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

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

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Overview

Our principal business is owning and operating, through our subsidiaries, acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. As of February 24, 2012, we owned and/or operated 25 acute care hospitals and 198 behavioral health centers located in 36 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands. As part of our ambulatory treatment centers division, we manage and/or own outright or in partnerships with physicians, 6 surgical hospitals and surgery and radiation oncology centers located in 4 states and Puerto Rico.

In November, 2010, we acquired Psychiatric Solutions, Inc. (“PSI”). PSI was formerly the largest operator of freestanding inpatient behavioral health care facilities operating a total of 105 inpatient and outpatient facilities in 32 states, Puerto Rico, and the U.S. Virgin Islands.

Net revenues from our acute care hospitals, surgical hospitals, surgery centers and radiation oncology centers accounted for 55% of our consolidated net revenues in 2011, 70% in 2010 and 74% in 2009. Net revenues from our behavioral health care facilities accounted for 45% of our consolidated net revenues during 2011, 30% during 2010 and 25% during 2009. Approximately 1% of our consolidated net revenues in 2009 were recorded in connection with two construction management contracts pursuant to the terms of which we built newly constructed acute care hospitals for an unrelated third party.

Services provided by our hospitals include general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services. We provide capital resources as well as a variety of management services to our facilities, including central purchasing, information services, finance and control systems, facilities planning, physician recruitment services, administrative personnel management, marketing and public relations.

Forward-Looking Statements and Risk Factors

This Annual Report contains “forward-looking statements” that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or our good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Such factors include, among other things, the following:

	•		our ability to comply with the existing laws and government regulations, and/or changes in laws and government regulations;

	•		an increasing number of legislative initiatives have recently been passed into law that may result in major changes in the health care delivery system on a national or state level. No assurances can be given that the implementation of these new laws will not have a material adverse effect on our business, financial condition or results of operations;

	•		possible unfavorable changes in the levels and terms of reimbursement for our charges by third party payors or government programs, including Medicare or Medicaid;

	•		an increase in the number of uninsured and self-pay patients treated at our acute care facilities that unfavorably impacts our ability to satisfactorily and timely collect our self-pay patient accounts;

	•		our ability to enter into managed care provider agreements on acceptable terms and the ability of our competitors to do the same, including contracts with United/Sierra Healthcare in Las Vegas, Nevada;

	•		the outcome of known and unknown litigation, government investigations, false claim act allegations, and liabilities and other claims asserted against us, including matters as disclosed in Item 3. Legal Proceedings;

	•		the potential unfavorable impact on our business of deterioration in national, regional and local economic and business conditions, including a continuation or worsening of unfavorable credit market conditions;

	•		competition from other healthcare providers (including physician owned facilities) in certain markets, including McAllen/Edinburg, Texas, the site of one of our largest acute care facilities and Riverside County, California;

	•		technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for healthcare;

	•		our ability to attract and retain qualified personnel, nurses, physicians and other healthcare professionals and the impact on our labor expenses resulting from a shortage of nurses and other healthcare professionals;

	•		demographic changes;

	•		our acquisition of PSI which has substantially increased our level of indebtedness which could, among other things, adversely affect our ability to raise additional capital to fund operations, limit our ability to react to changes in the economy or our industry and could potentially prevent us from meeting our obligations under the agreements related to our indebtedness;

	•		our ability to successfully integrate and improve our recent acquisitions and the availability of suitable acquisitions and divestiture opportunities;

	•		we receive Medicaid revenues in excess of $100 million annually from each of Texas, Pennsylvania, Virginia, Illinois and Washington, D.C., making us particularly sensitive to reductions in Medicaid and other state based revenue programs (which have been implemented in various forms with respect to our areas of operation in the respective 2012 state fiscal years) as well as regulatory, economic, environmental and competitive changes in those states. In the states in which we operate, based upon the state budgets for the 2012 fiscal year (which generally began at various times during the second half of 2011), we estimate that, on a blended basis, our aggregate Medicaid rates have been reduced by approximately 3% to 4% (or approximately $45 million to $55 million annually) from the average rates in effect during the states’ 2011 fiscal years (which generally ended during the third quarter of 2011). Our consolidated results of operations for the year ended December 31, 2011 include the pro rata portion of these Medicaid rate reductions. We can provide no assurance that further reductions to Medicaid revenues (which have been proposed in certain states for fiscal year 2013), particularly in the above-mentioned states, will not have a material adverse effect on our future results of operations;

	•		our ability to continue to obtain capital on acceptable terms, including borrowed funds, to fund the future growth of our business;

	•		some of our acute care facilities continue to experience decreasing inpatient admission trends;

	•		our financial statements reflect large amounts due from various commercial and private payors and there can be no assurance that failure of the payors to remit amounts due to us will not have a material adverse effect on our future results of operations;

	•		the Department of Health and Human Services (“HHS”) published final regulations in July, 2010 implementing the health information technology (“HIT”) provisions of the American Recovery and Reinvestment Act (referred to as the “HITECH Act”). The final regulation defines the “meaningful use” of Electronic Health Records (“EHR”) and establishes the requirements for the Medicare and Medicaid EHR payment incentive programs. The implementation period for these new Medicare and Medicaid incentive payments started in federal fiscal year 2011 and can end as late as 2016 for Medicare and 2021 for the state Medicaid programs. Our acute care hospitals may qualify for these EHR incentive payments upon implementation of the EHR application assuming they meet the “meaningful use criteria”. Certain of our acute care hospitals implemented an EHR application in 2011 and we plan to continue the implementation at each of our acute care hospitals, on a facility-by-facility basis, during 2012 and 2013. However, there can be no assurance that we (our acute care hospitals) will ultimately qualify for these incentive payments and, should we qualify, we are unable to quantify the amount of incentive payments we may receive since the amounts are dependent upon various factors including the implementation timing at each hospital. Should we qualify for incentive payments, there may be timing differences in the recognition of the revenues and expenses recorded in connection with the implementation of the EHR application which may cause material period-to-period changes in our future results of operations. Hospitals that do not qualify as a meaningful user of EHR by 2015 are subject to a reduced market basket update to the inpatient prospective payment system (“IPPS”) standardized amount in 2015 and each subsequent fiscal year. Although we believe that our acute care hospitals will be in compliance with the EHR standards by 2015, there can be no assurance that all of our facilities will be in compliance and therefore not subject to the penalty provision of the HITECH Act;

	•		in August, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. The 2011 Act imposed annual spending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report released by the Congressional Budget Office. Among its other provisions, the law established a bipartisan Congressional committee, known as the Joint Select Committee on Deficit Reduction (the “Joint Committee”), which was tasked with making recommendations aimed at reducing future federal budget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by the November 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented which, if triggered, would result in Medicare payment reductions of up to 2% per fiscal year with a uniform percentage reduction across all Medicare programs starting in 2013. We cannot predict whether Congress will attempt to suspend or restructure the automatic budget cuts or what other deficit reduction initiatives may be proposed by Congress;

	•		the ability to obtain adequate levels of general and professional liability insurance on current terms;

	•		changes in our business strategies or development plans;

	•		fluctuations in the value of our common stock, and;

	•		other factors referenced herein or in our other filings with the Securities and Exchange Commission.

Given these uncertainties, risks and assumptions, as outlined above, you are cautioned not to place undue reliance on such forward-looking statements. Our actual results and financial condition could differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements speak only as of the date the statements are made. We assume no obligation to publicly update any forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as may be required by law. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.

A summary of our significant accounting policies is outlined in Note 1 to the financial statements. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our financial statements, including the following:

Revenue recognition: We record revenues and related receivables for health care services at the time the services are provided. Medicare and Medicaid revenues represented 37% of our net patient revenues during 2011 and 38% during each of 2010 and 2009. Revenues from managed care entities, including health maintenance organizations and managed Medicare and Medicaid programs accounted for 43% of our net patient revenues during 2011 and 46% during each of 2010 and 2009.

We report net patient service revenue at the estimated net realizable amounts from patients and third-party payors and others for services rendered. We have agreements with third-party payors that provide for payments to us at amounts different from our established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Estimates of contractual allowances under managed care plans are based upon the payment terms specified in the related contractual agreements. We closely monitor our historical collection rates, as well as changes in applicable laws, rules and regulations and contract terms, to assure that provisions are made using the most accurate information available. However, due to the complexities involved in these estimations, actual payments from payors may be different from the amounts we estimate and record.

We estimate our Medicare and Medicaid revenues using the latest available financial information, patient utilization data, government provided data and in accordance with applicable Medicare and Medicaid payment rules and regulations. The laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation and as a result, there is at least a reasonable possibility that recorded estimates will change by material amounts in the near term. Certain types of payments by the Medicare program and state Medicaid programs (e.g. Medicare Disproportionate Share Hospital, Medicare Allowable Bad Debts and Inpatient Psychiatric Services) are subject to retroactive adjustment in future periods as a result of administrative review and audit and our estimates may vary from the final settlements. Such amounts are included in accounts receivable, net, on our Consolidated Balance Sheets. The funding of both federal Medicare and state Medicaid programs are subject to legislative and regulatory changes. As such, we cannot provide any assurance that future legislation and regulations, if enacted, will not have a material impact on our future Medicare and Medicaid reimbursements. Adjustments related to the final settlement of these retrospectively determined amounts did not materially impact our results in 2011, 2010 or 2009. If it were to occur, each 1% adjustment to our estimated net Medicare revenues that are subject to retrospective review and settlement as of December 31, 2011, would change our after-tax net income by approximately $2 million.

We provide care to patients who meet certain financial or economic criteria without charge or at amounts substantially less than our established rates. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in net revenues or in accounts receivable, net. Our acute care hospitals provided charity care and uninsured discounts, based on charges at established rates, amounting to $956 million, $807 million and $671 million during 2011, 2010 and 2009, respectively.

A portion of the accounts receivable at our acute care facilities are comprised of Medicaid accounts that are pending approval from third-party payers but we also have smaller amounts due from other miscellaneous payers such as county indigent programs in certain states. Our patient registration process includes an interview of the patient or the patient’s responsible party at the time of registration. At that time, an insurance eligibility determination is made and an insurance plan code is assigned. There are various pre-established insurance profiles in our patient accounting system which determine the expected insurance reimbursement for each patient based on the insurance plan code assigned and the services rendered. Certain patients may be classified as Medicaid pending at registration based upon a screening evaluation if we are unable to definitively determine if they are currently Medicaid eligible. When a patient is registered as Medicaid eligible or Medicaid pending our patient accounting system records net revenues for the services provided to that patient based upon the established Medicaid

reimbursement rates pending ultimate disposition of the patient’s Medicaid eligibility. Based on general factors as discussed below in Provision for Doubtful Accounts, our acute care facilities make estimates at each financial reporting period to reserve for amounts that are deemed to be uncollectible. Such estimated uncollectible amounts related to Medicaid pending, as well as other accounts receivable payer classifications, are considered when the overall individual facility and company-wide reserves are developed. Adjustments related to the final determination of these accounts did not materially impact our results of operations in 2011, 2010 or 2009.

Provision for Doubtful Accounts: Collection of receivables from third-party payers and patients is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patients and the portion of the bill which is the patient’s responsibility, primarily co-payments and deductibles. We estimate our provisions for doubtful accounts based on general factors such as payer mix, the agings of the receivables and historical collection experience. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions which might ultimately affect the collectability of the patient accounts and make adjustments to our allowances as warranted. At our acute care hospitals, third party liability accounts are pursued until all payment and adjustments are posted to the patient account. For those accounts with a patient balance after third party liability is finalized or accounts for uninsured patients, the patient receives statements and collection letters. Patients that express an inability to pay are reviewed for potential sources of financial assistance including our charity care policy. If the patient is deemed unwilling to pay, the account is written-off as bad debt and transferred to an outside collection agency for additional collection effort.

Uninsured patients that do not qualify as charity patients are extended an uninsured discount of at least 20% of total charges. During the collection process the hospital establishes a partial reserve in the allowance for doubtful accounts for self-pay balances outstanding for greater than 60 days from the date of discharge. All self-pay accounts at the hospital level are fully reserved if they have been outstanding for greater than 90 days from the date of discharge. Third party liability accounts are fully reserved in the allowance for doubtful accounts when the balance ages past 180 days from the date of discharge. Potential charity accounts are fully reserved when it is determined the patient may be unable to pay.

As of December 31, 2011, our accounts receivable includes $54 million due from Illinois, the collection of which has been delayed due to budgetary and funding pressures experienced by the state. Although approximately $41 million of the receivables due from Illinois have been outstanding in excess of 60 days (as of December 31, 2011), and a large portion will likely remain outstanding for the foreseeable future, we expect to eventually collect all amounts due to us and therefore no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due from Illinois would have an adverse impact on our future consolidated results of operations and cash flows.

On a consolidated basis, we monitor our total self-pay receivables to ensure that the total allowance for doubtful accounts provides adequate coverage based on historical collection experience. Our accounts receivable are recorded net of allowance for doubtful accounts of $253 million and $249 million at December 31, 2011 and 2010, respectively.

Approximately 93% during 2011, 93% during 2010 and 94% during 2009, of our consolidated provision for doubtful accounts, was incurred by our acute care hospitals. Shown below is our payer mix concentrations and related aging of our billed accounts receivable, net of contractual allowances, for our acute care hospitals as of December 31, 2011 and 2010:

As of December 31, 2011:


(amounts in thousands)	0-60 days		61-120 days		121-180 days		Over 180 days
Medicare	$	62,219	$	3,890	$	1,190	$	2,962
Medicaid		27,891		15,622		9,288		24,847
Commercial insurance and other		221,850		63,216		30,984		68,118
Private pay		105,841		77,267		9,594		18,826

Total	$	417,801	$	159,995	$	51,056	$	114,753

As of December 31, 2010:


(amounts in thousands)	0-60 days		61-120 days		121-180 days		Over 180 days
Medicare	$	56,586	$	2,868	$	824	$	1,214
Medicaid		29,166		13,280		6,865		19,135
Commercial insurance and other		201,609		50,479		23,210		42,459
Private pay		92,246		73,470		23,372		21,815

Total	$	379,607	$	140,097	$	54,271	$	84,623

Self-Insured Risks: We provide for self-insured risks, primarily general and professional liability claims and workers’ compensation claims. Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimate of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. All relevant information, including our own historical experience is used in estimating the expected amount of claims. While we continuously monitor these factors, our ultimate liability for professional and general liability claims could change materially from our current estimates due to inherent uncertainties involved in making this estimate. Our estimated self-insured reserves are reviewed and changed, if necessary, at each reporting date and changes are recognized currently as additional expense or as a reduction of expense. Given our significant self-insured exposure for professional and general liability claims, there can be no assurance that a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on our future results of operations.

Professional and General Liability

Effective January 1, 2008, most of our subsidiaries became self-insured for professional and general liability exposure up to $10 million per occurrence (as compared to $20 million per occurrence prior to 2008). Prior to our acquisition of PSI in November, 2010, our subsidiaries purchased several excess policies through commercial insurance carriers which provide for coverage in excess of $10 million up to $200 million per occurrence and in the aggregate. However, we are liable for 10% of the claims paid pursuant to the commercially insured coverage in excess of $10 million up to $60 million per occurrence and in the aggregate.

Prior to our acquisition in November, 2010, the PSI subsidiaries were commercially insured for professional and general liability insurance claims in excess of a $3 million self-insured retention to a limit of $75 million. PSI utilized its captive insurance company and that captive insurance company remains in place after our acquisition of PSI to manage the self-insured retention for all former PSI subsidiaries for claims incurred prior to

January 1, 2011. The captive insurance company also continues to manage the applicable self-insured retention for all professional and general liability claims, regardless of date incurred, for the former PSI subsidiaries located in Florida and Puerto Rico.

Since our acquisition of PSI on November 15, 2010, the former PSI subsidiaries are self-insured for professional and general liability exposure up to $3 million per occurrence and our legacy subsidiaries (which are not former PSI subsidiaries) are self-insured for professional and general liability exposure up to $10 million per occurrence. Effective November, 2010, our subsidiaries (including the former PSI subsidiaries) were provided with several excess policies through commercial insurance carriers which provide for coverage in excess of the applicable per occurrence self-insured retention (either $3 million or $10 million) up to $200 million per occurrence and in the aggregate. We remain liable for 10% of the claims paid pursuant to the commercially insured coverage in excess of $10 million up to $60 million per occurrence and in the aggregate.

Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimates of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. While we continuously monitor these factors, our ultimate liability for professional and general liability claims could change materially from our current estimates due to inherent uncertainties involved in making this estimate. Given our significant self-insured exposure for professional and general liability claims, there can be no assurance that a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on our future results of operations.

As of December 31, 2011, the total accrual for our professional and general liability claims, including the estimated claims related to the facilities acquired from PSI, was $292 million, of which $60 million is included in current liabilities. As of December 31, 2010, the total accrual for our professional and general liability claims was $289 million, of which $60 million is included in other current liabilities.

Based upon the results of reserve analyses, we recorded reductions to our professional and general liability self-insurance reserves (relating to prior years) amounting to $11 million during 2011, $49 million during 2010 and $23 million during 2009. The favorable change recorded during 2011 consisted primarily of third-party recoveries and reserve reductions in connection with PHICO–related claims which we became liable for upon PHICO’s (a former commercial insurance carrier) liquidation in 2002. The favorable changes in our estimated future claims payments recorded during 2010 and 2009 were due to: (i) an increased weighting given to company-specific metrics (to 75% from 50%), and decreased general industry metrics (to 25% from 50%), related to projected incidents per exposure, historical claims experience and loss development factors; (ii) historical data which measured the realized favorable impact of medical malpractice tort reform experienced in several states in which we operate, and; (iii) a decrease in claims related to certain higher risk specialties (such as obstetrical) due to a continuation of the company-wide patient safety initiative undertaken during the last several years. As the number of our facilities and our patient volumes have increased, thereby providing for a statistically significant data group, and taking into consideration our long-history of company-specific risk management programs and claims experience, our reserve analyses have included a greater emphasis on our historical professional and general liability experience which has developed favorably as compared to general industry trends.

Based upon the results of workers’ compensation reserves analyses, we recorded reductions to our prior year reserves for workers’ compensation claims amounting to $4 million during 2010 and $7 million during 2009. There were no such adjustments recorded during 2011.

Although we are unable to predict whether or not our future financial statements will include adjustments to our prior year reserves for self-insured general and professional and workers’ compensation claims, given the relatively unpredictable nature of the these potential liabilities and the factors impacting these reserves as discussed above, it is reasonably likely that our future financial results may include material adjustments to prior period reserves.

Below is a schedule showing the changes in our general and professional liability and workers’ compensation reserves during the three years ended December 31, 2011 (amount in thousands):


	General and Professional Liability			Workers’ Compensation			Total
Balance at January 1, 2009	$	271,110		$	48,497		$	319,607
Plus: accrued insurance expense, net of commercial premiums paid (a) (b)		34,963			9,351			44 314
Less: Payments made in settlement of self-insured claims		(40,465	)		(15,317	)		(55,782	)

Balance at January 1, 2010		265,608			42,531			308,139
Plus: accrued insurance expense, net of commercial premiums paid (a) (b)		4,742			14,997			19,739
Less: Payments made in settlement of self-insured claims		(31,713	)		(18,460	)		(50,173	)
Plus: Liabilities assumed in the acquisition of PSI		50,800			31,956			82,756

Balance at January 1, 2011		289,437			71,024			360,461
Plus: accrued insurance expense, net of commercial premiums paid (a)		50,865			32,747			83,612
Less: Payments made in settlement of self-insured claims		(43,786	)		(38,845	)		(82,631	)
Less: Adjustments to liabilities assumed in the acquisition of PSI		(4,467	)		—			(4,467	)

Balance at December 31, 2011	$	292,049		$	64,926		$	356,975

(a)	General and professional liability amounts are net of adjustments recorded during each year, as discussed above.

(b)	Workers’ compensation amounts for 2009 and 2010 are net of adjustments recorded during each year as discussed above.

In addition, we also maintain self-insured employee benefits programs for employee healthcare and dental claims. The ultimate costs related to these programs include expenses for claims incurred and paid in addition to an accrual for the estimated expenses incurred in connection with claims incurred but not yet reported.

Property Insurance:

We have commercial property insurance policies covering catastrophic losses, including windstorm damage, up to a $1 billion policy limit per occurrence, subject to a $250,000 deductible. Losses resulting from named windstorms are subject to deductibles between 3% and 5% of the declared total insurable value of the property. In addition, we have commercial property insurance policies covering catastrophic losses resulting from earthquake and flood damage, each subject to aggregated loss limits (as opposed to per occurrence losses). Our earthquake limit is $250 million, subject to a deductible of $250,000, except for facilities located within documented fault zones. Earthquake losses that affect facilities located in fault zones within the United States are subject to a $100 million limit and will have applied deductibles ranging from 1% to 5% of the declared total insurable value of the property. The earthquake limit in Puerto Rico is $25 million. Flood losses have either a $250,000 or $500,000 deductible, based upon the location of the facility.

Our property insurance coverage is scheduled for renewal on June 1, 2012. Due to an increase in property losses experienced nationwide in recent years, the cost of commercial property insurance has increased. As a result, catastrophic coverage for earthquake and flood has been limited to annual aggregate losses (as opposed to per occurrence losses). Given these insurance market conditions, there can be no assurance that a continuation of these unfavorable trends, or a sharp increase in uninsured property losses sustained by us, will not have a material adverse effect on our future results of operations.

Long-Lived Assets: We review our long-lived assets, including amortizable intangible assets, for impairment whenever events or circumstances indicate that the carrying value of these assets may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of our asset based on our estimate of its undiscounted future cash flow. If the analysis indicates that the carrying value is not recoverable from future cash flows, the asset is written down to its estimated fair value and an impairment loss is recognized. Fair values are determined based on estimated future cash flows using appropriate discount rates.

Goodwill: Goodwill is reviewed for impairment at the reporting unit level on an annual basis or sooner if the indicators of impairment arise. Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance of each reporting unit. We have designated September 1st as our annual impairment assessment date and performed an impairment assessment as of September 1, 2011 which indicated no impairment of goodwill. Future changes in the estimates used to conduct the impairment review, including profitability and market value projections, could indicate impairment in future periods potentially resulting in a write-off of a portion or all of our goodwill.

Income Taxes: Deferred tax assets and liabilities are recognized for the amount of taxes payable or deductible in future years as a result of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. We believe that future income will enable us to realize our deferred tax assets net of recorded valuation allowances relating to state net operating loss carry-forwards.

We operate in multiple jurisdictions with varying tax laws. We are subject to audits by any of these taxing authorities. Our tax returns have been examined by the Internal Revenue Service (“IRS”) through the year ended December 31, 2006. We believe that adequate accruals have been provided for federal, foreign and state taxes.

See Provision for Income Taxes and Effective Tax Rates below for discussion of our effective tax rates during each of the last three years.

Recent Accounting Pronouncements: For a summary of recent accounting pronouncements, please see Note 1 to the Consolidated Financial Statements as included in this Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

The following table summarizes our results of operations, and is used in the discussion below, for the years ended December 31, 2011, 2010 and 2009 (dollar amounts in thousands):


		Year Ended December 31,
	2011					2010					2009
Net revenues		$	7,500,198	100.0	%		$	5,568,185	100.0	%		$	5,202,379	100.0	%
Operating charges:
Salaries, wages and benefits			3,394,967	45.2	%			2,423,102	43.5	%			2,204,422	42.4	%
Other operating expenses			1,385,680	18.6	%			1,005,288	18.1	%			994,923	19.1	%
Supplies expense			821,811	11.0	%			733,093	13.2	%			699,249	13.4	%
Provision for doubtful accounts			613,619	8.2	%			546,909	9.8	%			508,603	9.8	%
Depreciation and amortization			295,228	3.9	%			223,915	4.0	%			204,703	3.9	%
Lease and rental expense			91,765	1.2	%			76,961	1.4	%			69,947	1.3	%
Transaction costs			—	—				53,220	1.0	%			—	—

			6,603,070	88.0	%			5,062,488	90.9	%			4,681,847	90.0	%

Income from operations			897,128	12.0	%			505,697	9.1	%			520,532	10.0	%
Interest expense, net			200,792	2.7	%			77,600	1.4	%			45,810	0.9	%

Income before income taxes			696,336	9.3	%			428,097	7.7	%			474,722	9.1	%
Provision for income taxes			247,466	3.3	%			152,302	2.7	%			170,475	3.3	%

Net income			448,870	6.0	%			275,795	5.0	%			304,247	5.8	%
Less: Net income attributable to noncontrolling interests			50,703	0.7	%			45,612	0.9	%			43,874	0.8	%

Net income attributable to UHS		$	398,167	5.3	%		$	230,183	4.1	%		$	260,373	5.0	%

Year Ended December 31, 2011 as compared to the Year Ended December 31, 2010:

Net revenues increased 35% or $1.93 billion to $7.50 billion during 2011 as compared to $5.57 billion during 2010. The increase was primarily attributable to:

	•		a $267 million or 5% increase in net revenues generated at our acute care hospitals and behavioral health care facilities owned during both periods (which we refer to as “same facility”, and includes change in revenues for the facilities acquired by us from PSI for the month of December, 2011 as compared to December, 2010), and;

	•		$1.68 billion increase in revenues at the facilities acquired by us from PSI (includes the period of January through November of 2011 as compared to November 15th through November 30th of 2010).

Income before income taxes (before deduction for income attributable to noncontrolling interests) increased $268 million to $696 million during 2011 as compared to $428 million during 2010. Included in our income before income taxes during 2011, as compared to 2010, was the following:

	•		an increase of $14 million at our acute care facilities, as discussed below in Acute Care Hospital Services, exclusive of: (i) the $32 million net unfavorable change in the reductions recorded during 2011 and 2010 to our professional and general liability reserves, as discussed above in Self-Insured Risks (the amounts attributable to our acute care hospitals were $10 million in 2011 and $42 million in 2010), and; (ii) the favorable change caused by the $7 million charge recorded during 2010 to write-off certain costs related to an acute care hospital construction project;

	•		an increase of $385 million at our behavioral health care facilities, as discussed below in Behavioral Health Services, exclusive of the $6 million net unfavorable change in the reductions recorded during

	2011 and 2010 to our professional and general liability reserves, as discussed above in Self-Insured Risks (the amounts attributable to our behavioral health care facilities were $1 million in 2011 and $7 million in 2010);

	•		a decrease of $123 million due to an increase in interest expense resulting primarily from the cost of borrowings utilized to finance the acquisition of PSI in November, 2010;

	•		a net decrease of $38 million resulting from the reductions recorded during 2011 and 2010 to our professional and general liability reserves, as discussed above in Self-Insured Risks ($11 million reduction recorded during 2011 and $49 million reduction during 2010);

	•		an increase of $53 million resulting from the transaction fees incurred during 2010 in connection with our acquisition of PSI, and;

	•		a net decrease of $23 million from other combined net unfavorable changes consisting of: (i) a $9 million increase resulting from the charge incurred during 2010 in connection with split-dollar life insurance agreements entered into during 2010 on the lives of our chief executive officer and his wife; (ii) a $7 million increase resulting from the charge recorded during 2010 to write-off certain costs related to an acute care hospital construction project, and; (iii) a net decrease of $39 million from other combined net unfavorable changes including the corporate overhead expenses incurred in connection with the behavioral health care facilities acquired from PSI.

Net income attributable to UHS increased $168 million to $398 million during 2011 as compared to $230 million during 2010. The increase consisted of:

	•		an increase of $268 million in income before income taxes, as discussed above;

	•		a decrease of $5 million resulting from an increase in income attributable to noncontrolling interests, and;

	•		a decrease of $95 million resulting from an increase in the provision for income taxes resulting primarily from: (i) a net increase in pre-tax income of $263 million ($268 million increase in income before income taxes net of the $5 million increase in net income attributable to noncontrolling interests), and; (ii) a $4 million favorable discrete tax item recorded during the third quarter of 2010.

Year Ended December 31, 2010 as compared to the Year Ended December 31, 2009:

Net revenues increased 7% or $366 million to $5.57 billion during 2010 as compared to $5.20 billion during 2009. The increase was attributable to:

	•		a $169 million or 3% increase in net revenues generated at our acute care hospitals and behavioral health care facilities, on a same facility basis;

	•		$227 million of combined behavioral health revenues generated during the period of November 16, 2010 to December 31, 2010 at the facilities acquired by us from PSI, and;

	•		$30 million of other combined net decreases in revenues resulting primarily from decreased revenues earned during 2010 in connection with construction management contract pursuant to the terms of which we built a newly constructed acute care hospital for an unrelated third party that was completed during the fourth quarter of 2009.

Income from continuing operations before income taxes decreased $47 million to $428 million during 2010 as compared to $475 million during 2009 due to the following:

	•		a decrease of $33 million at our acute care facilities, as discussed below in Acute Care Hospital Services, exclusive of: (i) the $22 million net favorable effect of the reductions recorded during 2010 and 2009 to our professional and general liability reserves, as discussed above in Self-Insured Risks (the amounts attributable to our acute care hospitals were $42 million in 2010 and $20 million in

2009); (ii) the $5 million net unfavorable effect of the reduction to our workers’ compensation self insurance reserves recorded during 2009 that related to years prior to 2009, and; (iii) the unfavorable effect of the $7 million charge recorded during 2010 to write-off certain costs related to an acute care hospital construction project;

	•		an increase of $62 million at our behavioral health care facilities as discussed below in Behavioral Health Services exclusive of: (i) the $4 million net favorable effect of the reductions recorded during 2010 and 2009 to our professional and general liability reserves, as discussed above in Self-Insured Risks (the amounts attributable to our behavioral health care facilities were $7 million in 2010 and $3 million in 2009), and; (ii) the $2 million unfavorable effect of the reduction to our workers’ compensation self insurance reserves recorded during 2009 that related to years prior to 2009;

	•		a decrease of $53 million resulting from the transaction fees incurred during 2010 in connection with our acquisition of PSI;

	•		a decrease of $32 million resulting from an increase in interest expense resulting primarily from the cost of borrowings incurred to finance the acquisition of PSI;

	•		a net increase of $26 million resulting from the reductions recorded during 2010 and 2009 to our professional and general liability reserves, as discussed above in Self-Insured Risks ($49 million reduction recorded during 2010 and $23 million reduction during 2009), and;

	•		a net decrease of $17 million from other combined net unfavorable changes consisting of: (i) a $9 million decrease resulting from the charge incurred during 2010 in connection with the previously disclosed split-dollar life insurance agreements entered into during 2010 on the lives of our chief executive officer and his wife; (ii) a $7 million decrease resulting from the charge recorded during 2010 to write-off certain costs related to an acute care hospital construction project; (iii) a $7 million decrease resulting from a reduction to our workers’ compensation self insurance reserves recorded during 2009 that related to years prior to 2009, and; (iv) a net increase of $6 million from other combined net favorable changes.

Net income attributable to UHS decreased $30 million to $230 million during 2010 as compared to $260 million during 2009 due to the following:

	•		the $47 million decrease in income from continuing operations before income taxes, as discussed above;

	•		an unfavorable change of $2 million in the net income attributable to noncontrolling interests;

	•		a favorable change of $19 million resulting from a decrease in the provision for income taxes resulting from the $49 million decrease in pre-tax income ($47 million decrease income from continuing operations and $2 million increase in income attributable to noncontrolling interests) and certain other nondeductible items as discussed below in Provision for Income Taxes and Effective Tax Rates.

Acute Care Hospital Services

Year Ended December 31, 2011 as compared to the Year Ended December 31, 2010:

The following table summarizes the results of operations for our acute care facilities on a same facility basis and is used in the discussions below for the years ended December 31, 2011 and 2010 (dollar amounts in thousands):


	Year Ended December 31, 2011					Year Ended December 31, 2010
Acute Care Hospitals—Same Facility Basis	Amount		% of Revenues			Amount		% of Revenues
Net revenues	$	4,071,570		100.0	%	$	3,901,815		100.0	%
Operating charges:
Salaries, wages and benefits		1,569,780		38.6	%		1,489,335		38.2	%
Other operating expenses		730,977		18.0	%		697,703		17.9	%
Supplies expense		637,549		15.7	%		640,451		16.4	%
Provision for doubtful accounts		535,367		13.1	%		509,681		13.1	%
Depreciation and amortization		198,038		4.9	%		178,634		4.6	%
Lease and rental expense		54,209		1.3	%		54,867		1.4	%

		3,725,920		91.5	%		3,570,671		91.5	%

Income from operations		345,650		8.5	%		331,144		8.5	%
Interest expense, net		3,903		0.1	%		3,411		0.0	%

Income before income taxes	$	341,747		8.4	%	$	327,733		8.5	%

On a same facility basis during 2011, as compared to 2010, net revenues at our acute care hospitals increased $170 million or 4%. Income before income taxes increased $14 million or 4% to $342 million or 8.4% of net revenues during 2011 as compared to $328 million or 8.5% of net revenues during 2010.

Inpatient admissions to these facilities decreased 2.2% during 2011, as compared to 2010, while patient days decreased 0.4%. Adjusted admissions (adjusted for outpatient activity) decreased 0.1% and adjusted patient days increased 1.7% during 2011, as compared to 2010. The average length of inpatient stay at these facilities was 4.4 days during each of 2011 and 2010. The occupancy rate, based on the average available beds at these facilities, was 58% during 2011 and 59% during 2010.

On a same facility basis, net revenue per adjusted admission at these facilities increased 4.5% during 2011, as compared to 2010, and net revenue per adjusted patient day increased 2.6% during 2011, as compared to 2010.

The increase in income before income taxes at our acute care hospitals during 2011, as compared to 2010, was due primarily to favorable operating trends experienced during the first six months of 2011 (a favorable change in payor mix and acuity of patients treated at our hospitals, a stabilization of our uninsured patient volumes and a reduction in our supplies expense). These favorable operating trends moderated during the second half of 2011.

A significant portion of the patients treated throughout our portfolio of acute care hospitals are uninsured patients which, in part, has resulted from an increase in the number of patients who are employed but do not have health insurance or who have policies with relatively high deductibles. We provide care to patients who meet certain financial or economic criteria without charge or at amounts substantially less than our established rates. Because we do not pursue collection of amounts that qualify as charity care, they are not reported in net revenues or in accounts receivable, net. Our acute care hospitals provided charity care and uninsured discounts, based on charges at established rates, amounting to $956 million during 2011 and $807 million during 2010.

The estimated cost of providing the charity services was $173 million during 2011 and $158 million during 2010. The estimated costs were based on a calculation which multiplied the percentage of operating expenses for our acute care hospitals to gross charges for those hospitals by the above-mentioned gross charity care and uninsured discount amounts. The percentage of cost to gross charges is calculated based on the total operating expenses for our acute care facilities (excluding provision for doubtful accounts) divided by gross patient service revenue for those facilities. An increase in the level of uninsured patients to our facilities and the resulting adverse trends in the provision for doubtful accounts and charity care provided could have a material unfavorable impact on our future operating results.

The following table summarizes the results of operations for all our acute care operations during 2011 and 2010. Included in these results, in addition to the same facility results shown above, is: (i) the favorable effect of $10 million recorded during 2011 and $42 million recorded during 2010 resulting from reductions to our professional and general liability self insurance reserves, as discussed above in Self-Insured Risks, and; (ii) the unfavorable effect of $7 million recorded during 2010 to write-off certain costs related to an acute care hospital construction project (dollar amounts in thousands):


	Year Ended December 31, 2011					Year Ended December 31, 2010
All Acute Care Hospitals	Amount		% of Revenues			Amount		% of Revenues
Net revenues	$	4,071,570		100.0	%	$	3,901,815		100.0	%
Operating charges:
Salaries, wages and benefits		1,569,780		38.6	%		1,489,335		38.2	%
Other operating expenses		720,807		17.7	%		662,009		17.0	%
Supplies expense		637,549		15.7	%		640,451		16.4	%
Provision for doubtful accounts		535,367		13.1	%		509,681		13.1	%
Depreciation and amortization		198,038		4.9	%		178,634		4.6	%
Lease and rental expense		54,209		1.3	%		54,867		1.4	%

		3,715,750		91.3	%		3,534,977		90.6	%

Income from operations		355,820		8.7	%		366,838		9.4	%
Interest expense, net		3,903		0.1	%		3,411		0.1	%

Income before income taxes	$	351,917		8.6	%	$	363,427		9.3	%

During 2011, as compared to 2010, net revenues at our acute care hospitals increased 4% or $170 million to $4.07 billion due to an increase in same facility revenues, as discussed above.

Income before income taxes decreased $11 million to $352 million or 8.6% of net revenues during 2011 as compared to $363 million or 9.3% of net revenues during 2010. The decrease in income before income taxes at our acute care facilities resulted from:

	•		a $14 million increase at our acute care facilities on a same facility basis, as discussed above;

	•		a decrease of $32 million resulting from the reductions recorded during 2011 ($10 million) and 2010 ($42 million) to our professional and general liability self-insurance reserves, as discussed above in Self-Insured Risks, and;

	•		an increase of $7 million resulting from the write-off of certain costs during 2010 related to an acute care hospital construction project.

Year Ended December 31, 2010 as compared to the Year Ended December 31, 2009:


	Year Ended December 31, 2010					Year Ended December 31, 2009
Acute Care Hospitals—Same Facility Basis	Amount		% of Revenues			Amount		% of Revenues
Net revenues	$	3,901,815		100.0	%	$	3,810,828		100.0	%
Operating charges:
Salaries, wages and benefits		1,489,335		38.2	%		1,449,183		38.0	%
Other operating expenses		697,703		17.9	%		685,529		18.0	%
Supplies expense		640,451		16.4	%		618,321		16.2	%
Provision for doubtful accounts		509,681		13.1	%		476,408		12.5	%
Depreciation and amortization		178,634		4.6	%		165,967		4.4	%
Lease and rental expense		54,867		1.4	%		51,035		1.3	%

		3,570,671		91.5	%		3,446,443		90.4	%

Income from operations		331,144		8.5	%		364,385		9.6	%
Interest expense, net		3,411		0.1	%		3,719		0.1	%

Income before income taxes	$	327,733		8.4	%	$	360,666		9.5	%

On a same facility basis during 2010, as compared to 2009, net revenues at our acute care hospitals increased $91 million or 2%. Income before income taxes decreased $33 million or 9% to $328 million or 8.4% of net revenues during 2010 as compared to $361 million or 9.5% of net revenues during 2009.

Inpatient admissions to these facilities decreased 0.3% during 2010, as compared to 2009, while patient days decreased 0.9%. Adjusted admissions (adjusted for outpatient activity) increased 1.3% and adjusted patient days increased 0.7% during 2010, as compared to 2009. The average length of inpatient stay at these facilities was 4.4 days during each of 2010 and 2009. The occupancy rate, based on the average available beds at these facilities, was 59% during 2010 and 62% during 2009.

On a same facility basis, net revenue per adjusted admission at these facilities increased 1.0% during 2010, as compared to 2009, and net revenue per adjusted patient day increased 1.7% during 2010, as compared to 2009.

The decrease in income before income taxes at our acute care hospitals during 2010, as compared to 2009, was due primarily to net revenue pressures experienced throughout our portfolio of acute care hospitals. The revenue pressures were caused primarily by declining commercial payor utilization and an increase in the number of uninsured and underinsured patients treated at our facilities. Our acute care facilities located in Texas were also unfavorably impacted by reductions in Medicaid revenues. Also contributing to the decline in income before income taxes at our acute care facilities were increases in salaries, wages and benefits expense and supplies expense which increased beyond the rate of increase of our acute care revenues.

Our acute care hospitals provided charity care and uninsured discounts, based on charges at established rates, amounting to $807 million during 2010 and $671 million during 2009.

The following table summarizes the results of operations for all our acute care operations during 2010 and 2009. Included in these results, in addition to the same facility results shown above, is: (i) the favorable effect of $42 million recorded during 2010 and $20 million recorded during 2009 resulting from reductions to our professional and general liability self insurance reserves, as discussed above in Self-Insured Risks; (ii) the unfavorable effect of $7 million recorded during 2010 to write-off certain costs related to an acute care hospital construction project, and; (iii) the favorable effect of $5 million recorded during 2009 resulting from a reduction to our workers’ compensation self insurance reserves (dollar amounts in thousands):


	Year Ended December 31, 2010					Year Ended December 31, 2009
All Acute Care Hospitals	Amount		% of Revenues			Amount		% of Revenues
Net revenues	$	3,901,815		100.0	%	$	3,810,828		100.0	%
Operating charges:
Salaries, wages and benefits		1,489,335		38.2	%		1,443,933		37.9	%
Other operating expenses		662,009		17.0	%		665,237		17.5	%
Supplies expense		640,451		16.4	%		618,321		16.2	%
Provision for doubtful accounts		509,681		13.1	%		476,408		12.5	%
Depreciation and amortization		178,634		4.6	%		165,967		4.4	%
Lease and rental expense		54,867		1.4	%		51,035		1.3	%

		3,534,977		90.6	%		3,420,901		89.8	%

Income from operations		366,838		9.4	%		389,927		10.2	%
Interest expense, net		3,411		0.1	%		3,719		0.1	%

Income before income taxes	$	363,427		9.3	%	$	386,208		10.1	%

During 2010, as compared to 2009, net revenues at our acute care hospitals increased 2% or $91 million to $3.90 billion due to an increase in same facility revenues, as discussed above.

Income before income taxes decreased $23 million to $363 million or 9.3% of net revenues during 2010 as compared to $386 million or 10.1% of net revenues during 2009. The decrease in income before income taxes at our acute care facilities resulted from:

	•		a $33 million decrease at our acute care facilities on a same facility basis, as discussed above;

	•		an increase of $22 million resulting from the reductions recorded during 2010 ($42 million) and 2009 ($20 million) to our professional and general liability self-insurance reserves, as discussed above in Self-Insured Risks;

	•		a decrease of $7 million resulting from the write-off of certain costs during 2010 related to an acute care hospital construction project, and;

	•		a decrease of $5 million resulting from a reduction to our workers’ compensation reserves recorded during 2009 that related to years prior to 2009.

Behavioral Health Care Services

Year Ended December 31, 2011 as compared to the Year Ended December 31, 2010

The following table summarizes the results of operations for our behavioral health care facilities, on a same facility basis, and is used in the discussions below for the years ended December 31, 2011 and 2010. On November 15, 2010, we acquired PSI which was formerly the largest operator of freestanding inpatient behavioral health care facilities operating inpatient and outpatient facilities in 32 states, Puerto Rico, and the U.S. Virgin Islands. Since the former PSI facilities were acquired by us in mid-November, 2010, for accurate comparability purposes, we have included the patient statistics and financial results for these facilities in our same facility results provided below beginning on December 1st of 2011 and 2010 (dollar amounts in thousands):


	Year Ended December 31, 2011					Year Ended December 31, 2010
Behavioral Health Care Facilities—Same Facility Basis	Amount		% of Revenues			Amount		% of Revenues
Net revenues	$	1,644,421		100.0	%	$	1,544,945		100.0	%
Operating charges:
Salaries, wages and benefits		795,285		48.4	%		758,451		49.1	%
Other operating expenses		296,500		18.0	%		278,063		18.0	%
Supplies expense		87,850		5.3	%		82,606		5.3	%
Provision for doubtful accounts		39,873		2.4	%		35,044		2.3	%
Depreciation and amortization		40,854		2.5	%		36,426		2.4	%
Lease and rental expense		17,401		1.1	%		17,495		1.1	%

		1,277,763		77.7	%		1,208,085		78.2	%

Income from operations		366,658		22.3	%		336,860		21.8	%
Interest expense, net		180		0.0	%		299		0.0	%

Income before income taxes	$	366,478		22.3	%	$	336,561		21.8	%

On a same facility basis during 2011, as compared to 2010, net revenues at our behavioral health care facilities increased 6% or $99 million to $1.64 billion during 2011 as compared to $1.54 billion during 2010. Income before income taxes increased $30 million or 9% to $366 million or 22.3% of net revenues during 2011 as compared to $337 million or 21.8% of net revenues during 2010.

Inpatient admissions to these facilities increased 7.7% during 2011, as compared to 2010, while patient days increased 3.4%. Adjusted admissions increased 7.6% and adjusted patient days increased 3.3% during 2011, as compared to 2010. The average length of patient stay at these facilities was 14.2 days during 2011 and 14.8 days during 2010. The occupancy rate, based on the average available beds at these facilities, was 74% during each of 2011 and 2010.

On a same facility basis, net revenue per adjusted admission at these facilities decreased 0.8% during 2011, as compared to 2010, and net revenue per adjusted patient day increased 3.3% during 2011, as compared to 2010.

The following table summarizes the results of operations for all our behavioral health care facilities for 2011and 2010 including newly acquired or recently opened facilities and the favorable effect resulting from reductions to our professional and general liability and workers’ compensation self insurance reserves as discussed in Self-Insured Risks. The operating results for the PSI facilities are included in the following table for the eleven-month period ended November 30, 2011 and the period of November 15, 2010 (date of acquisition) through December 31, 2010 (dollar amounts in thousands):


	Year Ended December 31, 2011					Year Ended December 31, 2010
All Behavioral Health Care Facilities	Amount		% of Revenues			Amount		% of Revenues
Net revenues	$	3,401,118		100.0	%	$	1,635,455		100.0	%
Operating charges:
Salaries, wages and benefits		1,677,928		49.3	%		806,837		49.3	%
Other operating expenses		607,991		17.9	%		291,825		17.8	%
Supplies expense		179,077		5.3	%		87,375		5.3	%
Provision for doubtful accounts		78,145		2.3	%		36,950		2.3	%
Depreciation and amortization		89,295		2.6	%		39,058		2.4	%
Lease and rental expense		34,230		1.0	%		19,810		1.2	%

		2,666,666		78.4	%		1,281,855		78.4	%

Income from operations		734,452		21.6	%		353,600		21.6	%
Interest expense, net		1,778		0.1	%		397		0.0	%

Income before income taxes	$	732,674		21.5	%	$	353,203		21.6	%

During 2011, as compared to 2010, net revenues at our behavioral health care facilities increased 108% or $1.77 billion to $3.40 billion during 2011 as compared to $1.64 billion during 2010. The increase in net revenues was attributable to:

	•		a $97 million increase in same facility revenues, as discussed above, and;

	•		a $1.67 billion increase resulting primarily from the revenues generated at the facilities acquired by us from PSI (represents the increase in revenues for the period of January through November, 2011 as compared to November 15, 2010 to November 30, 2010).

Income before income taxes increased $379 million or 107% to $733 million or 21.5% of net revenues during 2011, as compared to $353 million or 21.6% of net revenues during 2010. The increase in income before income taxes at our behavioral health facilities was attributable to:

	•		a $30 million increase at our behavioral health facilities on a same facility basis, as discussed above, and;

	•		a $349 million of other combined net increases, consisting primarily of the income generated at the PSI facilities acquired by us in November, 2010 (represents the increase in income before income taxes generated at these facilities for the period of January through November, 2011 as compared to November 15, 2010 to November 30, 2010).

Year Ended December 31, 2010 as compared to the Year Ended December 31, 2009:


	Year Ended December 31, 2010					Year Ended December 31, 2009
Behavioral Health Care Facilities—Same Facility Basis	Amount		% of Revenues			Amount		% of Revenues
Net revenues	$	1,393,095		100.0	%	$	1,314,749		100.0	%
Operating charges:
Salaries, wages and benefits		675,490		48.5	%		642,761		48.9	%
Other operating expenses		251,507		18.1	%		238,635		18.2	%
Supplies expense		74,280		5.3	%		73,549		5.6	%
Provision for doubtful accounts		29,966		2.2	%		31,939		2.4	%
Depreciation and amortization		31,967		2.3	%		31,598		2.4	%
Lease and rental expense		15,385		1.1	%		15,915		1.2	%

		1,078,595		77.4	%		1,034,397		78.7	%

Income from operations		314,500		22.6	%		280,352		21.3	%
Interest expense, net		11		0.0	%		209		0.0	%

Income before income taxes	$	314,489		22.6	%	$	280,143		21.3	%

On a same facility basis during 2010, as compared to 2009, net revenues at our behavioral health care facilities increased 6% or $78 million to $1.39 billion during 2010 as compared to $1.31 billion during 2009. Income before income taxes increased $34 million or 12% to $314 million or 22.6% of net revenues during 2010 as compared to $280 million or 21.3% of net revenues during 2009.

Inpatient admissions to these facilities increased 4.3% during 2010, as compared to 2009, while patient days increased 1.8%. Adjusted admissions increased 4.2% and adjusted patient days increased 1.7% during 2010, as compared to 2009. The average length of patient stay at these facilities was 15.0 days during 2010 and 15.3 days during 2009. The occupancy rate, based on the average available beds at these facilities, was 75% during 2010 and 74% during 2009.

On a same facility basis, net revenue per adjusted admission at these facilities increased 1.4% during 2010, as compared to 2009, and net revenue per adjusted patient day increased 3.9% during 2010, as compared to 2009.

The following table summarizes the results of operations for all our behavioral health care facilities for 2010 and 2009, including newly acquired or recently opened facilities and the favorable effect resulting from reductions to our professional and general liability and workers’ compensation self insurance reserves as discussed in Self-Insured Risks (dollar amounts in thousands):


	Year Ended December 31, 2010					Year Ended December 31, 2009
All Behavioral Health Care Facilities	Amount		% of Revenues			Amount		% of Revenues
Net revenues	$	1,635,455		100.0	%	$	1,315,029		100.0	%
Operating charges:
Salaries, wages and benefits		806,837		49.3	%		641,920		48.8	%
Other operating expenses		291,825		17.8	%		237,378		18.1	%
Supplies expense		87,375		5.3	%		73,715		5.6	%
Provision for doubtful accounts		36,950		2.3	%		31,948		2.4	%
Depreciation and amortization		39,058		2.4	%		31,717		2.4	%
Lease and rental expense		19,810		1.2	%		16,601		1.3	%

		1,281,855		78.4	%		1,033,279		78.6	%

Income from operations		353,600		21.6	%		281,750		21.4	%
Interest expense, net		397		0.0	%		209		0.0	%

Income before income taxes	$	353,203		21.6	%	$	281,541		21.4	%

During 2010, as compared to 2009, net revenues at our behavioral health care facilities (including the facilities formerly owned by PSI which were acquired by us in November, 2010, and other newly acquired and recently opened facilities), increased 24% or $320 million to $1.64 billion during 2010 as compared to $1.32 billion during 2009. The increase in net revenues was attributable to:

	•		a $78 million increase in same facility revenues, as discussed above, and;

	•		a $242 million increase resulting from the revenues generated at the PSI facilities acquired by us in November, 2010 and other acquired or opened facilities.

Income before income taxes increased $72 million or 25% to $353 million or 21.6% of net revenues during 2010, as compared to $281 million or 21.4% of net revenues during 2009. The increase in income from continuing operations before income taxes at our behavioral health facilities was attributable to:

	•		a $34 million increase at our behavioral health facilities on a same facility basis, as discussed above, and;

	•		a $38 million increase resulting from the income, net of losses, generated at the former PSI facilities and other acquired or opened facilities.

Sources of Revenue

Overview: We receive payments for services rendered from private insurers, including managed care plans, the federal government under the Medicare program, state governments under their respective Medicaid programs and directly from patients.

Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary depending on the type of services provided (e.g., medical/surgical, intensive care or behavioral health) and the geographic location of the hospital. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control. The percentage of patient service revenue attributable to outpatient services has generally

increased in recent years, primarily as a result of advances in medical technology that allow more services to be provided on an outpatient basis, as well as increased pressure from Medicare, Medicaid and private insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. We believe that our experience with respect to our increased outpatient levels mirrors the general trend occurring in the health care industry and we are unable to predict the rate of growth and resulting impact on our future revenues.

Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, and managed care plans, but are responsible for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Indications from recent federal and state legislation are that this trend will continue. Collection of amounts due from individuals is typically more difficult than from governmental or business payors and we continue to experience an increase in uninsured and self-pay patients which unfavorably impacts the collectability of our patient accounts thereby increasing our provision for doubtful accounts and charity care provided.

Since a significant portion of our revenues are derived from facilities located in Nevada, Texas and California, we are particularly sensitive to regulatory, economic, environmental and competition changes in those states. Any material change in the current payment programs or regulatory, economic, environmental or competitive conditions in those states could have a disproportionate effect on our overall business results.

The following tables show the approximate percentages of net patient revenue during the past three years (excludes sources of revenues for all periods presented for divested facilities which are reflected as discontinued operations in our Consolidated Financial Statements) for: (i) our Acute Care and Behavioral Health Care Facilities Combined; (ii) our Acute Care Facilities, and; (iii) our Behavioral Health Care Facilities. Net patient revenue is defined as revenue from all sources after deducting contractual allowances and discounts from established billing rates, which we derived from various sources of payment for the years indicated.


	Percentage of Net Patient Revenues
Acute Care and Behavioral Health Care Facilities Combined	2011			2010			2009
Third Party Payors:
Medicare		22	%		24	%		24	%
Medicaid		15	%		14	%		14	%
Managed Care (HMO and PPOs)		43	%		46	%		46	%
Other Sources		20	%		16	%		16	%

Total		100	%		100	%		100	%


	Percentage of Net Patient Revenues
Acute Care Facilities	2011			2010			2009
Third Party Payors:
Medicare		25	%		27	%		27	%
Medicaid		8	%		9	%		10	%
Managed Care (HMO and PPOs)		47	%		46	%		47	%
Other Sources		20	%		18	%		16	%

Total		100	%		100	%		100	%


	Percentage of Net Patient Revenues
Behavioral Health Care Facilities	2011			2010			2009
Third Party Payors:
Medicare		17	%		18	%		17	%
Medicaid		24	%		25	%		26	%
Managed Care (HMO and PPOs)		38	%		45	%		43	%
Other Sources		21	%		12	%		14	%

Total		100	%		100	%		100	%

Medicare: Medicare is a federal program that provides certain hospital and medical insurance benefits to persons aged 65 and over, some disabled persons and persons with end-stage renal disease. All of our acute care hospitals and many of our behavioral health centers are certified as providers of Medicare services by the appropriate governmental authorities. Amounts received under the Medicare program are generally significantly less than a hospital’s customary charges for services provided. Since a substantial portion of our revenues will come from patients under the Medicare program, our ability to operate our business successfully in the future will depend in large measure on our ability to adapt to changes in this program.

Under the Medicare program, for inpatient services, our general acute care hospitals receive reimbursement under the inpatient prospective payment system (“IPPS”). Under the IPPS, hospitals are paid a predetermined fixed payment amount for each hospital discharge. The fixed payment amount is based upon each patient’s Medicare severity diagnosis related group (“MS-DRG”). Every MS-DRG is assigned a payment rate based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. The MS-DRG payment rates are based upon historical national average costs and do not consider the actual costs incurred by a hospital in providing care. This MS-DRG assignment also affects the predetermined capital rate paid with each MS-DRG. The MS-DRG and capital payment rates are adjusted annually by the predetermined geographic adjustment factor for the geographic region in which a particular hospital is located and are weighted based upon a statistically normal distribution of severity. While we generally will not receive payment from Medicare for inpatient services, other than the MS-DRG payment, a hospital may qualify for an “outlier” payment if a particular patient’s treatment costs are extraordinarily high and exceed a specified threshold.

MS-DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The index used to adjust the MS-DRG rates, known as the “hospital market basket index,” gives consideration to the inflation experienced by hospitals in purchasing goods and services. Generally, however, the percentage increases in the MS-DRG payments have been lower than the projected increase in the cost of goods and services purchased by hospitals.

In July, 2010, CMS published its final IPPS 2011 payment rule which provided for a 2.6% market basket increase to the base Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors and annual geographic wage index updates and the documenting and coding adjustments were considered, our overall decrease from the federal fiscal year 2011 rule was 1.1%. In addition, as outlined in the Sources of Revenues and Health Care Reform discussion below, CMS was also required by federal law to reduce the update factor by 0.25% in federal fiscal year 2011.

In August, 2011, CMS published its final IPPS 2012 payment rule which provided for a 3.0% market basket increase to the base Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates, documenting and coding adjustments and Health Care Reform productivity adjustments are considered, we estimate our overall increase from the final federal fiscal year 2012 rule will approximate 0.6%. CMS also includes a 2.0% market basket reduction related to prior year documentation and coding adjustments as well as a 1.1% increase related to the correction of a prior year wage index budget neutrality adjustment. In addition, as outlined in the Sources of Revenues and Health Care Reform discussion below, CMS was also required by federal law to reduce the update factor by 0.10% in federal fiscal year 2012. The projected impact from this IPPS rule noted above reflects all of the adjustments described in this paragraph.

In September, 2007, the “TMA, Abstinence Education, and QI Programs Extension Act of 2007” legislation took effect and scaled back cuts in hospital reimbursement that CMS was set to impose. In federal fiscal years 2010 to 2012, the new law requires CMS to make adjustments to the Medicare standardized amounts in these years to reflect the removal of actual aggregate payment increases or decreases for documentation and coding adjustments that occurred during federal fiscal years 2008 and 2009 as compared to the initial CMS estimates. In federal fiscal year 2010, CMS made its initial statutory mandated adjustment under this legislation and will continue to do so in subsequent fiscal years to ensure the implementation of MS-DRGs was budget neutral among all affected hospitals. In July, 2010, the IPPS 2011 proposed payment rule applied a 2.9% reduction to the 2011 market basket update and indicated another 2.9% reduction would also be applied in 2012 for documenting and coding. In this same rule, CMS indicated a remaining documenting and coding adjustment of 3.9% reduction is still required to be made to future IPPS updates. In the 2012 IPPS final rule, CMS offset 2.0% of this remaining reduction and indicated that the remaining 1.9% may be offset in the IPPS 2013 payment rule.

On January 1, 2005, CMS implemented a new Psychiatric Prospective Payment System (“Psych PPS”) for inpatient services furnished by psychiatric hospitals under the Medicare program. This system replaced the cost-based reimbursement guidelines with a per diem Psych PPS with adjustments to account for certain facility and patient characteristics. The Psych PPS also contained provisions for outlier payments and an adjustment to a psychiatric hospital’s base payment if it maintains a full-service emergency department. According to the May, 2009 CMS notice, the market basket increase was 2.1% for the period of July 1, 2009 through June 30, 2010. According to the April, 2010 CMS notice, the market basket increase was 2.4% for the period of July 1, 2010 through June 30, 2011. In April, 2011 CMS published its final Psych PPS rule for the fifteen month period July 1, 2011 to September 30, 2012. The market basket increase for this time period is scheduled to be 2.95%, which includes a 0.25% reduction required by the federal Health Care Reform legislation enacted in 2010.

In October 2009, CMS published its annual final Medicare Outpatient Prospective Payment System (“OPPS”) rule for 2010. The final market basket increase to the OPPS base rate is 2.1%. When other statutorily required adjustments are considered the overall Medicare OPPS payment increase for 2010 is estimated to be 1.9%.

In November 2010, CMS published its annual final Medicare OPPS rule for 2011. The final market basket increase to the OPPS base rate is 2.46%. In addition, as outlined in the Sources of Revenues and Health Care Reform discussion below, CMS is also required by federal law to reduce the update factor by 0.25% in federal fiscal year 2011. When other statutorily required adjustments and hospital patient service mix are considered, the overall Medicare OPPS payment increase for 2011 is estimated to be 3.2%.

In November, 2011, CMS published its annual final Medicare OPPS rule for 2012. The market basket increase to the OPPS base rate is 3.0%. In addition, as outlined in the Sources of Revenues and Health Care Reform discussion below, CMS is also required by federal law to reduce the update factor by 0.1% in federal fiscal year 2012 and to reduce the annual update by a productivity adjustment which is 1.1%. In the final rule, CMS is also implementing a significant decrease in the 2012 Medicare rates for both hospital-based and community mental health center (CMHC) partial hospitalization programs. When other statutorily required adjustments, hospital patient service mix and the aforementioned partial hospitalization rates are considered, our overall Medicare OPPS payment decrease for 2012 is estimated to be 0.7%. Excluding the behavioral health division partial hospitalization rate impact, our Medicare OPPS payment increase for 2012 is estimated to be 2.1%.

In July 2010, the Department of Health and Human Services (“HHS”) published final regulations implementing the health information technology (“HIT”) provisions of the American Recovery and Reinvestment Act (referred to as the “HITECH Act”). The final regulation defines the “meaningful use” of Electronic Health Records (“EHR”) and establishes the requirements for the Medicare and Medicaid EHR payment incentive programs. The final rule established an initial set of standards and certification criteria.

The implementation period for these new Medicare and Medicaid incentive payments started in federal fiscal year 2011 and can end as late as 2016 for Medicare and 2021 for the state Medicaid programs. State Medicaid program participation in this federally funded incentive program is voluntary but we expect that all of

the states in which our eligible hospitals operate will ultimately choose to participate. Our acute care hospitals may qualify for these EHR incentive payments upon implementation of the EHR application assuming they meet the “meaningful use criteria”. The government’s ultimate goal is to promote more effective (quality) and efficient healthcare delivery through the use of technology to reduce the total cost of healthcare for all Americans and utilizing the cost savings to expand access to the healthcare system. Our acute care facilities have begun implementing an EHR application, on a facility-by-facility basis, beginning in 2011. The implementation is scheduled to be completed in 2013. However, there can be no assurance that we will ultimately qualify for these incentive payments and, should we qualify, the amount of incentive payments received is dependent upon various factors including the implementation timing at each facility. Should we qualify for incentive payments, there may be timing differences in the recognition of the revenues and expenses recorded in connection with the implementation of the EHR application which may cause material period-to-period changes in our future results of operations. Approximately $11 million of these incentive payments, which relate to state Medicaid programs, were received during 2011 (in the fourth quarter). These payments have been reflected as deferred revenue on our consolidated balance sheet as of December 31, 2011 (included in other current liabilities) and will be recorded as revenue in our consolidated statements of income in the periods in which the applicable hospitals are deemed to have met the meaningful use criteria. Also, if our hospitals meet the meaningful use criteria, we may become entitled to additional Medicaid incentive payments in future periods. Hospitals that do not qualify as a meaningful user of EHR by 2015 are subject to a reduced market basket update to the IPPS standardized amount in 2015 and each subsequent fiscal year. Although we believe that our acute care hospitals will be in compliance with the EHR standards by 2015, there can be no assurance that all of our facilities will be in compliance and therefore not subject to the penalty provision of the HITECH Act.

In August, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. Included in this law are the imposition of annual spending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report released by the Congressional Budget Office. Among its other provisions, the law established a bipartisan Congressional committee, known as the Joint Committee, which was responsible for developing recommendations aimed at reducing future federal budget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by the November 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented which, if triggered, would result in Medicare payment reductions of up to 2% per fiscal year with a uniform percentage reduction across all Medicare programs starting in 2013. We cannot predict whether Congress will attempt to suspend or restructure the automatic budget cuts or what other deficit reduction initiatives may be proposed by Congress.

Medicaid: Medicaid is a joint federal-state funded health care benefit program that is administered by the states to provide benefits to qualifying individuals who are unable to afford care. Most state Medicaid payments are made under a PPS-like system, or under programs that negotiate payment levels with individual hospitals. Amounts received under the Medicaid program are generally significantly less than a hospital’s customary charges for services provided. In addition to revenues received pursuant to the Medicare program, we receive a large portion of our revenues either directly from Medicaid programs or from managed care companies managing Medicaid. All of our acute care hospitals and most of our behavioral health centers are certified as providers of Medicaid services by the appropriate governmental authorities.

We receive Medicaid revenues in excess of $100 million annually from each of Texas, Pennsylvania, Virginia, Illinois and Washington, D.C., making us particularly sensitive to reductions in Medicaid and other state based revenue programs (which have been implemented in various forms with respect to our areas of operation in the respective 2012 state fiscal years) as well as regulatory, economic, environmental and competitive changes in those states. In the states in which we operate, based upon the state budgets for the 2012 fiscal year (which generally began at various times during the second half of 2011), we estimate that, on a blended basis, our aggregate Medicaid rates have been reduced by approximately 3% to 4% (or approximately $45 million to $55 million annually) from the average rates in effect during the states’ 2011 fiscal years (which generally ended during the third quarter of 2011). Our consolidated results of operations for the year ended

December 31, 2011 include the pro rata portion of these Medicaid rate reductions. We can provide no assurance that further reductions to Medicaid revenues (which have been proposed in certain states for fiscal year 2013), particularly in the above-mentioned states, will not have a material adverse effect on our future results of operations.

Certain of our acute care hospitals located in various counties of Texas (Hildalgo, Maverick, Potter and Webb) participate in CMS-approved private Medicaid supplemental payment (“UPL”) programs. These hospitals also have affiliation agreements with third-party hospitals to provide free hospital and physician care to qualifying indigent residents of these counties. Our hospitals receive both UPL payments from the Medicaid program and indigent care payments from third-party, affiliated hospitals. The UPL payments are contingent on the county or hospital district making an Inter-Governmental Transfer (“IGT”) to the state Medicaid program while the indigent care payment is contingent on a transfer of funds from the applicable affiliated hospitals. We received $33 million during 2011, $38 million during 2010 and $48 million during 2009, of aggregate, net UPL and affiliated hospital indigent care payments. For state fiscal year 2012, Texas Medicaid will operate under a CMS-approved Section 1115 five-year Medicaid waiver demonstration program. During the first five years of this program, the Texas Health and Human Services Commission (“THHSC”) will transition away from UPL payments to new waiver incentive payment programs. During the first year of transition, which commenced on October 1, 2011, THHSC will make payments to Medicaid UPL recipient providers that received payments during the state’s prior fiscal year. During transition years two through five, THHSC will make incentive payments under the program after certain qualifying criteria are met by hospitals. If during 2012 the applicable hospital district or county makes IGTs consistent with 2011 levels, we believe we would be entitled to aggregate net payments pursuant to these programs of approximately $24 million (during calendar year 2012).

We incur health-care related taxes (“Provider Taxes”) imposed by states in the form of a licensing fee, assessment or other mandatory payment which are related to: (i) healthcare items or services; (ii) the provision of, or the authority to provide, the health care items of services, or; (iii) the payment for the health care items or services. Such Provider Taxes are subject to various federal regulations that limit the scope and amount of the taxes that can be levied by states in order to secure federal matching dollars as part of their respective state Medicaid programs. We derive a related Medicaid reimbursement benefit from assessed Provider Taxes in the form of Medicaid claims based payment increases and/or lump sum Medicaid supplemental payments. We earned an aggregate net benefit of approximately $22 million during 2011 from Medicaid supplemental payments, after assessed Provider Taxes were considered (exclusive of our hospitals located in Oklahoma). We estimate that our aggregate net benefit from Provider Tax programs will approximate $19 million during 2012. The aggregate net benefit is earned from multiple states and therefore no particular state’s portion is individually material to our consolidated financial statements. However, Provider Taxes are governed by both federal and state laws and are subject to future legislative changes that, if reduced from current rates in several states, could have a material adverse impact on our consolidated future results of operations.

In January, 2012, the state of Oklahoma was granted federal approval by CMS for the Supplemental Hospital Offset Payment Program (“SHOPP”) which grants the Oklahoma Health Care Authority (“OHCA”) the authority to assess a 2.5% fee on certain Oklahoma hospitals and to make Medicaid UPL payments to hospitals through December 31, 2014, retroactive to July 1, 2011. The state is expected to finalize the initial supplemental payment program amounts during the first quarter of 2012. If the SHOPP program is implemented pursuant to its current preliminary terms and conditions, we estimate that we may be entitled to net annual reimbursements which would have a favorable impact on our future results of operations.

In July, 2011 in accordance with the state 2012-2013 General Appropriations Act (the “Act”), the Texas Health and Human Services Commission (“THHSC”) published a proposed rule that changes the reimbursement methodology for inpatient services by establishing a statewide base standard dollar amount (“SDA”) rate along with certain hospital specific SDA rate adjustments for geographic location, trauma level designation and teaching hospital status. The new SDA payment methodology became effective September 1, 2011. Similarly, THHSC also incorporated changes in conformance with the Act which results in reductions to various categories

of Medicaid hospital outpatient services. The expected reduction to our annual Medicaid inpatient reimbursement resulting from the proposed inpatient SDA payment methodology has been factored into the fiscal year 2012 Medicaid reductions (3% to 4%), as mentioned above.

The THHSC has indicated an intention to expand state Medicaid managed care programs in future state fiscal years starting in the state’s 2012 fiscal year. Although we are unable to determine the impact of the managed care expansion on future Medicaid reimbursement or its impact on Medicaid UPL payments, depending on the actual structure of the actual managed care expansion, this change could have a material adverse impact on our Medicaid UPL payments.

Managed Care: A significant portion of our net patient revenues are generated from managed care companies, which include health maintenance organizations, preferred provider organizations and managed Medicare (referred to as Medicare Part C or Medicare Advantage) and Medicaid programs. In general, we expect the percentage of our business from managed care programs to continue to grow. The consequent growth in managed care networks and the resulting impact of these networks on the operating results of our facilities vary among the markets in which we operate. Typically, we receive lower payments per patient from managed care payors than we do from traditional indemnity insurers, however, during the past few years we have secured price increases from many of our commercial payors including managed care companies.

Commercial Insurance: Our hospitals also provide services to individuals covered by private health care insurance. Private insurance carriers typically make direct payments to hospitals or, in some cases, reimburse their policy holders, based upon the particular hospital’s established charges and the particular coverage provided in the insurance policy. Private insurance reimbursement varies among payors and states and is generally based on contracts negotiated between the hospital and the payor.

Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment mechanisms, including predetermined payment or DRG-based payment systems, for more inpatient and outpatient services. To the extent that such efforts are successful and reduce the insurers’ reimbursement to hospitals and the costs of providing services to their beneficiaries, such reduced levels of reimbursement may have a negative impact on the operating results of our hospitals.

Other Sources: Our hospitals provide services to individuals that do not have any form of health care coverage. Such patients are evaluated, at the time of service or shortly thereafter, for their ability to pay based upon federal and state poverty guidelines, qualifications for Medicaid or other state assistance programs, as well as our local hospitals’ indigent and charity care policy. Patients without health care coverage who do not qualify for Medicaid or indigent care write-offs are offered substantial discounts in an effort to settle their outstanding account balances.

State Medicaid Disproportionate Share Hospital Payments: Hospitals that have an unusually large number of low-income patients (i.e., those with a Medicaid utilization rate of at least one standard deviation above the mean Medicaid utilization, or having a low income patient utilization rate exceeding 25%) are eligible to receive a disproportionate share hospital (“DSH”) adjustment. Congress established a national limit on DSH adjustments. Although this legislation and the resulting state broad-based provider taxes have affected the payments we receive under the Medicaid program, to date the net impact has not been materially adverse.

Upon meeting certain conditions and serving a disproportionately high share of Texas’ and South Carolina’s low income patients, five of our facilities located in Texas and one facility located in South Carolina received additional reimbursement from each state’s DSH fund. The Texas and South Carolina programs have been renewed for each state’s 2012 fiscal years (covering the period of October 1, 2011 through September 30, 2012 for each state). In connection with these DSH programs, included in our financial results was an aggregate of $45 million during 2011, $54 million during 2010 and $56 million during 2009. Assuming that the Texas and South Carolina programs are renewed for each state’s 2013 fiscal years, at amounts similar to the 2012 fiscal year

amounts, we estimate our aggregate reimbursements pursuant to these programs to be approximately $45 million during 2012. Failure to renew these DSH programs beyond their scheduled termination dates, failure of the public hospitals to provide the necessary IGTs for the states’ share of the DSH programs, failure of our hospitals that currently receive DSH payments to qualify for future DSH funds under these programs, or reductions in reimbursements, could have a material adverse effect on our future results of operations.

Sources of Revenues and Health Care Reform: Given increasing budget deficits, the federal government and many states are currently considering additional ways to limit increases in levels of Medicare and Medicaid funding, which could also adversely affect future payments received by our hospitals. In addition, the uncertainty and fiscal pressures placed upon the federal government as a result of, among other things, the War on Terrorism, economic recovery stimulus packages, responses to natural disasters, the expansion of a Medicare drug benefit and the federal budget deficit in general may affect the availability of federal funds to provide additional relief in the future. We are unable to predict the effect of future policy changes on our operations.

In March, 2010, the Health Care and Education Reconciliation Act of 2010 (H.R. 4872, P.L. 111-152), (the “Reconciliation Act”) and the Patient Protection and Affordable Care Act (P.L. 111-148), (the “Affordable Care Act”), were enacted into law and created significant changes to health insurance coverage for U.S. citizens as well as material revisions to the federal Medicare and state Medicaid programs. Medicare, Medicaid and other health care industry changes which are scheduled to be implemented at various times during this decade are noted below.

Immediate Medicare Reductions:

The Reconciliation Act reduced the market basket update for inpatient and outpatient hospitals and inpatient behavioral health facilities by 0.25% in each of 2010 and 2011 and by 0.10% in 2012. Further, the Affordable Care Act implements certain reforms to Medicare Advantage payments, effective in 2011.

Future Medicare Reductions:

Future changes to the Medicare program include:

	•		A Medicare shared savings program (effective 2012)

	•		A hospital readmissions reduction program (effective 2012)

	•		A national pilot program on payment bundling (effective 2013)

	•		A value-based purchasing program for hospitals (effective 2012)

	•		Reduction to Medicare disproportionate share hospital (“DSH”) payments (effective 2014)

Medicaid Revisions:

	•		Expanded Medicaid eligibility and related special federal payments (effective 2014)

	•		Reduction to Medicaid DSH (effective 2014)

Health Insurance Revisions:

	•		Large employer insurance reforms (effective 2014)

	•		Individual insurance mandate and related federal subsidies (effective 2014)

	•		Federally mandated insurance coverage reforms (2010 and forward)

Although the above-mentioned Medicare market basket reductions implemented in 2010 did not have a material impact on our results of operations to date, we are unable to estimate the future impact of the other legislative changes as outlined above.

In addition to statutory and regulatory changes to the Medicare and each of the state Medicaid programs, our operations and reimbursement may be affected by administrative rulings, new or novel interpretations and determinations of existing laws and regulations, post-payment audits, requirements for utilization review and new governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payments to our facilities. The final determination of amounts we receive under the Medicare and Medicaid programs often takes many years, because of audits by the program representatives, providers’ rights of appeal and the application of numerous technical reimbursement provisions. We believe that we have made adequate provisions for such potential adjustments. Nevertheless, until final adjustments are made, certain issues remain unresolved and previously determined allowances could become either inadequate or more than ultimately required.

Finally, we expect continued third-party efforts to aggressively manage reimbursement levels and cost controls. Reductions in reimbursement amounts received from third-party payors could have a material adverse effect on our financial position and our results of operations.

Other Operating Results

Combined revenues from our surgical hospitals, ambulatory surgery centers and radiation oncology centers were $15 million during 2011, $17 million during 2010 and $24 million during 2009. In connection with construction management contracts pursuant to the terms of which we are building/have built newly constructed acute care hospitals for an unrelated third party, we earned revenues of $42 million during 2009. The revenues and income before income taxes earned in connection with the construction management contracts did not have a material impact on our consolidated financial statements during 2011 or 2010. Combined income before income taxes earned in connection with the revenues mentioned above was $2 million during 2011, $5 million during 2010 and $13 million during 2009.

Interest Expense

Below is a schedule of our interest expense during 2011, 2010 and 2009 (amounts in thousands):


	2011			2010			2009
Revolving credit & demand notes	$	6,675		$	3,813		$	4,101
$200 million, 6.75% Senior Notes due 2011 (a.)		11,822			13,510			13,510
$400 million, 7.125% Senior Notes due 2016		28,496			28,496			28,496
$250 million, 7.00% Senior Notes due 2018		17,500			4,472			—
Term loan facility A		27,176			4,939			—
Term loan facility B		64,588			11,548			—
Accounts receivable securitization program		2,728			864			704

Subtotal-revolving credit, demand notes, Senior Notes, term loan facilities and accounts receivable securitization program		158,985			67,642			46,811
Interest rate swap expense/(income), net		8,255			5,956			5,263
Amortization of financing fees		28,255			3,729			1,135
Other combined interest expense		5,908			4,495			4,553
$590 million, 7.75% Notes from PSI (b.)		—			3,810			5,688
Capitalized interest on major construction projects		(447	)		(7,641	)		(11,565	)
Interest income		(164	)		(391	)		(387	)

Interest expense, net	$	200,792		$	77,600		$	45,810

(a.)	The $200 million, 6.75% Senior Notes matured on November 15, 2011 and were repaid utilizing funds borrowed under our revolving credit facility.

(b.)	Pursuant to the terms of these notes, which were assumed by us in connection with the acquisition of PSI, notice of redemption was provided by us as of the acquisition date and the indenture was satisfied and discharged and these notes were subsequently redeemed on December 15, 2010 utilizing borrowed funds which were held in escrow from November 15, 2010 to the date of redemption.

Interest expense increased $123 million during 2011 to $201 million as compared to $78 million during 2010. This increase was due primarily to: (i) the increased average outstanding borrowings resulting from the borrowed funds utilized to finance our purchase of PSI in November, 2010 (as discussed below); (ii) the increased interest expense incurred during 2011 on the $250 million, 7.00% senior notes issued in September, 2010, and; (iii) the increased expense resulting from the amortization of deferred financing costs incurred on the various debt facilities utilized to finance the purchase of PSI.

During 2011, the aggregate average outstanding borrowings under our credit agreement (consisting of the revolving credit, Term Loan A and Term Loan B facilities), demand notes and accounts receivable securitization program were $2.9 billion as compared to $610 million during 2010. The average effective interest rate on these facilities, including the amortization of deferred financing costs and original issue discounts and designated interest rate swap expense was 4.6% during 2011 and 5.0% during 2010. The average effective interest rate on these facilities, excluding the amortization of deferred financing costs and original issue discounts and designated interest rate swap expense was 3.4% during each of 2011 and 2010.

Interest expense increased $32 million during 2010 to $78 million as compared to $46 million during 2009. This increase was due primarily to: (i) the increased borrowings utilized to finance our acquisition of PSI in November, 2010, and an increase in the average effective interest rate (as discussed below); (ii) the interest expense incurred during 2010 on the $250 million, 7.00% senior notes issued in September, 2010, and; (iii) the interest expense incurred during 2010 on the $590 million, 7.75% notes assumed in connection with the acquisition of PSI in November, 2010 (these notes were redeemed on December 15, 2010).

During 2010, the aggregate average outstanding borrowings under our credit agreement (consisting of the revolving credit, Term Loan A and Term Loan B facilities), demand notes and accounts receivable securitization program was $610 million as compared to $287 million during 2009. The average effective interest rate on these facilities, including the amortization of deferred financing costs and original issue discounts and designated interest rate swap expense was 5.0% during 2010 and 3.9% during 2009. The average effective interest rate on these facilities, excluding the amortization of deferred financing costs and original issue discounts and designated interest rate swap expense was 3.4% during 2010 and 1.7% during 2009.

Transaction costs incurred in connection with acquisition of PSI

During 2010, we incurred $53 million of transaction costs in connection with our acquisition of PSI in November, 2010, consisting of the following:


	Amount (000s)
Severance and related expenses for PSI senior executives and other former employees	$	24,381
Legal and consulting fees		14,287
Investment banking fees		9,154
Other combined transaction costs		5,398

Total transaction costs	$	53,220

Provision for Income Taxes and Effective Tax Rates

The effective tax rates, as calculated by dividing the provision for income taxes by income before income taxes, were as follows for each of the years ended December 31, 2011, 2010 and 2009 (dollar amounts in thousands):


	2011			2010			2009
Provision for income taxes	$	247,466		$	152,302		$	170,475
Income before income taxes		696,336			428,097			474,722

Effective tax rate		35.5	%		35.6	%		35.9	%

Outside owners hold various noncontrolling, minority ownership interests in seven of our acute care facilities and one behavioral health care facility. Each of these facilities are owned and operated by limited liability companies (“LLC”) or limited partnerships (“LP”). As a result, since there is no income tax liability incurred at the LLC/LP level (since it passes through to the members/partners), the net income attributable to noncontrolling interests does not include any income tax provision/benefit. When computing the provision for income taxes, as reflected on our consolidated statements of income, the net income attributable to noncontrolling interests is deducted from income before income taxes since it represents the third-party members’/partners’ share of the income generated by the joint-venture entities. In addition to providing the effective tax rates, as indicated above (as calculated from dividing the provision for income taxes by the income before income taxes as reflected on the consolidated statements of income), we believe it is helpful to our investors that we also provide our effective tax rate as calculated after giving effect to the portion of our pre-tax income that is attributable to the third-party members/partners.

The effective tax rates, as calculated by dividing the provision for income taxes by the difference in income before income taxes, minus net income attributable to noncontrolling interests, were as follows for each of the years ended December 31, 2011, 2010 and 2009 (dollar amounts in thousands):


	2011			2010			2009
Provision for income taxes	$	247,466		$	152,302		$	170,475
Income before income taxes		696,336			428,097			474,722
Less: Net income attributable to noncontrolling interests		(50,703	)		(45,612	)		(43,874	)

Income before income taxes and after net income attributable to noncontrolling interests		645,633			382,485			430,848

Effective tax rate		38.3	%		39.8	%		39.6	%

Impacting the effective tax rates during 2011 was approximately $1 million favorable discrete tax item recorded to adjust the estimated liabilities for uncertain tax positions. Impacting the effective tax rates during 2010 were the following items: (i) $5 million unfavorable discrete tax item recorded to adjust the non-deductible portion of certain transaction costs incurred during 2010 in connection with our acquisition of PSI; (ii) a $4 million unfavorable discrete tax item recorded to adjust for the non-deductible, $9 million charge incurred from split-dollar life insurance agreements entered into during 2010 on the lives of our chief executive officer and his wife, partially offset by; (iii) a $4 million favorable discrete tax item recorded during 2010 to adjust the estimated non-deductible portion of the previously disclosed South Texas Health System settlement with the government based upon the final agreement. Impacting the effective tax rates during 2009 was a $4 million unfavorable discrete tax item related to the estimated non-deductible portion of the South Texas Health System settlement.

Discontinued Operations

In connection with the receipt of antitrust clearance from the Federal Trade Commission (“FTC”) in connection with our acquisition of PSI in November, 2010, we agreed to divest three former PSI facilities as well as one of our legacy behavioral health facilities in Puerto Rico. Pursuant to the terms of our agreement with the FTC, we divested:

	•		in July, 2011, the Meadowood Behavioral Health System, a 58-bed facility located in New Castle, Delaware;

	•		in December, 2011, the Montevista Hospital (101-bed) and Red Rock Hospital (21-bed), both of which are located in Las Vegas, Nevada, and;

	•		in January, 2012, the Hospital San Juan Capestrano, a 108-bed facility located in Rio Piedras, Puerto Rico.

The operating results for the three former PSI facilities located in Delaware and Nevada are reflected as discontinued operations during 2011 and 2010 (from the November 15th dates of acquisition). Since the aggregate

income from discontinued operations before income tax expense for these facilities is not material to our 2011 or 2010 consolidated financial statements, it is included as a reduction to other operating expenses. The aggregate pre-tax net gain on the divestitures of the above-mentioned facilities located in Delaware and Nevada did not have a material impact on our consolidated results of operations. The assets and liabilities for the Hospital San Juan Capestrano (sold in January, 2012) are reflected as “held for sale” on our Consolidated Balance Sheet as of December 31, 2011. The pre-tax gain on the divestiture of the Hospital San Juan Capestrano, which will not have a material impact on our 2012 consolidated results of operations, will be reflected in our consolidated results of operations during the first quarter of 2012. The assets and liabilities for each of the above-mentioned facilities are reflected as “held for sale” on our Consolidated Balance Sheet as of December 31, 2010.

The following table shows the results of operations for the former PSI facilities located in Delaware and Nevada, on a combined basis, which are reflected as discontinued operations (amounts in thousands):


		Year Ended December 31,
	2011				2010				2009
Net revenues		$	33,884			$	4,155			$	—
Income from discontinued operations			7,904				859				—
Gain on divestiture			442				—				—

Income from discontinued operations, before income tax expense			8,346				859				—
Income tax expense			(3,160	)			(318	)			—

Income from discontinued operations, net of income tax expense		$	5,186			$	541			$	—

Effects of Inflation and Seasonality

Seasonality—Our acute care services business is typically seasonal, with higher patient volumes and net patient service revenue in the first and fourth quarters of the year. This seasonality occurs because, generally, more people become ill during the winter months, which results in significant increases in the number of patients treated in our hospitals during those months.

Inflation—Inflation has not had a material impact on our results of operations over the last three years. However, since the healthcare industry is very labor intensive and salaries and benefits are subject to inflationary pressures, as are supply and other costs, we cannot predict the impact that future economic conditions may have on our ability to contain future expense increases. Our ability to pass on increased costs associated with providing healthcare to Medicare and Medicaid patients is limited due to various federal, state and local laws which have been enacted that, in certain cases, limit our ability to increase prices. We believe, however, that through adherence to cost containment policies, labor management and reasonable price increases, the effects of inflation on future operating margins should be manageable.

Liquidity

Year ended December 31, 2011 as compared to December 31, 2010:

Net cash provided by operating activities

Net cash provided by operating activities was $718 million during 2011 as compared to $501 million during 2010. The net increase of $217 million was primarily attributable to the following:

	•		a favorable change of $247 million due to an increase in net income plus depreciation and amortization expense and stock-based compensation less gains on sales of assets;

	•		a $158 million unfavorable change in accounts receivable, as discussed below;

	•		an $86 million favorable change in accrued and deferred income taxes due primarily to reductions to the 2011 federal and state income tax payments resulting from income tax overpayments relating to 2010;

	•		a $31 million favorable change in accrued insurance expense, net of commercial premiums paid, due primarily to the above-mentioned reductions to our professional and general liability self-insurance reserves recorded during 2011 and 2010 ($11 million recorded during 2011 as compared to $49 million recorded during 2010);

	•		a $26 million favorable change in other assets and deferred charges;

	•		a $12 million unfavorable change in accrued interest, and;

	•		$3 million of other combined net unfavorable changes.

Days sales outstanding (“DSO”): Our DSO are calculated by dividing our net revenue by the number of days in the year. The result is divided into the accounts receivable balance the end of the year. Our DSO were 47 days at December 31, 2011, 43 days at December 31, 2010 and 42 days at December 31, 2009.

Our net accounts receivable balance as of December 31, 2011 increased approximately $135 million over the balance as of December 31, 2010 (excluding the impact of acquisitions and divestitures). The increase was due primarily to: (i) increased revenues experienced by both our acute care and behavioral health care facilities during 2011 as a result of increases in adjusted patient days (adjusted for outpatient activity) and revenue per adjusted day, and; (ii) an increase in other receivables including state-based revenue program receivables in certain states, most particularly Illinois, which has $54 million of receivables outstanding as of December 31, 2011 resulting from state budgetary and funding pressures. Although approximately $41 million of the receivables due from Illinois have been outstanding in excess of 60 days (as of December 31, 2011), and a large portion will likely remain outstanding for the foreseeable future, we expect to eventually collect all amounts due to us and therefore no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due from Illinois would have an adverse impact on our future consolidated results of operations and cash flows. Excluding the $41 million of receivables from Illinois that have been outstanding in excess of 60 days (as of December 31, 2011), our DSO were 45 days at December 31, 2011.

Net cash used in investing activities

Net cash used in investing activities was $286 million during 2011 as compared to $2.19 billion during 2010.

2011:

The $286 million of net cash used in investing activities during 2011 consisted of $286 million spent on capital expenditures, $29 million spent on acquisitions, $68 million received from the sale of assets and businesses and $38 million spent in connection with the purchase and implementation of an electronic health records application (“EHR”). Please see Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations-Medicare for additional disclosure related to the EHR application.

2011 Capital Expenditures:

During 2011, we spent $286 million to finance capital expenditures, including the following:

	•		construction costs related to multiple projects at various existing acute care hospitals and behavioral health facilities including capacity expansion;

	•		construction costs related to the newly constructed Temecula Valley Hospital, a 140-bed acute care hospital located in Temecula, California which is scheduled to be completed and opened in mid-2013, and;

	•		capital expenditures for equipment at various existing facilities.

2011 Acquisitions of Assets and Businesses:

	•		we spent $29 million during 2011, excluding the assumption of $17 million of third-party debt, to: (i) acquire the real property of administrative/office buildings located in Pennsylvania, Tennessee and Washington, D.C.; (ii) fund a deposit in connection with execution of a definitive agreement, which is subject to regulatory approvals and closing conditions, to acquire the Knapp Medical Center, including a 226-bed acute care hospital, a surgery center, physician practices and other related assets located in Weslaco, Texas, and; (iii) purchase a cardiology practice in Texas.

2011 Divestiture of Assets and Businesses:

During 2011, we received $68 million from the divestiture of assets and businesses, including the following:

	•		the divestitures of three behavioral health facilities located in Delaware and Nevada (Meadowood Behavioral Health System, Montevista Hospital and Red Rock Hospital) which were divested pursuant to our above-mentioned agreement with the Federal Trade Commission in connection with our acquisition of PSI in November, 2010, and;

	•		the sale of the real property of a closed acute care hospital and our ownership interest in a radiation oncology center joint-venture.

2010:

The $2.19 billion of net cash used in investing activities during 2010 consisted of $1.96 billion spent on the acquisition of PSI in November, 2010, $239 million spent on capital expenditures, $21 million received from the sale of assets and businesses and $18 million spent in connection with the purchase and implementation of an EHR application.

2010 Acquisitions of Assets and Businesses:

	•		we spent $1.96 billion in November, 2010, excluding the assumption of $1.08 billion of PSI’s debt, to acquire 105 inpatient and outpatient behavioral health facilities located in 32 states, Puerto Rico and the U.S. Virgin Islands. In connection with this transaction, $1.05 billion of PSI’s outstanding borrowings were repaid utilizing funds borrowed under our $3.45 billion credit agreement, as discussed herein.

2010 Capital Expenditures:

During 2010, we spent $239 million to finance capital expenditures, including the following:

	•		construction costs related to the newly constructed Palmdale Regional Medical Center, a 121-bed acute care hospital located in Palmdale, California which was completed and opened in December, 2010;

	•		construction costs related to multiple projects in process to add capacity to our busiest behavioral health facilities, and;

	•		capital expenditures for equipment, renovations and new projects at various existing facilities.

2010 Divestiture of Assets and Businesses:

During 2010, we received $21 million from the divestiture of assets and businesses, including the following:

	•		the divestiture of our minority ownership interest in a healthcare technology company and sale of a portion of our ownership interest in an outpatient surgery center, and;

	•		the sale of the real property of Methodist Hospital located in Louisiana that was severely damaged and closed in 2005 as a result of Hurrican Katrina.

Net cash used in/provided by financing activities

Net cash used in financing activities was $421 million during 2011 as compared to $1.71 billion of net cash provided by financing activities during 2010.

2011:

The $421 million of net cash used in financing activities consisted of the following:

	•		spent $382 million on debt repayments consisting primarily of $200 million paid to extinguish 6.75% senior notes upon their maturity in November, 2011, $141 million paid to repay a portion of outstanding borrowing under our Term Loan B facility, $26 million paid to repay a portion of outstanding borrowings under our Term Loan A facility, and $15 million paid to reduced outstanding borrowings of other combined debt;

	•		generated $98 million of proceeds from additional net borrowings made pursuant to our revolving credit and demand notes and accounts receivable securitization program;

	•		spent $60 million to repurchase 1.6 million shares of our Class B Common Stock;

	•		spent $38 million to fund profit distributions to noncontrolling interests;

	•		spent $24 million on financing costs in connection with an amendment to our credit agreement (which includes our revolving credit agreement, Term Loan A and Term Loan B facilities) which was completed in March, 2011;

	•		spent $19 million to pay a $.05 per share quarterly dividend, and;

	•		generated $5 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock purchase plans.

2010:

The $1.71 billion of net cash provided by financing activities consisted of the following:

	•		generated $2.803 billion of proceeds from borrowings pursuant to our $3.45 billion credit agreement (net of $32 million of original issue discounts);

	•		generated $204 million of proceeds from borrowings pursuant to our accounts receivable securitization program;

	•		generated $250 million of proceeds from the issuance of $250 million of 7.00% senior notes that mature in October, 2018;

	•		generated $9 million of proceeds from other combined new borrowings;

	•		spent $1.392 billion on debt repayments consisting primarily of $1.05 billion paid to extinguish debt acquired in connection with our acquisition of PSI and $339 million paid to repay outstanding borrowings under our previously existing revolving credit facility and accounts receivable securitization program;

	•		spent $101 million on financing costs on the various new debt facilities mentioned above;

	•		spent $12 million to repurchase 294,000 shares of our Class B Common Stock;

	•		spent $19 million to pay a $.05 per share quarterly dividend;

	•		spent $32 million to fund profit distributions to noncontrolling interests, and;

	•		generated $13 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock purchase plans.

Year ended December 31, 2010 as compared to December 31, 2009:

Net cash provided by operating activities

Net cash provided by operating activities was $501 million during 2010 as compared to $541 million during 2009. The net decrease of $40 million, or 7%, was primarily attributable to the following:

	•		an unfavorable net change of $7 million due to an decrease in net income, plus or minus the adjustments to reconcile net income to net cash provided by operating activities (depreciation and amortization, gains on sales of businesses and assets and stock-based compensation expense);

	•		a favorable change of $24 million in accounts receivable;

	•		an unfavorable change of $30 million in construction management and other receivable which includes $10 million of cash proceeds received during the first quarter of 2009 from the estate liquidation of a commercial insurer (related receivable was recorded during fourth quarter of 2008);

	•		an unfavorable change of $15 million in accrued and deferred income taxes;

	•		an unfavorable change of $25 million in accrued insurance expense, net of commercial premium paid, resulting primarily from the reductions recorded during 2010 and 2009 to our professional and general liability self-insurance reserves (as discussed above in Self-Insured Risks);

	•		a favorable change of $8 million in accrued interest, and;

	•		$5 million of other combined net favorable changes.

Net cash used in investing activities

Net cash used in investing activities was $2.19 billion during 2010 as compared to $390 million during 2009. The factors contributing to the $2.19 billion of net cash used in investing activities during 2010 are detailed above.

2009:

The $390 million of net cash used in investing activities during 2009 consisted of $380 million spent on capital expenditures, $10 million received from the sale of assets and businesses, $12 million spent on the acquisition of assets and businesses and $8 million spent in connection with the purchase and implementation of an EHR application.

2009 Capital Expenditures:

During 2009, we spent $380 million to finance capital expenditures, including the following:

	•		construction costs related to the newly constructed Palmdale Regional Medical Center which was completed and opened in December, 2010;

	•		construction costs related to a major expansion of the emergency, imaging and women’s services at our Southwest Healthcare System hospitals located in Riverside County, California;

	•		construction costs related to a newly constructed Texoma Medical Center, a 220-bed replacement acute care hospital in Denison, Texas that was completed and opened in late December, 2009;

	•		construction costs related to a new patient tower at Summerlin Hospital Medical Center located in Las Vegas, Nevada that was completed and opened in December, 2009;

	•		construction costs related to multiple projects in process to add capacity to our busiest behavioral health facilities, and;

	•		capital expenditures for equipment, renovations and new projects at various existing facilities.

2009 Divestiture of Assets and Businesses:

During 2009, we received $10 million from the divestiture of assets and businesses, including the following:

	•		the sale of the real property assets of a medical office building on the campus of a previously divested acute care facility located in Pennsylvania, and;

	•		the sale of our ownership interest in an outpatient surgery center.

2009 Acquisitions of Assets and Businesses:

During 2009, we spent $12 million on the acquisition of businesses and real property, including the following:

	•		the acquisition of a 72-bed behavioral health care facility located in Louisville, Colorado, and;

	•		the acquisition of the real property assets of a medical office building located on the campus of one of our acute care hospitals located in Texas.

Net cash provided by/used in financing activities

Net cash provided by financing activities was $1.71 billion during 2010 as compared to $147 million of net cash used in financing activities during 2009. The factors contributing to the $1.71 billion of net cash provided by financing activities during 2010 is detailed above.

2009:

The $147 million of net cash used in financing activities consisted of the following:

	•		generated $26 million of proceeds primarily from additional borrowings pursuant to our previously existing revolving credit agreement;

	•		spent $66 million for debt repayments consisting primarily of repayments pursuant to our previously existing accounts receivable securitization program;

	•		spent $63 million to repurchase 2.56 million shares of our Class B Common Stock;

	•		spent $17 million to pay a quarterly dividend (of $.04 per share during each of the first three quarter of 2009 and $.05 during the fourth quarter of 2009);

	•		spent $30 million to fund profit distributions to noncontrolling interests, and;

	•		generated $3 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock purchase plans.

2012 Expected Capital Expenditures:

During 2012, we expect to spend approximately $350 million to $375 million on capital expenditures which includes expenditures for capital equipment, renovations, new projects at existing hospitals and construction of new facilities. Approximately $165 million of our 2012 expected capital expenditures relates to completion of projects that are in progress as of December 31, 2011. We believe that our capital expenditure program is adequate to expand, improve and equip our existing hospitals. We expect to finance all capital expenditures and acquisitions with internally generated funds and/or additional funds, as discussed below.

Capital Resources

Credit Facilities and Outstanding Debt Securities

On November 15, 2010, we entered into a credit agreement (the “Credit Agreement”) with various financial institutions. The Credit Agreement is a senior secured facility which provided an initial aggregate commitment amount of $3.45 billion, comprised of a new $800 million revolving credit facility, a $1.05 billion Term Loan A facility and a $1.6 billion Term Loan B facility. Prior to the effectiveness of the Credit Agreement Amendment in March, 2011 (as discussed below), we prepaid the principal amount and permanently reduced the Term Loan B commitment by $125 million. During 2011, we made scheduled principal payments of $16 million on the Term Loan B and $26 million on the Term Loan A. The revolving credit facility and the Term Loan A mature on November 15, 2015 and the Term Loan B matures on November 15, 2016. The revolving credit facility includes a $125 million sub-limit for letters of credit. The Credit Agreement is secured by substantially all of the assets of the Company and our material subsidiaries and guaranteed by our material subsidiaries.

On March 15, 2011, we entered into a first amendment to the Credit Agreement (the “Amendment”) which became effective immediately and provides, among other things, for a reduction in the interest rates payable in connection with borrowings under the Credit Agreement. Upon the effectiveness of the Amendment, borrowings under the Credit Agreement bear interest at the ABR rate which is defined as the rate per annum equal to, at our election (1) the greatest of (a) the lender’s prime rate, (b) the weighted average of the federal funds rate, plus 0.5% and (c) one month Eurodollar rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 0.50% to 1.25% for revolving credit and Term Loan A borrowings and 1.75% to 2.00% for Term Loan B borrowings or (2) the one, two, three or six month Eurodollar rate (at our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 1.50% to 2.25% for revolving credit and Term Loan A borrowings and ranging from 2.75% to 3.00% for Term Loan B borrowings. The current applicable margins are 0.75% for ABR-based loans, 1.75% for Eurodollar-based loans under the revolving credit and Term Loan A facilities and 2.75% under the Term Loan B facility. Upon the effectiveness of the Amendment, the minimum Eurodollar rate for the Term Loan B facility was reduced from 1.50% to 1.00%. In connection with the Amendment, we paid a fee of 1.00% of the amounts outstanding under the Term Loan B in accordance with the terms of the Credit Agreement.

In October, 2010, we amended our accounts receivable securitization program (“Securitization”) with a group of conduit lenders and liquidity banks. We increased the size of the Securitization to $240 million (the “Commitments”), from $200 million, and extended the maturity date to October 25, 2013. Substantially all of the patient-related accounts receivable of our acute care hospitals (“Receivables”) serve as collateral for the outstanding borrowings. The interest rate on the borrowings is based on the commercial paper rate plus a spread of 0.475% and there is a facility fee of 0.375% required on 102% on the Commitments. We have accounted for this Securitization as borrowings. We maintain effective control over the Receivables since, pursuant to the terms of the Securitization, the Receivables are sold from certain of our subsidiaries to special purpose entities that are wholly-owned by us. The Receivables, however, are owned by the special purpose entities, can be used only to satisfy the debts of the wholly-owned special purpose entities, and thus are not available to us except through our ownership interest in the special purpose entities. The wholly-owned special purpose entities use the Receivables to collateralize the loans obtained from the group of third-party conduit lenders and liquidity banks. The group of third-party conduit lenders and liquidity banks do not have recourse to us beyond the assets of the wholly-owned special purpose entities that securitize the loans. At December 31, 2011, we had $240 million of outstanding borrowings and no additional capacity pursuant to the terms of our accounts receivable securitization program.

As of December 31, 2011, we had $9 million outstanding borrowings under a short-term, on-demand credit facility. Outstanding borrowings, if any, pursuant to this facility are classified as long-term debt on our Consolidated Balance Sheet since they can be refinanced through available borrowings under the terms of our Credit Agreement.

As of December 31, 2011, we had an aggregate of $482 million of available borrowing capacity pursuant to the terms of our Credit Agreement and Securitization, net of $69 million of outstanding letters of credit and $9 million of outstanding borrowings under a short-term, on-demand credit facility.

On September 29, 2010, we issued $250 million of 7.00% senior unsecured notes (the “Unsecured Notes”) which are scheduled to mature on October 1, 2018. The Unsecured Notes were registered in April, 2011. Interest on the Unsecured Note is payable semiannually in arrears on April 1st and October 1st of each year. The Unsecured Notes can be redeemed in whole at anytime subject to a make-whole call at treasury rate plus 50 basis points prior to October 1, 2014. They are also redeemable in whole or in part at a price of: (i) 103.5% on or after October 1, 2014; (ii) 101.75% on or after October 1, 2015, and; (iii) 100% on or after October 1, 2016. These Unsecured Notes are guaranteed by a group of subsidiaries (each of which is a 100% directly owned subsidiary of Universal Health Services, Inc.) which fully and unconditionally guarantee the Unsecured Notes on a joint and several basis, subject to certain customary automatic release provisions.

On June 30, 2006, we issued $250 million of senior notes which have a 7.125% coupon rate and mature on June 30, 2016 (the “7.125% Notes”). Interest on the 7.125% Notes is payable semiannually in arrears on June 30th and December 30th of each year. In June, 2008, we issued an additional $150 million of 7.125% Notes which formed a single series with the original 7.125% Notes issued in June, 2006. Other than their date of issuance and initial price to the public, the terms of the 7.125% Notes issued in June, 2008 are identical to and trade interchangeably with, the 7.125% Notes which were originally issued in June, 2006.

During 2001, we issued $200 million of senior notes which have a 6.75% coupon rate and which matured and were paid in full on November 15, 2011 (the “6.75% Notes”). The interest on the 6.75% Notes was paid semiannually in arrears on May 15th and November 15th of each year.

In connection with the entering into of the Credit Agreement on November 15, 2010, and in accordance with the Indenture dated January 20, 2000 governing the rights of our existing notes, we entered into a supplemental indenture pursuant to which our 7.125% Notes (due in 2015) and our 6.75% Notes (which matured in November, 2011) were equally and ratably secured with the lenders under the Credit Agreement with respect to the collateral for so long as the lenders under the Credit Agreement are so secured.

The average amounts outstanding during 2011, 2010, and 2009 are under the current and prior Credit Agreements, demand notes and accounts receivable securitization programs were $2.9 billion, $610 million and $287 million, respectively, with corresponding interest rates of 3.4%, 3.4%, and 1.7% including commitment and facility fees. The maximum amounts outstanding at any month-end were $3.03 billion in 2011, $3.11 billion in 2010, and $356 million in 2009. The effective interest rate on our current and prior Credit Agreements, accounts receivable securitization programs, and demand notes, which includes the respective interest expense, commitment and facility fees, designated interest rate swaps expense and amortization of deferred financing costs and original issue discounts, was 4.6% in 2011, 5.0% in 2010 and 3.9% in 2009.

Our Credit Agreement includes a material adverse change clause that must be represented at each draw. The Credit Agreement contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens and indebtedness, transactions with affiliates and dividends; and requires compliance with financial covenants including maximum leverage and minimum interest coverage ratios. We are in compliance with all required covenants as of December 31, 2011.

The carrying values of our debt at December 31, 2011 and 2010 were approximately $3.65 billion and $3.92 billion, respectively. The fair values of our debt at December 31, 2011 and 2010 were $3.70 billion and $3.96, respectively. The fair values of our debt were computed based upon quotes received from financial institutions.

Our total debt as a percentage of total capitalization was 61% at December 31, 2011 and 66% at December 31, 2010.

We expect to finance all capital expenditures and acquisitions, pay dividends and potentially repurchase shares of our common stock utilizing internally generated and additional funds. Additional funds may be obtained through: (i) the issuance of equity; (ii) borrowings under our existing revolving credit facility or through refinancing the

existing revolving credit agreement, and/or; (iii) the issuance of other long-term debt. We believe that our operating cash flows, cash and cash equivalents, available borrowing capacity under our $800 million revolving credit facility and access to the capital markets provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months. However, in the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial condition and liquidity.

Contractual Obligations and Off-Balance Sheet Arrangements

As of December 31, 2011 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds. Our outstanding letters of credit and surety bonds as of December 31, 2011 totaled $79 million consisting of: (i) $62 million related to our self-insurance programs, and; (ii) $17 million of other debt and public utility guarantees.

Obligations under operating leases for real property, real property master leases and equipment amount to $206 million as of December 31, 2011. The real property master leases are leases for buildings on or near hospital property for which we guarantee a certain level of rental income. We sublease space in these buildings and any amounts received from these subleases are offset against the expense. In addition, we lease four hospital facilities from the Trust with terms expiring in 2014 and 2016. These leases contain up to three 5-year renewal options. We also lease the real property of certain facilities acquired by us in connection with the acquisition of PSI in November, 2010.

The following represents the scheduled maturities of our contractual obligations as of December 31, 2011:


	Payments Due by Period (dollars in thousands)
Contractual Obligation	Total		Less than 1 year		2-3 years		4-5 years		After 5 years
Long-term debt obligations (a)	$	3,653,907	$	2,479	$	246,608	$	3,130,778	$	274,042
Estimated future interest payments on debt outstanding as of December 31, 2011 (b)		744,755		165,745		300,907		215,488		62,615
Purchase and other obligations (c)		129,935		62,734		55,851		11,350		—
Operating leases (d)		206,428		58,388		75,494		48,493		24,053
Estimated future payments for defined benefit pension plan, and other retirement plan (e)		226,534		8,056		11,822		13,941		192,715

Total contractual cash obligations	$	4,961,559	$	297,402	$	690,682	$	3,420,050	$	553,425

(a)	Reflects borrowings outstanding as of December 31, 2011 as discussed in Note 4 to the Consolidated Financial Statements.

(b)

Assumes that all debt outstanding as of December 31, 2011, including borrowings under our revolving credit agreement, Term Loan A, Term Loan B, demand note and accounts receivable securitization program, remain outstanding until the final maturity of the debt agreements at the same interest rates (some of which are floating) which were in effect as of December 31, 2011. We have the right to repay borrowings upon short notice and without penalty, pursuant to the terms of the revolving credit agreement, demand note, Term Loan A facility and accounts receivable securitization program. Also includes the impact of various interest rate swap and cap agreements in effect as of December 31, 2011, as calculated to maturity dates utilizing the applicable floating interest rates in effect as of December 31, 2011.

(c)

Consists of: (i) $58 million related to long-term contracts with third-parties consisting primarily of certain revenue cycle data processing services for our acute care facilities; (ii) $66 million related to the expected costs to be paid to a third-party vendor in connection with the purchase and implementation of an electronic health records application (“EHR”) for each of our acute care facilities (excludes expected internal costs to be incurred, please see Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations-Medicare for additional disclosure), and; (iii) a $6 million liability for physician commitments expected to be paid in the future.

(d)	Reflects our future minimum operating lease payment obligations related to our operating lease agreements outstanding as of December 31, 2011 as discussed in Note 7 to the Consolidated Financial Statements. Some of the lease agreements provide us with the option to renew the lease and our future lease obligations would change if we exercised these renewal options.

(e)

Consists of $212 million of estimated future payments related to our non-contributory, defined benefit pension plan (estimated through 2088), as disclosed in Note 8 to the Consolidated Financial Statements, and $15 million of estimated future payments related to another retirement plan liability. Included in our other non-current liabilities as of December 31, 2011 was a $21 million liability recorded in connection with the non-contributory, defined benefit pension plan and an $11 million liability recorded in connection with the other retirement plan.

As of December 31, 2011, the total accrual for our professional and general liability claims was $292 million, of which $60 million is included in other current liabilities and $232 million is included in other non-current liabilities. We exclude the $292 million for professional and general liability claims from the contractual obligations table because there are no significant contractual obligations associated with these liabilities and because of the uncertainty of the dollar amounts to be ultimately paid as well as the timing of such payments. Please see Self-Insured Risks above for additional disclosure related to our professional and general liability claims and reserves.

In connection with five acute care facilities located in Las Vegas, Nevada, the minority ownership interests of which are reflected as redeemable noncontrolling interests on our Consolidated Balance Sheet, the outside owners have certain “put rights”, that are currently exercisable, that if exercised, require us to purchase the minority member’s interests at fair market value. The put rights are exercisable upon the occurrence of: (i) certain specified financial conditions falling below established thresholds; (ii) breach of the management contract by the managing member (a subsidiary of ours), or; (iii) if the minority member’s ownership percentage is reduced to less than certain thresholds. In connection with a behavioral health care facility located in Philadelphia, Pennsylvania and acquired by us as part of the PSI acquisition, the minority ownership interest of which is also reflected as redeemable noncontrolling interests on our Consolidated Balance Sheet, the outside owner has a “put option” to put its entire ownership interest to us at any time. If exercised, the put option requires us to purchase the minority member’s interest at fair market value. As of December 31, 2011, we believe the fair market value of the minority ownership interests in these facilities approximates the $218 million aggregate book value of the redeemable noncontrolling interests. We exclude the approximate amount that we may be required to pay to repurchase these minority ownership interests from the contractual obligations table because of the uncertainty as to: (i) whether or not the put rights will actually be exercised; (ii) the dollar amounts that would be paid if the put rights were exercised, and; (iii) the timing of such payments.

Additionally, the table above does not include $7 million of the total unrecognized tax benefits for uncertain tax positions as of December 31, 2011. Due to the high degree of uncertainty regarding the timing of potential cash flows, we cannot reasonably estimate the settlement periods for which the amounts may be utilized.

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