
Year
            1,556,500  


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Operating Data — (Continued)
 
                 
    2010     2009  
 
Equivalent admissions(e):
               
Quarter:
               
First
    615,500       610,200  
Second
            609,900  
Third
            615,100  
Fourth
            603,800  
Year
            2,439,000  
Average length of stay (days)(f):
               
Quarter:
               
First
    4.9       4.9  
Second
            4.8  
Third
            4.8  
Fourth
            4.8  
Year
            4.8  
Emergency room visits(g):
               
Quarter:
               
First
    1,367,100       1,359,700  
Second
            1,398,000  
Third
            1,441,200  
Fourth
            1,394,600  
Year
            5,593,500  
Outpatient surgeries(h):
               
Quarter:
               
First
    190,700       194,400  
Second
            200,200  
Third
            199,100  
Fourth
            200,900  
Year
            794,600  
Inpatient surgeries(i):
               
Quarter:
               
First
    122,500       122,600  
Second
            124,400  
Third
            125,300  
Fourth
            122,200  
Year
            494,500  

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Operating Data — (Continued)
 
                 
    2010     2009  
 
Days in accounts receivable(j):
               
Quarter:
               
First
    46       47  
Second
            45  
Third
            43  
Fourth
            45  
Year
            45  
Gross patient revenues(k) (dollars in millions):
               
Quarter:
               
First
  $ 31,054     $ 28,742  
Second
            28,500  
Third
            28,340  
Fourth
            30,100  
Year
            115,682  
Outpatient revenues as a % of patient revenues(l):
               
Quarter:
               
First
    36 %     38 %
Second
            39 %
Third
            38 %
Fourth
            36 %
Year
            38 %
NONCONSOLIDATING(m)
               
Number of hospitals in operation at:
               
March 31
    8       8  
June 30
            8  
September 30
            8  
December 31
            8  
Number of freestanding outpatient surgical centers in operation at:
               
March 31
    8       8  
June 30
            8  
September 30
            8  
December 31
            8  
Licensed hospital beds at:
               
March 31
    2,369       2,367  
June 30
            2,369  
September 30
            2,369  
December 31
            2,369  


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Operating Data — (Continued)
 
BALANCE SHEET DATA
 
                         
    % of Accounts Receivable  
    Under 91 Days     91 — 180 Days     Over 180 Days  
 
Accounts receivable aging at March 31, 2010:
                       
Medicare and Medicaid
    14 %     1 %     1 %
Managed care and other discounted
    19       4       4  
Uninsured
    14       6       37  
                         
Total
    47 %     11 %     42 %
                         
 
 
(a) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
 
(b) Weighted average licensed beds represents the average number of licensed beds, weighted based on periods owned.
 
(c) Represents the average number of patients in our hospital beds each day.
 
(d) Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.
 
(e) Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and then dividing the resulting amount by gross inpatient revenues. The equivalent admissions computation “equates” outpatient revenues to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume.
 
(f) Represents the average number of days admitted patients stay in our hospitals.
 
(g) Represents the number of patients treated in our emergency rooms.
 
(h) Represents the number of surgeries performed on patients who were not admitted to our hospitals. Pain management and endoscopy procedures are not included in outpatient surgeries.
 
(i) Represents the number of surgeries performed on patients who have been admitted to our hospitals. Pain management and endoscopy procedures are not included in inpatient surgeries.
 
(j) Days in accounts receivable are calculated by dividing the revenues for the period by the days in the period (revenues per day). Accounts receivable, net of allowance for doubtful accounts, at the end of the period is then divided by the revenues per day.
 
(k) Gross patient revenues are based upon our standard charge listing. Gross charges/revenues typically do not reflect what our hospital facilities are paid. Gross charges/revenues are reduced by contractual adjustments, discounts and charity care to determine reported revenues.
 
(l) Represents the percentage of patient revenues related to patients who are not admitted to our hospitals.
 
(m) The nonconsolidating facilities include facilities operated through 50/50 joint ventures which we do not control and are accounted for using the equity method of accounting.


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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The information called for by this item is provided under the caption “Market Risk” under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
ITEM 4.   CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
HCA’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of HCA’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and chief financial officer have concluded that HCA’s disclosure controls and procedures effectively and timely provide them with material information relating to HCA and its consolidated subsidiaries required to be disclosed in the reports HCA files or submits under the Exchange Act.
 
Changes in Internal Control Over Financial Reporting
 
During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
Part II: Other Information
 
Item 1:   Legal Proceedings
 
We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims or legal and regulatory proceedings could materially and adversely affect our results of operations and financial position in a given period.
 
Government Investigations, Claims and Litigation
 
In January 2001, we entered into an eight-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General at the Secretary of the Department of Health and Human Services (“OIG”), which expired on January 24, 2009. Under the CIA, we had numerous affirmative obligations, including the requirement to report potential violations of applicable federal health care laws and regulations. Pursuant to these obligations, we reported a number of potential violations of the Stark Law, the Anti-kickback Statute, the Emergency Medical Treatment and Active Labor Act and other laws, most of which we consider to be nonviolations or technical violations. We submitted our final report pursuant to the CIA on April 30, 2009, and in April 2010, we received notice from the OIG that our final report was accepted, relieving us of future obligations under the CIA. However, the government could still determine that our reporting and/or our resolution of reported issues was inadequate. Violation or breach of the CIA, or violation of federal or state laws relating to Medicare, Medicaid or similar programs, could subject us to substantial monetary fines, civil and criminal penalties and/or exclusion from participation in the Medicare and Medicaid programs. Alleged violations may be pursued by the government or through private qui tam actions. Sanctions imposed against us as a result of such actions could have a material, adverse effect on our results of operations or financial position.
 
New Hampshire Hospital Litigation
 
In 2006, the Foundation for Seacoast Health (the “Foundation”) filed suit against HCA in state court in New Hampshire. The Foundation alleged that both the 2006 Recapitalization transaction and a prior 1999 intra-corporate


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transaction violated a 1983 agreement that placed certain restrictions on transfers of the Portsmouth Regional Hospital. In May 2007, the trial court ruled against the Foundation on all its claims. On appeal, the New Hampshire Supreme Court affirmed the ruling on the Recapitalization, but remanded to the trial court the claims based on the 1999 intra-corporate transaction. The trial court ruled in December 2009 that the 1999 intra-corporate transaction breached the transfer restriction provisions of the 1983 agreement. The court will now conduct additional proceedings to determine whether any harm has flowed from the alleged breach, and if so, what the appropriate remedy should be. The court may consider whether to, among other things, award monetary damages, rescind or undo the 1999 intra-corporate transfer or give the Foundation a right to purchase hospital assets at a price to be determined (which the Foundation asserts should be below the fair market value of the hospital).
 
General Liability and Other Claims
 
We are a party to certain proceedings relating to claims for income taxes and related interest before the IRS Appeals Division. For a description of those proceedings, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Pending IRS Disputes” and Note 2 to our condensed consolidated financial statements.
 
We are also subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or for wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants have asked for punitive damages against us, which may not be covered by insurance. In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material, adverse effect on our results of operations or financial position.
 
Item 1A:   Risk Factors
 
Reference is made to the factors set forth under the caption “Forward-Looking Statements” in Part I, Item 2 of this Form 10-Q and other risk factors described in our annual report on Form 10-K for the year ended December 31, 2009, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our annual report on Form 10-K, except as set forth below.
 
Our hospitals face competition for patients from other hospitals and health care providers.
 
The health care business is highly competitive, and competition among hospitals and other health care providers for patients has intensified in recent years. Generally, other hospitals in the local communities we serve provide services similar to those offered by our hospitals. In addition, the Centers for Medicare & Medicaid Services (“CMS”) publicizes on its Medicare website performance data related to quality measures and data on patient satisfaction surveys hospitals submit in connection with their Medicare reimbursement. Federal law provides for the future expansion of the number of quality measures that must be reported. Additional quality measures and future trends toward clinical transparency may have an unanticipated impact on our competitive position and patient volumes. Further, the Health Reform Law requires all hospitals to annually establish, update and make public a list of the hospital’s standard charges for items and services. If any of our hospitals achieve poor results (or results that are lower than our competitors) on these quality measures or on patient satisfaction surveys or if our standard charges are higher than our competitors, our patient volumes could decline.
 
In addition, the number of freestanding specialty hospitals, surgery centers and diagnostic and imaging centers in the geographic areas in which we operate has increased significantly. As a result, most of our hospitals operate in a highly competitive environment. Some of the facilities that compete with our hospitals are owned by governmental agencies or not-for-profit corporations supported by endowments, charitable contributions and/or tax revenues and can finance capital expenditures and operations on a tax-exempt basis. Our hospitals are facing increasing competition from specialty hospitals, some of which are physician-owned, and from both our own and unaffiliated freestanding surgery centers for market share in high margin services and for quality physicians and personnel. If ambulatory surgery centers are better able to compete in this environment than our hospitals, our hospitals may experience a decline in patient volume, and we may experience a decrease in margin, even if those patients use our ambulatory surgery centers. In states that do not require a Certificate of Need (“CON”) for the


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purchase, construction or expansion of health care facilities or services, competition in the form of new services, facilities and capital spending is more prevalent. Further, if our competitors are better able to attract patients, recruit physicians, expand services or obtain favorable managed care contracts at their facilities than our hospitals and ambulatory surgery centers, we may experience an overall decline in patient volume. See “Business — Competition” in our 2009 Form 10-K.
 
The growth of uninsured and patient due accounts and a deterioration in the collectibility of these accounts could adversely affect our results of operations.
 
The primary collection risks of 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 copayments) remain outstanding. The provision for doubtful accounts relates primarily to amounts due directly from patients.
 
The amount of the provision for doubtful accounts is based upon management’s assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal and state governmental and private employer health care coverage, the rate of growth in uninsured patient admissions and other collection indicators. At March 31, 2010, our allowance for doubtful accounts represented approximately 94% of the $4.833 billion patient due accounts receivable balance. The sum of the provision for doubtful accounts, uninsured discounts and charity care increased from $6.134 billion for 2007 to $7.009 billion for 2008 and to $8.362 billion for 2009.
 
A continuation of the trends that have resulted in an increasing proportion of accounts receivable being comprised of uninsured accounts and a deterioration in the collectibility of these accounts will adversely affect our collection of accounts receivable, cash flows and results of operations. Prior to the Health Reform Law being fully implemented, our facilities may experience growth in bad debts, uninsured discounts and charity care as a result of a number of factors, including the recent economic downturn and increase in unemployment. The Health Reform Law seeks to decrease over time the number of uninsured individuals. Among other things, the Health Reform Law will, effective January 1, 2014, expand Medicaid and incentivize employers to offer, and require individuals to carry, health insurance or be subject to penalties. However, it is difficult to predict the full impact of the Health Reform Law due to the law’s complexity, lack of implementing regulations or interpretive guidance, gradual implementation and possible amendment, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them by the law. In addition, even after implementation of the Health Reform Law, we may continue to experience bad debts and have to provide uninsured discounts and charity care for undocumented aliens who are not permitted to enroll in a health insurance exchange or government health care programs.
 
Changes in governmental programs may reduce our revenues.
 
A significant portion of our patient volume is derived from government health care programs, principally Medicare and Medicaid. Specifically, we derived approximately 40% of our revenues from the Medicare and Medicaid programs in 2009. In recent years, legislative and regulatory changes have resulted in limitations on and, in some cases, reductions in levels of payments to health care providers for certain services under the Medicare program. For example, CMS has recently completed a two-year transition to full implementation of the Medicare severity diagnosis-related group (“MS-DRG”) system, which represents a refinement to the existing diagnosis-related group system. Future realignments in the MS-DRG system could impact the margins we receive for certain services. Further, the Health Reform Law provides for material reductions in the growth of Medicare program spending, including reductions in Medicare market basket updates, and Medicare and Medicaid DSH funding. Reductions to our reimbursement under the Medicare and Medicaid programs by the Health Reform Law could adversely affect our business and results of operations to the extent such reductions are not offset by anticipated increases in revenues from providing care to previously uninsured individuals.
 
Since most states must operate with balanced budgets and since the Medicaid program is often a state’s largest program, some states can be expected to enact or consider enacting legislation designed to reduce their Medicaid expenditures. The current economic downturn has increased the budgetary pressures on many states, and these


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budgetary pressures have resulted, and likely will continue to result, in decreased spending for Medicaid programs and the Children’s Health Insurance Program (“CHIP”) in many states. Further, many states have also adopted, or are considering, legislation designed to reduce coverage, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems. Effective March 23, 2010, the Health Reform Law requires states to at least maintain Medicaid eligibility standards established prior to the enactment of the law for adults until January 1, 2014 and for children until October 1, 2019. However, states with budget deficits may seek exceptions from this requirement to address eligibility standards that apply to adults making more than 133% of the federal poverty level. The Health Reform Law also provides for significant expansions to the Medicaid program, but these changes are not required until 2014. In addition, the Health Reform Law will result in increased state legislative and regulatory changes in order for states to comply with new federal mandates, such as the requirement to establish health insurance exchanges, and to participate in grants and other incentive opportunities.
 
In some cases, commercial third-party payers rely on all or portions of the MS-DRG system to determine payment rates, which may result in decreased reimbursement from some commercial third-party payers. Other changes to government health care programs may negatively impact payments from commercial third-party payers.
 
Current or future health care reform efforts, changes in laws or regulations regarding government health programs, other changes in the administration of government health programs and changes to commercial third-party payers in response to health care reform and other changes to government health programs could have a material, adverse effect on our financial position and results of operations.
 
We are unable to predict the impact of the Health Reform Law, which represents significant change to the health care industry.
 
The Health Reform Law will change how health care services are covered, delivered, and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to quality and integration. In addition, the new law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement.
 
The expansion of health insurance coverage under the Health Reform Law may result in a material increase in the number of patients using our facilities who have either private or public program coverage. In addition, a disproportionately large percentage of the new Medicaid coverage is likely to be in states that currently have relatively low income eligibility requirements. Two such states are Texas and Florida, where about one-half of the Company’s licensed beds are located. The Company also has a significant presence in other relatively low income eligibility states, including Georgia, Kansas, Louisiana, Missouri, Oklahoma and Virginia. Further, the Health Reform Law provides for a value-based purchasing program, the establishment of Accountable Care Organizations (“ACOs”) and bundled payment pilot programs, which will create possible sources of additional revenue.
 
However, it is difficult to predict the size of the potential revenue gains to the Company as a result of these elements of the Health Reform Law, because of uncertainty surrounding a number of material factors, including the following:
 
  •  how many previously uninsured individuals will obtain coverage as a result of the Health Reform Law (while the Congressional Budget Office (“CBO”) estimates 32 million, CMS estimates almost 34 million; both agencies made a number of assumptions to derive that figure, including how many individuals will ignore substantial subsidies and decide to pay the penalty rather than obtain health insurance and what percentage of people in the future will meet the new Medicaid income eligibility requirements);
 
  •  what percentage of the newly insured patients will be covered under the Medicaid program and what percentage will be covered by private health insurers;
 
  •  the extent to which states will enroll new Medicaid participants in managed care programs;


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  •  the pace at which insurance coverage expands, including the pace of different types of coverage expansion;
 
  •  the change, if any, in the volume of inpatient and outpatient hospital services that are sought by and provided to previously uninsured individuals;
 
  •  the rate paid to hospitals by private payers for newly covered individuals, including those covered through the newly created Exchanges and those who might be covered under the Medicaid program under contracts with the state;
 
  •  the rate paid by state governments under the Medicaid program for newly covered individuals;
 
  •  how the value-based purchasing and other quality programs will be implemented;
 
  •  the percentage of individuals in the Exchanges who select the high deductible plans, since health insurers offering those kinds of products have traditionally sought to pay lower rates to hospitals;
 
  •  whether the net effect of the Health Reform Law, including the prohibition on excluding individuals based on pre-existing conditions, the requirement to keep medical costs lower than a specified percentage of premium revenue, other health insurance reforms and the annual fee applied to all health insurers, will be to put pressure on the bottom line of health insurers, which in turn might cause them to seek to reduce payments to hospitals with respect to both newly insured individuals and their existing business; and
 
  •  the possibility that implementation of provisions expanding health insurance coverage will be delayed or even blocked due to court challenges or revised or eliminated as a result of efforts to repeal or amend the new law.
 
On the other hand, the Health Reform Law provides for significant reductions in the growth of Medicare spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to quality and integration. Since approximately 40% of our revenues in 2009 were from Medicare and Medicaid, reductions to these programs may significantly impact the Company and could offset any positive effects of the Health Reform Law. It is difficult to predict the size of the revenue reductions to Medicare and Medicaid spending, because of uncertainty regarding a number of material factors, including the following:
 
  •  the amount of overall revenues the Company will generate from Medicare and Medicaid business when the reductions are implemented;
 
  •  whether reductions required by the Health Reform Law will be changed by statute prior to becoming effective;
 
  •  the size of the Health Reform Law’s annual productivity adjustment to the market basket beginning in 2012 payment years;
 
  •  the amount of the Medicare DSH reductions that will be made, commencing in federal fiscal year 2014;
 
  •  the allocation to our hospitals of the Medicaid DSH reductions, commencing in federal fiscal year 2014;
 
  •  what the losses in revenues will be, if any, from the Health Reform Law’s quality initiatives;
 
  •  how successful ACOs, in which we participate, will be at coordinating care and reducing costs;
 
  •  the scope and nature of potential changes to Medicare reimbursement methods, such as an emphasis on bundling payments or coordination of care programs;
 
  •  whether the Company’s revenues from UPL programs will be adversely affected, because there may be fewer indigent, non-Medicaid patients for whom the Company provides services pursuant to UPL programs; and
 
  •  reductions to Medicare payments CMS may impose for “excessive readmissions.”


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Because of the many variables involved, we are unable to predict the net effect on the Company of the expected increases in insured individuals using our facilities, the reductions in Medicare spending, reductions in Medicare and Medicaid DSH funding, and numerous other provisions in the Health Reform Law that may affect the Company.
 
If we are unable to retain and negotiate favorable contracts with nongovernment payers, including managed care plans, our revenues may be reduced.
 
Our ability to obtain favorable contracts with nongovernment payers, including health maintenance organizations, preferred provider organizations and other managed care plans significantly affects the revenues and operating results of our facilities. Revenues derived from these entities and other insurers accounted for 53%, 52% and 53% of our patient revenues for the quarter ended March 31, 2010 and the years ended December 31, 2009 and December 31, 2008, respectively. Nongovernment payers, including managed care payers, continue to demand discounted fee structures, and the trend toward consolidation among nongovernment payers tends to increase their bargaining power over fee structures. As various provisions of the Health Reform Law are implemented, including the establishment of the Exchanges, nongovernment payers increasingly may demand reduced fees. Our future success will depend, in part, on our ability to retain and renew our managed care contracts and enter into new managed care contracts on terms favorable to us. Other health care providers may impact our ability to enter into managed care contracts or negotiate increases in our reimbursement and other favorable terms and conditions. For example, some of our competitors may negotiate exclusivity provisions with managed care plans or otherwise restrict the ability of managed care companies to contract with us. It is not clear what impact, if any, the increased obligations on managed care payers and other payers imposed by the Health Reform Law will have on our ability to negotiate reimbursement increases. If we are unable to retain and negotiate favorable contracts with managed care plans or experience reductions in payment increases or amounts received from nongovernment payers, our revenues may be reduced.
 
We have been and could become the subject of governmental investigations, claims and litigation.
 
Health care companies are subject to numerous investigations by various governmental agencies. Further, under the federal False Claims Act (“FCA”), private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions. Certain of our individual facilities have received, and other facilities may receive, government inquiries from federal and state agencies. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material, adverse effect on our financial position, results of operations and liquidity.
 
Governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries and carriers, as well as the OIG, CMS and state Medicaid programs, conduct audits of our health care operations. Private payers may conduct similar post-payment audits, and we also perform internal audits and monitoring. Depending on the nature of the conduct found in such audits and whether the underlying conduct could be considered systemic, the resolution of these audits could have a material, adverse effect on our financial position, results of operations and liquidity.
 
As required by statute, CMS is in the process of implementing the RAC program on a nationwide basis. Under the program, CMS contracts with RACs to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program. The Health Reform Law expands the RAC program’s scope to include managed Medicare plans and to include Medicaid claims by requiring all states to enter into contracts with RACs by December 31, 2010. In addition, CMS employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. Throughout 2010, MIC audits will continue to expand. The Health Reform Law increases federal funding for the MIC program for federal fiscal year 2011 and later years. In addition to RACs and MICs, several other contractors, including the state Medicaid agencies, have increased their review activities.


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Should we be found out of compliance with any of these laws, regulations or programs, depending on the nature of the findings, our business, our financial position and our results of operations could be negatively impacted.
 
Controls designed to reduce inpatient services may reduce our revenues.
 
Controls imposed by Medicare, managed Medicare, Medicaid, managed Medicaid and commercial third-party payers designed to reduce admissions and lengths of stay, commonly referred to as “utilization review,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and course of treatment of a patient by health plans. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payer-required preadmission authorization and utilization review and by payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Efforts to impose more stringent cost controls are expected to continue. For example, the Health Reform Law potentially expands the use of prepayment review by Medicare contractors by eliminating statutory restrictions on their use. Although we are unable to predict the effect these changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material, adverse effect on our business, financial position and results of operations.
 
Our overall business results may suffer from the recent economic downturn.
 
During periods of high unemployment, governmental entities often experience budget deficits as a result of increased costs and lower than expected tax collections. These budget deficits at federal, state and local government entities have decreased, and may continue to decrease, spending for health and human service programs, including Medicare, Medicaid and similar programs, which represent significant payer sources for our hospitals. Other risks we face during periods of high unemployment include potential declines in the population covered under managed care agreements, patient decisions to postpone or cancel elective and non-emergency health care procedures, potential increases in the uninsured and underinsured populations and further difficulties in our collecting patient co-payment and deductible receivables.
 
The industry trend towards value-based purchasing may negatively impact our revenues.
 
There is a trend in the health care industry toward value-based purchasing of health care services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events (also called “never events”). Many large commercial payers currently require hospitals to report quality data, and several commercial payers do not reimburse hospitals for certain preventable adverse events. Further, we have implemented a policy pursuant to which we do not bill patients or third-party payers for fees or expenses incurred due to certain preventable adverse events.
 
The Health Reform Law contains a number of provisions intended to promote value-based purchasing. Effective July 1, 2011, the Health Reform Law will prohibit the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat HACs. Beginning in federal fiscal year 2015, hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments. Hospitals with excessive readmissions for conditions designated by the HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard.
 
The Health Reform Law also requires HHS to implement a value-based purchasing program for inpatient hospital services. Beginning in federal fiscal year 2013, HHS will reduce inpatient hospital payments for all discharges by a percentage specified by statute ranging from 1% to 2% and pool the total amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each hospital that meets or exceeds the quality performance standards will receive from the pool of dollars created by these payment reductions.


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We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. We are unable at this time to predict how this trend will affect our results of operations, but it could negatively impact our revenues.
 
We may be subject to liabilities from claims by the Internal Revenue Service.
 
At March 31, 2010, we were contesting before the Appeals Division of the Internal Revenue Service (“IRS”) certain claimed deficiencies and adjustments proposed by the IRS in connection with its examination of the 2003 and 2004 federal income tax returns for HCA and eight affiliates that are treated as partnerships for federal income tax purposes (“affiliated partnerships”). The disputed items include the timing of recognition of certain patient service revenues and our method for calculating the tax allowance for doubtful accounts.
 
Six taxable periods of HCA and its predecessors ended in 1997 through 2002 and the 2002 taxable year of four affiliated partnerships, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, are pending before the IRS Examination Division as of March 31, 2010.
 
The IRS completed its audit of HCA’s 2005 and 2006 federal income tax returns in April 2010. We will contest certain claimed deficiencies and adjustments proposed by the IRS Examination Division in connection with this audit, including the timing of recognition of certain patient service revenues, before the IRS Appeals Division. We anticipate the IRS will begin an audit of the 2007, 2008 and 2009 federal income tax returns for HCA and one or more affiliated partnerships during 2010.
 
Management believes HCA, its predecessors and affiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS and final resolution of these disputes will not have a material, adverse effect on our results of operations or financial position. However, if payments due upon final resolution of these issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position.
 
Item 2:   Unregistered Sales of Equity Securities and Use of Proceeds
 
During the quarter ended March 31, 2010, HCA issued and sold 38,504 shares of common stock in connection with the cashless exercise of stock options for aggregate consideration of $490,926 resulting in 20,514 net settled shares. HCA also issued and sold 12,156 shares of common stock in connection with the cash exercise of stock options for aggregate consideration of $154,989. These shares were issued without registration in reliance on the exemptions afforded by Section 4(2) of the Securities Act of 1933, as amended, and Rule 701 promulgated thereunder.
 
The following table provides certain information with respect to our repurchases of common stock from January 1, 2010 through March 31, 2010.
 
                                 
                      Approximate
 
                Total Number
    Dollar Value of
 
                of Shares
    Shares That
 
                Purchased as
    May Yet Be
 
                Part of
    Purchased
 
                Publicly
    Under Publicly
 
    Total Number
          Announced
    Announced
 
    of Shares
    Average Price
    Plans or
    Plans or
 
Period
  Purchased     Paid per Share     Programs     Programs  
 
January 1, 2010 through January 31, 2010
    2,893     $ 87.99           $  
February 1, 2010 through February 28, 2010
    18     $ 87.99              
March 1, 2010 through March 31, 2010
    43,443     $ 84.71              
                                 
Total for First Quarter 2010
    46,354     $ 84.92           $  
                                 
 
During the first quarter of 2010, we purchased 46,354 shares pursuant to the terms of the Management Stockholders Agreement and/or separation agreements and stock purchase agreements between former employees and the Company.


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Item 6:   Exhibits
 
(a) List of Exhibits:
 
         
Exhibit 31.1
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
HCA INC.
 
  By: 
/s/  R. Milton Johnson
R. Milton Johnson
Executive Vice President and
Chief Financial Officer
 
Date: May 7, 2010


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