UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
FORMForm 10-K
   
(Mark One)
  
xþ
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 20062007
OR
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period fromto
Commission File Number 1-11239
 
HCA INC.
(Exact Name of Registrant as Specified in its Charter)
 
   
Delaware75-2497104
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)		 75-2497104
(I.R.S. Employer Identification No.)
One Park Plaza
Nashville, Tennessee		37203
(Zip Code)
(Address of Principal Executive Offices) 37203
(Zip Code)
Registrant’s telephone number, Including Area Code:(615) 344-9551
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  o     No  þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  þ     No  o
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o     No þ
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o     No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.  þ
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  oAccelerated filer  oNon-accelerated filer  o     Accelerated filer  o     Non-accelerated filerþSmaller reporting companyo
  (Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of February 28, 2007,29, 2008, there were approximately 93,004,00094,171,700 shares of Registrant’s common stock outstanding. As of June 30, 2006, which was prior toThere is not a market for the Registrant’s recapitalization,common stock; therefore, the aggregate market value of the Registrant’s common stock held by non-affiliates was approximately $16.1 billion. For purposes of the foregoing calculation only, Registrant’s directors, executive officers and the HCA 401(k) Plan have been deemed to be affiliates.is not calculable.
DOCUMENTS INCORPORATED BY REFERENCE
None.
 

 

INDEX
       
    Page
    Reference
PART I
 
Part I
Item 1.
  Business  3 
Item 1A.
  Risk Factors  2120 
Item 1B.
  Unresolved Staff Comments  3229 
Item 2.
  Properties  3230 
Item 3.
  Legal Proceedings  3330 
Item 4.
  Submission of Matters to a Vote of Security Holders  3632 
Part II
PART II
Item 5.
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  3733 
Item 6.
  Selected Financial Data  3834 
Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations  4036 
Item 7A.
  Quantitative and Qualitative Disclosures about Market Risk  6055 
Item 8.
  Financial Statements and Supplementary Data  6055 
Item 9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  6055 
Item 9A.
  Controls and Procedures  6055 
Item 9B.
  Other Information  6156 
Part III
PART III
Item 10.
  Directors, Executive Officers and Corporate Governance  6258 
Item 11.
  Executive Compensation  6762 
Item 12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  9889 
Item 13.
  Certain Relationships and Related Transactions, and Director Independence  10091 
Item 14.
  Principal Accountant Fees and Services  10495 
Part IV
PART IV
Item 15.
  Exhibits, and Financial Statement Schedules  10696 
 Signatures  112102 
Ex-3.1 Amended and Restated Certificate of Incorporation of the Company
 Ex-3.2 Amended and Restated Bylaws of the Company
 Ex-4.7(b) Amendment No. 1 to CreditEx-10.16 Form of Option Agreement (2008)
 Ex-4.13 November 17, 2006 Registration Rights Agreement
Ex-10.11 Key Employee 2006 Stock Incentive Plan
Ex-10.12 Management Stockholder's Agreement
Ex-10.13 Sale Participation Agreement
Ex-10.14 Form of Option Rollover Agreement
Ex-10.15 Form of Option Agreement (2007)
Ex-10.16 Exchange and Purchase Agreement
Ex-10.20 November 17, 2006 Management Agreement
Ex-10.22(c) Second Amendment to Supplemental Executive Retirement Plan
Ex-10.26Ex-10.27 HCA 2007Inc. 2008-2009 Senior Officer Performance Excellence Program
 Ex-10.27(a) Jack O. Bovender JrEx-10.28(e) Employment Agreement dated November 16, 2006 (Beverly B. Wallace)
 Ex-10.27(b) Richard M. Bracken Employment Agreement
Ex-10.27(c) R. Milton Johnson Employment Agreement
Ex-10.27(d) Samuel N. Hazen Employment Agreement
Ex-10.27(e) W. Paul Rutledge Employment Agreement
Ex-12 Statement re Computation of Ratio of Earnings to Fixed ChargesEx-10.28(f) 2008 Named Executive Officer Salaries and Performance Excellence Program Targets
 Ex-21 List of Subsidiaries
 Ex-23 Consent of Ernst & Young LLP Consent
 Ex-31.1 Section 302 Certification of the CEO
 Ex-31.2 Section 302 Certification of the CFO
 Ex-32 Section 906 Certification of the CEO & CFO


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PART I
Item 1.Business
General
 
HCA Inc. is one of the leading health care services companies in the United States. At December 31, 2006,2007, we operated 173169 hospitals, comprised of 166163 general, acute care hospitals; sixfive psychiatric hospitals; and one rehabilitation hospital. The 173169 hospital total includes seveneight hospitals (six(seven general, acute care hospitals and one rehabilitation hospital) owned by joint ventures in which an affiliate of HCA is a partner, and these joint ventures are accounted for using the equity method. In addition, we operated 107108 freestanding surgery centers, nine of which are owned by joint ventures in which an affiliate of HCA is a partner, and these joint ventures are accounted for using the equity method. Our facilities are located in 20 states England and Switzerland.England. The terms “Company,” “HCA,” “we,” “our” or “us,” as used herein, refer to HCA Inc. and its affiliates unless otherwise stated or indicated by context. The term “affiliates” means direct and indirect subsidiaries of HCA Inc. and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of HCA and the term “employees” refers to employees of affiliates of HCA.
 
Our primary objective is to provide the communities we serve a comprehensive array of quality health care services in the most cost-effective manner possible. Our general, acute care hospitals typically provide a full range of services to accommodate such medical specialties as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Outpatient and ancillary health care services are provided by our general, acute care hospitals, freestanding surgery centers, diagnostic centers and rehabilitation facilities. Our psychiatric hospitals provide a full range of mental health care services through inpatient, partial hospitalization and outpatient settings.
 
The Company was incorporated in Nevada in January 1990 and reincorporated in Delaware in September 1993. Our principal executive offices are located at One Park Plaza, Nashville, Tennessee 37203, and our telephone number is(615) 344-9551.
 
On July 24,November 17, 2006, our Board of Directors approved and we entered into a Merger AgreementHCA Inc. completed its merger (the “Merger Agreement” and the transactions contemplated thereby the “Merger”) with Hercules Acquisition Corporation, (“Merger Sub”), a Delaware corporation and a wholly owned subsidiary ofpursuant to which the Company was acquired by Hercules Holding II, LLC (“Hercules Holding”), a Delaware limited liability company owned by a private investor group including affiliates of Bain Capital, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity (each a “Sponsor” and together, the “Sponsors”), and affiliates of HCA founder, Dr. Thomas F. Frist Jr., (the “Frist Entities”,Entities,” and together with the Sponsors, the “Investors”), pursuant to which Hercules Holding would acquire alland by members of our outstanding shares of common stock for $51.00 per share in cash. The Merger Agreement was approved by our shareholders on November 16, 2006.management and certain other investors. The Merger, the financing transactions related to the Merger and other related transactions were consummated on November 17, 2006, had a transaction value of approximately $33.0 billion and are collectively referred to in this annual report as the “Recapitalization.” The Merger was accounted for as a recapitalization in our financial statements, with no adjustments to the historical basis of our assets and liabilities. As a result of the Recapitalization, our outstanding commoncapital stock is owned by Hercules Holding,the Investors, certain members of management and key employees and certain other key employees.investors. Our common stock is no longernot registered under the Securities Exchange Act of 1934, as amended, and is not traded on a national securities exchange. Effective September 26, 2007, we registered certain of our senior secured notes issued in connection with the Recapitalization with the Securities and Exchange Commission (the “SEC”) and is no longer traded on a national securities exchange., thus subjecting us to the reporting requirements of Section 15(d) of the Securities Exchange Act of 1934.
Available Information
 
We currently voluntarily file certain reports with the SEC, including annual reports onForm 10-K and quarterly reports onForm 10-Q. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet site athttp://www.sec.gov that contains the reports and other information we file electronically. Our website address is www.hcahealthcare.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge, through our website, our annual report onForm 10-K and quarterly reports onForm 10-Q, and all amendments to those

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reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of


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this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report.
 
Our Code of Conduct is available free of charge upon request to our Corporate Secretary, HCA Inc., One Park Plaza, Nashville, Tennessee 37203.
Business Strategy
 
We are committed to providing the communities we serve high quality, cost-effective health care while complying fully with our ethics policy, governmental regulations and guidelines and industry standards. As a part of this strategy, management focuses on the following principal elements:
 • maintain our dedication to the care and improvement of human life;
 
 • maintain our commitment to ethics and compliance;
 
 • leverage our leading local market positions;
 
 • expand our presence in key markets;
 
 • continue to leverage our scale;
 
 • continue to develop enduring physician relationships; and
 
 • become the health care employer of choice.
Health Care Facilities
 
We currently own, manage or operate hospitals; freestanding surgery centers; diagnostic and imaging centers; radiation and oncology therapy centers; comprehensive rehabilitation and physical therapy centers; and various other facilities.
 
At December 31, 2006,2007, we owned and operated 160156 general, acute care hospitals with 38,75437,915 licensed beds, and an additional sixseven general, acute care hospitals with 2,1272,237 licensed beds are operated through joint ventures, which are accounted for using the equity method. Most of our general, acute care hospitals provide medical and surgical services, including inpatient care, intensive care, cardiac care, diagnostic services and emergency services. The general, acute care hospitals also provide outpatient services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. Each hospital has an organized medical staff and a local board of trustees or governing board, made up of members of the local community.
 
Our hospitals do not typically engage in extensive medical research and education programs. However, some of our hospitals are affiliated with medical schools and may participate in the clinical rotation of medical interns and residents and other education programs.
 
At December 31, 2006,2007, we operated sixfive psychiatric hospitals with 600490 licensed beds. Our psychiatric hospitals provide therapeutic programs including child, adolescent and adult psychiatric care, adult and adolescent alcohol and drug abuse treatment and counseling.
 
Outpatient health care facilities operated by us include freestanding surgery centers, diagnostic and imaging centers, comprehensive outpatient rehabilitation and physical therapy centers, outpatient radiation and oncology therapy centers and various other facilities. These outpatient services are an integral component of our strategy to develop comprehensive health care networks in select communities.
 
In addition to providing capital resources, certain of our affiliates provide a variety of management services to our health care facilities, including patient safety programs; ethics and compliance programs; national supply contracts; equipment purchasing and leasing contracts; accounting, financial and clinical systems; governmental reimbursement assistance; construction planning and coordination; information technology systems and solutions; legal counsel; human resources services; and internal audit services.


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Sources of Revenue
 
Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or payment rates for such services. Charges and reimbursement rates for inpatient services vary significantly depending on the type of payer, the type of service (e.g., medical/surgical, intensive care or psychiatric) and the geographic location of the hospital. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control.
 
We receive payment for patient services from the federal government under the Medicare program, state governments under their respective Medicaid or similar programs, managed care plans, private insurers and directly from patients. The approximate percentages of our patient revenues from such sources were as follows:
              
  Year Ended December 31,
   
  2006 2005 2004
       
Medicare  26%  27%  28%
Managed Medicare  5   (a)  (a)
Medicaid  5   5   5 
Managed Medicaid  3   3   3 
Managed care and other insurers(a)  53   57   54 
Uninsured(b)  8   8   10 
          
 Total  100%  100%  100%
          
 
             
  Year Ended December 31,
  2007 2006 2005
 
Medicare  24%  26%  27%
Managed Medicare  5   5   (a)
Medicaid  5   5   5 
Managed Medicaid  3   3   3 
Managed care and other insurers(a)  53   53   57 
Uninsured  10   8   8 
             
Total  100%  100%  100%
             
(a)Prior to 2006, managed Medicare revenues were classified as managed care.
(b)Uninsured revenues for the years ended December 31, 2006 and 2005 were reduced by $1.095 billion and $769 million, respectively, of discounts to the uninsured, related to the uninsured discount program implemented January 1, 2005.
 
Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a federal-state program, administered by the states, which provides hospital and medical benefits to qualifying individuals who are unable to afford health care. All of our general, acute care hospitals located in the United States are certified as health care services providers for persons covered under Medicare and Medicaid programs. Amounts received under Medicare and Medicaid programs are generally significantly less than established hospital gross charges for the services provided.
 
Our hospitals generally offer discounts from established charges to certain group purchasers of health care services, including private insurance companies, employers, HMOs, PPOs and other managed care plans. These discount programs generally limit our ability to increase revenues in response to increasing costs. See Item 1, “Business — Competition.” Patients are generally not responsible for the total difference between established hospital gross charges and amounts reimbursed for such services under Medicare, Medicaid, HMOs or PPOs and other managed care plans, but are responsible to the extent of any exclusions, deductibles or coinsurance features of their coverage. The amount of such exclusions, deductibles and coinsurance has been increasing each year. Collection of amounts due from individuals is typically more difficult than from governmental or third-party payers. On January 1, 2005, we modified our policies toWe provide a discountdiscounts to uninsured patients who do not qualify for Medicaid or charity care. These discounts are similar to those provided to many local managed care plans. In implementing the discount policy, we attempt to qualify uninsured patients for Medicaid, other federal or state assistance or charity care. If an uninsured patient does not qualify for these programs, the uninsured discount is applied. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Revenue/ Volume Trends.”

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Medicare
Inpatient Acute Care
 
Medicare
Inpatient Acute Care
Under the Medicare program, we receive reimbursement under a prospective payment system (“PPS”) for general, acute care hospital inpatient services. Under hospital inpatient PPS, fixed payment amounts per inpatient discharge are established based on the patient’s assigned diagnosis related group (“DRG”). DRGs classify treatments for illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. DRG weights represent the average resources for a given DRG relative to the average


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resources for all DRGs. When the cost to treat certain patients falls well outside the normal distribution, providers typically receive additional “outlier” payments. DRG payments do not consider a specific hospital’s cost, but are adjusted for area wage differentials. Hospitals, other than those defined as “new,” receive PPS reimbursement for inpatient capital costs based on DRG weights multiplied by a geographically adjusted federal rate.
 
DRG rates are updated and DRG weights are recalibrated each federal fiscal year (which begins October 1). The index used to update the DRG rates (the “market basket”) gives consideration to the inflation experienced by hospitals and entities outside the health care industry in purchasing goods and services. However, for several years the percentage increases to the DRG rates have been lower than the percentage increases in the costs of goods and services purchased by hospitals. In federal fiscal year 2006,2007, the DRG rate increase was market basket of 3.7%3.4%. For federal fiscal year 2007,2008, the Centers for Medicare and Medicaid Services (“CMS”) set the DRG rate increase at full market basket of 3.4%3.3%. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) provided for DRG rate increases for certain federal fiscal years at full market basket, if data for ten patient care quality indicators were submitted to the Secretary of the Department of Health and Human Services (“HHS”). On February 8, 2006, the Deficit Reduction Act of 2005 (“DRA 2005”) was enacted by Congress and expanded the number of quality measures that must be reported to receive a full market basket update to 21, beginning with discharges occurring in the third quarter of 2006. On November 24, 2006, CMS issued a final rule that expands to 26 the number of quality measures that must be reported, beginning in the first quarter of calendar year 2007, and requires, beginning in the third quarter of calendar year 2007, that hospitals report the results of a 27-question patient perspective survey. Failure to submit the required quality indicators will result in a two percentage point reduction to the market basket update. All of our hospitals paid under Medicare inpatient DRG PPS are participating in the quality initiative by the Secretary of HHS by submitting the quality data requested. While we will endeavor to comply with all data submission requirements as additional requirements continue to be added, our submissions may not be deemed timely or sufficient to entitle us to the full market basket adjustment for all of our hospitals.
 
In the Federal Register dated August 18, 2006, CMS changed the methodology used to recalibrate the DRG weights from charge basedcharge-based weights to cost relative weights under a3-year three-year transition period beginning in federal fiscal year 2007. The adoption of the cost relative weights is not anticipated to have a material financial impact toon us. On August 22, 2007, CMS is currently studying alternativepublished a final rule which adopts a two-year implementation of Medicare-Severity Diagnostic-Related Groups (“MS-DRGs”), a severity-adjusted DRG systems that would recognize severity of illness. It is anticipated that CMS will propose revisionssystem. This change represents a refinement to the existing DRG system, and its impact on our revenues has not been significant. Additionally, CMS has imposed a documentation and coding adjustment to better recognize severity of illnessaccount for changes in payments under the new MS-DRG system that are not related to changes in case mix. Through legislative refinement, the documentation and coding adjustments for federal fiscal year 2008. It is uncertain asyears 2008 and 2009 are reductions to what those revisions might bethe base payment rate of 0.6% and what0.9%, respectively. However, Congress has given CMS the financial impact could beability to us.retrospectively determine if the documentation and coding adjustment levels for federal fiscal years 2008 and 2009 were adequate to account for changes in payments not related to changes in case mix. If the levels are found to have been inadequate, CMS can impose an adjustment to payments for federal fiscal years 2010, 2011 and 2012.
 Future
Further realignments in the DRG system could also reduce the marginspayments we receive for certain specialties, including cardiology and orthopedics. The greater proliferation of specialty hospitals in recent years has caused CMS to focus on payment levels for such specialties. Changes in the payments received for specialty services could have an adverse effect on our revenues.
 
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) provided for DRG rate increases for certain federal fiscal years at full market basket, if data for 10 patient care quality indicators were submitted to the Secretary of the Department of Health and Human Services (“HHS”). The Deficit Reduction Act of 2005 (“DRA 2005”) expanded and provided for the future expansion of the number of quality measures that must be reported to receive a full market basket update. On November 1, 2007, CMS announced a final rule that expands to 30 the number of quality measures that hospitals are required to report, beginning with discharges occurring in calendar year 2008, in order to qualify for the full market basket update to the inpatient prospective payment system in federal fiscal year 2009. Failure to submit the required quality indicators will result in a two percentage point reduction to the market basket update. All of our hospitals paid under Medicare inpatient DRG PPS are participating in the quality initiative by the Secretary of HHS by submitting the requested quality data. While we will endeavor to comply with all data submission requirements as additional requirements continue to be added, our submissions may not be deemed timely or sufficient to entitle us to the full market basket adjustment for all of our hospitals.
Historically, the Medicare program has set aside 5.1%5.10% of Medicare inpatient payments to pay for outlier cases. CMS estimates that outlier payments were 3.52%accounted for 3.96% and 3.96%4.65% of total operating DRG payments for federal fiscal years 20042005 and 2005,2006, respectively. For federal fiscal year 2006,2007, CMS established an outlier threshold of $24,485, which resulted in outlier payments, estimated by CMS, to be 4.60% of total operating DRG payments. For federal fiscal year 2008, CMS has established an outlier threshold of $23,600, which resulted in outlier payments of 4.62% as estimated by CMS. For federal fiscal year 2007, CMS has established an outlier threshold of $24,485.$22,185. We do not anticipate that the change to the outlier threshold for federal fiscal year 20072008 will have a material impact on our revenues.

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Outpatient
 
Outpatient
CMS reimburses hospital outpatient services (and certain Medicare Part B services furnished to hospital inpatients who have no Part A coverage) on a PPS basis. CMS has continued to use existing fee schedules to pay for


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physical, occupational and speech therapies, durable medical equipment, clinical diagnostic laboratory services and nonimplantable orthotics and prosthetics. Freestandingprosthetics, freestanding surgery centers services and services provided by independent diagnostic testing facilities are reimbursed on a fee schedule.facilities.
 
Hospital outpatient services paid under PPS are classified into groups called ambulatory payment classifications (“APCs”). Services for each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. Depending on the services provided, a hospital may be paid for more than one APC for a patient visit. The APC payment rates were updated for calendar years 20052006 and 20062007 by market basketbaskets of 3.3%3.70% and 3.7%3.40%, respectively. However, as a result of the expiration of additional payments for drugs that were being paid in calendar year 2005, for calendar year 2006 there was an effective 2.25% reduction to the market basket of 3.7%3.70%, resulting in a net market basketincrease of 1.45%. ForThis reduction was not applied in calendar year 2007 MMA provides for a full market basket update, and onsubsequent years. On November 24, 200627, 2007 CMS published a final rule that updated payment rates for calendar year 20072008 by the full market basket of 3.4%3.30%. In this final rule, CMS announced that it will requireoutlined the requirements for hospitals to submit quality data relating to outpatient care in order to receive the full market basket increase under the outpatient PPS beginning in calendar year 2009. CMS did not indicate whatrequires that data muston seven quality measures be submitted or other details of the program.according to a data submission schedule. Hospitals that fail to submit such data will receive the market basket update minus two percentage points for the outpatient PPS.
Rehabilitation
Rehabilitation
 
CMS reimburses inpatient rehabilitation facilities (“IRFs”) on a PPS basis. Under IRF PPS, patients are classified into case mix groups based upon impairment, age, comorbidities (additional diseases or disorders from which the patient suffers) and functional capability. IRFs are paid a predetermined amount per discharge that reflects the patient’s case mix group and is adjusted for area wage levels, low-income patients, rural areas and high-cost outliers. For federal fiscal years 20052006 and 2006,2007, CMS updated the PPS rate for rehabilitation hospitals and units by market basketbaskets of 3.1%3.6% and 3.6%3.3%, respectively. For federal fiscal year 2007, CMS has updated the PPS rate for IRFs by market basket of 3.3%. However, CMS also applied reductions to the standard payment amount of 1.9% and 2.6% for federal fiscal years 2006 and 2007, respectively, to account for coding changes that do not reflect real changes in case mix. For federal fiscal year 2008, CMS has updated the PPS rate for IRFs by market basket of 3.2% with no corresponding reduction for coding changes. However, the Medicare, Medicaid and SCHIP Reauthorization Act of 2007, signed into law on December 29, 2007, eliminates the market basket update as of April 1, 2008 and continues the zero update through federal fiscal year 2009. As of December 31, 2006,2007, we had one rehabilitation hospital, which is operated through a joint venture, and 4948 hospital rehabilitation units.
 
On May 7, 2004, CMS published a final rule to change the criteria for being classified as an IRF, commonly known as the “75 percent“75% rule.” CMS revised the medical conditions for patients served by rehabilitation facilities from ten10 medical conditions to 13 conditions. Pursuant to this final rule, a specified percentage of a facility’s inpatients over a given year must be treated for one of these conditions. The final rule provides for a transition period during which the percentage threshold would increase. For cost reporting periods that began on or after July 1, 2004 and before July 1, 2005, theincrease, starting at a 50% compliance threshold was setand culminating at 50% of the IRF’s total patient population. For cost reporting periods beginning on or after July 1, 2005 and before July 1, 2006, the compliancea 75% threshold, was set at 60% of the IRF’s total patient population. For cost reporting periods beginning on or after July 1, 2006 and before July 1, 2007, the compliance threshold is set at 65% of the IRF’s total patient population. The compliance threshold will be set at 75% for cost reporting periods beginning on or after July 1, 2007. Since then, several adjustments have been made to the transition period. The passage of the Medicare, Medicaid and SCHIP Reauthorization Act of 2007, set the compliance threshold at 60% for cost reporting periods beginning on or after July 1, 2006. Implementation of the “75 percent“75% rule” has started to reducereduced our IRF admissions and can be expected to continue to significantly restrict the treatment of patients whose medical conditions do not meet any of the 13 approved conditions.
 Medicare fiscal intermediaries have been given the authority to develop and implement Local Coverage Determinations (“LCD”) to determine the medical necessity of care rendered to Medicare patients where there is no national coverage determination. Some intermediaries have finalized their LCDs for rehabilitation services. A restrictive rehabilitation LCD has the potential to significantly impact Medicare rehabilitation payments. Some fiscal intermediaries have implemented LCDs that are more stringent than the 75 percent

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rule or have retroactively denied coverage based on new LCDs. The financial impact to us of the implementation of final rehabilitation LCDs throughout our markets is uncertain.
Psychiatric
      Payments to PPS-exempt psychiatric hospitals and units are based upon reasonable cost, subject to a cost-per-discharge target (the TEFRA limits) which are updated annually by a market basket index. The target amount for federal fiscal year 2006 was subject to a market basket update of 3.8% for psychiatric hospitals and units that are being paid under the three-year transition to the inpatient psychiatric PPS.
 On November 15, 2004, CMS published a final regulation to implement a
PPS for inpatient hospital services furnished in psychiatric hospitals and psychiatric units of general, acute care hospitals and critical access hospitals (“IPF PPS”). The new prospective payment system replaces the cost-based system became effective for reporting periods beginning on or after January 1, 2005.subsequent to December 31, 2004. IPF PPS is a per diem prospective payment, system, with adjustments to account for certain patient and facility characteristics. IPF PPS contains an “outlier” policy for extraordinarily costly cases and an adjustment to a facility’s base payment if it maintains a full-service emergency department. IPF PPS is beingwas implemented over a three-year transition period with full payment under IPF PPS to begin in the fourth year. Also, CMS has included a stop-loss provision to ensure that hospitals avoid significant losses during the transition.with cost reporting periods beginning on or after January 1, 2008. CMS has established the IPF PPS payment rate in a manner intended to be budget neutral and has adopted a July 1 update cycle. Thus, the initial IPF PPS per diem payment rate was effective for the18-month period January 1, 2005 through June 30, 2006. CMS updated payments underThe rehabilitation, psychiatric and long-term care (RPL) market basket update is used


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to update the IPF PPSPPS. The annual RPL market basket update for rate year 2007 (July 1, 2006 to June 30, 2007) by 4.5% (reflecting the blend of the 4.6% update for IPF TEFRA and the 4.3% update for IPF PPS payments). The market basket update accounts for moving from a calendar year to a rate year (the annual market basket2008 is estimated to be 3.4%)3.2%. As of December 31, 2006,2007, we had sixfive psychiatric hospitals and 3632 hospital psychiatric units.
Other
Other
 
Under PPS, the payment rates are adjusted for the area differences in wage levels by a factor (“wage index”) reflecting the relative wage level in the geographic area compared to the national average wage level. ForIn federal fiscal year 2006,years 2007 and 2008, CMS applied an occupational mix adjustment factor toadjusted 100% of the wage index amountsfactor for the first time, but limited the adjustment to 10%occupational mix. The redistributive impact of the wage index. CMS increased the occupational mix adjustment to 100% for inpatient PPS effective for federal fiscal year 2007 in the final rule published on October 11, 2006.
      MMA lowered the labor share for inpatient PPS payments for hospitals with wage indices less than or equal to 1.0 from 71.1% to 62.0%, effective October 1, 2004, unless the lower percentage would result in lower payments to the hospital. This change, in effect, increases payments for all hospitals whose wage index is less than or equal to 1.0. For all other hospitals, CMS lowered the 71.1% labor share to 69.7%, effective October 1, 2005. Also, effective October 1, 2005, IRF PPS adopted the Core-Based Statistical Area (“CBSA”) definition of labor market geographic areas but have not adopted an occupational mix adjustment. For federal fiscal year 2006, IRFs received a blended (50/50) wage index based on the old and new wage geographic definitions.
      The occupational mix adjustment has not been applied to IPF PPS at this time. However, in the final rule published on May 9, 2006, CMS adopted the CBSA definition of labor market geographic areas for IPF PPS effective July 1, 2006.
      The adoption of the wage indices based upon the new wage definitions and the adoption of the occupational mix adjustment for inpatient PPS,changes, while slightly negative in the aggregate, areis not anticipated to have a material financial impact for 2007.2008.
 
CMS has a significant initiative underway that could affect the administration of the Medicare program and impact how hospitals bill and receive payment for covered Medicare services. In accordance with MMA, CMS has initiated the implementation of contractor reform whereby CMS will competitively bid the Medicare fiscal intermediary and Medicare carrier functions to 15 Medicare Administrative Contractors

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(“MACs”). Hospital companies will have the option to work with the selected MAC in the jurisdiction where a given hospital is located or, in the case of chain providers, to use the MAC in the jurisdiction where the hospital company’s home office is located. We have requested that CMS enable usFor chain providers, either all hospitals in the chain must choose to stay with the MAC chosen for their locality or all hospitals must opt to use more than one MAC but less than the 12home office MAC. HCA has chosen to use the MACs whereassigned to the localities in which our hospitals are located. CMS awarded the firstone MAC contract in 2006, and during 2007, CMS was expected to award seven MAC contracts. However, during 2007, CMS only awarded four of the seven MAC contracts, on July 31, 2006. Jurisdiction 3, which includesbringing the statestotal number of Arizona, Montana, North Dakota, South Dakota, Utah and Wyoming, wasMAC contracts awarded to Noridian Administrative Services. HCA operates six hospitals in Jurisdiction 3 and Mutual of Omaha continues to serve as their fiscal intermediary. An additionalfive.
The remaining seven MAC jurisdictions are expected to be awarded in July and September of 2007, and the remaining seven jurisdictions are expected to be awarded in September 2008. All of these changes could impact claims processing functions and the resulting cash flow. We cannotflow; however, we are unable to predict the impact thatat this time.
The MMA of 2003 established the Recovery Audit Contractor (“RAC”) three-year demonstration program to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program. Beginning in 2005, CMS contracted with three different RACs to conduct these changes could have on our cash flow.reviews in California, Florida and New York. The program was expanded in August 2007 to include Massachusetts and South Carolina. Each RAC had discretion over the types of reviews and record requests it would conduct within the states for which it was responsible as long as it followed the CMS-defined Statement of Work. HCA had 45 hospitals subject to the demonstration of which 40 of those hospitals actually had a review performed. The Tax Relief and Health Care Act of 2006 made the RAC program permanent and mandated its nationwide expansion by 2010. The final impact of the demonstration program cannot be quantified at this time.
CMS reimburses ambulatory surgery centers (“ASCs”) using a predetermined fee schedule. Effective January 1, 2007, as a result of DRA 2005, reimbursements for ASC overhead costs arewere limited to no more than the overhead costs paid to hospital outpatient departments under the Medicare hospital outpatient prospective payment systemPPS for the same procedure. In the Federal Register datedOn August 23, 2006,2, 2007, CMS announced proposedissued final regulations that if adopted, would change paymentchanged payments for procedures performed in an ambulatory surgery center (“ASC”), effectiveASC. Effective January 1, 2008. Under this proposal,2008, ASC payment groups would increaseincreased from the current nine clinically disparate payment groups to an extensive list of covered surgical procedures among the 221 APCs used under the outpatient prospective payment systemPPS for these surgical services. CMS estimates that the rates for procedures performed in an ASC setting would equal 62%65% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. Moreover, under the proposed regulations, if CMS determines that a procedure is commonly performed in a physician’s office, the ASC reimbursement for that procedure would beis limited to the reimbursement allowable under the Medicare Part B Physician Fee Schedule. Under this proposal,Schedule, with limited exceptions. In addition, all surgical procedures, other than those that pose a significant safety risk or generally require an overnight stay, which would be listed by CMS, would beare payable as ASC procedures. This will expandrule expands the number of procedures that Medicare will pay for if performed in an ASC. CMS indicates in its discussion ofBecause the proposed regulations that it believes that the volumes and service mix of procedures provided in ASCs would change significantly in 2008 under the revisednew payment system but that CMS is not able to accurately project those changes. Ifhas a significant impact on payments for certain procedures, the proposal is adopted,final rule establishes a four-year transition period for implementing the required payment rates. This change may result in more Medicare procedures that are now performed in hospitals may bebeing moved to ASCs, reducing surgical volume in our hospitals. Also, more Medicare procedures that are now performed in ASCs may be moved to physicians’ offices. Commercial third-party payers may adopt similar policies. CMS has announced that the final rule to implement a revised ASC payment system will be published in a separate rule in 2007.


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Hospital operating margins have been, and may continue to be, under significant pressure because of deterioration in pricing flexibility and payer mix, and growth in operating expenses in excess of the increase in PPS payments under the Medicare program.
Managed Medicare
Managed Medicare
 
Managed Medicare plans relate to situations where a private company contracts with CMS to provide members with Medicare Part A, Part B and Part D benefits. Managed Medicare plans can be structured as HMOs, PPOs, or private fee-for-service plans.
Medicaid
Medicaid
 
Medicaid programs are funded jointly by the federal government and the states and are administered by states under approved plans. Most state Medicaid program payments are made under a PPS or are based on negotiated payment levels with individual hospitals. Medicaid reimbursement is often less than a hospital’s cost of services. The federal government and many states are currently considering altering the level of Medicaid funding (including upper payment limits) or program eligibility that could adversely affect future levels of Medicaid reimbursement received by our hospitals. As permitted by law, certain states in which we operate have adopted broad-based provider taxes to fund their Medicaid programs.
 
Since states must operate with balanced budgets and since the Medicaid program is often the state’s largest program, states can be expected to adopt or consider adopting legislation designed to reduce their

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Medicaid expenditures. DRA 2005 signed into law on February 8, 2006, includes Medicaid cuts of approximately $4.8 billion over five years. In addition, proposed regulatory changes, if implemented, would reduce federal Medicaid funding by an additional $12.2 billion over five years. On January 18,May 29, 2007, CMS published a proposedfinal rule entitled “Medicaid Program; Cost LimitsLimit for Providers Operated by Units of Government and Provisions to Ensure the Integrity of Federal-State Financial Partnership”. The proposedCongress enacted a moratorium on this rule if finalized,delaying its implementation until 2008. However, when the moratorium expires in May 2008, this final rule could significantly impact state Medicaid programs. It is uncertain if suchIn its proposed form, this rule will be finalized.was expected to reduce federal Medicaid funding by $12.2 billion over five years. As a result of the moratorium on implementing the final rule, the impact of the final rule has not been quantified. States have also adopted, or are considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programsand/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems. Future legislation or other changes in the administration or interpretation of government health programs could have a material, adverse effect on our financial position and results of operations.
Managed Medicaid
Managed Medicaid
 
Managed Medicaid programs relate to situations where states contract with one or more entities for patient enrollment, care management and claims adjudication. The states usually do not abdicategive up program responsibilities for financing, eligibility criteria and core benefit plan design. We generally contract directly with one of the designated entities, usually a managed care organization. The provisions of these programs are state-specific.
Annual Cost Reports
Annual Cost Reports
 
All hospitals participating in the Medicare, Medicaid and TRICARE programs, whether paid on a reasonable cost basis or under a PPS, are required to meet certain financial reporting requirements. Federal and, where applicable, state regulations require the submission of annual cost reports covering the revenue,revenues, costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.
 
Annual cost reports required under the Medicare and Medicaid programs are subject to routine audits, which may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs. These audits often require several years to reach the final determination of amounts due to or from us under these programs. Providers also have rights of appeal, and it is common to contest issues raised in audits of prior years’cost reports.


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Managed Care and Other Discounted Plans
Managed Care and Other Discounted Plans
 
Most of our hospitals offer discounts from established charges to certain large group purchasers of health care services, including managed care plans and private insurance companies. Admissions reimbursed by managed care and other insurers were 36%37%, 42%36% and 42% of our total admissions for the years ended December 31, 2007, 2006 2005 and 2004,2005, respectively (prior to 2006, managed Medicare admissions, 7% and 6% of 2007 and 2006, respectively, admissions, were classified as managed care). Managed care contracts are typically negotiated for one-year or two-year terms. While we generally received annual average yield increases of six to seven percent from managed care payers during 2006,2007, there can be no assurance that we will continue to receive increases in the future.
Hospital Utilization
 
We believe that the most important factors relating to the overall utilization of a hospital are the quality and market position of the hospital and the number and quality of physicians and other health care professionals providing patient care within the facility. Generally, we believe the ability of a hospital to be a market leader is determined by its breadth of services, level of technology, emphasis on quality of care and convenience for patients and physicians. Other factors that impact utilization include the growth in local population, local economic conditions and market penetration of managed care programs.

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The following table sets forth certain operating statistics for our hospitals. Hospital operations are subject to certain seasonal fluctuations, including decreases in patient utilization during holiday periods and increases in the cold weather months.
                     
  Years Ended December 31,
   
  2006 2005 2004 2003 2002
           
Number of hospitals at end of period(a)  166   175   182   184   173 
Number of freestanding outpatient surgery centers at end of period(b)  98   87   84   79   74 
Number of licensed beds at end of period(c)  39,354   41,265   41,852   42,108   39,932 
Weighted average licensed beds(d)  40,653   41,902   41,997   41,568   39,985 
Admissions(e)  1,610,100   1,647,800   1,659,200   1,635,200   1,582,800 
Equivalent admissions(f)  2,416,700   2,476,600   2,454,000   2,405,400   2,339,400 
Average length of stay (days)(g)  4.9   4.9   5.0   5.0   5.0 
Average daily census(h)  21,688   22,225   22,493   22,234   21,509 
Occupancy rate(i)  53%  53%  54%  54%  54%
Emergency room visits(j)  5,213,500   5,415,200   5,219,500   5,160,200   4,802,800 
Outpatient surgeries(k)  820,900   836,600   834,800   814,300   809,900 
Inpatient surgeries(l)  533,100   541,400   541,000   528,600   518,100 
 
                     
  Years Ended December 31,
  2007 2006 2005 2004 2003
 
Number of hospitals at end of period (a)  161   166   175   182   184 
Number of freestanding outpatient surgery centers at end of period (b)  99   98   87   84   79 
Number of licensed beds at end of period (c)  38,405   39,354   41,265   41,852   42,108 
Weighted average licensed beds (d)  39,065   40,653   41,902   41,997   41,568 
Admissions (e)  1,552,700   1,610,100   1,647,800   1,659,200   1,635,200 
Equivalent admissions (f)  2,352,400   2,416,700   2,476,600   2,454,000   2,405,400 
Average length of stay (days) (g)  4.9   4.9   4.9   5.0   5.0 
Average daily census (h)  21,049   21,688   22,225   22,493   22,234 
Occupancy rate (i)  54%  53%  53%  54%  54%
Emergency room visits (j)  5,116,100   5,213,500   5,415,200   5,219,500   5,160,200 
Outpatient surgeries (k)  804,900   820,900   836,600   834,800   814,300 
Inpatient surgeries (l)  516,500   533,100   541,400   541,000   528,600 
(a)Excludes eight facilities in 2007 and seven facilities in 2006, 2005, 2004 and 2003 and six facilities in 2002 that are not consolidated (accounted for using the equity method) for financial reporting purposes.
 
(b)Excludes nine facilities in 2007 and 2006, seven facilities in 2005, eight facilities in 2004 and four facilities in 2003 that are not consolidated (accounted for using the equity method) for financial reporting purposes.
(c)Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(d)Weighted average licensed beds represents the average number of licensed beds, weighted based on periods owned.
(e)Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.


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(f)Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation “equates” outpatient revenue to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume.
(g)Represents the average number of days admitted patients stay in our hospitals.
(h)Represents the average number of patients in our hospital beds each day.
(i)Represents the percentage of hospital licensed beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms.
(j)Represents the number of patients treated in our emergency rooms.
(k)Represents the number of surgeries performed on patients who were not admitted to our hospitals. Pain management and endoscopy procedures are not included in outpatient surgeries.
(l)Represents the number of surgeries performed on patients who have been admitted to our hospitals. Pain management and endoscopy procedures are not included in inpatient surgeries.
Competition
Generally, other hospitals in the local communities served by most of our hospitals provide services similar to those offered by our hospitals. Additionally, in the past several years the number of freestanding surgery centers and diagnostic centers (including facilities owned by physicians) in the geographic areas in which we operate has increased significantly. As a result, most of our hospitals operate in a highly competitive environment. The rates charged by our hospitals are intended to be competitive with those charged by other local hospitals for similar services. In some cases, competing hospitals are more established than our hospitals. Some competing hospitals are owned by tax-supported government agencies and many others are owned by not-for-profit entities that may be supported by endowments, charitable contributions and tax revenues, and are exempt from sales, property and income taxes. Such exemptions and support are not available to our hospitals. In certain localities there are large teaching hospitals that provide highly specialized facilities, equipment and services which may not be available at most of our hospitals. We are facing increasing competition from physician-owned specialty hospitals and freestanding surgery centers for market share in high margin services.
Psychiatric hospitals frequently attract patients from areas outside their immediate locale and, therefore, our psychiatric hospitals compete with both local and regional hospitals, including the psychiatric units of general, acute care hospitals.
Our strategies are designed to ensure our hospitals are competitive. We believe our hospitals compete within local communities on the basis of many factors, including the quality of care; ability to attract and retain quality physicians, skilled clinical personnel and other health care professionals; location; breadth of services; technology offered and prices charged. We have increased our focus on operating outpatient services with improved accessibility and more convenient service for patients, and increased predictability and efficiency for physicians.
Two of the most significant factors to the competitive position of a hospital are the number and quality of physicians affiliated with the hospital. Although physicians may at any time terminate their affiliation with a hospital operated by us, our hospitals seek to retain physicians with varied specialties on the hospitals’ medical staffs and to attract other qualified physicians. We believe that physicians refer patients to a hospital on the basis of the quality and scope of services it renders to patients and physicians, the quality of physicians on the medical staff, the location of the hospital and the quality of the hospital’s facilities, equipment and employees. Accordingly, we strive to maintain and provide quality facilities, equipment, employees and services for physicians and patients.
Another major factor in the competitive position of a hospital is management’s ability to negotiate service contracts with purchasers of group health care services. Managed care plans attempt to direct and control the use of hospital services and obtain discounts from hospitals’ established gross charges. In addition, employers and traditional health insurers are increasingly interested in containing costs through negotiations with hospitals for


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managed care programs and discounts from established gross charges. Generally, hospitals compete for service contracts with group health care services purchasers on the basis of price, market reputation, geographic location, quality and range of services, quality of the medical staff and convenience. In addition, some of our competitors may negotiate exclusivity provisions with managed care plans or otherwise restrict the ability of managed care companies to contract with us. The importance of obtaining contracts with managed care organizations varies from community to community, depending on the market strength of such organizations.
State certificate of need (“CON”) laws, which place limitations on a hospital’s ability to expand hospital services and facilities, make capital expenditures and otherwise make changes in operations, may also have the effect of restricting competition. In those states which have no CON laws or which set relatively high levels of expenditures before they become reviewable by state authorities, competition in the form of new services, facilities and capital spending is more prevalent. See Item 1, “Business — Regulation and Other Factors.”
We, and the health care industry as a whole, face the challenge of continuing to provide quality patient care while dealing with rising costs and strong competition for patients. Changes in medical technology, existing and future legislation, regulations and interpretations and managed care contracting for provider services by private and government payers remain ongoing challenges.
Admissions and average lengths of stay continue to be negatively affected by payer-required preadmission authorization, utilization review and payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Increased competition, admission constraints and payer pressures are expected to continue. To meet these challenges, we intend to expand many of our facilities or acquire or construct new facilities to better enable the provision of a comprehensive array of outpatient services, offer discounts to private payer groups, upgrade facilities and equipment, and offer new or expanded programs and services.
Regulation and Other Factors
Licensure, Certification and Accreditation
Health care facility construction and operation are subject to numerous federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. We believe that our health care facilities are properly licensed under applicable state laws. All of our general, acute care hospitals are certified for participation in the Medicare and Medicaid programs and are accredited by The Joint Commission. If any facility were to lose its Joint Commission accreditation or otherwise lose its certification under the Medicare and Medicaid programs, the facility would be unable to receive reimbursement from the Medicare and Medicaid programs. Management believes our facilities are in substantial compliance with current applicable federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, it may become necessary for us to make changes in our facilities, equipment, personnel and services. The requirements for licensure also may include notification or approval in the event of the transfer or change of ownership. Failure to obtain the necessary state approval in these circumstances can result in the inability to complete an acquisition or change of ownership.
Certificates of Need
In some states where we operate hospitals and other health care facilities, the construction or expansion of health care facilities, the acquisition of existing facilities, the transfer or change of ownership and the addition of new beds or services may be subject to review by and prior approval of state regulatory agencies under a CON program. Such laws generally require the reviewing state agency to determine the public need for additional or expanded health care facilities and services. Failure to obtain necessary state approval can result in the inability to expand facilities, complete an acquisition or change ownership.


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State Rate Review
Some states have adopted legislation mandating rate or budget review for hospitals or have adopted taxes on hospital revenues, assessments or licensure fees to fund indigent health care within the state. In the aggregate, indigent tax provisions have not materially, adversely affected our results of operations. Although we do not currently operate facilities in states that mandate rate or budget reviews, we cannot predict whether we will operate in such states in the future, or whether the states in which we currently operate may adopt legislation mandating such reviews.
Utilization Review
Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards, are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by quality improvement organizations to assess the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of DRG classifications and the appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided, may assess fines and also have the authority to recommend to HHS that a provider, which is in substantial noncompliance with the appropriate standards, be excluded from participating in the Medicare program. Most nongovernmental managed care organizations also require utilization review.
Federal Health Care Program Regulations
Participation in any federal health care program, including the Medicare and Medicaid programs, is heavily regulated by statute and regulation. If a hospital fails to substantially comply with the numerous conditions of participation in the Medicare and Medicaid programs or performs certain prohibited acts, the hospital’s participation in the federal health care programs may be terminated, or civil or criminal penalties may be imposed under certain provisions of the Social Security Act, or both.
Anti-kickback Statute
A section of the Social Security Act known as the “Anti-kickback Statute” prohibits providers and others from directly or indirectly soliciting, receiving, offering or paying any remuneration with the intent of generating referrals or orders for services or items covered by a federal health care program. Courts have interpreted this statute broadly. Violations of the Anti-kickback Statute may be punished by a criminal fine of up to $25,000 for each violation or imprisonment, civil money penalties of up to $50,000 per violation and damages of up to three times the total amount of the remunerationand/or exclusion from participation in federal health care programs, including Medicare and Medicaid. Courts have held that there is a violation of the Anti-kickback Statute if just one purpose of the renumeration is to generate referrals, even if there are other lawful purposes.
The Office of Inspector General at HHS (“OIG”), among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse and waste. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. As one means of providing guidance to health care providers, the OIG issues “Special Fraud Alerts.” These alerts do not have the force of law, but identify features of arrangements or transactions that may indicate that the arrangements or transactions violate the Anti-kickback Statute or other federal health care laws. The OIG has identified several incentive arrangements, which, if accompanied by inappropriate intent, constitute suspect practices, including: (a) payment of any incentive by a hospital each time a physician refers a patient to the hospital, (b) the use of free or significantly discounted office space or equipment in facilities usually located close to the hospital, (c) provision of free or significantly discounted billing, nursing or other staff services, (d) free training for a physician’s office staff in areas such as management techniques and laboratory techniques, (e) guarantees which provide that, if the physician’s income fails to reach a predetermined level, the hospital will pay any portion of the remainder, (f) low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients to the hospital, (g) payment of the costs of a physician’s travel and expenses for conferences, (h) coverage on the hospital’s group health insurance plans at an inappropriately low cost to the


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physician, (i) payment for services (which may include consultations at the hospital) which require few, if any, substantive duties by the physician, (j) purchasing goods or services from physicians at prices in excess of their fair market value, and (k) rental of space in physician offices, at other than fair market value terms, by persons or entities to which physicians refer. The OIG has encouraged persons having information about hospitals who offer the above types of incentives to physicians to report such information to the OIG.
The OIG also issues Special Advisory Bulletins as a means of providing guidance to health care providers. These bulletins, along with the Special Fraud Alerts, have focused on certain arrangements that could be subject to heightened scrutiny by government enforcement authorities, including: (a) contractual joint venture arrangements and other joint venture arrangements between those in a position to refer business, such as physicians, and those providing items or services for which Medicare or Medicaid pays, and (b) certain “gainsharing” arrangements, i.e., the practice of giving physicians a share of any reduction in a hospital’s costs for patient care attributable in part to the physician’s efforts.
In addition to issuing Special Fraud Alerts and Special Advisory Bulletins, the OIG issues compliance program guidance for certain types of health care providers. In January 2005, the OIG published Supplemental Compliance Guidance for Hospitals, supplementing its 1998 guidance for the hospital industry. In the supplemental guidance, the OIG identifies a number of risk areas under federal fraud and abuse statutes and regulations. These areas of risk include compensation arrangements with physicians, recruitment arrangements with physicians and joint venture relationships with physicians.
As authorized by Congress, the OIG has published safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the Anti-kickback Statute. Currently, there are statutory exceptions and safe harbors for various activities, including the following: investment interests, space rental, equipment rental, practitioner recruitment, personnel services and management contracts, sale of practice, referral services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary coinsurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, freestanding surgery centers, ambulance replenishing, and referral agreements for specialty services. The fact that conduct or a business arrangement does not fall within a safe harbor, or that it is identified in a fraud alert or advisory bulletin or as a risk area in the Supplemental Compliance Guidelines for Hospitals, does not automatically render the conduct or business arrangement illegal under the Anti-kickback Statute. However, such conduct and business arrangements may lead to increased scrutiny by government enforcement authorities. Although the Company believes that its arrangements with physicians and other referral sources have been structured to comply with current law and available interpretations, there can be no assurance that regulatory authorities enforcing these laws will determine these financial arrangements do not violate the Anti-kickback Statute or other applicable laws. An adverse determination could subject the Company to liabilities under the Social Security Act, including criminal penalties, civil monetary penalties and exclusion from participation in Medicare, Medicaid or other federal health care programs.
Stark Law
The Social Security Act also includes a provision commonly known as the “Stark Law.” This law effectively prohibits physicians from referring Medicare and Medicaid patients to entities with which they or any of their immediate family members have a financial relationship, if these entities provide certain “designated health services” that are reimbursable by Medicare, including inpatient and outpatient hospital services, clinical laboratory services and radiology services. Sanctions for violating the Stark Law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, civil monetary penalties of up to $15,000 per prohibited service provided, and exclusion from the Medicare and Medicaid programs. The statute also provides for a penalty of up to $100,000 for a circumvention scheme. There are exceptions to the self-referral prohibition for many of the customary financial arrangements between physicians and providers, including employment contracts, leases and recruitment agreements. There is also an exception for a physician’s ownership interest in an entire hospital, as opposed to an ownership interest in a hospital department. Unlike safe harbors under the Anti-kickback Statute with which compliance is voluntary, an arrangement must comply with every requirement of a Stark Law exception or the arrangement is in violation of the Stark Law.


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CMS has issued three phases of final regulations implementing the Stark Law. Phases I and II became effective in January 2002 and July 2004, respectively, and Phase III became effective in December 2007. While these regulations help clarify the requirements of the exceptions to the Stark Law, it is unclear how the government will interpret many of these exceptions for enforcement purposes. In addition, CMS recently proposed changes to the regulations implementing the Stark Law that would further restrict the types of arrangements that facilities and physicians may enter, including additional restrictions on certain leases, percentage compensation arrangements, and agreements under which a hospital purchases services under arrangements. There can be no assurance that the arrangements entered into by us and our facilities will be found to be in compliance with the Stark Law, as it ultimately may be implemented or interpreted.
In 2003, Congress passed legislation that modified the hospital ownership exception to the Stark Law by creating an18-month moratorium on allowing physicians to own interests in new specialty hospitals. The moratorium was extended by regulatory and legislative action and expired on August 8, 2006. At the conclusion of the moratorium, HHS announced that it will require hospitals to disclose certain financial arrangements with physicians. On September 14, 2007, CMS published an information collection request called the Disclosure of Financial Relationships Report (“DFRR”). HHS will initially select 500 hospitals that will be required to report the financial arrangements with physicians as required in the DFRR. Those hospitals are comprised of 290 hospitals that failed to respond to a previous voluntary CMS questionnaire about investments and compensation relationships and 210 additional hospitals. The DFRR and its supporting documentation are currently under review by the Office of Management and Budget and have not yet been released.
Similar State Laws
Many states in which we operate also have laws that prohibit payments to physicians for patient referrals, similar to the Anti-kickback Statute and self-referral legislation similar to the Stark Law. The scope of these state laws is broad, since they can often apply regardless of the source of payment for care, and little precedent exists for their interpretation or enforcement. These statutes typically provide for criminal and civil penalties, as well as loss of facility licensure.
Other Fraud and Abuse Provisions
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of certain fraud and abuse laws by adding several criminal provisions for health care fraud offenses that apply to all health benefit programs. The Social Security Act also imposes criminal and civil penalties for making false claims and statements to Medicare and Medicaid. False claims include, but are not limited to, billing for services not rendered or for misrepresenting actual services rendered in order to obtain higher reimbursement, billing for unnecessary goods and services, and cost report fraud. Federal enforcement officials have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed health care fraud, even if the officer or managing employee had no knowledge of the fraud. Criminal and civil penalties may be imposed for a number of other prohibited activities, including failure to return known overpayments, certain gainsharing arrangements, billing Medicare amounts that are substantially in excess of a provider’s usual charges, offering remuneration to influence a Medicare or Medicaid beneficiary’s selection of a health care provider, contracting with an individual or entity known to be excluded from a federal health care program, making or accepting a payment to induce a physician to reduce or limit services, and soliciting or receiving any remuneration in return for referring an individual for an item or service payable by a federal healthcare program. Like the Anti-kickback Statute, these provisions are very broad. To avoid liability, providers must, among other things, carefully and accurately code claims for reimbursement, as well as accurately prepare cost reports.
Some of these provisions, including the federal Civil Monetary Penalty Law, require a lower burden of proof than other fraud and abuse laws, including the Anti-kickback Statute. Civil monetary penalties that may be imposed under the federal Civil Monetary Penalty Law range from $10,000 to $50,000 per act, and in some cases may result in penalties of up to three times the remuneration offered, paid, solicited or received. In addition, a violator may be subject to exclusion from federal and state healthcare programs. Federal and state governments increasingly use the federal Civil Monetary Penalty Law, especially where they believe they cannot meet the higher burden of proof


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requirements under the Anti-kickback Statute. Further, individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds under the Medicare Integrity Program.
The Federal False Claims Act and Similar State Laws
Thequi tam,or whistleblower, provisions of the federal False Claims Act allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. Further, the government may use the False Claims Act to prosecute Medicare and other government program fraud in areas such as coding errors, billing for services not provided and submitting false cost reports. When a defendant is determined by a court of law to be liable under the False Claims Act, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. Liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government. The False Claims Act defines the term “knowingly” broadly. Though simple negligence will not give rise to liability under the False Claims Act, submitting a claim with reckless disregard to its truth or falsity constitutes a “knowing” submission under the False Claims Act and, therefore, will qualify for liability.
In some cases, whistleblowers, the federal government and some courts have taken the position that providers who allegedly have violated other statutes, such as the Anti-kickback Statute and the Stark Law, have thereby submitted false claims under the False Claims Act. A number of states in which we operate have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court.
HIPAA Administrative Simplification and Privacy Requirements
The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data transmission standards for certain health care claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the health care industry. HHS has issued regulations implementing the HIPAA Administrative Simplification Provisions and compliance with these regulations is mandatory for our facilities. HHS has proposed a rule that would establish standards for electronic health care claims attachments. In addition, HIPAA requires that each provider receive, and by May 23, 2008 exclusively use, a National Provider Identifier. We believe that the cost of compliance with these regulations has not had and is not expected to have a material, adverse effect on our business, financial position or results of operations.
Pursuant to HIPAA, HHS adopted standards to protect the privacy and security of individually identifiable health-related information. The privacy regulations control the use and disclosure of individually identifiable health-related information, whether communicated electronically, on paper or orally. The regulations also provide patients with significant new rights related to understanding and controlling how their health information is used or disclosed. The security regulations require health care providers to implement and maintain administrative, physical and technical practices to protect the security of individually identifiable health information that is maintained or transmitted electronically. We enforce a HIPAA compliance plan, which we believe complies with HIPAA privacy and security requirements and under which a HIPAA compliance group monitors our compliance. The privacy regulations and security regulations have and will continue to impose significant costs on our facilities in order to comply with these standards.
Violations of HIPAA could result in civil penalties of up to $25,000 per type of violation in each calendar year and criminal penalties of up to $250,000 per violation. In addition, there are numerous legislative and regulatory initiatives at the federal and state levels addressing patient privacy concerns. Facilities will continue to remain subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These statutes vary and could impose additional penalties.
EMTALA
All of our hospitals are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires any hospital participating in the Medicare program to conduct an appropriate medical screening examination of every individual who presents to the hospital’s emergency room for treatment and, if the individual


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is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer an individual or if the hospital delays appropriate treatment in order to first inquire about the individual’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program. In addition, an injured individual, the individual’s family or a medical facility that suffers a financial loss as a direct result of a hospital’s violation of the law can bring a civil suit against the hospital.
The government broadly interprets EMTALA to cover situations in which individuals do not actually present to a hospital’s emergency room, but present for emergency examination or treatment to the hospital’s campus, generally, or to a hospital-based clinic that treats emergency medical conditions or are transported in a hospital-owned ambulance, subject to certain exceptions. EMTALA does not generally apply to individuals admitted for inpatient services. The government also has expressed its intent to investigate and enforce EMTALA violations actively in the future. We believe our hospitals operate in substantial compliance with EMTALA.
Corporate Practice of Medicine/Fee Splitting
Some of the states in which we operate have laws prohibiting corporations and other entities from employing physicians, practicing medicine for a profit and making certain direct and indirect payments or fee-splitting arrangements between health care providers designed to induce or encourage the referral of patients to, or the recommendation of, particular providers for medical products and services. Possible sanctions for violation of these restrictions include loss of license and civil and criminal penalties. In addition, agreements between the corporation and the physician may be considered void and unenforceable. These statutes vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies.
Health Care Industry Investigations
Significant media and public attention has focused in recent years on the hospital industry. While we are currently not aware of any material investigations of the Company under federal or state health care laws or regulations, it is possible that governmental entities could initiate investigations or litigation in the future at facilities we operate and that such matters could result in significant penalties, as well as adverse publicity. It is also possible that our executives and managers could be included in governmental investigations or litigation or named as defendants in private litigation.
Our substantial Medicare, Medicaid and other governmental billings result in heightened scrutiny of our operations. We continue to monitor all aspects of our business and have developed a comprehensive ethics and compliance program that is designed to meet or exceed applicable federal guidelines and industry standards. Because the law in this area is complex and constantly evolving, governmental investigations or litigation may result in interpretations that are inconsistent with our or industry practices.
In public statements surrounding current investigations, governmental authorities have taken positions on a number of issues, including some for which little official interpretation previously has been available, that appear to be inconsistent with practices that have been common within the industry and that previously have not been challenged in this manner. In some instances, government investigations that have in the past been conducted under the civil provisions of federal law may now be conducted as criminal investigations.
Both federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the health care area. The OIG and the Department of Justice have, from time to time, established national enforcement initiatives, targeting all hospital providers, that focus on specific billing practices or other suspected areas of abuse.
In addition to national enforcement initiatives, federal and state investigations relate to a wide variety of routine health care operations such as: cost reporting and billing practices, including for Medicare outliers; financial arrangements with referral sources; physician recruitment activities; physician joint ventures; and hospital charges and collection practices for self-pay patients. We engage in many of these routine health care operations and other


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activities that could be the subject of governmental investigations or inquiries. For example, we have significant Medicare and Medicaid billings, numerous financial arrangements with physicians who are referral sources to our hospitals, and joint venture arrangements involving physician investors. Any additional investigations of the Company, our executives or managers could result in significant liabilities or penalties to us, as well as adverse publicity.
Commencing in 1997, we became aware we were the subject of governmental investigations and litigation relating to our business practices. As part of the investigations, the United States intervened in a number ofqui tamactions brought by private parties. The investigations related to, among other things, DRG coding, outpatient laboratory billing, home health issues, physician relations, cost report and wound care issues. The investigations were concluded through a series of agreements executed in 2000 and 2003 with the Criminal Division of the Department of Justice, the Civil Division of the Department of Justice, various U.S. Attorneys’ offices, CMS, a negotiating team representing states with claims against us, and others. In January 2001, we entered into an eight-year Corporate Integrity Agreement (the “CIA”) with the Office of Inspector General of the Department of Health and Human Services. Violation or breach of the CIA, or other violation of federal or state laws relating to Medicare, Medicaid or similar programs, could subject us to substantial monetary fines, civil and criminal penaltiesand/or exclusion from participation in the Medicare and Medicaid programs and other federal and state health care programs. Alleged violations may be pursued by the government or through privatequi tamactions. Sanctions imposed against us as a result of such actions could have a material, adverse effect on our results of operations and financial position.
Health Care Reform
Health care is one of the largest industries in the United States and continues to attract much legislative interest and public attention. In recent years, various legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Many states have enacted, or are considering enacting, measures designed to reduce their Medicaid expenditures and change private health care insurance. States have also adopted, or are considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programsand/or impose additional taxes on hospitals to help finance or expand states’ Medicaid systems. Some states, including the states in which we operate, have applied for and have been granted federal waivers from current Medicaid regulations to allow them to serve some or all of their Medicaid participants through managed care providers. Hospital operating margins have been, and may continue to be, under significant pressure because of deterioration in pricing flexibility and payer mix, and growth in operating expenses in excess of the increase in PPS payments under the Medicare program.
Compliance Program and Corporate Integrity Agreement
We maintain a comprehensive ethics and compliance program that is designed to meet or exceed applicable federal guidelines and industry standards. The program is intended to monitor and raise awareness of various regulatory issues among employees and to emphasize the importance of complying with governmental laws and regulations. As part of the ethics and compliance program, we provide annual ethics and compliance training to our employees and encourage all employees to report any violations to their supervisor, an ethics and compliance officer or a toll-free telephone ethics line.
Our CIA is structured to assure the federal government of our overall federal health care program compliance and specifically covers DRG coding, outpatient PPS billing and physician relations. We underwent major training efforts to ensure that our employees learned and applied the policies and procedures implemented under the CIA and our ethics and compliance program. The CIA has had the effect of increasing the amount of information we provide to the federal government regarding our health care practices and our compliance with federal regulations. Under the CIA, we have numerous affirmative obligations, including the requirement that we report potential violations of applicable federal health care laws and regulations and have, pursuant to this obligation, reported a number of potential violations of the Stark Law, the Anti-kickback Statute, EMTALA, HIPAA and other laws, most of which we consider to be nonviolations or technical violations. This obligation could result in greater scrutiny by regulatory authorities. The government could determine that our reportingand/or our resolution of reported issues


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has been inadequate. Breach of the CIAand/or a finding of violations of applicable health care laws or regulations could subject us to repayment requirements, substantial monetary penalties, civil penalties, exclusion from participation in the Medicare and Medicaid and other federal and state health care programs and, for violations of certain laws and regulations, criminal penalties.
Antitrust Laws
The federal government and most states have enacted antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. These laws prohibit price fixing, concerted refusal to deal, market monopolization, price discrimination, tying arrangements, acquisitions of competitors and other practices that have, or may have, an adverse effect on competition. Violations of federal or state antitrust laws can result in various sanctions, including criminal and civil penalties. Antitrust enforcement in the health care industry is currently a priority of the Federal Trade Commission. We believe we are in compliance with such federal and state laws, but future review of our practices by courts or regulatory authorities could result in a determination that could adversely affect our operations.
Environmental Matters
We are subject to various federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Management does not believe that we will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect our capital expenditures, results of operations or financial condition.
Insurance
As typical in the health care industry, we are subject to claims and legal actions by patients in the ordinary course of business. Subject to a $5 million per occurrence self-insured retention, our facilities are insured by our wholly-owned insurance subsidiary for losses up to $50 million per occurrence. The insurance subsidiary has obtained reinsurance for professional liability risks generally above a retention level of $15 million per occurrence. We also maintain professional liability insurance with unrelated commercial carriers for losses in excess of amounts insured by our insurance subsidiary.
We purchase, from unrelated insurance companies, coverage for directors and officers liability and property loss in amounts that we believe are customary for our industry. The directors and officers liability coverage includes a $25 million corporate deductible for the periods prior to the Merger and a $1 million corporate deductible subsequent to the Merger. The property coverage includes varying deductibles depending on the cause of the property damage. These deductibles range from $500,000 per claim up to 5% of the affected property values for certain flood and wind and earthquake related incidents.
Employees and Medical Staff
At December 31, 2007 we had approximately 186,000 employees, including approximately 50,000 part-time employees. References herein to “employees” refer to employees of affiliates of HCA. We are subject to various state and federal laws that regulate wages, hours, benefits and other terms and conditions relating to employment. Employees at 21 of our hospitals were represented by various labor unions at December 31, 2007 and 2006. We consider our employee relations to be satisfactory. Our hospitals, as well as others, have experienced some recent union organizational activity. We had elections at two hospitals in California and one in Missouri during 2007. We do not expect such efforts to materially affect our future operations. Our hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate. In some markets, nurse and medical support personnel availability has become a significant operating issue to health care providers. To address this challenge, we have implemented several initiatives to improve retention, recruiting, compensation programs and productivity. We may also be required to increase the utilization of more expensive temporary or contract personnel.
Our hospitals are staffed by licensed physicians, who generally are not employees of our hospitals. However, some physicians provide services in our hospitals under contracts which generally describe a term of service,


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provide and establish the duties and obligations of such physicians, require the maintenance of certain performance criteria and fix compensation for such services. Any licensed physician may apply to be accepted to the medical staff of any of our hospitals, but the hospital’s medical staff and the appropriate governing board of the hospital, in accordance with established credentialing criteria, must approve acceptance to the staff. Members of the medical staffs of our hospitals often also serve on the medical staffs of other hospitals and may terminate their affiliation with one of our hospitals at any time.
Item 1A.Risk Factors
Risk Factors
If any of the events discussed in the following risk factors were to occur, our business, financial position, results of operations, cash flows or prospects could be materially, adversely affected. Additional risks and uncertainties not presently known, or currently deemed immaterial, may also constrain our business and operations.
Our Substantial Leverage Could Adversely Affect Our Ability To Raise Additional Capital To Fund Our Operations, Limit Our Ability To React To Changes In The Economy Or Our Industry, Expose Us To Interest Rate Risk To The Extent Of Our Variable Rate Debt And Prevent Us From Meeting Our Obligations.
Since completing the Recapitalization, we are highly leveraged. As of December 31, 2007, our total indebtedness was $27.308 billion. Our high degree of leverage could have important consequences, including:
• increasing our vulnerability to general economic and industry conditions;
• requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
• exposing us to the risk of increased interest rates as certain of our unhedged borrowings are at variable rates of interest;
• limiting our ability to make strategic acquisitions or causing us to make nonstrategic divestitures;
• limiting our ability to obtain additional financing for working capital, capital expenditures, product or service line development, debt service requirements, acquisitions and general corporate or other purposes; and
• limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.
We and our subsidiaries have the ability to incur additional indebtedness in the future, subject to the restrictions contained in our senior secured credit facilities and the indentures governing our outstanding notes. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.
Our Debt Agreements Contain Restrictions That Limit Our Flexibility In Operating Our Business.
Our senior secured credit facilities and the indentures governing our outstanding notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and certain of our subsidiaries’ ability to, among other things:
• incur additional indebtedness or issue certain preferred shares;
• pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
• make certain investments;
• sell or transfer assets;
• create liens;


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• consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
• enter into certain transactions with our affiliates.
Under our asset-based revolving credit facility, when (and for as long as) the combined availability under our asset-based revolving credit facility and our senior secured revolving credit facility is less than a specified amount, for a certain period of time, or if a payment or bankruptcy event of default has occurred and is continuing, funds deposited into any of our depository accounts will be transferred on a daily basis into a blocked account with the administrative agent and applied to prepay loans under the asset-based revolving credit facility and to cash collateralize letters of credit issued thereunder.
Under our senior secured credit facilities we are required to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and there can be no assurance that we will continue to meet those ratios. A breach of any of these covenants could result in a default under both of our senior secured credit facilities. Upon the occurrence of an event of default under our senior secured credit facilities, our lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the collateral granted to them to secure each such indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit facilities and our existing senior secured notes. If any of the lenders under our senior secured credit facilities accelerate the repayment of borrowings, there can be no assurance that we will have sufficient assets to repay our senior secured credit facilities and our outstanding notes.
Our Hospitals Face Competition For Patients From Other Hospitals And Health Care Providers.
The health care business is highly competitive, and competition among hospitals and other health care providers for patients has intensified in recent years. Generally, other hospitals in the local communities served by most of our hospitals provide services similar to those offered by our hospitals. In 2005, CMS began making public performance data related to 10 quality measures that hospitals submit in connection with their Medicare reimbursement. On February 8, 2006, the federal DRA 2005 was enacted by Congress to expand and provide for the future expansion of the number of quality measures that must be reported. For federal fiscal year 2008, CMS requires hospitals to report 27 measures of inpatient quality of care to avoid a 2% point reduction in their market basket update. For the federal fiscal year 2009 payment update, CMS will require hospitals to report 30 inpatient quality measures to avoid a 2% point reduction in their market basket update. CMS is requiring that seven measures of outpatient quality of care be reported during federal fiscal year 2008 to receive the full market basket update for outpatient services in federal fiscal year 2009. The additional quality measures and future trends toward clinical transparency may have an unanticipated impact on our competitive position and patient volumes. If any of our hospitals achieve poor results (or results that are lower than our competitors) on these quality measures, patient volumes could decline.
In addition, the number of freestanding specialty hospitals, surgery centers and diagnostic and imaging centers in the geographic areas in which we operate has increased significantly. As a result, most of our hospitals operate in a highly competitive environment. Some of the hospitals that compete with our hospitals are owned by governmental agencies or not-for-profit corporations supported by endowments, charitable contributionsand/or tax revenues and can finance capital expenditures and operations on a tax-exempt basis. Our hospitals are facing increasing competition from physician-owned specialty hospitals and from both our own and unaffiliated freestanding surgery centers for market share in high margin services and for quality physicians and personnel. Also, we anticipate that the number of physician-owned specialty hospitals may increase as HHS has ended a moratorium on the Medicare enrollment of such hospitals. If ambulatory surgery centers are better able to compete in this environment than our hospitals, our hospitals may experience a decline in patient volume, and we may experience a decrease in margin, even if those patients use our ambulatory surgery centers. Further, if our competitors are better able to attract patients, recruit physicians, expand services or obtain favorable managed care contracts at their facilities than our hospitals and ambulatory surgery centers, we may experience an overall decline in patient volume. See Item 1, “Business — Competition.”


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The Growth Of Uninsured And Patient Due Accounts And A Deterioration In The Collectibility Of These Accounts Could Adversely Affect Our Results Of Operations.
The primary collection risks of our accounts receivable relate to the uninsured patient accounts and patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. The provision for doubtful accounts relates primarily to amounts due directly from patients.
The amount of the provision for doubtful accounts is based upon management’s assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal and state governmental and private employer health care coverage, the rate of growth in uninsured patient admissions and other collection indicators. At December 31, 2007, our allowance for doubtful accounts represented approximately 89% of the $4.825 billion patient due accounts receivable balance. For the year ended December 31, 2007, the provision for doubtful accounts increased to 11.7% of revenues compared to 10.4% of revenues in 2006.
A continuation of the trends that have resulted in an increasing proportion of accounts receivable being comprised of uninsured accounts and a deterioration in the collectibility of these accounts will adversely affect our collection of accounts receivable, cash flows and results of operations.
Changes In Governmental And Judicial Interpretations May Negatively Impact Our Ability To Obtain Reimbursement Of Medicare Bad Debts
The Medicare program will reimburse 70% of bad debts related to deductibles and coinsurance for patients with Medicare coverage, after the provider has made a reasonable effort to collect these amounts. On March 30, 2006, the United States District Court for the Western District of Michigan entered a final order inBattle Creek Health System v. Thompson,which provided that reasonable collection efforts have not been satisfied as long as the Medicare accounts remained with an external collection agency. On appeal, the United States Court of Appeals for the Sixth Circuit upheld the lower court’s decision. We incur substantial amounts of Medicare bad debts every year that could be subjected to theBattle Creek decision. We utilize extensive in-house and external collection efforts for our accounts receivable, including deductible and coinsurance amounts owed by patients with Medicare coverage. We utilize a secondary collection agency after in-house and primary collection agency efforts have been unsuccessful. As of August 1, 2007, we modified our accounts receivable collection processes to provide us with reasonable collection results and comply with CMS’s interpretation of reasonable collection efforts. Possible future changes in judicial and administrative interpretations of law and regulations governing Medicare could disrupt our collections processes, increase our costs or otherwise adversely affect our business and results of operations.
Changes In Governmental Programs May Reduce Our Revenues.
A significant portion of our patient volumes is derived from government health care programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. We derived approximately 57% of our admissions from the Medicare and Medicaid programs in 2007. In recent years, legislative and regulatory changes have resulted in limitations on and, in some cases, reductions in levels of payments to health care providers for certain services under these government programs. Possible future changes in the Medicare, Medicaid, and other state programs, including Medicaid supplemental payments pursuant to upper payment limit programs, may impact reimbursements to health care providers and insurers. Such changes may also increase our operating costs, which could reduce our profitability.
Effective January 1, 2007, as a result of the federal DRA 2005, reimbursements for ASC overhead costs were limited to no more than the overhead costs paid to hospital outpatient departments under the Medicare hospital outpatient PPS for the same procedure. On August 2, 2007, CMS issued final regulations that changed payments for procedures performed in an ASC. Effective January 1, 2008, ASC payment groups increased from nine clinically disparate payment groups to an extensive list of covered surgical procedures among the APCs used under the outpatient PPS for these surgical services. CMS estimates that the payment rates for procedures performed in an ASC setting equal 65% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. Moreover, if CMS determines that a procedure is commonly performed in a physician’s office, the ASC reimbursement for that procedure is limited to the reimbursement allowable under the Medicare Part B Physician


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Fee Schedule, with limited exceptions. In addition, all surgical procedures, other than those that pose a significant safety risk or generally require an overnight stay, are payable as ASC procedures. This has expanded the number of procedures that Medicare pays for if performed in an ASC. Because the new payment system has a significant impact on payments for certain procedures, the final rule establishes a four-year transition period for implementing the revised payment rates. More Medicare procedures that are now performed in hospitals, such as ours, may be moved to ASCs, reducing surgical volume in our hospitals. Also, more Medicare procedures that are now performed in ASCs, such as ours, may be moved to physicians’ offices. Commercial third-party payers may adopt similar policies.
On August 22, 2007, CMS issued a final rule for federal fiscal year 2008 for hospital inpatient PPS. This rule adopts a two-year implementation of MS-DRGs, a severity-adjusted DRG system. This change represents a refinement to the existing DRG system, and its impact on our revenues has not been significant. Realignments in the DRG system could impact the margins we receive for certain services. This rule provides for a 3.3% market basket update for hospitals that submit certain quality patient care indicators and a 1.3% update for hospitals that do not submit this data. While we will endeavor to comply with all quality data submission requirements, our submissions may not be deemed timely or sufficient to entitle us to the full market basket adjustment for all our hospitals. Medicare payments to hospitals in federal fiscal year 2008 will be reduced by 0.6% to eliminate what CMS estimates will be the effect of coding or classification changes as a result of hospitals implementing the MS-DRG system. This “documentation and coding adjustment” will increase to 0.9% for federal fiscal year 2009. However, Congress has given CMS the ability to retrospectively determine if the documentation and coding adjustment levels for federal fiscal years 2008 and 2009 were adequate to account for changes in payments not related to changes in case mix. If the levels are found to have been inadequate, CMS can impose an adjustment to payments for federal fiscal years 2010, 2011 and 2012. This evaluation of changes in case-mix based on actual claims data may yield a higher documentation and coding adjustment thereby potentially reducing our revenues and impacting our results of operations in ways that cannot be quantified at this time. Additionally, Medicare payments to hospitals are subject to a number of other adjustments, and the actual impact on payments to specific hospitals may vary. In some cases, commercial third-party payers and other payers such as some state Medicaid programs rely on all or portions of the Medicare DRG system to determine payment rates. The change from traditional Medicare DRGs to MS-DRGs could adversely impact those payment rates if any other payers adopt MS-DRGs.
Since states must operate with balanced budgets and since the Medicaid program is often the state’s largest program, states can be expected to adopt or consider adopting legislation designed to reduce their Medicaid expenditures. DRA 2005 includes Medicaid cuts of approximately $4.8 billion over five years. On May 29, 2007, CMS published a final rule entitled “Medicaid Program; Cost Limit for Providers Operated by Units of Government and Provisions to Ensure the Integrity of Federal-State Financial Partnership.” A moratorium was placed on this rule, delaying its implementation until 2008. However, when the moratorium expires, this final rule could significantly impact state Medicaid programs. In its proposed form, this rule was expected to reduce federal Medicaid funding by $12.2 billion over five years. As a result of the moratorium on implementing the final rule, the impact of the final rule has not been quantified. States have also adopted, or are considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programsand/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems. Future legislation or other changes in the administration or interpretation of government health programs could have a material, adverse effect on our financial position and results of operations.
Demands Of Nongovernment Payers May Adversely Affect Our Growth In Revenues.
Our ability to negotiate favorable contracts with nongovernment payers, including managed care plans, significantly affects the revenues and operating results of most of our hospitals. Admissions derived from managed care and other insurers accounted for approximately 37% of our admissions in 2007. Nongovernment payers, including managed care payers, increasingly are demanding discounted fee structures, and the trend toward consolidation among nongovernment payers tends to increase their bargaining power over fee structures. Reductions in price increases or the amounts received from managed care, commercial insurance or other payers could have a material, adverse effect on our financial position and results of operations.


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If We Are Unable To Retain And Negotiate Favorable Contracts With Managed Care Plans, Our Revenues May Be Reduced.
Our ability to obtain favorable contracts with health maintenance organizations, preferred provider organizations and other managed care plans significantly affects the revenues and operating results of our facilities. Revenues derived from these entities and other insurers accounted for 53% of our patient revenues for each of the years ended December 31, 2007 and 2006. Our future success will depend, in part, on our ability to retain and renew our managed care contracts and enter into new managed care contracts on terms favorable to us. Other health care providers may impact our ability to enter into managed care contracts or negotiate increases in our reimbursement and other favorable terms and conditions. For example, some of our competitors may negotiate exclusivity provisions with managed care plans or otherwise restrict the ability of managed care companies to contract with us. If we are unable to retain and negotiate favorable contracts with managed care plans, our revenues may be reduced.
Our Performance Depends On Our Ability To Recruit And Retain Quality Physicians.
Physicians generally direct the majority of hospital admissions, and the success of our hospitals depends, therefore, in part on the number and quality of the physicians on the medical staffs of our hospitals, the admitting practices of those physicians and maintaining good relations with those physicians. Physicians are generally not employees of the hospitals at which they practice and, in many of the markets that we serve, most physicians have admitting privileges at other hospitals in addition to our hospitals. Such physicians may terminate their affiliation with our hospitals at any time. If we are unable to provide adequate support personnel or technologically advanced equipment and hospital facilities that meet the needs of those physicians, they may be discouraged from referring patients to our facilities, admissions may decrease and our operating performance may decline.
Our Hospitals Face Competition For Staffing, Which May Increase Labor Costs And Reduce Profitability.
Our operations are dependent on the efforts, abilities and experience of our management and medical support personnel, such as nurses, pharmacists and lab technicians, as well as our physicians. We compete with other health care providers in recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our hospitals, including nurses and other nonphysician health care professionals. In some markets, the availability of nurses and other medical support personnel has become a significant operating issue to health care providers. We may be required to continue to enhance wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary or contract personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate. As the competition increases to hire more people from labor pools that are not growing at a rate sufficient to meet demand, our labor costs could increase. Additionally, to the extent that a significant portion of our employee base unionizes, or attempts to unionize, our costs could increase. If our costs increase, we may not be able to raise rates to offset these increased costs. Because a significant percentage of our revenues consists of fixed, prospective payments, our ability to pass along increased labor costs is constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control labor costs, could have a material, adverse effect on our results of operations.
If We Fail To Comply With Extensive Laws And Government Regulations, We Could Suffer Penalties Or Be Required To Make Significant Changes To Our Operations.
The health care industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:
• billing for services;
• relationships with physicians and other referral sources;
• adequacy of medical care;
• quality of medical equipment and services;
• qualifications of medical and support personnel;


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• confidentiality, maintenance and security issues associated with health-related information and medical records;
• the screening, stabilization and transfer of individuals who have emergency medical conditions;
• licensure and certification;
• hospital rate or budget review;
• operating policies and procedures; and
• addition of facilities and services.
Among these laws are the Anti-kickback Statute, the Stark Law and the False Claims Act and similar state laws. These laws impact the relationships that we may have with physicians and other referral sources. We have a variety of financial relationships with physicians and others who either refer or influence the referral of patients to our hospitals and other health care facilities, including employment contracts, leases and professional service agreements. We also have similar relationships with physicians and facilities to which patients are referred from our facilities. We also provide financial incentives, including minimum revenue guarantees, to recruit physicians into the communities served by our hospitals. The OIG has enacted safe harbor regulations that outline practices that are deemed protected from prosecution under the Anti-kickback Statute. While we endeavor to comply with the applicable safe harbors, certain of our current arrangements, including joint ventures and financial relationships with physicians and other referral sources and persons and entities to which we refer patients, do not qualify for safe harbor protection. Failure to qualify for a safe harbor does not mean that the arrangement necessarily violates the Anti-kickback Statute, but may subject the arrangement to greater scrutiny; however, we cannot assure you that practices that are outside of a safe harbor will not be found to violate the Anti-kickback Statute. Allegations of violations of the Anti-kickback Statute may also be brought under the federal Civil Monetary Penalty Law, which requires a lower burden of proof than other fraud and abuse laws, including the Anti-kickback Statute.
Our financial relationships with referring physicians and their immediate family members must comply with the Stark Law by meeting an exception. We attempt to structure our relationships to meet an exception to the Stark Law, but the regulations implementing the exceptions are detailed and complex, and we cannot assure that every relationship complies fully with the Stark Law. Unlike the Anti-kickback Statute, failure to meet an exception under the Stark Law results in a violation of the Stark Law, even if such violation is technical in nature.
Additionally, if we violate the Anti-kickback Statute or Stark Law, or if we improperly bill for our services, we may be found to violate the False Claims Act, either under a suit brought by the government or by a private person under aqui tam, or “whistleblower,” suit.
If we fail to comply with the Anti-kickback Statute, the Stark Law, the False Claims Act or other applicable laws and regulations, or if we fail to maintain an effective corporate compliance program, we could be subjected to liabilities, including civil penalties (including the loss of our licenses to operate one or more facilities), exclusion of one or more facilities from participation in the Medicare, Medicaid and other federal and state health care programs and, for violations of certain laws and regulations, criminal penalties. See Item 1, “Business — Regulation and Other Factors.”
Because many of these laws and their implementation regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material, adverse effect our business, financial condition, results of operations or prospects, and our business reputation could suffer significantly. In addition, other legislation or regulations at the federal or state level may be adopted that adversely affect our business.
CMS has announced its intent to require 500 hospitals to respond to the DFRR and thereby disclose certain financial relationships between such hospitals and physicians. The timing and format of the DFRR are not yet


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known. HHS has indicated it intends to use the DFRR to monitor compliance with the Stark Law, and HHS may share the information with other government agencies. CMS has indicated that responding hospitals will have a limited amount of time to compile a significant amount of information relating to their financial relationships with physicians. Depending on the final format of the DFRR, responding hospitals may be subject to substantial penalties as a result of enforcement actions brought by government agencies and whistleblowers acting pursuant to the False Claims Act and similar state laws, based on such allegations as failure to respond within required deadlines, that the response is inaccurate or contains incomplete information, or that the response indicates a potential violation of the Stark Law or other requirements. Any such investigation, enforcement action, or whistleblower allegation could materially adversely affect the results of our operations.
We Have Been The Subject Of Governmental Investigations, Claims And Litigation
Commencing in 1997, we became aware that we were the subject of governmental investigations and litigation relating to our business practices. The investigations were concluded through a series of agreements executed in 2000 and 2003. In January 2001, we entered into an eight-year Corporate Integrity Agreement (“CIA”) with the OIG. Under the CIA, we have numerous affirmative obligations, including the requirement that we report potential violations of applicable federal health care laws and regulations and have, pursuant to this obligation, reported a number of potential violations of the Stark Law, the Anti-kickback Statute, the Emergency Medical Treatment and Active Labor Act (“EMTALA”) and other laws, most of which we consider to be nonviolations or technical violations. The government could determine that our reportingand/or our resolution of reported issues have been inadequate. If we are found to be in violation of the CIA or any applicable health care laws or regulations, we could be subject to repayment requirements, substantial monetary fines, civil penalties, exclusion from participation in the Medicare and Medicaid and other federal and state health care programs, and, for violations of certain laws and regulations, criminal penalties. Any such sanctions or expenses could have a material, adverse effect on our financial position, results of operations or liquidity.
Health care companies are subject to numerous investigations by various governmental agencies. Further, under the federal False Claims Act, private parties have the right to bringqui tam, or “whistleblower,” suits against companies that submit false claims for payments to the government. Some states have adopted similar state whistleblower and false claims provisions. Companies doing business under federal health care programs may be contacted by various governmental agencies in connection with a government investigation either brought by the government or by a private person under aqui tam action. Because of the confidential nature of some government investigations or a confidential seal under the federal False Claims Act, we do not always know the particulars of the allegations or concerns at the time the government notifies us that an investigation is proceeding. Certain of our individual facilities have received, and other facilities may receive, government inquiries from federal and state agencies. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material, adverse effect on our financial position, results of operations and liquidity.
Governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries and carriers, as well as the OIG, conduct audits of our health care operations. Private payers may conduct similar post-payment audits, and we also perform internal audits and monitoring. Depending on the nature of the conduct found in such audits and whether the underlying conduct could be considered systemic, the resolution of these audits could have a material, adverse effect on our financial position, results of operations and liquidity.
Controls Designed To Reduce Inpatient Services May Reduce Our Revenues.
Controls imposed by Medicare, managed Medicare, Medicaid, managed Medicaid and commercial third-party payers designed to reduce admissions and lengths of stay, commonly referred to as “utilization review,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and course of treatment of a patient by health plans. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payer-required preadmission authorization and utilization review and by payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Efforts to impose more stringent cost controls are expected to continue. Although we are unable to predict the effect these changes will have on our operations, significant limits on the scope of services reimbursed and on


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reimbursement rates and fees could have a material, adverse effect on our business, financial position and results of operations.
Our Operations Could Be Impaired By A Failure Of Our Information Systems.
Any system failure that causes an interruption in service or availability of our systems could adversely affect operations or delay the collection of revenue. Even though we have implemented network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering. The occurrence of any of these events could result in interruptions, delays, the loss or corruption of data, or cessations in the availability of systems, all of which could have a material, adverse effect on our financial position and results of operations and harm our business reputation.
The performance of our sophisticated information technology and systems is critical to our business operations. In addition to our shared services initiatives, our information systems are essential to a number of critical areas of our operations, including:
• accounting and financial reporting;
• billing and collecting accounts;
• coding and compliance;
• clinical systems;
• medical records and document storage;
• inventory management; and
• negotiating, pricing and administering managed care contracts and supply contracts.
State Efforts To Regulate The Construction Or Expansion Of Health Care Facilities Could Impair Our Ability To Operate And Expand Our Operations.
Some states, particularly in the eastern part of the country, require health care providers to obtain prior approval, known as a certificate of need, for the purchase, construction or expansion of health care facilities, to make certain capital expenditures or to make changes in services or bed capacity. In giving approval, these states consider the need for additional or expanded health care facilities or services. We currently operate health care facilities in a number of states with certificate of need laws. The failure to obtain any requested certificate of need could impair our ability to operate or expand operations. Any such failure could, in turn, adversely affect our ability to attract patients to our facilities and grow our revenues, which would have an adverse effect on our results of operations.
Our Facilities Are Heavily Concentrated In Florida And Texas, Which Makes Us Sensitive To Regulatory, Economic, Environmental And Competitive Conditions And Changes In Those States.
We operated 169 hospitals at December 31, 2007, and 72 of those hospitals are located in Florida and Texas. Our Florida and Texas facilities’ combined revenues represented approximately 51% of our consolidated revenues for the year ended December 31, 2007. This concentration makes us particularly sensitive to regulatory, economic, environmental and competitive conditions and 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.
In addition, our hospitals in Florida and Texas and other areas across the Gulf Coast are located in hurricane-prone areas. In the recent past, hurricanes have had a disruptive effect on the operations of our hospitals in Florida, Texas and other coastal states, and the patient populations in those states. Our business activities could be harmed by a particularly active hurricane season or even a single storm. In addition, the premiums to renew our property insurance policy for 2006 and 2007 increased significantly over premiums incurred in 2005. Our current policy also includes an increase in the stated deductible and we were not able to obtain coverage in the amounts we have had under our policies prior to 2006. As a result of such increases in deductibles, we expect that our cash flows and


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profitability may be adversely affected. In addition, the property insurance we obtain may not be adequate to cover losses from future hurricanes or other natural disasters.
We May Be Subject To Liabilities From Claims By The IRS.
We are currently contesting before the Appeals Division of the Internal Revenue Service (the “IRS”) certain claimed deficiencies and adjustments proposed by the IRS in connection with its examination of the 2001 and 2002 federal income tax returns for HCA and 15 affiliates that are treated as partnerships for federal income tax purposes (“affiliated partnerships”). We expect the IRS will complete its examination of the 2003 and 2004 federal income tax returns for HCA and 19 affiliated partnerships during the first quarter of 2008 and intend to contest certain claimed deficiencies and adjustments proposed by the IRS in connection with these audits before the IRS Appeals Division.
The disputed items pending before the IRS Appeals Division for 2001 and 2002, or proposed by the IRS Examination Division for 2003 and 2004, include the deductibility of a portion of the 2001 and 2003 government settlement payments, the timing of recognition of certain patient service revenues in 2001 through 2004, the method for calculating the tax allowance for doubtful accounts in 2002 through 2004, and the amount of insurance expense deducted in 2001 and 2002.
The IRS began an audit of the 2005 and 2006 federal income tax returns for HCA during the first quarter of 2008. We expect the IRS will open examinations of the 2005 and 2006 federal income tax for returns for one or more affiliated partnerships during 2008.
We May Be Subject To Liabilities From Claims Brought Against Our Facilities.
We are subject to litigation relating to our business practices, including claims and legal actions by patients and others in the ordinary course of business alleging malpractice, product liability or other legal theories. See Item 3, “Legal Proceedings.” Many of these actions involve large claims and significant defense costs. We insure a substantial portion of our professional liability risks through a wholly-owned subsidiary. Management believes our reserves for self-insured retentions and insurance coverage are sufficient to cover claims arising out of the operation of our facilities. Our wholly-owned insurance subsidiary has entered into certain reinsurance contracts, and the obligations covered by the reinsurance contracts are included in its reserves for professional liability risks, as the subsidiary remains liable to the extent that the reinsurers do not meet their obligations under the reinsurance contracts. If payments for claims exceed actuarially determined estimates, are not covered by insurance or reinsurers, if any, fail to meet their obligations, our results of operations and financial position could be adversely affected.
We Are Exposed To Market Risks Related To Changes In The Market Values Of Securities And Interest Rate Changes.
We are exposed to market risk related to changes in market values of securities. The investments in debt and equity securities of our wholly-owned insurance subsidiary were $1.870 billion and $29 million, respectively, at December 31, 2007. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. The fair value of investments is generally based on quoted market prices. At December 31, 2007, we had a net unrealized gain of $21 million on the insurance subsidiary’s investment securities.
We are exposed to market risk related to market illiquidity. Liquidity of the investments in debt and equity securities of our wholly-owned insurance subsidiary could be affected by the inability to access capital markets. At December 31, 2007, our wholly-owned insurance subsidiary, had invested $725 million in municipal, tax-exempt student loan auction rate securities and $20 million in preferred stock auction rate securities which were classified as long-term investments. The auction rate securities (“ARS”) are publicly issued securities with long-term stated maturities for which the interest rates are reset through a Dutch auction every 35 to 92 days. The auctions have historically provided a liquid market for these securities, as investors could readily sell their investments at auction. With the liquidity issues experienced in global credit and capital markets, the ARS held by our wholly-owned subsidiary have experienced multiple failed auctions, beginning on February 11, 2008, as the amount of securities


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submitted for sale exceeded the amount of purchase orders. There is a very limited market for the ARS at this time. We do not currently intend to attempt sell the ARS as the liquidity needs of our insurance subsidiary are expected to be met by other investments in its investment portfolio. If uncertainties in the credit and capital markets continue or there are ratings downgrades on the ARS held by our insurance subsidiary, we may be required to recognize other-than-temporary impairments on these long-term investments in future periods.
We are also exposed to market risk related to changes in interest rates and periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The net interest payments based on the notional amounts in these agreements generally match the timing of the cash flows of the related liabilities. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not assets or liabilities of HCA. Any market risk or opportunity associated with these swap agreements is offset by the opposite market impact on the related debt. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk.”
Since The Recapitalization, The Investors Control Us And May Have Conflicts Of Interest With Us In The Future.
As of December 31, 2007, the Investors indirectly own 97.5% of our capital stock due to the Recapitalization. As a result, the Investors have control over our decisions to enter into any significant corporate transaction and have the ability to prevent any transaction that requires the approval of shareholders. For example, the Investors could cause us to make acquisitions that increase the amount of our indebtedness or sell assets.
Additionally, the Sponsors are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by the Sponsors continue to indirectly own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions.
Item 1B.Unresolved Staff Comments
None.


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Item 2.Properties
The following table lists, by state, the number of hospitals (general, acute care, psychiatric and rehabilitation) directly or indirectly owned and operated by us as of December 31, 2007:
         
State
 Hospitals Beds
 
Alaska  1   250 
California  5   1,515 
Colorado  7   2,227 
Florida  37   9,427 
Georgia  13   2,234 
Idaho  2   481 
Indiana  1   278 
Kansas  4   1,286 
Kentucky  2   384 
Louisiana  10   1,602 
Mississippi  1   130 
Missouri  6   1,055 
Nevada  3   1,075 
New Hampshire  2   295 
Oklahoma  2   793 
South Carolina  3   740 
Tennessee  13   2,317 
Texas  35   10,054 
Utah  6   932 
Virginia  10   2,963 
         
International
        
England  6   704 
         
   169   40,742 
         
In addition to the hospitals listed in the above table, we directly or indirectly operate 108 freestanding surgery centers. We also operate medical office buildings in conjunction with some of our hospitals. These office buildings are primarily occupied by physicians who practice at our hospitals.
We maintain our headquarters in approximately 1,147,000 square feet of space in the Nashville, Tennessee area. In addition to the headquarters in Nashville, we maintain regional service centers related to our shared services initiatives. These service centers are located in markets in which we operate hospitals.
We believe our headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for our present needs. Our properties are subject to various federal, state and local statutes and ordinances regulating their operation. Management does not believe that compliance with such statutes and ordinances will materially affect our financial position or results of operations.
Item 3.Legal Proceedings
We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims or legal and regulatory proceedings could have a material, adverse effect on our results of operations or financial position in a given period.
Government Investigations, Claims and Litigation
In January 2001, we entered into an eight-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the Department of Health and Human Services. Violation or breach of the CIA, or violation of federal or state laws relating to Medicare, Medicaid or similar programs, could subject us to substantial monetary fines, civil and criminal penaltiesand/or exclusion from participation in the Medicare and Medicaid programs.


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Alleged violations may be pursued by the government or through privatequi tamactions. Sanctions imposed against us as a result of such actions could have a material, adverse effect on our results of operations or financial position.
Shareholder Derivative Lawsuits in Federal Court
In November 2005, two then current shareholders each filed a derivative lawsuit, purportedly on behalf of HCA, in the United States District Court for the Middle District of Tennessee against our Chairman and Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer, other executives, and certain members of our Board of Directors. Each lawsuit asserted claims for breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment in connection with our July 13, 2005 announcement of preliminary results of operations for the quarter ended June 30, 2005 and seeks monetary damages.
On January 23, 2006, the Court consolidated these actions asIn re HCA Inc. Derivative Litigation, case number 3:05-CV-0968. The court stayed this action on February 27, 2006, pending resolution of a motion to dismiss the consolidated amended complaint in the related federal securities class action against us. On March 24, 2006, a consolidated derivative complaint was filed pursuant to a prior court order. These cases have now been settled.
Shareholder Derivative Lawsuit in State Court
On January 18, 2006, a then current shareholder filed a derivative lawsuit, purportedly on behalf of HCA, in the Circuit Court for the State of Tennessee (Nashville District), against our Chairman and Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer, other executives, and certain members of our Board of Directors. This lawsuit was substantially identical in all material respects to the consolidated federal litigation described above under “Shareholder Derivative Lawsuits in Federal Court.” The Court stayed this action on April 3, 2006, pending resolution of a motion to dismiss the consolidated amended complaint in the related federal securities class action against us. This case has now been settled.
ERISA Litigation
On November 22, 2005, Brenda Thurman, a former employee of an HCA affiliate, filed a complaint in the United States District Court for the Middle District of Tennessee on behalf of herself, the HCA Savings and Retirement Program (the “Plan”), and a class of participants in the Plan who held an interest in our common stock, against our Chairman and Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer, and other unnamed individuals. The lawsuit, filed under sections 502(a)(2) and 502(a)(3) of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §§ 1132(a)(2) and (3), alleges that defendants breached their fiduciary duties owed to the Plan and to plan participants and seeks monetary damages and injunctions and other relief.
On January 13, 2006, the court signed an order staying all proceedings and discovery in this matter, pending resolution of a motion to dismiss the consolidated amended complaint in the related federal securities class action against HCA. On January 18, 2006, the magistrate judge signed an order (1) consolidating Thurman’s cause of action with all other future actions making the same claims and arising out of the same operative facts, (2) appointing Thurman as lead plaintiff, and (3) appointing Thurman’s attorneys as lead counsel and liaison counsel in the case. On January 26, 2006, the court issued an order reassigning the case to United States District Court Judge William J. Haynes, Jr., who was presiding over the federal securities class action and federal derivative lawsuits. We have reached an agreement in principle to settle this suit, subject to court approval.
Merger Litigation in State Court
We are aware of six asserted class action lawsuits related to the Merger filed against us, our Chairman and Chief Executive Officer, our President and Chief Operating Officer, members of the Board of Directors and each of the Sponsors in the Chancery Court for Davidson County, Tennessee. The complaints are substantially similar and allege, among other things, that the Merger was the product of a flawed process, that the consideration to be paid to our shareholders in the Merger was unfair and inadequate, and that there was a breach of fiduciary duties. The complaints further allege that the Sponsors abetted the actions of our officers and directors in breaching their


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fiduciary duties to our shareholders. The complaints sought, among other relief, an injunction preventing completion of the Merger. On August 3, 2006, the Chancery Court consolidated these actions and all later-filed actions asIn re HCA Inc. Shareholder Litigation, case number06-1816-III. On November 8, 2006, we and the other named parties entered into a memorandum of understanding with plaintiffs’ counsel in connection with these actions. These cases have now been settled.
��
Two cases making similar allegations and seeking similar relief on behalf of purported classes of then current shareholders have also been filed in Delaware. These two actions have also been consolidated under case number 2307-N and are pending in the Delaware Chancery Court, New Castle County. These cases have been dismissed in light of the settlement of the related Tennessee cases.
On October 23, 2006, the Foundation for Seacoast Health filed a lawsuit against us and one of our affiliates, HCA Health Services of New Hampshire, Inc., in the Superior Court of Rockingham County, New Hampshire. Among other things, the complaint seeks to enforce certain provisions of an asset purchase agreement between the parties, including a purported right of first refusal to purchase a New Hampshire hospital, that allegedly were triggered by the Merger and other prior events. The Foundation initially sought to enjoin the Merger. However, the parties reached an agreement that allowed the Merger to proceed, while preserving the plaintiff’s opportunity to litigate whether the Merger triggered the right of first refusal to purchase the hospital and, if so, at what price the hospital could be repurchased. On May 25, 2007, the court granted HCA’s motion for summary judgment disposing of the Foundation’s central claims. The Foundation has filed an appeal from the final judgment.
General Liability and Other Claims
On April 10, 2006, a class action complaint was filed against us in the District Court of Kansas alleging, among other matters, nurse understaffing at all of our hospitals, certain consumer protection act violations, negligence and unjust enrichment. The complaint is seeking, among other relief, declaratory relief and monetary damages, including disgorgement of profits of $12.250 billion. A motion to dismiss this action was granted on July 27, 2006, but the plaintiffs have appealed this dismissal. We believe this lawsuit is without merit and plan to defend it vigorously.
We are a party to certain proceedings relating to claims for income taxes and related interest in the United States Tax Court and the United States Court of Federal Claims. For a description of those proceedings, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — IRS Disputes” and Note 6 to our consolidated financial statements.
We are also subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or for wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants have asked for punitive damages against us, which may not be covered by insurance. In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material, adverse effect on our results of operations or financial position.
Item 4.Submission of Matters to a Vote of Security Holders
On December 31, 2007, Hercules Holding II, LLC, the holder of 97.5% of our issued and outstanding shares of capital stock, reelected Christopher J. Birosak, George A. Bitar, Jack O. Bovender, Jr., Richard M. Bracken, John P. Connaughton, Thomas F. Frist, Jr., Thomas F. Frist III, Christopher  R. Gordon, Michael W. Michelson, James C. Momtazee, Stephen G. Pagliuca, Peter M. Stavros and Nathan C. Thorne, as the Board of Directors of the Company through a written consent of stockholders to action without a meeting. On January 29, 2008, a notice of such action was sent to the holders of record of our issued and outstanding capital stock as of the close of business on December 31, 2007.


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PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our outstanding common stock is privately held, and there is no established public trading market for our common stock. As of February 29, 2008, there were 637 holders of our common stock. See Item 7, “Management’s Discussion and Analysis of Financial condition and Results of Operations — Liquidity and Capital Resources — Financing Activities” for a description of the restrictions on our ability to pay dividends.
In January 2006, our Board of Directors approved an increase in our quarterly dividend from $0.15 per share to $0.17 per share. The Board declared the initial $0.17 per share dividend payable on June 1, 2006 to shareholders of record at May 1, 2006 and an additional dividend payable September 1, 2006 to shareholders of record on August 1, 2006. We did not pay a quarterly dividend during the fourth quarter of 2006. We did not pay any dividends in 2007.
During the quarter ended December 31, 2007, HCA issued 15,814 shares of common stock in connection with the exercise of stock options for aggregate consideration of $201,629. The shares were issued without registration in reliance on the exemptions afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 701 promulgated thereunder.


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Item 6.Selected Financial Data
HCA INC.
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(Dollars in millions)
                     
  2007  2006  2005  2004  2003 
 
Summary of Operations:
                    
Revenues $26,858  $25,477  $24,455  $23,502  $21,808 
                     
Salaries and benefits  10,714   10,409   9,928   9,419   8,682 
Supplies  4,395   4,322   4,126   3,901   3,522 
Other operating expenses  4,241   4,056   4,034   3,769   3,656 
Provision for doubtful accounts  3,130   2,660   2,358   2,669   2,207 
Gains on investments  (8)  (243)  (53)  (56)  (1)
Equity in earnings of affiliates  (206)  (197)  (221)  (194)  (199)
Depreciation and amortization  1,426   1,391   1,374   1,250   1,112 
Interest expense  2,215   955   655   563   491 
Gains on sales of facilities  (471)  (205)  (78)  —   (85)
Impairment of long-lived assets  24   24   —   12   130 
Transaction costs  —   442   —   —   — 
Government settlement and investigation related costs  —   —   —   —   (33)
                     
   25,460   23,614   22,123   21,333   19,482 
                     
Income before minority interests and income taxes  1,398   1,863   2,332   2,169   2,326 
Minority interests in earnings of consolidated entities  208   201   178   168   150 
                     
Income before income taxes  1,190   1,662   2,154   2,001   2,176 
Provision for income taxes  316   626   730   755   844 
                     
Net income $874  $1,036  $1,424  $1,246  $1,332 
                     
Financial Position:
                    
Assets $24,025  $23,675  $22,225  $21,840  $21,400 
Working capital  2,356   2,502   1,320   1,509   1,654 
Long-term debt, including amounts due within one year  27,308   28,408   10,475   10,530   8,707 
Minority interests in equity of consolidated entities  938   907   828   809   680 
Equity securities with contingent redemption rights  164   125   —   —   — 
Stockholders’ (deficit) equity  (10,538)  (11,374)  4,863   4,407   6,209 
Cash Flow Data:
                    
Cash provided by operating activities $1,396  $1,845  $2,971  $2,954  $2,292 
Cash used in investing activities  (479)  (1,307)  (1,681)  (1,688)  (2,862)
Cash (used in) provided by financing activities  (1,158)  (240)  (1,212)  (1,347)  650 


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  2007  2006  2005  2004  2003 
 
Operating Data:
                    
Number of hospitals at end of period(a)  161   166   175   182   184 
Number of freestanding outpatient surgical centers at end of period(b)  99   98   87   84   79 
Number of licensed beds at end of period(c)  38,405   39,354   41,265   41,852   42,108 
Weighted average licensed beds(d)  39,065   40,653   41,902   41,997   41,568 
Admissions(e)  1,552,700   1,610,100   1,647,800   1,659,200   1,635,200 
Equivalent admissions(f)  2,352,400   2,416,700   2,476,600   2,454,000   2,405,400 
Average length of stay (days)(g)  4.9   4.9   4.9   5.0   5.0 
Average daily census(h)  21,049   21,688   22,225   22,493   22,234 
Occupancy(i)  54%  53%  53%  54%  54%
Emergency room visits(j)  5,116,100   5,213,500   5,415,200   5,219,500   5,160,200 
Outpatient surgeries(k)  804,900   820,900   836,600   834,800   814,300 
Inpatient surgeries(l)  516,500   533,100   541,400   541,000   528,600 
Days revenues in accounts receivable(m)  53   53   50   48   52 
Gross patient revenues(n) $92,429  $84,913  $78,662  $71,279  $62,626 
Outpatient revenues as a % of patient revenues(o)  37%  36%  36%  37%  37%
(a)Excludes eight facilities in 2007 and seven facilities in 2006, 2005, 2004, and 2003 that are not consolidated (accounted for using the equity method) for financial reporting purposes.
(b)Excludes nine facilities in 2007 and 2006, seven facilities in 2005, eight facilities in 2004 and four facilities in 2003 that are not consolidated (accounted for using the equity method) for financial reporting purposes.
 
(c)Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
 
(d)Weighted average licensed beds represents the average number of licensed beds, weighted based on periods owned.
 
(e)Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.
 
(f)Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation “equates” outpatient revenue to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume.
 
(g)Represents the average number of days admitted patients stay in our hospitals.
 
(h)Represents the average number of patients in our hospital beds each day.
 
(i)Represents the percentage of hospital licensed beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms.
 
(j)Represents the number of patients treated in our emergency rooms.
 
(k)Represents the number of surgeries performed on patients who were not admitted to our hospitals. Pain management and endoscopy procedures are not included in outpatient surgeries.
 
(l)Represents the number of surgeries performed on patients who have been admitted to our hospitals. Pain management and endoscopy procedures are not included in inpatient surgeries.

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Competition
      Generally, other hospitals in the local communities served by most of our hospitals provide services similar to those offered by our hospitals. Additionally, in the past several years the number of freestanding surgery centers and diagnostic centers (including facilities owned by physicians) in the geographic areas in which we operate has increased significantly. As a result, most of our hospitals operate in a highly competitive environment. The rates charged by our hospitals are intended to be competitive with those charged by other local hospitals for similar services. In some cases, competing hospitals are more established than our hospitals. Some competing hospitals are owned by tax-supported government agencies and many others are owned by not-for-profit entities that may be supported by endowments, charitable contributions and tax revenues, and are exempt from sales, property and income taxes. Such exemptions and support are not available to our hospitals. In certain localities there are large teaching hospitals that provide highly specialized facilities, equipment and services which may not be available at most of our hospitals. We are facing increasing competition from physician-owned specialty hospitals and freestanding surgery centers for market share in high margin services.
      Psychiatric hospitals frequently attract patients from areas outside their immediate locale and, therefore, our psychiatric hospitals compete with both local and regional hospitals, including the psychiatric units of general, acute care hospitals.
      Our strategies are designed to ensure our hospitals are competitive. We believe our hospitals compete within local communities on the basis of many factors, including the quality of care; ability to attract and retain quality physicians, skilled clinical personnel and other health care professionals; location; breadth of services; technology offered and prices charged. We have increased our focus on operating outpatient services with improved accessibility and more convenient service for patients, and increased predictability and efficiency for physicians.
      Two of the most significant factors to the competitive position of a hospital are the number and quality of physicians affiliated with the hospital. Although physicians may at any time terminate their affiliation with a hospital operated by us, our hospitals seek to retain physicians with varied specialties on the hospitals’ medical staffs and to attract other qualified physicians. We believe that physicians refer patients to a hospital on the basis of the quality and scope of services it renders to patients and physicians, the quality of physicians on the medical staff, the location of the hospital and the quality of the hospital’s facilities, equipment and employees. Accordingly, we strive to maintain and provide quality facilities, equipment, employees and services for physicians and patients.
      Another major factor in the competitive position of a hospital is management’s ability to negotiate service contracts with purchasers of group health care services. Managed care plans attempt to direct and control the use of hospital services and obtain discounts from hospitals’ established gross charges. In addition, employers and traditional health insurers are increasingly interested in containing costs through negotiations with hospitals for managed care programs and discounts from established gross charges. Generally, hospitals compete for service contracts with group health care services purchasers on the basis of price, market reputation, geographic location, quality and range of services, quality of the medical staff and convenience. The importance of obtaining contracts with managed care organizations varies from community to community, depending on the market strength of such organizations.
      State certificate of need (“CON”) laws, which place limitations on a hospital’s ability to expand hospital services and facilities, make capital expenditures and otherwise make changes in operations, may also have the effect of restricting competition. In those states which have no CON laws or which set relatively high levels of expenditures before they become reviewable by state authorities, competition in the form of new services, facilities and capital spending is more prevalent. See Item 1, “Business — Regulation and Other Factors.”
      We, and the health care industry as a whole, face the challenge of continuing to provide quality patient care while dealing with rising costs and strong competition for patients. Changes in medical technology, existing and future legislation, regulations and interpretations and managed care contracting for provider services by private and government payers remain ongoing challenges.

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      Admissions and average lengths of stay continue to be negatively affected by payer-required preadmission authorization, utilization review and payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Increased competition, admission constraints and payer pressures are expected to continue. To meet these challenges, we intend to expand many of our facilities or acquire or construct new facilities to better enable the provision of a comprehensive array of outpatient services, offer discounts to private payer groups, upgrade facilities and equipment, and offer new or expanded programs and services.
Regulation and Other Factors
Licensure, Certification and Accreditation
      Health care facility construction and operation are subject to numerous federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. We believe that our health care facilities are properly licensed under applicable state laws. All of our general, acute care hospitals are certified for participation in the Medicare and Medicaid programs and are accredited by the Joint Commission on Accreditation of Healthcare Organizations (“Joint Commission”). If any facility were to lose its Joint Commission accreditation or otherwise lose its certification under the Medicare and Medicaid programs, the facility would be unable to receive reimbursement from the Medicare and Medicaid programs. Management believes our facilities are in substantial compliance with current applicable federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, it may become necessary for us to make changes in our facilities, equipment, personnel and services. The requirements for licensure also may include notification or approval in the event of the transfer or change of ownership. Failure to obtain the necessary state approval in these circumstances can result in the inability to complete an acquisition or change of ownership.
Certificates of Need
      In some states where we operate hospitals, the construction or expansion of health care facilities, the acquisition of existing facilities, the transfer or change of ownership and the addition of new beds or services may be subject to review by and prior approval of state regulatory agencies under a CON program. Such laws generally require the reviewing state agency to determine the public need for additional or expanded health care facilities and services. Failure to obtain necessary state approval can result in the inability to expand facilities, complete an acquisition or change ownership.
State Rate Review
      Some states have adopted legislation mandating rate or budget review for hospitals or have adopted taxes on hospital revenues, assessments or licensure fees to fund indigent health care within the state. In the aggregate, indigent tax provisions have not materially, adversely affected our results of operations. Although we do not currently operate facilities in states that mandate rate or budget reviews, we cannot predict whether we will operate in such states in the future, or whether the states in which we currently operate may adopt legislation mandating such reviews.
Utilization Review
      Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards, are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by quality improvement organizations to assess the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care

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provided, the validity of DRG classifications and the appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided, may assess fines and also have the authority to recommend to HHS that a provider, which is in substantial noncompliance with the appropriate standards, be excluded from participating in the Medicare program. Most nongovernmental managed care organizations also require utilization review.
Federal Health Care Program Regulations
      Participation in any federal health care program, including the Medicare and Medicaid programs, is heavily regulated by statute and regulation. If a hospital fails to substantially comply with the numerous conditions of participation in the Medicare and Medicaid programs or performs certain prohibited acts, the hospital’s participation in the federal health care programs may be terminated, or civil or criminal penalties may be imposed under certain provisions of the Social Security Act, or both.
Anti-kickback Statute
      A section of the Social Security Act known as the “Anti-kickback Statute” prohibits providers and others from directly or indirectly soliciting, receiving, offering or paying any remuneration with the intent of generating referrals or orders for services or items covered by a federal health care program. Courts have interpreted this statute broadly. Violations of the Anti-kickback Statute may be punished by a criminal fine of up to $25,000 for each violation or imprisonment, civil money penalties of up to $50,000 per violation and damages of up to three times the total amount of the remuneration and/or exclusion from participation in federal health care programs, including Medicare and Medicaid. Courts have held that there is a violation of the Anti-kickback Statute if just one purpose of the renumeration is to generate referrals, even if there are other lawful purposes.
      The Office of Inspector General at HHS (“OIG”), among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse and waste. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. As one means of providing guidance to health care providers, the OIG issues “Special Fraud Alerts.” These alerts do not have the force of law, but identify features of arrangements or transactions that may indicate that the arrangements or transactions violate the Anti-kickback Statute or other federal health care laws. The OIG has identified several incentive arrangements, which, if accompanied by inappropriate intent, constitute suspect practices, including: (a) payment of any incentive by the hospital each time a physician refers a patient to the hospital, (b) the use of free or significantly discounted office space or equipment in facilities usually located close to the hospital, (c) provision of free or significantly discounted billing, nursing or other staff services, (d) free training for a physician’s office staff in areas such as management techniques and laboratory techniques, (e) guarantees which provide that, if the physician’s income fails to reach a predetermined level, the hospital will pay any portion of the remainder, (f) low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients to the hospital, (g) payment of the costs of a physician’s travel and expenses for conferences, (h) coverage on the hospital’s group health insurance plans at an inappropriately low cost to the physician, (i) payment for services (which may include consultations at the hospital) which require few, if any, substantive duties by the physician, (j) purchasing goods or services from physicians at prices in excess of their fair market value, and (k) rental of space in physician offices, at other than fair market value terms, by persons or entities to which physicians refer. The OIG has encouraged persons having information about hospitals who offer the above types of incentives to physicians to report such information to the OIG.
      The OIG also issues Special Advisory Bulletins as a means of providing guidance to health care providers. These bulletins, along with the Special Fraud Alerts, have focused on certain arrangements that could be subject to heightened scrutiny by government enforcement authorities, including: (a) contractual joint venture arrangements and other joint venture arrangements between those in a position to refer business, such as physicians, and those providing items or services for which Medicare or Medicaid pays, and (b) certain “gainsharing” arrangements, i.e., the practice of giving physicians a share of any reduction in a hospital’s costs for patient care attributable in part to the physician’s efforts.

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      In addition to issuing Special Fraud Alerts and Special Advisory Bulletins, the OIG issues compliance program guidance for certain types of health care providers. In January 2005, the OIG published Supplemental Compliance Guidance for Hospitals, supplementing its 1998 guidance for the hospital industry. In the supplemental guidance, the OIG identifies a number of risk areas under federal fraud and abuse statutes and regulations. These areas of risk include compensation arrangements with physicians, recruitment arrangements with physicians and joint venture relationships with physicians.
      As authorized by Congress, the OIG has published safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the Anti-kickback Statute. Currently, there are statutory exceptions and safe harbors for various activities, including the following: investment interests, space rental, equipment rental, practitioner recruitment, personnel services and management contracts, sale of practice, referral services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary coinsurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, freestanding surgery centers, ambulance replenishing, and referral agreements for specialty services. The fact that conduct or a business arrangement does not fall within a safe harbor, or that it is identified in a fraud alert or advisory bulletin or as a risk area in the Supplemental Compliance Guidelines for Hospitals, does not automatically render the conduct or business arrangement illegal under the Anti-kickback Statute. However, such conduct and business arrangements may lead to increased scrutiny by government enforcement authorities. Although the Company believes that its arrangements with physicians have been structured to comply with current law and available interpretations, there can be no assurance that regulatory authorities enforcing these laws will determine these financial arrangements do not violate the Anti-kickback Statute or other applicable laws. An adverse determination could subject the Company to liabilities under the Social Security Act, including criminal penalties, civil monetary penalties and exclusion from participation in Medicare, Medicaid or other federal health care programs.
Stark Law
      The Social Security Act also includes a provision commonly known as the “Stark Law.” This law effectively prohibits physicians from referring Medicare and Medicaid patients to entities with which they or any of their immediate family members have a financial relationship, if these entities provide certain “designated health services” that are reimbursable by Medicare, including inpatient and outpatient hospital services, clinical laboratory services and radiology services. Sanctions for violating the Stark Law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, civil monetary penalties of up to $15,000 per prohibited service provided, and exclusion from the Medicare and Medicaid programs. The statute also provides for a penalty of up to $100,000 for a circumvention scheme. There are exceptions to the self-referral prohibition for many of the customary financial arrangements between physicians and providers, including employment contracts, leases and recruitment agreements. There is also an exception for a physician’s ownership interest in an entire hospital, as opposed to an ownership interest in a hospital department. Unlike safe harbors under the Anti-kickback Statute with which compliance is voluntary, an arrangement must comply with every requirement of a Stark Law exception or the arrangement is in violation of the Stark Law.
      CMS has issued two phases of regulations implementing the Stark Law, which became effective on January 4, 2002 and July 26, 2004, respectively, and which created several additional exceptions. A third phase is expected to be issued by March 2008. While these regulations help clarify the requirements of the exceptions to the Stark Law, it is unclear how the government will interpret many of them for enforcement purposes.
      In 2003, Congress passed legislation that modified the hospital ownership exception to the Stark Law by creating an18-month moratorium on allowing physicians to own interests in new specialty hospitals. During the moratorium, HHS was required to conduct an analysis of specialty hospitals, including quality of care provided and physician referral patterns to these facilities. MedPAC was also required to study cost and payment issues related to specialty hospitals. The moratorium applied to hospitals that primarily or exclusively treat cardiac, orthopedic or surgical conditions or any other specialized category of patients or cases designated by regulation, unless the hospitals were in operation or development before November 18, 2003, did not

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increase the number of physician investors, and met certain other requirements. The moratorium expired on June 8, 2005. In March 2005, MedPAC issued its report on specialty hospitals, in which it recommended that Congress extend the moratorium until January 1, 2007, modify payments to hospitals to reflect more closely the cost of care, and allow certain types of gainsharing arrangements. In May 2005, HHS issued the required report of its analysis of specialty hospitals in which it recommended reforming certain inpatient hospital services and ambulatory surgery center services payment rates that may currently encourage the establishment of specialty hospitals and implementation of closer scrutiny of the processes for approving new specialty hospitals for participation in Medicare. Further, HHS suspended processing new provider enrollment applications for specialty hospitals until January 2006, creating in effect a moratorium on new specialty hospitals. DRA 2005, signed into law February 8, 2006, directed HHS to extend this enrollment suspension until the earlier of six months from the enactment of DRA 2005 or the release of a report regarding physician owned specialty hospitals by HHS. On August 8, 2006, HHS issued its final report, in which it announced that it would resume processing and certifying provider enrollment applications for specialty hospitals. HHS also announced that it will require hospitals to disclose any financial arrangements with physicians. HHS has not announced when it will begin collecting this data, the specific data that hospitals will be required to submit or which hospitals will be required to provide information.
Similar State Laws
      Many states in which we operate also have laws that prohibit payments to physicians for patient referrals, similar to the Anti-kickback Statute and self-referral legislation similar to the Stark Law. The scope of these state laws is broad, since they can often apply regardless of the source of payment for care, and little precedent exists for their interpretation or enforcement. These statutes typically provide for criminal and civil penalties, as well as loss of facility licensure.
HIPAA and BBA-97
      The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of certain fraud and abuse laws by adding several criminal provisions for health care fraud offenses that apply to all health benefit programs. HIPAA also added a prohibition against incentives intended to influence decisions by Medicare beneficiaries as to the provider from which they will receive services. In addition, HIPAA created new enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program, and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. Federal enforcement officials now have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed health care fraud, even if the officer or managing employee had no knowledge of the fraud. HIPAA was followed by the Balanced Budget Act of 1997 (“BBA-97”), which created additional fraud and abuse provisions, including civil penalties for contracting with an individual or entity that the provider knows or should know is excluded from a federal health care program.
Other Fraud and Abuse Provisions
      The Social Security Act also imposes criminal and civil penalties for making false claims and statements to Medicare and Medicaid. False claims include, but are not limited to, billing for services not rendered or for misrepresenting actual services rendered in order to obtain higher reimbursement, billing for unnecessary goods and services, and cost report fraud. Criminal and civil penalties may be imposed for a number of other prohibited activities, including failure to return known overpayments, certain gainsharing arrangements, billing Medicare amounts that are substantially in excess of a provider’s usual charges, offering remuneration to influence a Medicare or Medicaid beneficiary’s selection of a health care provider, making or accepting a payment to induce a physician to reduce or limit services and soliciting or receiving any remuneration in return for referring an individual for an item or service payable by a federal healthcare program. Like the Anti-kickback Statute, these provisions are very broad. To avoid liability, providers must, among other things, carefully and accurately code claims for reimbursement, as well as accurately prepare cost reports.

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      Some of these provisions, including the federal Civil Monetary Penalty Law, require a lower burden of proof than other fraud and abuse laws, including the Anti-kickback Statute. Civil monetary penalties that may be imposed under the federal Civil Monetary Penalty Law range from $10,000 to $50,000 per act, and in some cases may result in penalties of up to three times the remuneration offered, paid, solicited or received. In addition, a violator may be subject to exclusion from federal and state healthcare programs. Federal and state governments increasingly use the federal Civil Monetary Penalty Law, especially where they believe they cannot meet the higher burden of proof requirements under the Anti-kickback Statute.
The Federal False Claims Act and Similar State Laws
      Thequi tam, or whistleblower, provisions of the federal False Claims Act allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. Further, the government may use the False Claims Act to prosecute Medicare and other government program fraud in areas such as coding errors, billing for services not provided and submitting false cost reports. When a defendant is determined by a court of law to be liable under the False Claims Act, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. Liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government. The False Claims Act defines the term “knowingly” broadly. Though simple negligence will not give rise to liability under the False Claims Act, submitting a claim with reckless disregard to its truth or falsity constitutes a “knowing” submission under the False Claims Act and, therefore, will qualify for liability.
      In some cases, whistleblowers, the federal government and some courts have taken the position that providers who allegedly have violated other statutes, such as the Anti-kickback Statute and the Stark Law, have thereby submitted false claims under the False Claims Act. A number of states in which we operate have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court.
HIPAA Administrative Simplification and Privacy Requirements
      The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data transmission standards for certain health care claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the health care industry. HHS has issued regulations implementing the HIPAA Administrative Simplification Provisions and compliance with these regulations became mandatory for our facilities in October 2003, although CMS accepted noncompliant claims through September 30, 2005. HHS has proposed a rule that would establish standards for electronic health care claims attachments. In addition, HIPAA requires that each provider apply for and receive a National Provider Identifier by May 2007. We believe that the cost of compliance with these regulations has not had and is not expected to have a material adverse effect on our business, financial position or results of operations.
      HIPAA also requires HHS to adopt standards to protect the privacy and security of individually identifiable health-related information. HHS issued regulations containing privacy standards and compliance with these regulations became mandatory during April 2003. The privacy regulations control the use and disclosure of individually identifiable health-related information, whether communicated electronically, on paper or orally. The regulations also provide patients with significant new rights related to understanding and controlling how their health information is used or disclosed. HHS released final security regulations that became mandatory during April 2005 and require health care providers to implement administrative, physical and technical practices to protect the security of individually identifiable health information that is maintained or transmitted electronically. We have developed and enforce a HIPAA compliance plan, which we believe complies with HIPAA privacy and security requirements and under which a HIPAA compliance group monitors our compliance. The privacy regulations and security regulations have and will continue to impose significant costs on our facilities in order to comply with these standards.

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      Violations of HIPAA could result in civil penalties of up to $25,000 per type of violation in each calendar year and criminal penalties of up to $250,000 per violation. In addition, there are numerous legislative and regulatory initiatives at the federal and state levels addressing patient privacy concerns. Facilities will continue to remain subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These statutes vary and could impose additional penalties.
EMTALA
      All of our hospitals are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every individual who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize that condition or make an appropriate transfer of the individual to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer an individual or if the hospital delays appropriate treatment in order to first inquire about the individual’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program. In addition, an injured individual, the individual’s family or a medical facility that suffers a financial loss as a direct result of a hospital’s violation of the law can bring a civil suit against the hospital.
      The government broadly interprets EMTALA to cover situations in which individuals do not actually present to a hospital’s emergency room, but present for emergency examination or treatment to the hospital’s campus, generally, or to a hospital-based clinic that treats emergency medical conditions or are transported in a hospital-owned ambulance, subject to certain exceptions. EMTALA does not generally apply to individuals admitted for inpatient services. The government also has expressed its intent to investigate and enforce EMTALA violations actively in the future. We believe our hospitals operate in substantial compliance with EMTALA.
Corporate Practice of Medicine/ Fee Splitting
      Some of the states in which we operate have laws that prohibit corporations and other entities from employing physicians and practicing medicine for a profit or that prohibit certain direct and indirect payments or fee-splitting arrangements between health care providers that are designed to induce or encourage the referral of patients to, or the recommendation of, particular providers for medical products and services. Possible sanctions for violation of these restrictions include loss of license and civil and criminal penalties. In addition, agreements between the corporation and the physician may be considered void and unenforceable. These statutes vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies.
Health Care Industry Investigations
      Significant media and public attention has focused in recent years on the hospital industry. While we are currently not aware of any material investigations of the Company under federal or state health care laws or regulations, it is possible that governmental entities could initiate investigations or litigation in the future at facilities we operate and that such matters could result in significant penalties as well as adverse publicity. It is also possible that our executives and managers could be included in governmental investigations or litigation or named as defendants in private litigation.
      Our substantial Medicare, Medicaid and other governmental billings result in heightened scrutiny of our operations. We continue to monitor all aspects of our business and have developed a comprehensive ethics and compliance program that is designed to meet or exceed applicable federal guidelines and industry standards. Because the law in this area is complex and constantly evolving, governmental investigations or litigation may result in interpretations that are inconsistent with our or industry practices.

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      In public statements surrounding current investigations, governmental authorities have taken positions on a number of issues, including some for which little official interpretation previously has been available, that appear to be inconsistent with practices that have been common within the industry and that previously have not been challenged in this manner. In some instances, government investigations that have in the past been conducted under the civil provisions of federal law may now be conducted as criminal investigations.
      Both federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the health care area. The OIG and the Department of Justice have, from time to time, established national enforcement initiatives, targeting all hospital providers, that focus on specific billing practices or other suspected areas of abuse.
      In addition to national enforcement initiatives, federal and state investigations relate to a wide variety of routine health care operations such as: cost reporting and billing practices, including for Medicare outliers; financial arrangements with referral sources; physician recruitment activities; physician joint ventures; and hospital charges and collection practices for self-pay patients. We engage in many of these routine health care operations and other activities that could be the subject of governmental investigations or inquiries. For example, we have significant Medicare and Medicaid billings, numerous financial arrangements with physicians who are referral sources to our hospitals, and joint venture arrangements involving physician investors. Any additional investigations of the Company, our executives or managers could result in significant liabilities or penalties to us, as well as adverse publicity.
      Commencing in 1997, we became aware we were the subject of governmental investigations and litigation relating to our business practices. As part of the investigations, the United States intervened in a number ofqui tamactions brought by private parties. The investigations related to, among other things, DRG coding, outpatient laboratory billing, home health issues, physician relations, cost report and wound care issues. The investigations were concluded through a series of agreements executed in 2000 and 2003 with the Criminal Division of the Department of Justice, the Civil Division of the Department of Justice, various U.S. Attorneys’ offices, CMS, a negotiating team representing states with claims against us, and others. In January 2001, we entered into an eight-year Corporate Integrity Agreement (the “CIA”) with the Office of Inspector General of the Department of Health and Human Services. Violation or breach of the CIA, or other violation of federal or state laws relating to Medicare, Medicaid or similar programs, could subject us to substantial monetary fines, civil and criminal penalties and/or exclusion from participation in the Medicare and Medicaid programs and other federal and state health care programs. Alleged violations may be pursued by the government or through privatequi tam actions. Sanctions imposed against us as a result of such actions could have a material, adverse effect on our results of operations and financial position.
Health Care Reform
      Health care is one of the largest industries in the United States and continues to attract much legislative interest and public attention. In recent years, various legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Many states have enacted, or are considering enacting, measures designed to reduce their Medicaid expenditures and change private health care insurance. States have also adopted, or are considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand states’ Medicaid systems. Some states, including the states in which we operate, have applied for and have been granted federal waivers from current Medicaid regulations to allow them to serve some or all of their Medicaid participants through managed care providers. Hospital operating margins have been, and may continue to be, under significant pressure because of deterioration in pricing flexibility and payer mix, and growth in operating expenses in excess of the increase in PPS payments under the Medicare program.
Compliance Program and Corporate Integrity Agreement
      We maintain a comprehensive ethics and compliance program that is designed to meet or exceed applicable federal guidelines and industry standards. The program is intended to monitor and raise awareness

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of various regulatory issues among employees and to emphasize the importance of complying with governmental laws and regulations. As part of the ethics and compliance program, we provide annual ethics and compliance training to our employees and encourage all employees to report any violations to their supervisor, an ethics and compliance officer or a toll-free telephone ethics line.
      Our CIA with the OIG is structured to assure the federal government of our overall federal health care program compliance and specifically covers DRG coding, outpatient PPS billing and physician relations. We underwent major training efforts to ensure that our employees learned and applied the policies and procedures implemented under the CIA and our ethics and compliance program. The CIA also included testing for outpatient laboratory billing in 2001, which was replaced with skilled nursing facilities billing in 2003. The CIA has had the effect of increasing the amount of information we provide to the federal government regarding our health care practices and our compliance with federal regulations. Under the CIA, we have numerous affirmative obligations, including the requirement that we report potential violations of applicable federal health care laws and regulations and have, pursuant to this obligation, reported a number of potential violations of the Stark Law, the Anti-kickback Statute, EMTALA and other laws, most of which we consider to be nonviolations or technical violations. This obligation could result in greater scrutiny by regulatory authorities. Although no government agency has taken any adverse action related to the CIA disclosures, the government could determine that our reporting and/or our resolution of reported issues has been inadequate. Breach of the CIA and/or a finding of violations of applicable health care laws or regulations could subject us to repayment requirements, substantial monetary penalties, civil penalties, exclusion from participation in the Medicare and Medicaid and other federal and state health care programs and, for violations of certain laws and regulations, criminal penalties.
Antitrust Laws
      The federal government and most states have enacted antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. These laws prohibit price fixing, concerted refusal to deal, market monopolization, price discrimination, tying arrangements, acquisitions of competitors and other practices that have, or may have, an adverse effect on competition. Violations of federal or state antitrust laws can result in various sanctions, including criminal and civil penalties. Antitrust enforcement in the health care industry is currently a priority of the Federal Trade Commission. We believe we are in compliance with such federal and state laws, but future review of our practices by courts or regulatory authorities could result in a determination that could adversely affect our operations.
Environmental Matters
      We are subject to various federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Management does not believe that we will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect our capital expenditures, results of operations or financial condition.
Insurance
      As is typical in the health care industry, we are subject to claims and legal actions by patients in the ordinary course of business. Our facilities are insured by our wholly-owned insurance subsidiary for losses up to $50 million per occurrence. The insurance subsidiary has obtained reinsurance for professional liability risks generally above a retention level of $15 million per occurrence. We also maintain professional liability insurance with unrelated commercial carriers for losses in excess of amounts insured by our insurance subsidiary. Effective January 1, 2007, our facilities will generally be self-insured for the first $5 million of per occurrence losses.
      We purchase, from unrelated insurance companies, coverage for directors and officers liability and property loss in amounts that we believe are customary for our industry. The directors and officers liability coverage includes a $25 million corporate deductible for the periods prior to the Merger and a $1 million corporate deductible subsequent to the Merger. The property coverage includes varying deductibles depending

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on the cause of the property damage. These deductibles range from $500,000 per claim up to 5% of the affected property values for certain flood and wind and earthquake related incidents.
Employees and Medical Staffs
      At December 31, 2006, we had approximately 186,000 employees, including approximately 49,000 part-time employees. References herein to “employees” refer to employees of affiliates of HCA. We are subject to various state and federal laws that regulate wages, hours, benefits and other terms and conditions relating to employment. Employees at 21 and 16 of our hospitals were represented by various labor unions at December 31, 2006 and 2005, respectively. We consider our employee relations to be satisfactory. Our hospitals have experienced some recent union organizational activity. We had elections at seven hospitals in Florida in the fourth quarter of 2006 and an election at one hospital in California in February 2007. We do not expect such efforts to materially affect our future operations. Our hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate. In some markets, nurse and medical support personnel availability has become a significant operating issue to health care providers. To address this challenge, we have implemented several initiatives to improve retention, recruiting, compensation programs and productivity. This shortage may also require an increase in the utilization of more expensive temporary personnel.
      Our hospitals are staffed by licenced physicians, who generally are not employees of our hospitals. However, some physicians provide services in our hospitals under contracts which generally describe a term of service, provide and establish the duties and obligations of such physicians, require the maintenance of certain performance criteria and fix compensation for such services. Any licensed physician may apply to be accepted to the medical staff of any of our hospitals, but the hospital’s medical staff and the appropriate governing board of the hospital, in accordance with established credentialing criteria, must approve acceptance to the staff. Members of the medical staffs of our hospitals often also serve on the medical staffs of other hospitals and may terminate their affiliation with one of our hospitals at any time.
Item 1A.  Risk Factors
Risk Factors
      If any of the events discussed in the following risk factors were to occur, our business, financial position, results of operations, cash flows or prospects could be materially, adversely affected. Additional risks and uncertainties not presently known, or currently deemed immaterial, may also constrain our business and operations.
Our Substantial Leverage Could Adversely Affect Our Ability To Raise Additional Capital To Fund Our Operations, Limit Our Ability To React To Changes In The Economy Or Our Industry, Expose Us To Interest Rate Risk To The Extent Of Our Variable Rate Debt And Prevent Us From Meeting Our Obligations.
      On November 17, 2006, we consummated the Merger with Merger Sub, a wholly owned subsidiary of Hercules Holding, pursuant to which the Investors acquired all of our outstanding shares of common stock for $51.00 per share in cash. The Merger, the financing transactions related to the Merger and other related transactions had a transaction value of approximately $33.0 billion and are collectively referred to in this annual report as the “Recapitalization.” As a result of the Recapitalization, our outstanding common stock is owned by Hercules Holding, certain members of management and other key employees, and certain other investors. Our common stock is no longer registered with the SEC and is no longer traded on a national securities exchange.

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      Since completing the Recapitalization, we are highly leveraged. As of December 31, 2006, our total indebtedness was $28.408 billion. Our high degree of leverage could have important consequences, including:
 • increasing our vulnerability to general economic and industry conditions;
• requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
• exposing us to the risk of increased interest rates as certain of our unhedged borrowings will be at variable rates of interest;
• limiting our ability to make strategic acquisitions or causing us to make nonstrategic divestitures;
• limiting our ability to obtain additional financing for working capital, capital expenditures, product or service line development, debt service requirements, acquisitions and general corporate or other purposes; and
• limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.
      We and our subsidiaries have the ability to incur additional indebtedness in the future, subject to the restrictions contained in our senior secured credit facilities and the indentures governing our outstanding notes. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.
Our Debt Agreements Contain Restrictions That Limit Our Flexibility In Operating Our Business.
      Our senior secured credit facilities and the indentures governing our outstanding notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and certain of our subsidiaries’ ability to, among other things:
• incur additional indebtedness or issue certain preferred shares;
• pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
• make certain investments;
• sell or transfer assets;
• create liens;
• consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
• enter into certain transactions with our affiliates.
      Under our asset-based revolving credit facility, when (and for as long as) the combined availability under our asset-based revolving credit facility and our senior secured revolving credit facility is less than a specified amount, for a certain period of time, or if a payment or bankruptcy event of default has occurred and is continuing, funds deposited into any of our depository accounts will be transferred on a daily basis into a blocked account with the administrative agent and applied to prepay loans under the asset-based revolving credit facility and to cash collateralize letters of credit issued thereunder.
      Under our senior secured credit facilities we will be required to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and there can be no assurance that we will meet those ratios. A breach of any of these covenants could result in a default under both of our senior secured credit facilities. Upon the occurrence of an event of default under our senior secured credit facilities, our lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the collateral granted to them to secure each such indebtedness. We have pledged a significant portion

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of our assets as collateral under our senior secured credit facilities and our existing senior secured notes. If any of the lenders under our senior secured credit facilities accelerate the repayment of borrowings, there can be no assurance that we will have sufficient assets to repay our senior secured credit facilities and our outstanding notes.
Our Hospitals Face Competition For Patients From Other Hospitals And Health Care Providers.
      The health care business is highly competitive, and competition among hospitals and other health care providers for patients has intensified in recent years. Generally, other hospitals in the local communities served by most of our hospitals provide services similar to those offered by our hospitals. In 2005, CMS began making public performance data related to ten quality measures that hospitals submit in connection with their Medicare reimbursement. On February 8, 2006, DRA 2005 was enacted by Congress and expanded the number of quality measures that must be reported to 21, beginning with discharges occurring in the third quarter of 2006. If any of our hospitals achieve poor results (or results that are lower than our competitors) on these 21 quality measures, patient volumes could decline. In addition, DRA 2005 requires that CMS expand the number of quality measures in future years. On November 1, 2006, CMS announced a final rule that expands to 26 the number of quality measures that must be reported, beginning in the first quarter of calendar year 2007, and requires, beginning in the third quarter of calendar year 2007, that hospitals report the results of a 27-question patient perspective survey. The additional quality measures and future trends toward clinical transparency may have an unanticipated impact on our competitive position and patient volumes.
      In addition, the number of freestanding specialty hospitals, surgery centers and diagnostic and imaging centers in the geographic areas in which we operate has increased significantly. As a result, most of our hospitals operate in a highly competitive environment. Some of the hospitals that compete with our hospitals are owned by governmental agencies or not-for-profit corporations supported by endowments, charitable contributions and/or tax revenues and can finance capital expenditures and operations on a tax-exempt basis. Our hospitals are facing increasing competition from physician-owned specialty hospitals and from both our own and unaffiliated freestanding surgery centers for market share in high margin services and for quality physicians and personnel. If ambulatory surgery centers are better able to compete in this environment than our hospitals, our hospitals may experience a decline in patient volume, and we may experience a decrease in margin, even if those patients use our ambulatory surgery centers. Further, if our competitors are better able to attract patients, recruit physicians, expand services or obtain favorable managed care contracts at their facilities than our hospitals and ambulatory surgery centers, we may experience an overall decline in patient volume. See Item 1, “Business — Competition.”
      Section 507 of MMA provided for an18-month moratorium on the establishment of new specialty hospitals. The moratorium expired on June 8, 2005. However, HHS suspended processing new provider enrollment applications for specialty hospitals until January 2006, creating, in effect, a new moratorium on specialty hospitals. DRA 2005 directed HHS to extend this enrollment suspension until the earlier of six months from the enactment of DRA 2005 or the release of a report regarding physician owned specialty hospitals by HHS. On August 8, 2006, HHS issued its final report, in which it announced that it would resume processing and certifying provider enrollment applications. As a result of the moratorium being rescinded, we face additional competition from an increased number of specialty hospitals, including hospitals owned by physicians currently on staff at our hospitals. In addition, HHS announced that it will require all hospitals to disclose any physician ownership and certain financial arrangements with physicians. HHS has not announced when it will begin collecting this data, the specific data that hospitals will be required to submit or which hospitals will be required to provide information.
The Growth Of Uninsured And Patient Due Accounts And A Deterioration In The Collectibility Of These Accounts Could Adversely Affect Our Results Of Operations.
      The primary collection risks of our accounts receivable relate to the uninsured patient accounts and patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. The provision for doubtful accounts relates primarily to amounts due directly from patients.

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      The amount of the provision for doubtful accounts is based upon management’s assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal and state governmental and private employer health care coverage, the rate of growth in uninsured patient admissions and other collection indicators. At December 31, 2006, our allowance for doubtful accounts represented approximately 86% of the $3.972 billion patient due accounts receivable balance, including accounts, net of estimated contractual discounts, related to patients for which eligibility for Medicaid coverage was being evaluated (“pending Medicaid accounts”). For the year ended December 31, 2006, the provision for doubtful accounts increased to 10.4% of revenues compared to 9.6% of revenues in 2005. Adjusting for the effect of the uninsured discount policy implemented January 1, 2005, the provision for doubtful accounts was 14.1% and 12.4% of revenues for the years ended December 31, 2006 and 2005, respectively.
      A continuation of the trends that have resulted in an increasing proportion of accounts receivable being comprised of uninsured accounts and a deterioration in the collectibility of these accounts will adversely affect our collection of accounts receivable, cash flows and results of operations.
Changes In Governmental Interpretations May Negatively Impact Our Ability To Obtain Reimbursement Of Medicare Bad Debts
      The Medicare program will reimburse 70% of bad debts related to deductibles and coinsurance for patients with Medicare coverage, after the provider has made a reasonable effort to collect these amounts. On March 30, 2006, the United States District Court for the Western District of Michigan entered a final order inBattle Creek Health System v. Thompson,which provided that reasonable collection efforts have not been satisfied as long as the Medicare accounts remained with an external collection agency. The case is under appeal at the United States Court of Appeals for the Sixth Circuit. We utilize extensive in-house and external collection efforts for our accounts receivable, including deductible and coinsurance amounts owed by patients with Medicare coverage. However, we utilize a secondary collection agency after in-house and primary collection agency efforts have been unsuccessful. As a result of theBattle Creek decision, we contacted CMS and outlined our collection process and the reasons for our belief that Medicare bad debts could be claimed for reimbursement after exhaustion of collection efforts at the primary collection agency, but while the accounts were still pending with the secondary collection agency. CMS has responded to us consistent with theBattle Creekdecision. We are in continued discussions with CMS concerning the proper timing to claim reimbursement for Medicare bad debts. We incur approximately $30 million of Medicare bad debts per year that are subject to theBattle Creekdecision. We are unable to predict the outcome of theBattle Creekcase or CMS’s final answer on the use of external collection agencies. We are currently evaluating possible modifications to our accounts receivable collection processes that will both provide us with reasonable collection results and comply with CMS’s interpretation of reasonable collection efforts.
Changes In Governmental Programs May Reduce Our Revenues.
      A significant portion of our patient volumes is derived from government health care programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. We derived approximately 58% of our admissions from the Medicare and Medicaid programs in 2006. In recent years, legislative and regulatory changes have resulted in limitations on and, in some cases, reductions in levels of payments to health care providers for certain services under these government programs. Such changes may also increase our operating costs, which could reduce our profitability.
      Effective January 1, 2007, as a result of DRA 2005, reimbursements for ASC overhead costs are limited to no more than the overhead costs paid to hospital outpatient departments under the Medicare hospital outpatient prospective payment system for the same procedure. On August 8, 2006 CMS announced proposed regulations that, if adopted, would change payment for procedures performed in an ASC, effective January 1, 2008. Under this proposal, ASC payment groups would increase from the current nine clinically disparate payment groups to the 221 Ambulatory Procedure Classification groups (APCs) used under the outpatient prospective payment system for these surgical services. CMS estimates that the rates for procedures performed in an ASC setting would equal 62% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. Moreover, under the proposed regulations, if CMS determines

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that a procedure is commonly performed in a physician’s office, the ASC reimbursement for that procedure would be limited to the reimbursement allowable under the Medicare Part B Physician Fee Schedule. In addition, under this proposal, all surgical procedures, other than those that pose a significant safety risk or generally require an overnight stay, which would be listed by CMS, would be payable as ASC procedures. This will expand the number of procedures that Medicare will pay for if performed in an ASC. CMS indicates in its discussion of the proposed regulations that it believes that the volumes and service mix of procedures provided in ASCs would change significantly in 2008 under the revised payment system, but that CMS is not able to accurately project those changes. If the proposal is adopted, more Medicare procedures that are now performed in hospitals, such as ours, may be moved to ASCs reducing surgical volume in our hospitals. Also, more Medicare procedures that are now performed in ASCs, such as ours, may be moved to physicians’ offices. Commercial third-party payers may adopt similar policies.
      On August 1, 2006, CMS announced a final rule that refines the DRG payment system. CMS announced that it is considering additional changes effective in federal fiscal year 2008. We cannot predict the impact that any such changes, if finalized, would have on our revenues. Future realignments in the DRG system could also reduce the margins we receive for certain specialties, including cardiology and orthopedics. In fact, the greater popularity of specialty hospitals in recent years has caused CMS to focus on payment levels for such specialties. Any such change in the payments received for specialty services could have an adverse effect on our revenues and could require us to modify our strategy. Other Medicare payment changes may also affect our revenues. See Item 1. “Business — Sources of Revenue.” DRG rates are updated and DRG weights are recalibrated each federal fiscal year. The index used to update the market basket gives consideration to the inflation experienced by hospitals and entities outside the health care industry in purchasing goods and services. MMA, as amended by DRA 2005, provides for DRG increases using the full market basket if data for certain patient care quality indicators is submitted quarterly to CMS, and using the market basket minus two percentage points if such data is not submitted. While we will endeavor to comply with all data submission requirements, our submissions may not be deemed timely or sufficient to entitle us to the full market basket adjustment for all of our hospitals.
      Since states must operate with balanced budgets and since the Medicaid program is often the state’s largest program, states can be expected to adopt or consider adopting legislation designed to reduce their Medicaid expenditures. DRA 2005, signed into law on February 8, 2006, includes Medicaid cuts of approximately $4.8 billion over five years. In addition, proposed regulatory changes, if implemented, would reduce federal Medicaid funding by an additional $12.2 billion over five years. On January 18, 2007, CMS published a proposed rule entitled “Medicaid Program; Cost Limits for Providers Operated by Units of Government and Provisions to Ensure the Integrity of Federal-State Financial Partnership.” The proposed rule, if finalized, could significantly impact state Medicaid programs. It is uncertain if the rule will be finalized. States have also adopted, or are considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems. Future legislation or other changes in the administration or interpretation of government health programs could have a material adverse effect on our financial position and results of operations.
Demands Of Nongovernment Payers May Adversely Affect Our Growth In Revenues.
      Our ability to negotiate favorable contracts with nongovernment payers, including managed care plans, significantly affects the revenues and operating results of most of our hospitals. Admissions derived from managed care and other insurers accounted for approximately 36% of our admissions in 2006. Nongovernment payers, including managed care payers, increasingly are demanding discounted fee structures, and the trend toward consolidation among nongovernment payers tends to increase their bargaining power over fee structures. Reductions in price increases or the amounts received from managed care, commercial insurance or other payers could have a material adverse effect on our financial position and results of operations.

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Our Performance Depends On Our Ability To Recruit And Retain Quality Physicians.
      Physicians generally direct the majority of hospital admissions, and the success of our hospitals depends, therefore, in part on the number and quality of the physicians on the medical staffs of our hospitals, the admitting practices of those physicians and maintaining good relations with those physicians. Physicians are generally not employees of the hospitals at which they practice and, in many of the markets that we serve, most physicians have admitting privileges at other hospitals in addition to our hospitals. Such physicians may terminate their affiliation with our hospitals at any time. If we are unable to provide adequate support personnel or technologically advanced equipment and hospital facilities that meet the needs of those physicians, they may be discouraged from referring patients to our facilities, admissions may decrease and our operating performance may decline.
Our Hospitals Face Competition For Staffing, Which May Increase Labor Costs And Reduce Profitability.
      Our operations are dependent on the efforts, abilities and experience of our management and medical support personnel, such as nurses, pharmacists and lab technicians, as well as our physicians. We compete with other health care providers in recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our hospitals, including nurses and other nonphysician health care professionals. In some markets, the availability of nurses and other medical support personnel has become a significant operating issue to health care providers. This shortage may require us to continue to enhance wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate. In addition, to the extent that a significant portion of our employee base unionizes, or attempts to unionize, our labor costs could increase. If our labor costs increase, we may not be able to raise rates to offset these increased costs. Because a significant percentage of our revenues consists of fixed, prospective payments, our ability to pass along increased labor costs is constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control labor costs, could have a material, adverse effect on our results of operations.
If We Fail To Comply With Extensive Laws And Government Regulations, We Could Suffer Penalties Or Be Required To Make Significant Changes To Our Operations.
      The health care industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:
• billing for services;
• relationships with physicians and other referral sources;
• adequacy of medical care;
• quality of medical equipment and services;
• qualifications of medical and support personnel;
• confidentiality, maintenance and security issues associated with health-related information and medical records;
• the screening, stabilization and transfer of individuals who have emergency medical conditions;
• licensure;
• hospital rate or budget review;
• operating policies and procedures; and
• addition of facilities and services.

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      Among these laws are the Anti-kickback Statute, the Stark Law and the False Claims Act and similar state laws. These laws impact the relationships that we may have with physicians and other referral sources. We have a variety of financial relationships with physicians and others who either refer or influence the referral of patients to our hospitals and other health care facilities, including employment contracts, leases and professional service agreements. We also have similar relationships with physicians and facilities to which patients are referred from our facilities from time to time. We also provide financial incentives, including minimum revenue guarantees, to recruit physicians into the communities served by our hospitals. The OIG has enacted safe harbor regulations that outline practices that are deemed protected from prosecution under the Anti-kickback Statute. While we endeavor to comply with the applicable safe harbors, certain of our current arrangements, including joint ventures and financial relationships with physicians and other referral sources and persons and entities to which we refer patients, do not qualify for safe harbor protection. Failure to qualify for a safe harbor does not mean that the arrangement necessarily violates the Anti-kickback Statute but may subject the arrangement to greater scrutiny; however, we cannot assure you that practices that are outside of a safe harbor will not be found to violate the Anti-kickback Statute. Allegations of violations of the Anti-kickback Statute may also be brought under the federal Civil Monetary Penalty Law, which requires a lower burden of proof than other fraud and abuse laws, including the Anti-kickback Statute.
      Our financial relationships with referring physicians and their immediate family members must comply with the Stark Law by meeting an exception. We attempt to structure our relationships to meet an exception to the Stark Law, but the regulations implementing the exceptions are detailed and complex, and we cannot assure you that every relationship complies fully with the Stark Law. Unlike the Anti-kickback Statute, failure to meet an exception under the Stark Law results in a violation of the Stark Law, even if such violation is technical in nature.
      Additionally, if we violate the Anti-kickback Statute or Stark Law, or if we improperly bill for our services, we may be found to violate the False Claims Act, either under a suit brought by the government or by a private person under aqui tam, or “whistleblower,” suit.
      If we fail to comply with the Anti-kickback Statute, the Stark Law, the False Claims Act or other applicable laws and regulations, or if we fail to maintain an effective corporate compliance program, we could be subjected to liabilities, including civil penalties (including the loss of our licenses to operate one or more facilities), exclusion of one or more facilities from participation in the Medicare, Medicaid and other federal and state health care programs and, for violations of certain laws and regulations, criminal penalties. See Item 1, “Business — Regulation and Other Factors.”
      Because many of these laws and their implementation regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material, adverse effect our business, financial condition, results of operations or prospects, and our business reputation could suffer significantly. In addition, other legislation or regulations at the federal or state level may be adopted that adversely affect our business.
We Have Been The Subject Of Governmental Investigations, Claims And Litigation
      Commencing in 1997, we became aware that we were the subject of governmental investigations and litigation relating to our business practices. The investigations were concluded through a series of agreements executed in 2000 and 2003. In January 2001, we entered into an eight-year Corporate Integrity Agreement (“CIA”) with the OIG. Under the CIA, we have numerous affirmative obligations, including the requirement that we report potential violations of applicable federal health care laws and regulations and have, pursuant to this obligation, reported a number of potential violations of the Stark Law, the Anti-kickback Statute, EMTALA and other laws, most of which we consider to be nonviolations or technical violations. Although no government agency has taken any adverse action related to the CIA disclosures, the government could

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determine that our reporting and/or our resolution of reported issues have been inadequate. If we are found to be in violation of the CIA or any applicable health care laws or regulations, we could be subject to repayment requirements, substantial monetary fines, civil penalties, exclusion from participation in the Medicare and Medicaid and other federal and state health care programs, and, for violations of certain laws and regulations, criminal penalties. Any such sanctions or expenses could have a material, adverse effect on our financial position, results of operations or liquidity.
      In September 2005, we received a subpoena from the Office of the United States Attorney for the Southern District of New York seeking the production of documents. Also in September 2005, we were informed that the SEC had issued a formal order of investigation. Both the subpoena and the formal order of investigation relate to trading in our securities. We are cooperating fully with these investigations.
      Subsequently, we and certain of our executive officers and directors were named in various federal securities law class actions and several shareholders have filed derivative lawsuits purportedly on behalf of the Company. Additionally, a former employee filed a complaint against certain of our executive officers pursuant to the Employee Retirement Income Security Act, and we have been served with a shareholder demand letter addressed to our Board of Directors. We cannot predict the results of the investigations or any related lawsuits or the effect that findings in such investigations or lawsuits adverse to us may have on us. We have, however, reached an agreement in principle for the settlement of the derivative lawsuits.
      On July 24, 2006, we announced that we had entered into the Merger Agreement. In connection with the Merger, we are aware of eight asserted class action lawsuits related to the Merger filed against us, certain of our executive officers, our directors and the Sponsors, and one lawsuit filed against us and one of our affiliates seeking enforcement of contractual obligations allegedly arising from the Merger. Certain of these lawsuits, though not all, are the subject of an agreement in principle to settle. Additional lawsuits pertaining to the Merger could be filed in the future. These proceedings are described in greater detail under Item 3, “Legal Proceedings.”
      Health care companies are subject to numerous investigations by various governmental agencies. Further, under the federal False Claims Act, private parties have the right to bringqui tam, or “whistleblower,” suits against companies that submit false claims for payments to the government. Some states have adopted similar state whistleblower and false claims provisions. From time to time, companies doing business under federal health care programs may be contacted by various governmental agencies in connection with a government investigation either brought by the government or by a private person under aqui tam action. Because of the confidential nature of some government investigations or a confidential seal under the federal False Claims Act, we do not always know the particulars of the allegations or concerns at the time the government notifies us that an investigation is proceeding. Certain of our individual facilities have received, and other facilities from time to time may receive, government inquiries from federal and state agencies. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material, adverse effect on our financial position, results of operations and liquidity.
      From time to time, governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries and carriers, as well as the OIG, conduct audits of our health care operations. Private payers may conduct similar post-payment audits, and we also perform internal audits and monitoring. Depending on the nature of the conduct found in such audits and whether the underlying conduct could be considered systemic, the resolution of these audits could have a material, adverse effect on our financial position, results of operations and liquidity.
Controls Designed To Reduce Inpatient Services May Reduce Our Revenues.
      Controls imposed by Medicare and commercial third-party payers designed to reduce admissions and lengths of stay, commonly referred to as “utilization review,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and course of treatment of a patient by health plans. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payer-required preadmission authorization and utilization review and by payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Efforts to impose

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more stringent cost controls are expected to continue. Although we are unable to predict the effect these changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material, adverse effect on our business, financial position and results of operations.
Our Operations Could Be Impaired By A Failure Of Our Information Systems.
      Any system failure that causes an interruption in service or availability of our systems could adversely affect operations or delay the collection of revenue. Even though we have implemented network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering. The occurrence of any of these events could result in interruptions, delays, the loss or corruption of data, or cessations in the availability of systems, all of which could have a material, adverse effect on our financial position and results of operations and harm our business reputation.
      The performance of our sophisticated information technology and systems is critical to our business operations. In addition to our shared services initiatives, our information systems are essential to a number of critical areas of our operations, including:
• accounting and financial reporting;
• billing and collecting accounts;
• coding and compliance;
• clinical systems;
• medical records and document storage;
• inventory management; and
• negotiating, pricing and administering managed care contracts and supply contracts.
      We are in the process of implementing projects to replace our payroll and human resources information systems. Management estimates that the payroll and human resources system projects will require total expenditures of approximately $333 million to develop and install. At December 31, 2006,project-to-date costs incurred were $295 million ($160 million of the costs incurred have been capitalized and $135 million have been expensed). Management expects that the system development, testing, data conversion and installation will continue through 2007.
State Efforts To Regulate The Construction Or Expansion Of Hospitals Could Impair Our Ability To Operate And Expand Our Operations.
      Some states, particularly in the eastern part of the country, require health care providers to obtain prior approval, known as a certificate of need, for the purchase, construction or expansion of health care facilities, to make certain capital expenditures or to make changes in services or bed capacity. In giving approval, these states consider the need for additional or expanded health care facilities or services. We currently operate hospitals in a number of states with certificate of need laws. The failure to obtain any requested certificate of need could impair our ability to operate or expand operations. Any such failure could, in turn, adversely affect our ability to attract patients to our hospitals and grow our revenues, which would have an adverse effect on our results of operations.
Our Facilities Are Heavily Concentrated In Florida And Texas, Which Makes Us Sensitive To Regulatory, Economic, Environmental And Competitive Changes In Those States.
      We operated 173 hospitals at December 31, 2006, and 73 of those hospitals are located in Florida and Texas. Our Florida and Texas facilities’ combined revenues represented approximately 51% of our consolidated revenues for the year ended December 31, 2006. This concentration makes us particularly sensitive to regulatory, economic, environmental and competition changes in those states. Any material change in the

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current payment programs or regulatory, economic, environmental or competitive conditions in those states could have a disproportionate effect on our overall business results.
      In addition, our hospitals in Florida and Texas and other areas across the Gulf Coast are located in hurricane-prone areas. In the recent past, hurricanes have had a disruptive effect on the operations of our hospitals in Florida, Texas and other coastal states, and the patient populations in those states. Our business activities could be harmed by a particularly active hurricane season or even a single storm. In addition, the premiums to renew our property insurance policy for 2006 and 2007 increased significantly over premiums incurred in 2005. Our new policy also includes an increase in the stated deductible and we were not able to obtain coverage in the amounts we have had under our policies prior to 2006. As a result of such increases in premiums and deductibles, we expect that our cash flows and profitability will be adversely affected. In addition, the property insurance we obtain may not be adequate to cover losses from future hurricanes or other natural disasters.
We May Be Subject To Liabilities From Claims By The IRS.
      We are currently contesting claims for income taxes, interest and penalties proposed by the IRS for prior years aggregating approximately $678 million through December 31, 2006. The disputed items include the deductibility of a portion of the 2001 government settlement payment, the timing of recognition of certain patient service revenues in 2000 through 2002, the method for calculating the tax allowance for uncollectible accounts in 2002 and the amount of insurance expense deducted in 1999 through 2002.
      During 2006, the IRS began an examination of our 2003 through 2004 federal income tax returns. The IRS has not determined the amount of any additional income tax, interest and penalties that it may claim upon completion of this examination or any future examinations that may be initiated. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Pending IRS Disputes.”
We May Be Subject To Liabilities From Claims Brought Against Our Facilities.
      We are subject to litigation relating to our business practices, including claims and legal actions by patients and others in the ordinary course of business alleging malpractice, product liability or other legal theories. See Item 3, “Legal Proceedings.” Many of these actions involve large claims and significant defense costs. We insure a substantial portion of our professional liability risks through a wholly-owned subsidiary. Management believes our insurance coverage is sufficient to cover claims arising out of the operation of our facilities. Our wholly-owned insurance subsidiary has entered into certain reinsurance contracts, and the obligations covered by the reinsurance contracts are included in its reserves for professional liability risks, as the subsidiary remains liable to the extent that the reinsurers do not meet their obligations under the reinsurance contracts. If payments for claims exceed actuarially determined estimates, are not covered by insurance or reinsurers, if any, fail to meet their obligations, our results of operations and financial position could be adversely affected.
We Are Exposed To Market Risks Related To Changes In The Market Values Of Securities And Interest Rate Changes.
      We are exposed to market risk related to changes in market values of securities. The investments in debt and equity securities of our wholly-owned insurance subsidiary were $2.129 billion and $14 million, respectively, at December 31, 2006. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. The fair value of investments is generally based on quoted market prices. At December 31, 2006, we had a net unrealized gain of $25 million on the insurance subsidiary’s investment securities.
      We are also exposed to market risk related to changes in interest rates and periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The net interest payments based on the notional amounts in these agreements generally match the timing of the cash flows of the related liabilities. The notional amounts of the

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swap agreements represent balances used to calculate the exchange of cash flows and are not assets or liabilities of HCA. Any market risk or opportunity associated with these swap agreements is offset by the opposite market impact on the related debt. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk.”
Since The Merger, The Investors Control Us And May Have Conflicts Of Interest With Us In The Future.
      The Investors indirectly own approximately 97.5% of our capital stock due to the Recapitalization. As a result, the Investors have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of shareholders. For example, the Investors could cause us to make acquisitions that increase the amount of our indebtedness or sell assets.
      Additionally, the Sponsors are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by the Sponsors continue to indirectly own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions.

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Item 1B.  Unresolved Staff Comments
      None.
Item 2.Properties
      The following table lists, by state, the number of hospitals (general, acute care, psychiatric and rehabilitation) directly or indirectly owned and operated by us as of December 31, 2006:
         
State Hospitals Beds
     
Alaska  1   238 
California  5   1,504 
Colorado  7   2,246 
Florida  38   9,900 
Georgia  12   2,124 
Idaho  2   476 
Indiana  1   278 
Kansas  4   1,286 
Kentucky  2   384 
Louisiana  11   1,748 
Mississippi  1   130 
Missouri  7   1,222 
Nevada  3   1,075 
New Hampshire  2   295 
Oklahoma  2   942 
South Carolina  3   740 
Tennessee  13   2,297 
Texas  35   9,896 
Utah  6   932 
Virginia  10   2,963 
 
International        
Switzerland  2   220 
England  6   704 
       
   173   41,600 
       
      In addition to the hospitals listed in the above table, we directly or indirectly operate 107 freestanding surgery centers. We also operate medical office buildings in conjunction with some of our hospitals. These office buildings are primarily occupied by physicians who practice at our hospitals.
      We maintain our headquarters in approximately 918,000 square feet of space in the Nashville, Tennessee area. In addition to the headquarters in Nashville, we maintain regional service centers related to our shared services initiatives. These service centers are located in markets in which we operate hospitals.
      Our headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for our present needs. Our properties are subject to various federal, state and local statutes and ordinances regulating their operation. Management does not believe that compliance with such statutes and ordinances will materially affect our financial position or results of operations.

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Item 3.Legal Proceedings
      We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims or legal and regulatory proceedings could materially and adversely affect our results of operations and financial position in a given period.
Government Investigation, Claims and Litigation
      In January 2001, we entered into an eight-year CIA with the Office of Inspector General of the Department of Health and Human Services. Violation or breach of the CIA, or other violation of federal or state laws relating to Medicare, Medicaid or similar programs, could subject us to substantial monetary fines, civil and criminal penalties and/or exclusion from participation in the Medicare and Medicaid programs and other federal and state health care programs. Alleged violations may be pursued by the government or through privatequi tamactions. Sanctions imposed against us as a result of such actions could have a material adverse effect on our results of operations and financial position.
Governmental Investigations
      In September 2005, we received a subpoena from the Office of the United States Attorney for the Southern District of New York seeking the production of documents. Also in September 2005, we were informed that the SEC had issued a formal order of investigation. Both the subpoena and the formal order of investigation relate to trading in our securities. We are cooperating fully with these investigations.
Securities Class Action Litigation
      In November 2005, two putative federal securities law class actions were filed in the United States District Court for the Middle District of Tennessee seeking monetary damages on behalf of persons who purchased our stock between January 12, 2005 and July 13, 2005. These substantially similar lawsuits assert claims pursuant to Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, against us and our Chairman and Chief Executive Officer, President and Chief Operating Officer, and Executive Vice President and Chief Financial Officer, related to our July 13, 2005 announcement of preliminary results of operations for the quarter ended June 30, 2005.
      On January 5, 2006, the court consolidated these actions and all later-filed related securities actions under the captionIn re HCA Inc. Securities Litigation, case number 3:05-CV-00960. Pursuant to federal statute, on January 25, 2006, the court appointed co-lead plaintiffs to represent the interests of the asserted class members in this litigation. Co-lead plaintiffs filed a consolidated amended complaint on April 21, 2006. We believe that the allegations contained within these class action lawsuits are without merit and intend to vigorously defend the litigation.
      On June 27, 2006, we and each of the defendants moved to dismiss the consolidated amended complaint, and these motions are still pending.
Shareholder Derivative Lawsuits in Federal Court
      In November 2005, two then current shareholders each filed a derivative lawsuit, purportedly on behalf of our company, in the United States District Court for the Middle District of Tennessee against our Chairman and Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer, other executives, and certain members of our Board of Directors. Each lawsuit asserts claims for breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment in connection with our July 13, 2005 announcement of preliminary results of operations for the quarter ended June 30, 2005 and seeks monetary damages.
      On January 23, 2006, the Court consolidated these actions asIn re HCA Inc. Derivative Litigation, lead case number 3:05-CV-0968. The court stayed this action on February 27, 2006, pending resolution of a motion to dismiss the consolidated amended complaint in the related federal securities class action against us. On

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March 24, 2006, a consolidated derivative complaint was filed pursuant to a prior court order. On November 8, 2006, we reached an agreement in principle for the settlement of this consolidated action. The proposed settlement is subject to definitive documentation and court approval.
Shareholder Derivative Lawsuit in State Court
      On January 18, 2006, a then current shareholder filed a derivative lawsuit, purportedly on behalf of our company, in the Circuit Court for the State of Tennessee (Nashville District), against our Chairman and Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer, other executives, and certain members of our Board of Directors. This lawsuit is substantially identical in all material respects to the consolidated federal litigation described above under “Shareholder Derivative Lawsuits in Federal Court.” The Court stayed this action on April 3, 2006, pending resolution of a motion to dismiss the consolidated amended complaint in the related federal securities class action against us. On November 8, 2006, we reached an agreement in principle for the settlement of this action. The proposed settlement is subject to definitive documentation and court approval.
ERISA Litigation
      On November 22, 2005, Brenda Thurman, a former employee of an HCA affiliate, filed a complaint in the United States District Court for the Middle District of Tennessee on behalf of herself, the HCA Savings and Retirement Program (the “Plan”), and a class of participants in the Plan who held an interest in our common stock, against our Chairman and Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer, and other unnamed individuals. The lawsuit, filed under sections 502(a)(2) and 502(a)(3) of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §§ 1132(a)(2) and (3), alleges that defendants breached their fiduciary duties owed to the Plan and to plan participants and seeks monetary damages and injunctions and other relief.
      On January 13, 2006, the court signed an order staying all proceedings and discovery in this matter, pending resolution of a motion to dismiss the consolidated amended complaint in the related federal securities class action against HCA. On January 18, 2006, the magistrate judge signed an order (1) consolidating Thurman’s cause of action with all other future actions making the same claims and arising out of the same operative facts, (2) appointing Thurman as lead plaintiff, and (3) appointing Thurman’s attorneys as lead counsel and liaison counsel in the case. On January 26, 2006, the court issued an order reassigning the case to United States District Court Judge William J. Haynes, Jr., who has been presiding over the federal securities class action and federal derivative lawsuits.
Merger Litigation in State Court
      We are aware of six asserted class action lawsuits related to the Merger filed against us, our Chairman and Chief Executive Officer, our President and Chief Operating Officer, members of the Board of Directors and each of the Sponsors in the Chancery Court for Davidson County, Tennessee. The complaints are substantially similar and allege, among other things, that the Merger was the product of a flawed process, that the consideration to be paid to our shareholders in the Merger was unfair and inadequate, and that there was a breach of fiduciary duties. The complaints further allege that the Sponsors abetted the actions of our officers and directors in breaching their fiduciary duties to our shareholders. The complaints sought, among other relief, an injunction preventing completion of the Merger. On August 3, 2006, the Chancery Court consolidated these actions and all later-filed actions asIn re HCA Inc. Shareholder Litigation, case number 06-1816-III.
      On November 8, 2006, we and the other named parties entered into a memorandum of understanding with plaintiffs’ counsel in connection with these actions.
      Under the terms of the memorandum, we, the other named parties and the plaintiffs have agreed to settle the lawsuit subject to court approval. If the court approves the settlement contemplated in the memorandum, the lawsuit will be dismissed with prejudice. We and the other defendants deny all of the allegations in the lawsuit. Pursuant to the terms of the memorandum, Hercules Holding agreed to waive that portion in excess

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of $220 million of any termination fee that it has a right to receive under the Merger Agreement. Also, we and the other parties agreed not to assert that a then current shareholder’s demand for appraisal is untimely under Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”) where such shareholder submitted a written demand for appraisal within 30 calendar days of the shareholders meeting held to adopt the Merger Agreement (with any such deadline being extended to the following business day should the 30th day fall on a holiday or weekend). We and the other parties also agreed not to assert that (i) the surviving corporation in the Merger or then current shareholder who was entitled to appraisal rights may not file a petition in the Court of Chancery of the State of Delaware demanding a determination of the value of the shares held by all such shareholders if such petition is not filed within 120 days of the effective time of the Merger so long as such petition is filed within 150 days of the effective time, (ii) a then current shareholder may not withdraw such shareholder’s demand for appraisal and accept the terms offered by the Merger if such withdrawal is not made within 60 days of the effective time of the Merger so long as such withdrawal is made within 90 days of the effective time of the Merger and (iii) that a then current shareholder may not, upon written request, receive from the surviving corporation a statement setting forth the aggregate number of shares not voted in favor of the Merger with respect to which demands for appraisal have been received and the aggregate number of holders of such shares if such request is not made within 120 days of the effective time of the Merger so long as such request is made within 150 days of the effective time.
      Two cases making similar allegations and seeking similar relief on behalf of purported classes of then current shareholders have also been filed in Delaware. These two actions have also been consolidated under case number 2307-N and are pending in the Delaware Chancery Court, New Castle County. We believe this lawsuit is without merit and plan to defend it vigorously. We further believe the claims asserted in this lawsuit are subject to the November 8, 2006 agreement in principle to settle the Merger litigation and shareholder derivative lawsuits.
      On October 23, 2006, the Foundation for Seacoast Health filed a lawsuit against us and one of our affiliates, HCA Health Services of New Hampshire, Inc., in the Superior Court of Rockingham County, New Hampshire. Among other things, the complaint seeks to enforce certain provisions of an asset purchase agreement between the parties, including a purported right of first refusal to purchase a New Hampshire hospital, that allegedly are triggered by the Merger. The Foundation initially sought to enjoin the Merger. However, the parties reached an agreement that allowed the Merger to proceed, while preserving the plaintiff’s opportunity to litigate whether the Merger triggered the right of first refusal to purchase the hospital and, if so, at what price the hospital could be repurchased. The court has adopted a procedural schedule for addressing these issues that includes a trial in June 2007.
General Liability and Other Claims
      On April 10, 2006, a class action complaint was filed against us in the District Court of Kansas alleging, among other matters, nurse understaffing at all of our hospitals, certain consumer protection act violations, negligence and unjust enrichment. The complaint is seeking, among other relief, declaratory relief and monetary damages, including disgorgement of profits of $12.25 billion. A motion to dismiss this action was granted on July 27, 2006, but the plaintiffs have appealed this dismissal. We believe this lawsuit is without merit and plan to defend it vigorously.
      We are a party to certain proceedings relating to claims for income taxes and related interest in the United States Tax Court and the United States Court of Federal Claims. For a description of those proceedings, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — IRS Disputes” and Note 6 to our consolidated financial statements.
      We are also subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or for wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants have asked for punitive damages against us, which may not be covered by insurance. In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material, adverse effect on our results of operations or financial position.

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Item 4.Submission of Matters to a Vote of Security Holders
      We held a special meeting of shareholders on November 16, 2006. The following matter was voted upon at the meeting:
             
  Votes in Favor Votes Against Abstentions
       
To adopt the Agreement and Plan of Merger, dated as of July 24, 2006, by and among the Company, Hercules Holding II, LLC, a Delaware limited liability company, and Hercules Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Hercules Holding II, LLC  283,539,958   31,968,124   4,830,055 

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PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
      Our outstanding common stock is privately held, and there is no established public trading market for our common stock. As of February 28, 2007, there were 653 holders of our common stock. See Item 7, “Management’s Discussion and Analysis of Financial condition and Results of Operations — Liquidity and Capital Resources — Financing Activities” for a description of the restrictions on our ability to pay dividends.
      In January 2005, our Board of Directors approved an increase in our quarterly dividend from $0.13 per share to $0.15 per share. The Board declared the initial $0.15 per share dividend payable on June 1, 2005 to shareholders of record at May 1, 2005. In January 2006, our Board of Directors approved an increase in our quarterly dividend from $0.15 per share to $0.17 per share. The Board declared the initial $0.17 per share dividend payable on June 1, 2006 to shareholders of record at May 1, 2006 and an additional dividend payable September 1, 2006 to shareholders of record on August 1, 2006. We did not pay a quarterly dividend during the fourth quarter of 2006.

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Item 6.Selected Financial Data
HCA INC.
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(Dollars in millions)
                       
  2006 2005 2004 2003 2002
           
Summary of Operations:
                    
 Revenues $25,477  $24,455  $23,502  $21,808  $19,729 
 
 Salaries and benefits  10,409   9,928   9,419   8,682   7,952 
 Supplies  4,322   4,126   3,901   3,522   3,158 
 Other operating expenses  4,057   4,039   3,797   3,676   3,341 
 Provision for doubtful accounts  2,660   2,358   2,669   2,207   1,581 
 (Gains) losses on investments  (243)  (53)  (56)  (1)  2 
 Equity in earnings of affiliates  (197)  (221)  (194)  (199)  (206)
 Depreciation and amortization  1,391   1,374   1,250   1,112   1,010 
 Interest expense  955   655   563   491   446 
 Gains on sales of facilities  (205)  (78)  —   (85)  (6)
 Transaction costs  442   —   —   —    — 
 Impairment of long-lived assets  24   —   12   130   19 
 Government settlement and investigation related costs  —   —   —   (33)  661 
 Impairment of investment securities  —   —   —   —   168 
                
   23,615   22,128   21,361   19,502   18,126 
                
 Income before minority interests and income taxes  1,862   2,327   2,141   2,306   1,603 
 Minority interests in earnings of consolidated entities  201   178   168   150   148 
                
 Income before income taxes  1,661   2,149   1,973   2,156   1,455 
 Provision for income taxes  625   725   727   824   622 
                
  Net income $1,036  $1,424  $1,246  $1,332  $833 
                
Financial Position:
                    
 Assets $23,675  $22,225  $21,840  $21,400  $19,059 
 Working capital  2,502   1,320   1,509   1,654   766 
 Long-term debt, including amounts due within one year  28,408   10,475   10,530   8,707   6,943 
 Minority interests in equity of consolidated entities  907   828   809   680   611 
 Equity securities with contingent redemption rights  125   —   —   —    — 
 Stockholders’ (deficit) equity  (11,374)  4,863   4,407   6,209   5,702 
Cash Flow Data:
                    
 Cash provided by operating activities $1,845  $2,971  $2,954  $2,292  $2,648 
 Cash used in investing activities  (1,307)  (1,681)  (1,688)  (2,862)  (1,740)
 Cash (used in) provided by financing activities  (240)  (1,212)  (1,347)  650   (934)
Operating Data:
                    
 Number of hospitals at end of period(a)  166   175   182   184   173 
 Number of freestanding outpatient surgical centers at end of period(b)  98   87   84   79   74 
 Number of licensed beds at end of period(c)  39,354   41,265   41,852   42,108   39,932 
 Weighted average licensed beds(d)  40,653   41,902   41,997   41,568   39,985 
 Admissions(e)  1,610,100   1,647,800   1,659,200   1,635,200   1,582,800 
 Equivalent admissions(f)  2,416,700   2,476,600   2,454,000   2,405,400   2,339,400 
 Average length of stay (days)(g)  4.9   4.9   5.0   5.0   5.0 
 Average daily census(h)  21,688   22,225   22,493   22,234   21,509 
 Occupancy(i)  53%  53%  54%  54%  54%
 Emergency room visits(j)  5,213,500   5,415,200   5,219,500   5,160,200   4,802,800 
 Outpatient surgeries(k)  820,900   836,600   834,800   814,300   809,900 
 Inpatient surgeries(l)  533,100   541,400   541,000   528,600   518,100 
 Days revenues in accounts receivable(m)  53   50   48   52   52 
 Gross patient revenues(n) $84,913  $78,662  $71,279  $62,626  $53,542 
 Outpatient revenues as a % of patient revenues(o)  36%  36%  37%  37%  37%

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(a)Excludes seven facilities in 2006, 2005, 2004, and 2003; and six facilities in 2002 that are not consolidated (accounted for using the equity method) for financial reporting purposes.
(b)Excludes nine facilities in 2006, seven facilities in 2005, eight facilities in 2004 and four facilities in 2003 and 2002 that are not consolidated (accounted for using the equity method) for financial reporting purposes.
(c)Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(d)Weighted average licensed beds represents the average number of licensed beds, weighted based on periods owned.
(e)Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.
(f)Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation “equates” outpatient revenue to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume.
(g)Represents the average number of days admitted patients stay in our hospitals.
(h)Represents the average number of patients in our hospital beds each day.
(i)Represents the percentage of hospital licensed beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms.
(j)Represents the number of patients treated in our emergency rooms.
(k)Represents the number of surgeries performed on patients who were not admitted to our hospitals. Pain management and endoscopy procedures are not included in outpatient surgeries.
(l)Represents the number of surgeries performed on patients who have been admitted to our hospitals. Pain management and endoscopy procedures are not included in inpatient surgeries.
(m)Revenues per day is calculated by dividing the revenues for the period by the days in the period. Days revenues in accounts receivable is then calculated as accounts receivable, net of the allowance for doubtful accounts, at the end of the period divided by revenues per day.
(n)Gross patient revenues are based upon our standard charge listing. Gross charges/revenues typically do not reflect what our hospital facilities are paid. Gross charges/revenues are reduced by contractual adjustments, discounts and charity care to determine reported revenues.
(o)Represents the percentage of patient revenues related to patients who are not admitted to our hospitals.


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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 On November 17, 2006, we consummated the Merger with Merger Sub, a wholly owned subsidiary of Hercules Holding, pursuant to which Hercules Holding acquired all of our outstanding shares of common stock for $51.00 per share in cash. The Merger, the financing transactions related to the Merger and other related transactions had a transaction value of approximately $33.0 billion and are collectively referred to in this annual report as the “Recapitalization.” As a result of the Recapitalization, our outstanding common stock is owned by Hercules Holding, certain members of management and other key employees, and certain other entities. Our common stock is no longer registered with the SEC and is no longer traded on a national securities exchange.
The selected financial data and the accompanying consolidated financial statements present certain information with respect to the financial position, results of operations and cash flows of HCA Inc. which should be read in conjunction with the following discussion and analysis. The terms “HCA,” “Company,” “we,” “our,” or “us,” as used herein, refer to HCA Inc. and our affiliates unless otherwise stated or indicated by context. The term “affiliates” means direct and indirect subsidiaries of HCA Inc. and partnerships and joint ventures in which such subsidiaries are partners.
Forward-Looking Statements
 
This Annual Report onForm 10-K includes certain disclosures which contain “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “initiative” or “continue.” These forward-looking statements are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control, that could significantly affect current plans and expectations and our future financial position and results of operations. These factors include, but are not limited to, (1) the ability to recognize the benefits of the Recapitalization, and the effect of the Recapitalization on our customer, employee and other relationships, (2) the impact of the substantial indebtedness incurred to finance the Recapitalization, (3) increases in the amount and risk of collectibility of uninsured accounts and deductibles and copayment amounts for insured accounts, (4) the ability to achieve operating and financial targets, and achieveattain expected levels of patient volumes and control the costs of providing services, (5) possible changes in the Medicare, Medicaid and other state programs, including Medicaid supplemental payments pursuant to upper payment limit (“UPL”) programs, that may impact reimbursements to health care providers and insurers, (6) the highly competitive nature of the health care business, (7) changes in revenue mix and the ability to enter into and renew managed care provider agreements on acceptable terms, (8) the efforts of insurers, health care providers and others to contain health care costs, (9) the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures and our corporate integrity agreement with the government,CIA, (10) changes in federal, state or local laws or regulations affecting the health care industry, (11) increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel, (12) the outcome of governmental investigations by the United States Attorney for the Southern District of New York and the SEC, (13) the outcome of certain class action and derivative litigation filed with respect to us, (14) the possible enactment of federal or state health care reform, (15)(13) the availability and terms of capital to fund the expansion of our business (16) the continuing impact of hurricanes onand improvements to our existing facilities, and the ability to obtain recoveries under our insurance policies, (17)(14) changes in accounting practices, (18)(15) changes in general economic conditions (19)nationally and regionally in our markets, (16) future divestitures which may result in charges, (20)(17) changes in business strategy or development plans, (21)(18) delays in receiving payments for services provided, (22)(19) the outcome of pending and any future tax audits, appeals and litigation associated with our tax positions, (23)(20) potential liabilities and other claims that may be asserted against us, and (24)(21) other risk factors described in this Annual Report onForm 10-K. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those

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HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.
20062007 Operations Summary
 
Net income totaled $874 million for the year ended December 31, 2007 compared to $1.036 billion for the year ended December 31, 2006 compared to $1.424 billion for the year ended December 31, 2005.2006. The 2007 results include gains on investments of $8 million, gains on sales of facilities of $471 million and an impairment of long-lived assets of $24 million. The 2006 results include reductions to estimated professional liability reserves of $136 million, gains on investments of $243 million, gains on sales of facilities of $205 million, transaction costs related to the Recapitalization of $442 million and an impairment of long-lived assets of $24 million. The 2005 results include reductions to estimated professional liability reserves of $83 million, expenses associated with hurricanes of $60 million, gains on investments of $53 million, gains on sales of facilities of $78 million, a favorable tax settlement of $48 million and a tax benefit$442 million of $24 milliontransaction costs related to the repatriation of foreign earnings.Recapitalization.
 
Revenues increased 4.2%5.4% on a consolidated basis and 6.2%7.4% on a same facility basis for the year ended December 31, 20062007 compared to the year ended December 31, 2005.2006. The consolidated revenues increase can be


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HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
2007 Operations Summary (Continued)
attributed to a 6.8%an 8.3% increase in revenue per equivalent admission, offsetting a 2.4%2.7% decline in equivalent admissions. The same facility revenues increase resulted from flat same facility equivalent admissions and a 6.2%an 8.1% increase in same facility revenue per equivalent admission.admission, offsetting a 0.7% decline in equivalent admissions.
 
During the year ended December 31, 2006,2007, same facility admissions increased 0.2%decreased 1.3% compared to the year ended December 31, 2005.2006. Same facility inpatient surgeries increased 0.7%decreased 1.0% and same facility outpatient surgeries decreased 1.2%1.1% during the year ended December 31, 20062007 compared to the year ended December 31, 2005.2006.
 
For the year ended December 31, 2006,2007, the provision for doubtful accounts increased to 10.4%11.7% of revenues from 9.6%10.4% of revenues for the year ended December 31, 2005.2006. Same facility uninsured admissions increased 10.9%9.4% and same facility uninsured emergency room visits increased 6.2%7.3% for the year ended December 31, 20062007 compared to the year ended December 31, 2005.2006.
 
Interest expense totaled $2.215 billion for the year ended December 31, 2007 compared to $955 million for the year ended December 31, 2006 compared to $655 million for the year ended December 31, 2005. Interest2006. The $1.260 billion increase in interest expense for the fourth quarter of 20062007 was $373 million and represented an increase of $207 million compared to the fourth quarter of 2005, due primarily to the increasedsignificant increase in debt related to the November 2006 Recapitalization.
Business Strategy
 
We are committed to providing the communities we serve high quality, cost-effective health care while complying fully with our ethics policy, governmental regulations and guidelines and industry standards. As a part of this strategy, management focuses on the following principal elements:
 
Maintain Our Dedication to the Care and Improvement of Human Life.  Our business is built on putting patients first and providing high quality health care services in the communities we serve. Our dedicated professionals oversee our Quality Review System, which measures clinical outcomes, satisfaction and regulatory compliance to improve hospital quality and performance. In addition, we continue to implement advanced health information technology to improve the quality and convenience of services to our communities. We are using our advanced electronic medication administration record, which uses bar coding technology to ensure that each patient receives the right medication, to build toward a fully electronic health record that provideswill provide convenient access, electronic order entry and decision support for physicians. These technologies improve patient safety, quality and efficiency.

41

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Business Strategy (Continued)
Maintain Our Commitment to Ethics and Compliance.  We are committed to a corporate culture highlighted by the following values — compassion, honesty, integrity, fairness, loyalty, respect and kindness. Our comprehensive ethics and compliance program reinforces our dedication to these values.
 
Leverage Our Leading Local Market Positions.  We strive to maintain and enhance the leading positions that we enjoy in the majority of our markets. We believe that the broad geographic presence of our facilities across a range of markets, in combination with the breadth and quality of services provided by our facilities, increases our attractiveness to patients and large employers and positions us to negotiate more favorable terms from commercial payers and increase the number of payers with whom we contract. We also intend to strategically enhance our outpatient presence in our communities to attract more patients to our facilities.
 
Expand Our Presence in Key Markets.  We seek to grow our business in key markets, focusing on large, high growth urban and suburban communities, primarily in the southern and western regions of the United States. We seek to strategically invest in new and expanded services at our existing hospitals and surgery centers to increase our revenues at those facilities and provide the benefits of medical technology advances to our communities. For example, weWe intend to continue to expand high volume and high margin specialty services, such as cardiology and orthopedic services, and increase the capacity, scope and convenience of our outpatient facilities. To complement this organicintrinsic growth, we intend to continue to opportunistically develop and acquire new hospitals and outpatient facilities.


37

 
HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Business Strategy (Continued)
Continue to Leverage Our Scale.  We will continue to obtain price efficiencies through our group purchasing organization and to build on the cost savings and efficiencies in billing, collection and other processes we have achieved through our nine regional service centers. We are increasingly taking advantage of our national scale by contracting for services on a multistate basis. We will explore the feasibility of replicating our successful shared services model for additional clinical and support functions, such as physician credentialing, medical transcription and electronic medical recordkeeping, across multiple markets.
 
Continue to Develop Enduring Physician Relationships.  We depend on the quality and dedication of the physicians who serve at our facilities, and we aggressively recruit both primary care physicians and key specialists to meet community needs and improve our market position. We strategically recruit physicians and often assist them in establishing a practice or joining an existing practice where there is a community need and provide support to build their practices in compliance with regulatory standards. We intend to improve both service levels and revenues in our markets by:
 • expanding the number of high quality specialty services, such as cardiology, orthopedics, oncology and neonatology;
 
 • continuing to use joint ventures with physicians to further develop our outpatient business, particularly through ambulatory surgery centers and outpatient diagnostic centers;
 
 • developing medical office buildings to provide convenient facilities for physicians to locate their practices and serve their patients; and
 
 • continuing our focus on improving hospital quality and performance and implementing advanced technologies in our facilities to attract physicians to our facilities.
 
Become the Health Care Employer of Choice.  We will continue to use a number of industry-leading practices to help ensure that our hospitals are a health care employer of choice in their respective communities. Our staffing initiatives for both care providers and hospital management provide strategies for recruitment, compensation and productivity to increase employee retention and operating efficiency at our hospitals. For example, we maintain an internal contract nursing agency to supply our hospitals with high

42

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Business Strategy (Continued)
quality staffing at a lower cost than external agencies. In addition, we have developed several proprietary training and career development programs for our physicians and hospital administrators, including an executive development program designed to train the next generation of hospital leadership. We believe that our continued investment in the training and retention of employees improves the quality of care, enhances operational efficiency and fosters employee loyalty.
Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Our estimates are based on historical experience and various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from these estimates.
 
We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenues
Revenues
 
Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from payers. Estimates of contractual allowances under managed care health plans are based upon the


38

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Critical Accounting Policies and Estimates (Continued)

Revenues (Continued)
payment terms specified in the related contractual agreements. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The estimated reimbursement amounts are made on a payer-specific basis and are recorded based on the best information available regarding management’s interpretation of the applicable laws, regulations and contract terms. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms that resultresulting from contract renegotiations and renewals. We have invested significant resources to refine and improve our computerized billing systemsystems and the information system data used to make contractual allowance estimates. We have developed standardized calculation processes and related training programs to improve the utility of our patient accounting systems.
 
The Emergency Medical Treatment and Active Labor Act (“EMTALA”) requires any hospital that participatesparticipating in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize thatthe condition or make an appropriate transfer of the individual to a facility that canable to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. Federal and state laws and regulations, including but not limited to EMTALA, require, and our commitment to providing quality patient care encourages, the provision of services to patients who are financially unable to pay for the health care services they receive.
 
We do not pursue collection of amounts related to patients who meet our guidelines to qualify as charity care; therefore, they are not reported in revenues. The revenues associated with uninsured patients who do not meet our guidelines to qualify as charity care have generally been reported in revenues at gross charges. Patients treated at our hospitals for nonelective care, who have income at or below 200% of the federal poverty level, are eligible for charity care. The federal poverty level is established by the federal government and is based on income and family size. On January 1, 2005, we modifiedWe provide discounts from our policies to provide discountsgross charges to uninsured patients who do not qualify for Medicaid or charity care. These discounts are similar to those provided to many local managed care plans.

43

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Critical Accounting Policies and Estimates (Continued)
     Revenues (Continued)
Due to the complexities involved in the classification and documentation of health care services authorized and provided, the estimation of revenues earned and the related reimbursement are often subject to interpretations that could result in payments that are different from our estimates. A hypothetical 1% change in net receivables that are subject to contractual discounts at December 31, 20062007 would result in an impact on pretax earnings of approximately $32$34 million.
Provision for Doubtful Accounts and the Allowance for Doubtful Accounts
Provision for Doubtful Accounts and the Allowance for Doubtful Accounts
 
The collection of outstanding receivables from Medicare, managed care payers, other third-party payers and patients is our primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to amounts due directly from patients. An estimated allowance for doubtful accounts is recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed. We considerPrior to August 2007, we considered the return of an account from the primary external collection agency to be the culmination of our reasonable collection efforts and the timing basis for writing off the account balance. During August 2007, we modified our collection policies to establish a review of all accounts, upon completion of our internal collection efforts, against certain standard collection criteria. Upon the completion of this review process, accounts determined to possess positive collectibility attributes are forwarded to a secondary external collection agency and the other accounts are written off. The accounts that are not collected by the secondary external collection agency are written off when they are returned to us by the collection agency


39

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Critical Accounting Policies and Estimates (Continued)

Provision for Doubtful Accounts and the Allowance for Doubtful Accounts (Continued)
(usually within 18 to 24 months). Our August 2007 collection policy change results in a delay in writing off the accounts forwarded to the secondary external collection agency compared to our previous policy and we expect to incur increases in both our gross accounts receivable and the allowance for doubtful accounts due to this delay in recording writeoffs. Writeoffs are based upon specific identification and the writeoff process requires a writeoff adjustment entry to the patient accounting system. We do not pursue collection of amounts related to patients that meet our guidelines to qualify as charity care. Charity care is not reported in revenues and does not have an impact on the provision for doubtful accounts.
 
The amount of the provision for doubtful accounts is based upon management’s assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal, state, and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical writeoffs and recoveries at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectibility of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and writeoff data. At December 31, 2006,2007, the allowance for doubtful accounts represented approximately 86%89% of the $3.972$4.825 billion patient due accounts receivable balance, including accounts, net of the related estimated contractual discounts, related to patients for which eligibility for Medicaid assistance or charity was being evaluated (“pending Medicaid accounts”). At December 31, 2005,2006, the allowance for doubtful accounts represented approximately 85%86% of the $3.404$3.972 billion patient due accounts receivable balance, including pending Medicaid accounts, net of the related estimated contractual discounts. The provision for doubtful accounts was 10.4% of revenues in 2006, 9.6% of revenues in 2005 and 11.4% of revenues in 2004. Our uninsured discount policy, which became effective January 1, 2005, resulted in $1.095 billion and $769 million in discounts to the uninsured being recorded during 2006 and 2005, respectively. Adjusting for the effect of the uninsured discounts, the provision for doubtful accounts was 14.1% and 12.4% of revenues for the years ended December 31, 2006 and 2005, respectively. See “Supplemental Non-GAAP Disclosures, Operating Measures Adjusted for the Impact of Discounts for the Uninsured.” Days revenues in accounts receivable were 53 days, 5053 days and 4850 days at December 31, 2007, 2006 2005 and 2004,2005, respectively. Management expects a continuation of the challenges related to the collection of the patient due accounts. Adverse changes in the percentage of our patients having adequate health care coverage, general economic conditions, patient accounting service center operations, payer mix, or trends in federal, state, and private employer health care coverage could affect the collection of accounts receivable, cash flows and results of operations.
The approximate breakdown of accounts receivable by payer classification as of December 31, 2007 and 2006 is set forth in the following table:
             
  % of Accounts Receivable
  Under 91 Days 91—180 Days Over 180 Days
 
Accounts receivable aging at December 31, 2007:            
Medicare and Medicaid  11%  1%  2%
Managed care and other insurers  19   4   4 
Uninsured  20   11   28 
             
Total  50%  16%  34%
             
Accounts receivable aging at December 31, 2006:            
Medicare and Medicaid  13%  1%  2%
Managed care and other insurers  21   4   4 
Uninsured  20   11   24 
             
Total  54%  16%  30%
             


40

44

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Critical Accounting Policies and Estimates (Continued)
     Provision for Doubtful Accounts and the Allowance for Doubtful Accounts (Continued)Professional Liability Claims
 The approximate breakdown of accounts receivable by payer classification as of December 31, 2006 and 2005 is set forth in the following table:
               
  % of Accounts Receivable
   
  Under 91 Days 91 — 180 Days Over 180 Days
       
Accounts receivable aging at December 31, 2006:            
 Medicare and Medicaid  13%  1%  2%
 Managed care and other insurers  21   4   4 
 Uninsured  20   11   24 
          
  Total  54%  16%  30%
          
Accounts receivable aging at December 31, 2005:            
 Medicare and Medicaid  13%  2%  2%
 Managed care and other insurers  21   4   4 
 Uninsured  21   11   22 
          
  Total  55%  17%  28%
          
Professional Liability Claims
We, along with virtually all health care providers, operate in an environment with professional liability risks. Prior to 2007, a substantial portion of our professional liability risks was insured through a wholly-owned insurance subsidiary. Reserves for professional liability risks were $1.584$1.513 billion and $1.621$1.584 billion at December 31, 20062007 and December 31, 2005,2006, respectively. The current portion of these reserves, $275$280 million and $285$275 million at December 31, 20062007 and 2005,2006, respectively, is included in “other accrued expenses.” Obligations covered by reinsurance contracts are included in the reserves for professional liability risks, as the insurance subsidiary remains liable to the extent reinsurers do not meet their obligations. Reserves for professional liability risks (net of $42$44 million and $43$42 million receivable under reinsurance contracts at December 31, 20062007 and 2005,2006, respectively) were $1.542$1.469 billion and $1.578$1.542 billion at December 31, 20062007 and 2005,2006, respectively. Reserves and provisions for professional liability risks are based upon actuarially determined estimates. The independent actuaries’ estimated reserve ranges, net of amounts receivable under reinsurance contracts, were $1.224 billion to $1.471 billion at December 31, 2007 and $1.321 billion to $1.545 billion at December 31, 2006 and $1.373 billion to $1.589 billion at December 31, 2005.2006. Reserves for professional liability risks represent the estimated ultimate cost of all reported and unreported losses incurred through the respective consolidated balance sheet dates. The reserves are estimated using individual case-basis valuations and actuarial analyses. Those estimates are subject to the effects of trends in loss severity and frequency. The estimates are continually reviewed and adjustments are recorded as experience develops or new information becomes known.
 
The reserves for professional liability risks cover approximately 3,0002,600 and 3,3003,000 individual claims at December 31, 20062007 and 2005,2006, respectively, and estimates for unreported potential claims. The time period required to resolve these claims can vary depending upon the jurisdiction and whether the claim is settled or litigated. The estimation of the timing of payments beyond a year can vary significantly. Changes to the estimated reserve amounts are included in current operating results. Due to the considerable variability that is inherent in such estimates, there can be no assurance that the ultimate liability will not exceed management’s estimates.

45

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Critical Accounting Policies and Estimates (Continued)
     Professional Liability Claims (Continued)
Provisions for losses related to professional liability risks were $163 million, $217 million $298 million and $291$298 million for the years ended December 31, 2007, 2006 and 2005, and 2004, respectively. We recognized reductions in our estimated professional liability insurance reserves of $136 million, $83 million and $59 million during 2006, 2005 and 2004, respectively. These reductions reflectThe declining provision for losses trend reflects the recognition by the external actuaries of our improving frequency and severity claim trends. This improving frequency and moderating severity can be primarily attributed to tort reforms enacted in key states, particularly Texas, and our risk management and patient safety initiatives, particularly in the areasarea of obstetrics and emergency services.obstetrics.
Income Taxes
Income Taxes
 
We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences that arise from the recognition of items in different periods for tax and accounting purposes. Deferred tax assets generally represent the tax effects of amounts expensed in our income statement for which tax deductions will be claimed in future periods.
 
Although we believe that we have properly reported taxable income and paid taxes in accordance with applicable laws, federal, and state or international taxing authorities may challenge our tax positions upon audit. To reflect the possibility thatWe account for uncertain tax positions in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. Accordingly, we report a liability for unrecognized tax benefits from uncertain tax positions taken or expected to be taken in our positions may not ultimately be sustained, we have established, and when appropriate adjust, provisions for potential adverseincome tax outcomes, based on our evaluation of the underlying facts and circumstances.return. Final audit results may vary from our estimates.
Results of Operations
Revenue/ Volume Trends
Revenue/Volume Trends
 
Our revenues depend upon inpatient occupancy levels, the ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charge and negotiated payment


41

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)

Revenue/Volume Trends (Continued)
rates for such services. Gross charges typically do not reflect what our facilities are actually paid. Our facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from gross charges. We do not pursue collection of amounts related to patients who meet our guidelines to qualify for charity care; therefore, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care that are similar to the discounts provided to many local managed care plans.
 
Revenues increased 4.2%5.4% to $26.858 billion for the year ended December 31, 2007 from $25.477 billion for the year ended December 31, 2006 and increased 4.2% for the year ended December 31, 2006 from $24.455 billion for the year ended December 31, 2005 and increased 4.1% for2005. The increase in revenues in 2007 can be primarily attributed to an 8.3% increase in revenue per equivalent admission, offsetting a 2.7% decline in equivalent admissions compared to the year ended December 31, 2005 from $23.502 billion for the year ended December 31, 2004.prior year. The increase in revenues in 2006 can be primarily attributed to a 6.8% increase in revenue per equivalent admission offsetting a 2.4% decline in equivalent admissions compared to the prior year. Our uninsured discount policy, which became effective January 1, 2005, resulted
Same facility admissions decreased 1.3% in $1.095 billion and $769 million in discounts to the uninsured being recorded during 2006 and 2005, respectively. Adjusting for the effect of the uninsured discounts, revenue per equivalent admission increased 8.0% in the year ended December 31, 20062007 compared to the year ended December 31, 2005. See “Supplemental Non-GAAP Disclosures, Operating Measures Adjusted for the Impact of Discounts for the Uninsured.” The increase in revenues in 2005 can be primarily attributed to a 0.9% increase in equivalent admissions2006 and a 3.1% increase in revenue per equivalent admission compared to the prior year.
      Same facility admissions increased 0.2% in 2006 compared to 20052005. Same facility inpatient surgeries decreased 1.0% and increased 0.1% in 2005same facility outpatient surgeries decreased 1.1% during 2007 compared to 2004.2006. Same facility inpatient surgeries increased 0.7% and same facility outpatient surgeries decreased 1.2% during 2006 compared to 2005. Same facility inpatient surgeriesemergency room visits increased 0.9% and same facility outpatient

46

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)
     Revenue/ Volume Trends (Continued)
surgeries increased 0.3%0.7% during 20052007 compared to 2004. Same facility emergency room visits2006 and decreased 0.8% during 2006 compared to 2005 and increased 4.8% during 2005 compared to 2004.2005.
 
Admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the years ended December 31, 2007, 2006 2005 and 20042005 are set forth below.
             
  Years Ended December 31,
   
  2006 2005 2004
       
Medicare  37%  38%  39%
Managed Medicare  6   (a)  (a)
Medicaid  9   10   10 
Managed Medicaid  6   5   4 
Managed care and other insurers(a)  36   42   42 
Uninsured  6   5   5 
          
   100%  100%  100%
          
 
             
  Years Ended December 31,
  2007 2006 2005
 
Medicare    35%    37%    38%
Managed Medicare  7   6   (a)
Medicaid  8   9   10 
Managed Medicaid  7   6   5 
Managed care and other insurers(a)  37   36   42 
Uninsured  6   6   5 
             
   100%  100%  100%
             
(a)Prior to 2006, managed Medicare admissions were classified as managed care.
 
Same facility uninsured emergency room visits increased 7.3% and same facility uninsured admissions increased 9.4% during 2007 compared to 2006. Same facility uninsured emergency room visits increased 6.2% and same facility uninsured admissions increased 10.9% during 2006 compared to 2005. Same facility uninsured emergency room visits increased 11.0% andManagement expects the current trends of increasing same facility uninsured admissions increased 9.5% during 2005 compared to 2004. Management cannot predict whether the current trends in same facility emergency room visits and same facility uninsured admissions will continue.to continue during 2008.
 
Several factors negatively affected patient volumes in 20062007 and 2005.2006. More stringent enforcement of case management guidelines led to certain patient services being classified as outpatient observation visits instead ofone-day admissions. Unit closures and changes in Medicare admission guidelines led to reductions in rehabilitation and skilled nursing admissions. Cardiac admissions have been affected by competition from physician-owned heart hospitals and credentialing decisions made at some of our Florida hospitals. More stringent enforcement of case management guidelines led to certain patient services being classified as outpatient observation visits instead of one-day admissions. To increase patient volumes, we plan to increase physician recruitment, increase available medical office


42

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)

Revenue/Volume Trends (Continued)
building space on or near our campuses, and continue capital spending devoted to both maintenance of technology and facilities and growth and expansion programs.
 At December 31, 2006, we owned and operated 38 hospitals and 33 surgery centers in the state of Florida. Our Florida facilities’ revenues totaled $6.563 billion and $6.276 billion for the years ended December 31, 2006 and 2005, respectively. At December 31, 2006, we owned and operated 35 hospitals and 22 surgery centers in the state of Texas. Our Texas facilities’ revenues totaled $6.316 billion and $5.900 billion for the years ended December 31, 2006 and 2005, respectively.
      We provided $1.296 billion, $1.138 billion and $926 million of charity care during the years ended December 31, 2006, 2005 and 2004, respectively. On January 1, 2005, we modified our policies to provide a discount to uninsured patients who do not qualify for Medicaid or charity care. These discounts are similar to those provided to many local managed care plans and totaled $1.095 billion and $769 million for the years ended December 31, 2006 and 2005, respectively.

47

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)
     Revenue/ Volume Trends (Continued)
      We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. Legislative changes have resulted in limitations and even reductions in levels of payments to health care providers for certain services under these government programs.
The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care plans and other insurers and the uninsured for the years ended December 31, 2007, 2006 2005 and 20042005 are set forth below.
             
  Years Ended December 31,
   
  2006 2005 2004
       
Medicare  34%  36%  37%
Managed Medicare  6   (a)  (a)
Medicaid  6   7   6 
Managed Medicaid  3   3   3 
Managed care and other insurers(a)  46   49   48 
Uninsured(b)  5   5   6 
          
   100%  100%  100%
          
 
             
  Years Ended December 31,
  2007 2006 2005
 
Medicare    32%    34%    36%
Managed Medicare  7   6   (a)
Medicaid  7   6   7 
Managed Medicaid  4   3   3 
Managed care and other insurers(a)  44   46   49 
Uninsured  6   5   5 
             
   100%  100%  100%
             
(a)Prior to 2006, managed Medicare revenues were classified as managed care.
(b)Uninsured revenues for the years ended December 31, 2006 and 2005 were reduced due to discounts to the uninsured, related to the uninsured discount program implemented January 1, 2005.
At December 31, 2007, we owned and operated 37 hospitals and 34 surgery centers in the state of Florida. Our Florida facilities’ revenues totaled $6.732 billion and $6.563 billion for the years ended December 31, 2007 and 2006, respectively. At December 31, 2007, we owned and operated 35 hospitals and 22 surgery centers in the state of Texas. Our Texas facilities’ revenues totaled $6.911 billion and $6.316 billion for the years ended December 31, 2007 and 2006, respectively. During 2007 and 2006, 55% and 54%, respectively, of our admissions and 51% of our revenues were generated by our Florida and Texas facilities. Uninsured admissions in Florida and Texas represented 62% and 59% of our uninsured admissions during 2007 and 2006, respectively.
We provided $1.530 billion, $1.296 billion and $1.138 billion of charity care (amounts are based upon our gross charges) during the years ended December 31, 2007, 2006 and 2005, respectively. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. These discounts are similar to those provided to many local managed care plans and totaled $1.474 billion, $1.095 billion and $769 million for the years ended December 31, 2007, 2006 and 2005, respectively.
We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. During 2007 and 2006, we have increased the indigent care services we provide in several communities in the state of Texas, in affiliation with other hospitals. The state of Texas has been involved in the effort to increase the indigent care provided by private hospitals. As a result of this additional indigent care provided by private hospitals, public hospital districts or counties in Texas have available funds that were previously devoted to indigent care. The public hospital districts or counties are under no contractual or legal obligation to provide such indigent care. The public hospital districts or counties have elected to offer some portion of these amounts of newly availablead valorem tax revenues as a state portion of the Medicaid program (which is funded by both state and federal dollars). Such action is at the sole discretion of the public hospital districts or counties. It is anticipated that the state contributions will be matched with federal Medicaid funds. The state then may make Medicaid supplemental payments to hospitals in the state, including those that are providing additional indigent care services. Such payments must be within the federal UPL established by federal regulation.


43

48

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)
Operating Results Summary

Revenue/Volume Trends (Continued)
 
Our Texas Medicaid revenues increased by $232 million and $39 million during 2007 and 2006, respectively, due to increases in Medicaid supplemental payments pursuant to UPL programs in which we, local governments and other unaffiliated providers participate.
Based upon review of certain expenditures claimed for federal Medicaid matching funds by the state of Texas, CMS recently deferred a portion of claimed amounts. The federal deferral is expected to continue until CMS completes its review. The outcome of such review might affect the past and future claimed payments. We have not recognized any net benefits related to the Texas Medicaid supplemental payments in our operating results for periods subsequent to June 30, 2007 and will continue this revenue recognition policy until we receive further guidance from responsible federal and state agencies. We expect to receive updated information from the responsible federal and state agencies during the second and third quarters of 2008.


44

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)
Operating Results Summary
The following are comparative summaries of operating results for the years ended December 31, 2007, 2006 2005 and 20042005 (dollars in millions):
                          
  2006 2005 2004
       
  Amount Ratio Amount Ratio Amount Ratio
             
Revenues $25,477   100.0  $24,455   100.0  $23,502   100.0 
Salaries and benefits  10,409   40.9   9,928   40.6   9,419   40.1 
Supplies  4,322   17.0   4,126   16.9   3,901   16.6 
Other operating expenses  4,057   16.0   4,039   16.5   3,797   16.0 
Provision for doubtful accounts  2,660   10.4   2,358   9.6   2,669   11.4 
Gains on investments  (243)  (1.0)  (53)  (0.2)  (56)  (0.2)
Equity in earnings of affiliates  (197)  (0.8)  (221)  (0.9)  (194)  (0.8)
Depreciation and amortization  1,391   5.5   1,374   5.6   1,250   5.3 
Interest expense  955   3.7   655   2.7   563   2.4 
Gains on sales of facilities  (205)  (0.8)  (78)  (0.3)  —   — 
Transaction costs  442   1.7   —   —   —    — 
Impairment of long-lived assets  24   0.1   —   —   12   0.1 
                   
   23,615   92.7   22,128   90.5   21,361   90.9 
                   
Income before minority interests and income taxes  1,862   7.3   2,327   9.5   2,141   9.1 
Minority interests in earnings of consolidated entities  201   0.8   178   0.7   168   0.7 
                   
Income before income taxes  1,661   6.5   2,149   8.8   1,973   8.4 
Provision for income taxes  625   2.4   725   3.0   727   3.1 
                   
 Net income $1,036   4.1  $1,424   5.8  $1,246   5.3 
                   
% changes from prior year:                        
 Revenues  4.2%      4.1%      7.8%    
 Income before income taxes  (22.7)      9.0       (8.5)    
 Net income  (27.2)      14.2       (6.5)    
 Admissions(a)  (2.3)      (0.7)      1.5     
 Equivalent admissions(b)  (2.4)      0.9       2.0     
 Revenue per equivalent admission  6.8       3.1       5.6     
Same facility % changes from prior year(c):                        
 Revenues  6.2       4.7       7.3     
 Admissions(a)  0.2       0.1       0.7     
 Equivalent admissions(b)  —       1.4       1.3     
 Revenue per equivalent admission  6.2       3.2       6.0     
 
                         
  2007  2006  2005 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
 
Revenues $26,858   100.0  $25,477   100.0  $24,455   100.0 
                         
Salaries and benefits  10,714   39.9   10,409   40.9   9,928   40.6 
Supplies  4,395   16.4   4,322   17.0   4,126   16.9 
Other operating expenses  4,241   15.7   4,056   16.0   4,034   16.5 
Provision for doubtful accounts  3,130   11.7   2,660   10.4   2,358   9.6 
Gains on investments  (8)  —   (243)  (1.0)  (53)  (0.2)
Equity in earnings of affiliates  (206)  (0.8)  (197)  (0.8)  (221)  (0.9)
Depreciation and amortization  1,426   5.4   1,391   5.5   1,374   5.6 
Interest expense  2,215   8.2   955   3.7   655   2.7 
Gains on sales of facilities  (471)  (1.8)  (205)  (0.8)  (78)  (0.3)
Impairment of long-lived assets  24   0.1   24   0.1   —   — 
Transaction costs  —   —   442   1.7   —   — 
                         
   25,460   94.8   23,614   92.7   22,123   90.5 
                         
Income before minority interests and income taxes  1,398   5.2   1,863   7.3   2,332   9.5 
Minority interests in earnings of consolidated entities  208   0.8   201   0.8   178   0.7 
                         
Income before income taxes  1,190   4.4   1,662   6.5   2,154   8.8 
Provision for income taxes  316   1.1   626   2.4   730   3.0 
                         
Net income $874   3.3  $1,036   4.1  $1,424   5.8 
                         
% changes from prior year:                        
Revenues  5.4%      4.2%      4.1%    
Income before income taxes  (28.4)      (22.9)      7.7     
Net income  (15.7)      (27.2)      14.2     
Admissions(a)  (3.6)      (2.3)      (0.7)    
Equivalent admissions(b)  (2.7)      (2.4)      0.9     
Revenue per equivalent admission  8.3       6.8       3.1     
Same facility % changes from prior year(c):                        
Revenues  7.4       6.2       4.7     
Admissions(a)  (1.3)      0.2       0.1     
Equivalent admissions(b)  (0.7)      —       1.4     
Revenue per equivalent admission  8.1       6.2       3.2     
(a)Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.
 
(b)Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation “equates” outpatient revenue to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume.
 
(c)Same facility information excludes the operations of hospitals and their related facilities that were either acquired, divested or removed from service during the current and prior year.


45

49

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)
     Operating Results Summary (Continued)
Supplemental Non-GAAP Disclosures
Operating Measures Adjusted for the Impact of Discounts for the Uninsured
(Dollars in millions, except revenue per equivalent admission)
 The results of operations
Years Ended December 31, 2007 and 2006
Net income totaled $874 million for the year ended December 31, 2006, adjusted2007 compared to $1.036 billion for the impactyear ended December 31, 2006. Financial results for 2007 include gains on sales of facilities of $471 million, gains on investments of $8 million and an asset impairment charge of $24 million. Financial results for 2006 include gains on sales of facilities of $205 million, gains on investments of $243 million, expenses related to the Recapitalization of $442 million and an asset impairment charge of $24 million.
Revenues increased 5.4% to $26.858 billion for 2007 from $25.477 billion for 2006. The increase in revenues was due primarily to an 8.3% increase in revenue per equivalent admission, offsetting a 2.7% decline in equivalent admissions compared to the prior year. Same facility revenues increased 7.4% due to an 8.1% increase in same facility revenue per equivalent admission, offsetting a 0.7% decrease in same facility equivalent admissions compared to the prior year.
During 2007, same facility admissions decreased 1.3%, compared to 2006. Inpatient surgical volumes decreased 3.1% on a consolidated basis and same facility inpatient surgeries decreased 1.0% during 2007 compared to 2006. Outpatient surgical volumes decreased 2.0% on a consolidated basis and same facility outpatient surgeries decreased 1.1% during 2007 compared to 2006.
Salaries and benefits, as a percentage of revenues, were 39.9% in 2007 and 40.9% in 2006. Salaries and benefits per equivalent admission increased 5.8% in 2007 compared to 2006. Labor rate increases averaged 5.0% for 2007 compared to 2006.
Supplies, as a percentage of revenues, were 16.4% in 2007 and 17.0% in 2006. Supply costs per equivalent admission increased 4.5% in 2007 compared to 2006. Same facility supply costs increased 6.4% for medical devices, primarily for orthopedic supplies, 13.1% for blood products, and 5.6% for general medical and surgical items.
Other operating expenses, as a percentage of revenues, decreased to 15.7% in 2007 from 16.0% in 2006. Other operating expenses are primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Other operating expenses include $187 million and $11 million of indigent care costs in certain Texas markets during 2007 and 2006, respectively. Provisions for losses related to professional liability risks were $163 million and $217 million for 2007 and 2006, respectively. The reduction in the provision for professional liability risks reflects the recognition by our external actuaries of improving frequency and severity claim trends at our facilities.
Provision for doubtful accounts, as a percentage of revenues, increased to 11.7% for 2007 from 10.4% in 2006. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients. The increase in the provision for doubtful accounts, as a percentage of revenues, can be attributed to an increasing amount of patient financial responsibility under certain managed care plans and same facility increases in uninsured emergency room visits of 7.3% and uninsured admissions of 9.4% in 2007 compared to 2006. At December 31, 2007, our allowance for doubtful accounts represented approximately 89% of the $4.825 billion total patient due accounts receivable balance, including accounts, net of estimated contractual discounts, related to patients for which eligibility for Medicaid coverage was being evaluated.
Gains on investments for 2007 and 2006 of $8 million and $243 million, respectively, relate to sales of investment securities by our wholly-owned insurance subsidiary. Net unrealized gains on investment securities declined from $25 million at December 31, 2006 to $21 million at December 31, 2007. The decrease in realized gains for 2007 was primarily due to the decision to liquidate our equity investment portfolio and reinvest in debt and interest-bearing investments during the fourth quarter of 2006. We expect realized gains, if any, during 2008 to be more comparable to the 2007 amounts rather than the 2006 amounts.


46

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)

Years Ended December 31, 2007 and 2006 (Continued)
Equity in earnings of affiliates increased from $197 million for 2006 to $206 million for 2007. Equity in earnings of affiliates relates primarily to our Denver, Colorado market joint venture.
Depreciation and amortization decreased, as a percentage of revenue, to 5.4% in 2007 from 5.5% in 2006. Purchases of property and equipment of $1.444 billion during 2007 were generally equivalent to depreciation expense for 2007 of $1.421 billion.
Interest expense increased to $2.215 billion for 2007 from $955 million for 2006. The increase in interest expense is primarily due to the increased debt related to the Recapitalization. Our average debt balance was $27.732 billion for 2007 compared to $13.811 billion for 2006. The average interest rate for our long-term debt decreased from 7.9% at December 31, 2006 to 7.6% at December 31, 2007.
Gains on sales of facilities were $471 million for 2007 and included a $312 million gain on the sale of our uninsured discount policy, are presented below:two Switzerland hospitals and a $131 million gain on the sale of a facility in Florida. Gains on sales of facilities were $205 million for 2006 and included a $92 million gain on the sale of four hospitals in West Virginia and Virginia and a $93 million gain on the sale of two hospitals in Florida.
                             
  Year Ended December 31, 2006
   
    Non-GAAP
       % of
    GAAP  % Adjusted
  Reported Uninsured Non-GAAP of Revenues Revenues
  GAAP(a) Discounts Adjusted    
  Amounts Adjustment(b) Amounts(c) 2006 2005 2006 2005
               
Revenues $25,477  $1,095  $26,572   100.0%  100.0%  100.0%  100.0%
Salaries and benefits  10,409   —   10,409   40.9   40.6   39.2   39.4 
Supplies  4,322   —   4,322   17.0   16.9   16.3   16.4 
Other operating expenses  4,057   —   4,057   16.0   16.5   15.2   15.9 
Provision for doubtful accounts  2,660   1,095   3,755   10.4   9.6   14.1   12.4 
Admissions  1,610,100       1,610,100                 
Equivalent admissions  2,416,700       2,416,700                 
Revenue per equivalent admission $10,542      $10,995                 
% change from prior year  6.8%      8.0%                
Same Facility(d):
                            
Revenues $24,448  $1,063  $25,511                 
Admissions  1,557,700       1,557,700                 
Equivalent admissions  2,322,500       2,322,500                 
Revenue per equivalent admission $10,527      $10,984                 
% change from prior year  6.2%      7.3%                
 
Minority interests in earnings of consolidated entities increased from $201 million for 2006 to $208 million for 2007. The increase relates primarily to the operations of surgery centers and other outpatient services entities.
(a)Generally accepted accounting principles (“GAAP”).
(b)Represents the impact of the discounts for the uninsured for the period. On January 1, 2005, we modified our policies to provide discounts to uninsured patients who do not qualify for Medicaid or charity care. These discounts are similar to those provided to many local managed care plans. In implementing the discount policy, we first attempt to qualify uninsured patients for Medicaid, other federal or state assistance or charity care. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.
(c)Revenues, the provision for doubtful accounts, certain operating expense categories as a percentage of revenues and revenue per equivalent admission have been adjusted to exclude the discounts under our uninsured discount policy (non-GAAP financial measures). We believe these non-GAAP financial measures are useful to investors and provide disclosures of our results of operations on the same basis as that used by management. Management finds this information to be useful to enable the evaluation of revenue and certain expense category trends that are influenced by patient volumes and are generally analyzed as a percentage of net revenues. These non-GAAP financial measures should not be considered an alternative to GAAP financial measures. We believe this supplemental information provides management and the users of our financial statements with useful information forperiod-to-period comparisons. Investors are encouraged to use GAAP measures when evaluating our overall financial performance.
(d)Same facility information excludes the operations of hospitals and their related facilities which were either acquired, divested or removed from service during the current and prior period.
The effective tax rate was 26.6% for 2007 and 37.6% for 2006. Based on new information received in 2007 related primarily to tax positions taken in prior taxable periods, we reduced our provision for income taxes by $85 million. During 2007, we also recorded reductions to the provision for income taxes of $39 million to adjust 2006 state tax accruals to the amounts recorded on completed tax returns and based upon an analysis of the Recapitalization costs. Excluding the effect of these adjustments, the effective tax rate for 2007 would have been 37.0%.
Years Ended December 31, 2006 and 2005
 
Years Ended December 31, 2006 and 2005
Net income totaled $1.036 billion for the year ended December 31, 2006 compared to $1.424 billion for the year ended December 31, 2005. Financial results for 2006 include gains on investments of $243 million, gains on sales of facilities of $205 million, reductions to estimated professional liability reserves of $136 million, expenses related to the Recapitalization of $442 million and an asset impairment charge of $24 million. Financial results for 2005 include gains on investments of $53 million, gains on sales of facilities of $78 million, reductions to estimated professional liability reserves of $83 million, an adverse financial

50

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)
     Years Ended December 31, 2006 and 2005 (Continued)
impact from hurricanes of $60 million, a tax benefit of $24 million related to the repatriation of foreign earnings, and a favorable tax settlement of $48 million related to the divestitures in 1998 and 2001 of certain noncore business units.
 
Revenues increased 4.2% to $25.477 billion for the year ended December 31, 2006 from $24.455 billion for the year ended December 31, 2005. The increase in revenues was due primarily to a 6.8% increase in revenue per equivalent admission offsetting a 2.4% decline in equivalent admissions compared to the prior year. Same facility revenues increased 6.2% due to a 6.2% increase in same facility revenue per equivalent admission and flat same facility equivalent admissions for the year ended December 31, 2006 compared to the year ended December 31, 2005.
 
During the year ended December 31, 2006, same facility admissions increased 0.2%, compared to the year ended December 31, 2005. Same facility inpatient surgeries increased 0.7% and same facility outpatient surgeries decreased 1.2% during the year ended December 31, 2006 compared to the year ended December 31, 2005.
 
Salaries and benefits, as a percentage of revenues, were 40.9% in 2006 and 40.6% in 2005. Salaries and benefits per equivalent admission increased 7.4% in 2006 compared to 2005. Labor rate increases averaged approximately 5.4% for the year ended December 31, 2006 compared to 2005.


47

 
HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)

Years Ended December 31, 2006 and 2005 (Continued)
Supplies, as a percentage of revenues, were 17.0% in 2006 and 16.9% in 2005. Supply costs per equivalent admission increased 7.4% in 2006 compared to 2005. Same facility supply costs increased 11.0% for medical devices (cardiology and orthopedic) and 2.6% for pharmacy products.
 
Other operating expenses, as a percentage of revenues, decreased to 16.0% in 2006 from 16.5% in 2005. Other operating expenses in 2006 reflect reductions to our estimated professional liability reserves of $136 million, compared to $83 million in reductions recorded in 2005. Other operating expenses are primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes.
 
Provision for doubtful accounts, as a percentage of revenues, increased to 10.4% for the year ended December 31, 2006 from 9.6% in the year ended December 31, 2005. Adjusting for the effect of the discount policy for the uninsured, the provision for doubtful accounts, as a percentage of revenues, was 14.1% in 2006 compared to 12.4% in 2005. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients. The increase in the provision for doubtful accounts, as a percentage of revenues, can be attributed to an increasing amount of patient financial responsibility under certain managed care plans and same facility increases in uninsured emergency room visits of 6.2% and uninsured admissions of 10.9% in 2006 compared to 2005. At December 31, 2006, our allowance for doubtful accounts represented approximately 86% of the $3.972 billion total patient due accounts receivable balance, including accounts, net of estimated contractual discounts, related to patients for which eligibility for Medicaid coverage was being evaluated.
 
Gains on investments for the year ended December 31, 2006 of $243 million relate to sales of investment securities by our wholly-owned insurance subsidiary. Gains on investments for the year ended December 31, 2005 were $53 million. Net unrealized gains on investment securities declined from $184 million at December 31, 2005 to $25 million at December 31, 2006. The increase in realized gains and the decline in unrealized gains were primarily due to the decision to liquidate our equity investment portfolio and reinvest in debt and interest-bearing investments.

51

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)
     Years Ended December 31, 2006 and 2005 (Continued)
Equity in earnings of affiliates decreased from $221 million for the year ended December 31, 2005 to $197 million for the year ended December 31, 2006. The decrease was primarily due to decreases in profits at the Denver, Colorado market joint venture.
 
Depreciation and amortization decreased, as a percentage of revenue, to 5.5% in the year ended December 31, 2006 from 5.6% in the year ended December 31, 2005. During 2005, we incurred additional depreciation expense of approximately $44 million to correct accumulated depreciation of certain facilities and assure a consistent application of our accounting policy relative to certain short-lived medical equipment.
 
Interest expense increased to $955 million for the year ended December 31, 2006 from $655 million for the year ended December 31, 2005. While interest expense increased $300 million for the year ended December 31, 2006 compared to 2005, $207 million of the increase occurred during the fourth quarter of 2006 due to the increased debt related to the Recapitalization. Our average debt balance was $13.811 billion for the year ended December 31, 2006 compared to $9.828 billion for the year ended December 31, 2005. The average interest rate for our long-term debt increased from 7.0% at December 31, 2005 to 7.9% at December 31, 2006.
 
Gains on sales of facilities were $205 million for the year ended December 31, 2006 and included a $92 million gain on the sale of four hospitals in West Virginia and Virginia and a $93 million gain on the sale of two hospitals in Florida. Gains on sales were facilities were $78 million for the year ended December 31, 2005 and included a $29 million gain related to the recognition of previously deferred gain on the sale of a group of medical office buildings.
 
Minority interests in earnings of consolidated entities increased from $178 million for the year ended December 31, 2005 to $201 million for the year ended December 31, 2006. The increase relates primarily to the operations of surgery centers and other outpatient services entities.
 
The effective tax rate was 37.6% for the year ended December 31, 2006 and 33.8%33.9% for the year ended December 31, 2005. During 2005, the effective tax rate was reduced due to a favorable tax settlement of $48 million related to the divestiture of certain noncore business units and a tax


48

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)

Years Ended December 31, 2006 and 2005 (Continued)
benefit of $24 million from the repatriation of foreign earnings. Excluding the effect of the combined $72 million tax benefit, the effective tax rate for the year ended December 31, 2005 would have been 37.1%.
Years Ended December 31, 2005 and 2004
      Net income increased 14.2%, from $1.246 billion for the year ended December 31, 2004 to $1.424 billion for the year ended December 31, 2005. Financial results for 2005 include gains on investments of $53 million, gains on sales of facilities of $78 million, reductions to estimated professional liability reserves of $83 million, an adverse financial impact from hurricanes of $60 million, a tax benefit of $24 million related to the repatriation of foreign earnings, and a favorable tax settlement of $48 million related to the divestures in 1998 and 2001 of certain noncore business units. The 2004 results include gains on investments of $56 million, a favorable change in the estimated provision for doubtful accounts totaling $46 million based upon refinements to our allowance for doubtful accounts estimation process, a $59 million reduction to estimated professional liability reserves, an adverse financial impact from hurricanes of $40 million, and an impairment of long-lived assets of $12 million.
      Revenues increased 4.1% to $24.455 billion for the year ended December 31, 2005 compared to $23.502 billion for the year ended December 31, 2004. The increase in revenues was due to a 0.9% increase in

52

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)
     Years Ended December 31, 2005 and 2004 (Continued)
equivalent admissions and 3.1% increase in revenue per equivalent admission. Adjusting for the effect of the uninsured discount policy, revenues increased 7.3% for the year ended December 31, 2005 compared to 2004. For the year ended December 31, 2005, admissions decreased 0.7% and same facility admissions increased by 0.1% compared to 2004. Outpatient surgical volumes increased 0.2% and increased 0.3% on a same facility basis in 2005 compared to 2004.
      Salaries and benefits, as a percentage of revenues, were 40.6% in 2005 and 40.1% in 2004. Adjusting for the effect of the uninsured discount policy, salaries and benefits were 39.4% of revenues for the year ended December 31, 2005. Labor rate increases averaged approximately 4.2% for the year ended December 31, 2005.
      Supply costs increased, as a percentage of revenues, to 16.9% for the year ended December 31, 2005 from 16.6% for the year ended December 31, 2004. Adjusting for the effect of the uninsured discount policy, supplies were 16.4% of revenues for the year ended December 31, 2005. During 2005, general supply cost trends included a more stable pricing environment for medical devices and pharmacy items and a stabilization in usage rates for drug-eluting stents.
      Other operating expenses (primarily consisting of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance and nonincome taxes), as a percentage of revenues, increased to 16.5% in 2005 from 16.0% in 2004. Adjusting for the effect of the uninsured discount policy, other operating expenses were 15.9% of revenues for the year ended December 31, 2005.
      The provision for doubtful accounts, as a percentage of revenues, declined to 9.6% for the year ended December 31, 2005 from 11.4% for the year ended December 31, 2004. Adjusting for the effect of the uninsured discount policy, the provision for doubtful accounts was 12.4% of revenues in the year ended December 31, 2005. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients. The increase in the provision for doubtful accounts (adjusted for uninsured discounts), as a percentage of revenues, related to an increasing amount of patient financial responsibility under certain managed care plans, increases in uninsured emergency room visits of 9.9% and increases in uninsured admissions of 8.9% in 2005 compared to 2004. At December 31, 2005, the allowance for doubtful accounts represented approximately 85% of the $3.404 billion total patient due accounts receivable balance, including accounts, net of estimated contractual discounts, related to patients for which eligibility for Medicaid coverage was being evaluated.
      Gains on investments for the year ended December 31, 2005 of $53 million consist primarily of net gains on investment securities held by our wholly-owned insurance subsidiary. Gains on investments for the year ended December 31, 2004 were $56 million. At December 31, 2005, we had net unrealized gains of $184 million on the insurance subsidiary’s investment securities.
      Equity in earnings of affiliates increased to $221 million for the year ended December 31, 2005 compared to $194 million for the year ended December 31, 2004. The increase was primarily due to an increase in profits at the Denver, Colorado market joint venture.
      Depreciation and amortization increased, as a percentage of revenues, to 5.6% in the year ended December 31, 2005 from 5.3% in the year ended December 31, 2004. A portion of the increase is the result of additional depreciation expense of approximately $44 million recorded during 2005 to correct accumulated depreciation at certain facilities and assure a consistent application of our accounting policy relative to certain short-lived medical equipment.

53

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Results of Operations (Continued)
     Years Ended December 31, 2005 and 2004 (Continued)
      Interest expense increased to $655 million for the year ended December 31, 2005 from $563 million for the year ended December 31, 2004. The average debt balance was $9.828 billion for the year ended December 31, 2005 compared to $8.853 billion for the year ended December 31, 2004. The average interest rate for our long-term debt increased from 6.5% at December 31, 2004 to 7.0% at December 31, 2005.
      During 2004, we closed San Jose Medical Center in San Jose, California, resulting in a pretax asset impairment charge of $12 million ($8 million after-tax)37.3%.
 Minority interests in earnings of consolidated entities increased to $178 million for the year ended December 31, 2005 compared to $168 million for the year ended December 31, 2004.
      The effective tax rate was 33.8% for the year ended December 31, 2005 and 36.8% for the year ended December 31, 2004. During 2005, the effective tax rate was reduced due to a favorable tax settlement of $48 million related to the divestures of certain noncore business units in 1998 and 2001 and a tax benefit of $24 million related to the repatriation of foreign earnings. Excluding the effect of the combined $72 million of tax benefits, the effective tax rate for the year ended December 31, 2005 would have been 37.1%.
Liquidity and Capital Resources
 
Our main cash requirements are the servicing of our debt, capital expenditures on our existing properties and acquisitions of hospitals and other health care entities. Our primary cash sources are cash flow from operating activities, issuances of debt and equity securities and dispositions of hospitals and other health care entities.
Cash provided by operating activities totaled $1.396 billion in 2007 compared to $1.845 billion in 2006 compared toand $2.971 billion in 2005 and $2.954 billion in 2004.2005. Working capital totaled $2.356 billion at December 31, 2007 and $2.502 billion at December 31, 2006 and $1.320 billion at December 31, 2005. Cash flows provided by operating activities include income tax benefits related to the exercise of employee stock awards of $163 million and $50 million for the years ended December 31, 2005 and 2004, respectively. For the year ended December 31, 2006, income tax benefits related to the exercise of employee stock awards of $97 million were included in financing activities.2006. The lower cash provided by operating activities in 20062007 when compared to both 20052006 and 20042005 relates, primarily, to increases in income taxinterest payments net of refunds, of $524 million$1.270 billion for 2007 compared to 2006 and $1.539 billion for 2007 compared to 2005, and $693decreases in net income tax payments of $666 million for 20062007 compared to 2004,2006 and increases in accounts receivable,$142 million for 2007 compared to 2005. The net impact of the provisioncash payments for doubtful accounts,interest and income taxes was an increase in cash payments of $92$604 million for 20062007 compared to 20052006 and $404 millionan increase of $1.397 billion for 20062007 compared to 2004.2005.
 
Cash used in investing activities was $479 million, $1.307 billion and $1.681 billion in 2007, 2006 and $1.688 billion in 2006, 2005, and 2004, respectively. Excluding acquisitions, capital expenditures were $1.444 billion in 2007, $1.865 billion in 2006 and $1.592 billion in 2005 and $1.513 billion in 2004.2005. We expended $32 million, $112 million $126 million and $44$126 million for acquisitions of hospitals and health care entities during 2007, 2006 and 2005, and 2004, respectively. During 2006,Expenditures for acquisitions includedin all three hospitals and outpatient and ancillary services entities. During 2005 and 2004, the acquisitionsyears were generally comprised of outpatient and ancillary services entities. Capital expenditures in all three yearsentities and were funded by a combination of cash flows from operations and the issuance or incurrence of debt. Planned capital expenditures are expected to approximate $1.8 billion in 2007.2008. At December 31, 2006,2007, there were projects under construction which had an estimated additional cost to complete and equip over the next five years of $1.9 billion. We expect to finance capital expenditures with internally generated and borrowed funds.
 
During 2007, we sold three hospitals for cash proceeds of $661 million, and we also received cash proceeds of $106 million related primarily to the sales of real estate investments. The sales of nine hospitals were completed during 2006 and we receivedfor cash proceeds of $560 million. Wemillion, and we also received cash proceeds of $91 million on the sales of real estate investments and our equity investment in a hospital joint venture. The sales of five hospitals were completed duringDuring 2005, and we received cash proceeds of $260 million.million from the sales of five hospitals and $60 million of cash proceeds related primarily to the sales of real estate investments.
 
Cash used in financing activities totaled $1.158 billion in 2007, $240 million in 2006 and $1.212 billion in 20052005. During 2007, we used the cash proceeds from sales of facilities and $1.347 billion in 2004.available cash provided by operations to make debt repayments of $1.270 billion. The 2006 Recapitalization included the issuance of $19.964 billion of long-term debt, the receipt of

54

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Liquidity and Capital Resources (Continued)
$3.782 $3.782 billion of equity contributions, the repurchase of $20.364 billion of common stock, the payment of $745 million related tofor Recapitalization related fees and expenses, and the retirement of $3.182 billion of existing long-term debt.
During 2007, we received $100 million of cash from issuances of our common stock. During 2006, we repurchased 13.1 million shares (excluding the Recapitalization) of our common stock for a total of $653 million. During 2005, we repurchased 36.7 million shares of our common stock for a total cost of $1.856 billion. During 2004, we repurchased 77.4 million shares of our common stock for a total cost of $3.109 billion. During 2005,billion, and we received cash inflows of $943 million related to the exercise of employee stock options.


49

 
HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Liquidity and Capital Resources (Continued)
In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($1.82.507 billion as of December 31, 20062007 and $2.5$2.692 billion as of February 28, 2007)29, 2008) and anticipated access to public and private debt markets.
 
Investments of our professional liability insurance subsidiary, to maintain statutory equity and pay claims, totaled $2.143$1.899 billion and $2.384$2.143 billion at December 31, 20062007 and 2005,2006, respectively. Claims payments, net of reinsurance recoveries, during the next twelve months are expected to approximate $250$230 million. Our wholly-owned insurance subsidiary has entered into certain reinsurance contracts, and the obligations covered by the reinsurance contracts are included in the reserves for professional liability risks, as the subsidiary remains liable to the extent that the reinsurers do not meet their obligations under the reinsurance contracts. To minimize our exposure to losses from reinsurer insolvencies, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk arising from similar activities or economic characteristics of the reinsurers. The amounts receivable related to the reinsurance contracts were $42$44 million and $43$42 million at December 31, 20062007 and 2005,2006, respectively.
Financing Activities
Financing Activities
 
Due to the Recapitalization, we are a highly leveraged company with significant debt service requirements. Our debt totaled $27.308 billion and $28.408 billion at December 31, 2007 and 2006, and represented a $17.933 billion increase from the total debt of $10.475 billion at December 31, 2005. We expect ourrespectively. Our interest expense to increaseincreased from $955 million for the year ended December 31, 2006 to approximately $2.3$2.215 billion infor 2007.
 
In connection with the Recapitalization, we entered into (i) a $2.0$2.000 billion senior secured asset-based revolving loan agreementcredit facility with a borrowing base of 85% of eligible accounts receivable, withsubject to customary reserves and eligibility criteria ($4650 million available at December 31, 2006)2007) (the “ABL credit facility”) and (ii) a new senior secured credit agreement (the “cash flow credit facility” and, together with the ABL credit facility, the “senior secured credit facilities”), consisting of a $2.0$2.000 billion revolving credit facility ($1.8261.857 billion available at December 31, 20062007 after giving effect to certain outstanding letters of credit), a $2.75$2.750 billion term loan A ($2.638 billion outstanding at December 31, 2007), a $8.8$8.800 billion term loan B and a€1.0($8.712 billion term loan ($1.320 billionoutstanding at December 31, 2006). Obligations under the senior secured credit facilities are guaranteed by all material, unrestricted wholly-owned U.S. subsidiaries. In addition, borrowings under the€1.02007) and a €1.000 billion European term loan are guaranteed by all material, wholly-owned European subsidiaries.(€663 million, or $967 million, outstanding at December 31, 2007).
 
Also in connection with the Recapitalization, we issued $4.2$4.200 billion of senior secured notes (comprised of $1.0$1.000 billion of 91/8% notes due 2014 and $3.2$3.200 billion of 91/4% notes due 2016) and $1.5$1.500 billion of 95/8% senior secured toggle notes (which allow us, at our option, to pay interest in-kindin kind during the first five years) due 2016, which are subject to certain standard covenants. The notes are guaranteed by certain of our subsidiaries.
 
Proceeds from the senior secured credit facilities and the senior secured notes were used in connection with the closing of the Recapitalization and to repay the amounts owedRecapitalization. Amounts owned under our previous bank credit agreements.agreements were repaid at the close of the Recapitalization. In connection with the Recapitalization, we also tendered for all amounts outstanding under the

55

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Liquidity and Capital Resources (Continued)
     Financing Activities (Continued)
8.85% notes due 2007, the 7.00% notes due 2007, the 7.25% notes due 2008, the 5.25% notes due 2008 and the 5.50% notes due 2009 (collectively, the “Short term Notes”“Notes”). Approximately 97% of the $1.365 billion total outstanding amount under the Short term Notes was repurchased pursuant to the tender.
 
The senior secured credit facilities and senior secured notes are fully and unconditionally guaranteed by substantially all existing and future, direct and indirect, wholly-owned material domestic subsidiaries that are “Unrestricted Subsidiaries” under our Indenture dated as of December 16, 1993 (except for certain special purpose subsidiaries that only guarantee and pledge their assets under our ABL credit facility). In 2006, we issued $1.0 billion of 6.5% notes due 2016. Proceeds of $625 million were used to refinance the remaining amount outstandingaddition, borrowings under the 2005European term loan and the remaining proceeds were used to pay down amounts advanced under a bank revolving credit facility.are guaranteed by all material, wholly-owned European subsidiaries.


50

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
 In 2005, in connection with our modified “Dutch” auction tender offer, we entered into the 2005 term loan with several banks, which had a maturity of May 2006. Under this agreement, we borrowed $800 million. Proceeds from the 2005 term loan were used to partially fund the repurchase of our common stock. The proceeds of $175 million from the sales of hospitals in 2005 were used to repay a portion of the amounts outstanding under the 2005 term loan.
Liquidity and Capital Resources (Continued)
 

Financing Activities (Continued)
Management believes that cash flows from operations, amounts available under our senior secured credit facilities and our anticipated access to public and private debt markets will be sufficient to meet expected liquidity needs during the next twelve months.
Contractual Obligations and Off-Balance Sheet Arrangements
 
As of December 31, 2006,2007, maturities of contractual obligations and other commercial commitments are presented in the table below (dollars in millions):
                     
  Payments Due by Period
   
Contractual Obligations(a) Total Current 2-3 Years 4-5 Years After 5 Years
           
Long-term debt including interest, excluding the senior secured credit facilities(b) $25,272  $1,197  $2,370  $3,745  $17,960 
Loans outstanding under the senior secured credit facilities, including interest(b)  22,535   1,390   2,892   3,235   15,018 
Operating leases(c)  1,287   236   348   199   504 
Purchase and other obligations(c)  27   17   5   5   — 
                
Total contractual obligations $49,121  $2,840  $5,615  $7,184  $33,482 
                
                     
  Commitment Expiration by Period
Other Commercial Commitments  
Not Recorded on the Consolidated Balance Sheet Total Current 2-3 Years 4-5 Years After 5 Years
           
Letters of credit(d) $134  $46  $—  $—  $88 
Surety bonds(e)  131   126   5   —   — 
Physician commitments(f)  37   34   2   1   — 
Guarantees(g)  2   —   —   —   2 
                
Total commercial commitments $304  $206  $7  $1  $90 
                
 
                         
  Payments Due by Period    
Contractual Obligations(a)
 Total  Current  2-3 Years  4-5 Years  After 5 Years    
 
Long-term debt including interest, excluding the senior secured credit facilities(b) $24,250  $1,207  $3,440  $3,468  $16,135     
Loans outstanding under the senior secured credit facilities, including interest(b)  19,433   1,250   2,725   5,650   9,808     
Operating leases(c)  1,218   216   332   197   473     
Purchase and other obligations(c)  33   25   5   3   —     
                         
Total contractual obligations $44,934  $2,698  $6,502  $9,318  $26,416     
                         
                         
  Commitment Expiration by Period    
Other Commercial Commitments Not Recorded on the Consolidated Balance Sheet
 Total  Current  2-3 Years  4-5 Years  After 5 Years    
 
Surety bonds(d) $166  $163  $3  $—  $—     
Letters of credit(e)  145   49   —   54   42     
Physician commitments(f)  44   42   2   —   —     
Guarantees(g)  2   —   —   —   2     
                         
Total commercial commitments $357  $254  $5  $54  $44     
                         
(a)We have not included obligations to pay estimated professional liability claims ($1.5841.513 billion at December 31, 2006)2007) in this table. TheSubstantially all of the estimated professional liability claims are expected to be funded by the designated investment securities that are restricted for this purpose ($2.1431.899 billion at December 31, 2006)2007). We also have not included obligations related to unrecognized tax benefits of $828 million at December 31, 2007, as we cannot reasonably estimate the timing or amounts of additional cash payments, if any, at this time.

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HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(b)Estimate of interest payments assumes that interest rates, borrowing spreads and foreign currency exchange rates at December 31, 2006,2007, remain constant during the period presented.
 
(c)Future operating lease obligations and purchase obligations are not recorded in our consolidated balance sheet.
 
(d)Amounts relate primarily to instances in which we have letters of credit outstanding with insurance companies that issued workers compensation insurance policies to us in prior years. The letters of credit serve as security to the insurance companies for payment obligations we retained.
(e)Amounts relate primarily to instances in which we have agreed to indemnify various commercial insurers who have provided surety bonds to cover damages for malpractice cases which were awarded to plaintiffs by the courts. These cases are currently under appeal and the bonds will not be released by the courts until the cases are closed.
 
(e)Amounts relate primarily to instances in which we have letters of credit outstanding with insurance companies that issued workers compensation insurance policies to us in prior years. The letters of credit serve as security to the insurance companies for payment obligations we retained.


51

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Contractual Obligations and Off-Balance Sheet Arrangements (Continued)
(f)In consideration for physicians relocating to the communities in which our hospitals are located and agreeing to engage in private practice for the benefit of the respective communities, we make advances to physicians, normally over a period of one year, to assist in establishing the physicians’ practices. The actual amount of these commitments to be advanced often depends upon the financial results of the physicians’ private practices during the recruitment agreement payment period. The physician commitments reflected were based on our maximum exposure on effective agreements at December 31, 2006.2007.
 
(g)We have entered into guarantee agreements related to certain leases.
Market Risk
 
We are exposed to market risk related to changes in market values of securities. The investments in debt and equity securities of our wholly-owned insurance subsidiary were $2.129$1.870 billion and $14$29 million, respectively, at December 31, 2006.2007. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. The fair value of investments is generally based on quoted market prices. At December 31, 2006,2007, we had a net unrealized gain of $25$21 million on the insurance subsidiary’s investment securities.
 
We are exposed to market risk related to market illiquidity. Liquidity of the investments in debt and equity securities of our wholly-owned insurance subsidiary could be impaired by the inability to access the capital markets. Should the wholly-owned insurance subsidiary require significant amounts of cash to pay claims and other expenses on short notice in excess of normal cash requirements, we may have difficulty selling these investments in a timely manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. At December 31, 2007, our wholly-owned insurance subsidiary, had invested $725 million in municipal, tax-exempt student loan auction rate securities and $20 million in preferred stock auction rate securities which were classified as long-term investments. The auction rate securities (“ARS”) are publicly issued securities with long-term stated maturities for which the interest rates are reset through a Dutch auction every 35 to 92 days. The auctions have historically provided a liquid market for these securities as investors could readily sell their investments at auction. With the liquidity issues experienced in global credit and capital markets, the ARS held by our wholly-owned insurance subsidiary have experienced multiple failed auctions, beginning on February 11, 2008, as the amount of securities submitted for sale exceeded the amount of purchase orders. There is a very limited market for the ARS at this time. We do not currently intend to attempt sell the ARS as the liquidity needs of our insurance subsidiary are expected to be met by other investments in its investment portfolio. If uncertainties in the credit and capital markets continue or there are ratings downgrades on the ARS held by our insurance subsidiary, we may be required to recognize other-than-temporary impairments on these long-term investments in future periods.
We are also exposed to market risk related to changes in interest rates and we periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives are included in other comprehensive income.
 
With respect to our interest-bearing liabilities, approximately $6.746$5.673 billion of long-term debt at December 31, 20062007 is subject to variable rates of interest, while the remaining balance in long-term debt of $21.662$21.635 billion at December 31, 20062007 is subject to fixed rates of interest. Both the general level of interest rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities


52

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Market Risk (Continued)
bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the federal funds rate plus 1/1/2 of 1% and (2) the prime rate of Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period. The applicable margin for borrowings under the senior secured credit facilities, with the exception of term loan B where the margin is static, may be reduced subject to attaining certain leverage ratios.

57

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Market Risk (Continued)
      Due primarily to the lowering of our credit ratings in connection with the Recapitalization, the The average rate for our long-term debt increaseddecreased from 7.0% at December 31, 2005 to 7.9% at December 31, 2006. 2006 to 7.6% at December 31, 2007. On February 16, 2007, we amended the cash flow credit facility to reduce the applicable margins with respect to the term borrowings thereunder. On June 20, 2007, we amended the ABL credit facility to reduce the applicable margin with respect to borrowings thereunder.
The estimated fair value of our total long-term debt was $28.096$26.127 billion at December 31, 2006.2007. The estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities. Based on a hypothetical 1% increase in interest rates, the potential annualized reduction to future pretax earnings would be approximately $67$57 million. To mitigate the impact of fluctuations in interest rates, we generally target a portion of our debt portfolio to be maintained at fixed rates.
 
Our international operations and the€1.0 billion European term loan expose us to market risks associated with foreign currencies. In order to mitigate the currency exposure related to debt service obligations through December 31, 2011 under the€1.0 billion European term loan, in November 2006 we have entered into certain cross currency swap agreements. A cross currency swap is an agreement between two parties to exchange a stream of principal and interest payments in one currency for a stream of principal and interest payments in another currency over a specified period.
Financial Instruments
Financial Instruments
 
Derivative financial instruments are employed to manage risks, including foreign currency and interest rate exposures, and are not used for trading or speculative purposes. We recognize derivative instruments, such as interest rate swap agreements and foreign exchange contracts, in the consolidated balance sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders’ equity, as a component of other comprehensive income, depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge. Gains and losses on derivatives designated as cash flow hedges, to the extent they are effective, are recorded in other comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged items when they occur.
      Changes in the value of financial instruments denominated in foreign currencies used as hedges of the net investment in foreign operations are reported in other comprehensive income. Changes in the fair value of derivatives not qualifying as hedges, and for any portion of a hedge that is ineffective, are reported in earnings.
 
The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses resulting from the early termination of interest rate swap agreements are deferred and amortized as adjustments to expense over the remaining period of the debt originally covered by the terminated swap.
Effects of Inflation and Changing Prices
 
Various federal, state and local laws have been enacted that, in certain cases, limit our ability to increase prices. Revenues for general, acute care hospital services rendered to Medicare patients are established under the federal government’s prospective payment system. Totalfee-for-service Medicare revenues approximated 24% in 2007, 26% in 2006 and 27% in 2005 and 28% in 2004 of our total patient revenues.
 
Management believes that hospital industry operating margins have been, and may continue to be, under significant pressure because of changes in payer mix and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. In addition, as a result of increasing regulatory and competitive pressures, our ability to maintain operating margins through price increases to non-Medicare patients is limited.


53

58

HCA INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
IRS Disputes
 HCA is
We are currently contesting before the Appeals Division of the Internal Revenue Service (the “IRS”), the United States Tax Court (the “Tax Court”), and the United States Court of Federal Claims, certain claimed deficiencies and adjustments proposed by the IRS in conjunctionconnection with its examinationsexamination of HCA’s 1994 throughthe 2001 and 2002 federal income tax returns Columbia Healthcare Corporation’sfor HCA and 15 affiliates that are treated as partnerships for federal income tax purposes (“CHC”affiliated partnerships”) 1993. We expect the IRS will complete its examination of the 2003 and 19942004 federal income tax returns HCA-Hospital Corporationfor HCA and 19 affiliated partnerships during the first quarter of America’s (“Hospital Corporation of America”) 1991 through 1993 federal income tax returns2008 and Healthtrust, Inc. — The Hospital Company’s (“Healthtrust”) 1990 through 1994 federal income tax returns.
      During 2003, the United States Court of Appeals for the Sixth Circuit affirmed a Tax Court decision received in 1996 relatedintend to contest certain claimed deficiencies and adjustments proposed by the IRS examination of Hospital Corporation of America’s 1987 through 1988 Federal income tax returns, in whichconnection with these audits before the IRS contestedAppeals Division.
The disputed items pending before the method that Hospital Corporation of America used to calculate its tax allowanceIRS Appeals Division for doubtful accounts. HCA filed a petition for review2001 and 2002, or proposed by the United States Supreme Court, which was denied in October 2004. Due to the volumeIRS Examination Division for 2003 and complexity of calculating the tax allowance for doubtful accounts, the IRS has not determined the amount of additional tax and interest that it may claim for taxable years after 1988. In December 2004, HCA made a deposit of $109 million for additional tax and interest, based on its estimate of amounts due for taxable periods through 1998.
      Other disputed items include the deductibility of a portion of the 2001 and 2003 government settlement payment,payments, the timing of recognition of certain patient service revenues in 20002001 through 2002,2004, the method for calculating the tax allowance for doubtful accounts in 2002 through 2004, and the amount of insurance expense deducted in 19992001 and 2002.
Thirty-two taxable periods of HCA, its predecessors, subsidiaries and affiliated partnerships ended in 1987 through 2002. The2000, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, are pending before the IRS has claimed an additional $678 million in income taxes, interest and penalties throughExamination Division or the United States Tax Court as of December 31, 2006 with respect to these issues. This amount is net of a refundable tax deposit of $177 million, and related interest, we made during 2006.2007.
 During February 2006, the
The IRS began an examinationaudit of HCA’s 2003 through 2004the 2005 and 2006 federal income tax returns. Thereturns for HCA during the first quarter of 2008. We expect the IRS has not determinedwill open examinations of the amount of any additional2005 and 2006 federal income tax interest and penalties that it may claim upon completion of this examination.returns for one or more affiliated partnerships during 2008.
 
Management believes that adequate provisions have been recorded to satisfy final resolution of the disputed issues. Management believes that HCA, CHC, Hospital Corporation of Americaits predecessors, subsidiaries and Healthtrustaffiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS during previous examinations and that final resolution of these disputes will not have a material, adverse effect on theour results of operations or financial position. However, if payments due upon final resolution of these issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position.


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59

Item 7A.Quantitative and Qualitative Disclosures about Market Risk
 
The information called for by this item is provided under the caption “Market Risk” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 8.Financial Statements and Supplementary Data
 
Information with respect to this Item is contained in our consolidated financial statements indicated in the Index to Consolidated Financial Statements onPage F-1 of this Annual Report onForm 10-K.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
Item 9A.Controls and Procedures
1.  Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined underRule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
2.  Internal Control Over Financial Reporting
 
(a) Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange ActRule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.2007.
 Our management’s assessment of
Ernst & Young, LLP, the effectiveness ofindependent registered public accounting firm that audited our consolidated financial statements included in thisForm 10-K, has issued a report on our internal control over financial reporting, as of December 31, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young’s attestation reportwhich is included herein.


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60

(b) Attestation Report of the Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
HCA Inc.
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that HCA Inc. maintained effective’s internal control over financial reporting as of December 31, 2006,2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). HCA Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that HCA Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, HCA Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006,2007, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of HCA Inc. as of December 31, 20062007 and 2005,2006, and the related consolidated statements of income, stockholders’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2006,2007, and our report dated March 22, 200726, 2008 expressed an unqualified opinion thereon.
Nashville, Tennessee
March 26, 2008
Item 9B./s/ ERNST & YOUNG LLPOther Information
Nashville, Tennessee
2008-2009 Senior Officer Performance Excellence Program.
On March 22, 200726, 2008, the Compensation Committee and Board of the Company adopted the2008-2009 Senior Officer Performance Excellence Program (the “Senior Officer PEP”). Under the Senior Officer PEP, the executive officers of the Company shall be eligible to earn performance awards based upon the achievement of certain


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specified performance targets. The specified performance criteria for the Company’s Named Executive Officers (as defined in the Senior Officer PEP) is EBITDA (as defined in the Senior Officer PEP). The performance criteria for other participants are based on EBITDA and specified individual performance goals. Target awards for the Named Executive Officers are as follows: 126% in 2008 and 132% in 2009 of base salary for the Chairman and CEO; 96% in 2008 and 102% in 2009 of base salary for the President and COO; and 66% in 2008 and 72% in 2009 of base salary for the Executive Vice President and CFO and the Group Presidents.
Target awards for senior officers other than the Named Executive Officers are 36% to 56% of base salary, as determined by the Committee. The Committee shall adjust these levels and percentages for 2009 in its sole discretion. Participants will receive 100% of the target award for target performance, 50% of the target award for a minimum acceptable (threshold) level of performance, and a maximum of 200% of the target award for maximum performance.
The minimum (threshold), target and maximum performance levels shall be set by the Committee in its sole discretion. No payments will be made for performance below specified threshold amounts. Payouts between threshold and maximum will be calculated by the Committee in its sole discretion using interpolation. The Committee may make adjustments to the terms of awards under the Senior Officer PEP in recognition of unusual or nonrecurring events affecting a participant or the Company, or the financial statements of the Company, or in certain other instances specified in the Senior Officer PEP.
With respect to 2009, the Committee may supplement the measures and weightings set forth in the Senior Officer PEP with various Company, operating unit, business segment or division financial performance measures as described in the Senior Officer PEP.
The foregoing description of the Senior Officer PEP does not purport to be complete and is qualified in its entirety by reference to the Senior Officer PEP, a copy of which is attached to this report as Exhibit 10.27 and is incorporated herein by reference. The Company has separate performance excellence programs for its employees who are not senior officers.


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PART III
Item 9B.     Other Information
      None.

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PART III
Item 10.Directors, Executive Officers and Corporate Governance
 
As of February 28, 2007,29, 2008, our directors were as follows:
           
    Director  
Name Age Since Position(s)
       
Jack O. Bovender, Jr.   61   1999  Chairman of the Board and Chief Executive Officer
Christopher J. Birosak  52   2006  Director
George A. Bitar  42   2006  Director
Richard M. Bracken  54   2002  President, Chief Operating Officer and Director
John P. Connaughton  40   2006  Director
Thomas F. Frist, Jr., M.D.   68   1994  Director
Thomas F. Frist III  39   2006  Director
Christopher R. Gordon  34   2006  Director
Michael W. Michelson  55   2006  Director
James C. Momtazee  35   2006  Director
Stephen G. Pagliuca  52   2006  Director
Peter M. Stavros  32   2006  Director
Nathan C. Thorne  53   2006  Director
 
           
    Director
  
Name
 
Age
 
Since
 
Position(s)
 
Jack O. Bovender, Jr.   62   1999  Chairman of the Board and Chief Executive Officer
Christopher J. Birosak  53   2006  Director
George A. Bitar  43   2006  Director
Richard M. Bracken  55   2002  President, Chief Operating Officer and Director
John P. Connaughton  42   2006  Director
Thomas F. Frist, Jr., M.D  69   1994  Director
Thomas F. Frist III  40   2006  Director
Christopher R. Gordon  35   2006  Director
Michael W. Michelson  56   2006  Director
James C. Momtazee  36   2006  Director
Stephen G. Pagliuca  53   2006  Director
Peter M. Stavros  33   2006  Director
Nathan C. Thorne  54   2006  Director
As of February 28, 2007,29, 2008, our executive officers (other than Messrs. Bovender and Bracken who are listed above) were as follows:
       
Name
 
Age
 
Position(s)
 
R. Milton Johnson  5051  Executive Vice President and Chief Financial Officer
David G. Anderson  5960  Senior Vice President — Finance and Treasurer
Victor L. Campbell  6061  Senior Vice President
Rosalyn S. Elton  4546  Senior Vice President — Operations Finance
V. Carl George  6263  Senior Vice President — Development
Charles J. Hall  54  President — Eastern Group
R. Sam Hankins, Jr.   5657  Chief Financial Officer — Outpatient Services Group
Russell K. Harms  4950  Chief Financial Officer — Central Group
Samuel N. Hazen  4647  President — Western Group
Patricia T. Lindler59Senior Vice President — Government Programs
A. Bruce Moore, Jr.   4748  President — Outpatient Services Group
Jonathan B. Perlin  4647  President — Clinical Services Group and Chief Medical Officer and Senior Vice President — Quality
W. Paul Rutledge  5253  President — Central Group
Richard J. Shallcross  4849  Chief Financial Officer — Western Group
Joseph N. Steakley  5253  Senior Vice President — Internal Audit Services
John M. Steele  5152  Senior Vice President — Human Resources
Donald W. Stinnett  5051  Chief Financial Officer — Eastern Group
Beverly B. Wallace  5657  President — Shared Services Group
Robert A. Waterman  5354  Senior Vice President and General Counsel
Noel Brown Williams  5152  Senior Vice President and Chief Information Officer
Alan R. Yuspeh  5758  Senior Vice President —and Chief Ethics and Compliance and Corporate ResponsibilityOfficer

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Our Board of Directors consists of thirteen directors, who were elected upon consummation of the Merger and are each managers of Hercules Holding. The Amended and Restated Limited Liability Company Agreement of Hercules Holding requires that the members of Hercules Holding take all necessary action to ensure that the persons


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who serve as managers of Hercules Holding also serve on the Board of Directors of HCA. See “Certain Relationships and Related Transactions.” In addition, Messrs. Bovender’s and Bracken’s employment agreements provide that they will continue to serve as members of our Board of Directors so long as they remain officers of HCA, with Mr. Bovender to serve as the Chairman. Because of these requirements, together with Hercules Holding’s ownership of approximately 97.5% of our outstanding common stock, we do not currently have a policy or procedures with respect to shareholder recommendations for nominees to the Board of Directors.
 
Christopher J. Birosakis a Managing Director in the Merrill Lynch Global Private Equity Division which he joined in 2004. Prior to joining the Global Private Equity Division, Mr. Birosak worked in various capacities in the Merrill Lynch Leveraged Finance Group with particular emphasis on leveraged buyouts and mergers and acquisitions related financings. Mr. Birosak also serves on the board of directors of the Atrium Companies, Inc. and NPC International. Mr. Birosak joined Merrill Lynch in 1994.
 
George A. Bitaris a Managing Director in the Merrill Lynch Global Private Equity Division where he serves as Co-Head of the U.S.North America Region, and a Managing Director in Merrill Lynch Global Partners,Private Equity, Inc., the Manager of ML Global Private Equity Fund, L.P., a proprietary private equity fund. Mr. Bitar serves on the Board of Hertz Global Holdings, Inc., The Hertz Corporation, Advantage Sales and Marketing, Inc. and Aeolus Re Ltd.
 
Jack O. Bovender, Jr. has served as our Chairman and Chief Executive Officer since January 2002. Mr. Bovender served as President and Chief Executive Officer of the Company from January 2001 to December 2001. From August 1997 to January 2001, Mr. Bovender served as President and Chief Operating Officer of the Company. From April 1994 to August 1997, he was retired. Prior to his retirement, Mr. Bovender served as Chief Operating Officer of HCA-Hospital Corporation of America from 1992 until 1994. Prior to 1992, Mr. Bovender held several senior level positions with HCA-Hospital Corporation of America.
 
Richard M. Brackenwas appointed President and Chief Operating Officer in January 2002; he was appointed Chief Operating Officer in July 2001. Mr. Bracken served as President — Western Group of the Company from August 1997 until July 2001. From January 1995 to August 1997, Mr. Bracken served as President of the Pacific Division of the Company. Prior to 1995, Mr. Bracken served in various hospital Chief Executive Officer and Administrator positions with HCA-Hospital Corporation of America.
 
John P. Connaughtonhas been a Managing Director of Bain Capital Partners, LLC since 1997 and a member of the firm since 1989. He has played a leading role in transactions in the medical, technology and media industries. Prior to joining Bain Capital, Mr. Connaughton was a consultant at Bain & Company, Inc., where he advised Fortune 500 companies. Mr. Connaughton currently serves as a director of M|M/C Communications (PriMed), CRC Health Group, Warner Chilcott, Corporation, Epoch Senior Living, CRC Health Corporation,Ltd., Sungard Data Systems, Warner Music Group, AMC Entertainment Inc. (formerly Loews Cineplex Entertainment LCE Holdings, Inc.), Warner Music Group, ProSiebenSat.1.Media AG, SunGard Data Systems, Cumulus Media Partners, Quintiles Transnational Corporation and The Boston Celtics.
 
Thomas F. Frist, Jr., M.D.  served as an executive officer and Chairman of our Board of Directors from January 2001 to January 2002. From July 1997 to January 2001, Dr. Frist served as our Chairman and Chief Executive Officer. Dr. Frist served as Vice Chairman of the Board of Directors from April 1995 to July 1997 and as Chairman from February 1994 to April 1995. He was Chairman, Chief Executive Officer and President of HCA-Hospital Corporation of America from 1988 to February 1994. Dr. Frist is the father of Thomas F. Frist III, who also serves as a director.
 
Thomas F. Frist IIIis a principal of Frist Capital LLC, a private investment vehicle for Mr. Frist and certain related persons and has held such position since 1998. Mr. Frist is also a general partner at Frisco Partners, another Frist family investment vehicle. Mr. Frist is the son of Thomas F. Frist, Jr., M.D., who also serves as a director.

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Christopher R. Gordonis a principal of Bain Capital and joined the firm in 1997. Prior to joining Bain Capital, Mr. Gordon was a consultant at Bain & Company. Mr. Gordon currently serves as a director of CRC Health Corporation.
 
Michael W. Michelsonhas been a member of the limited liability company which serves as the general partner of Kohlberg Kravis Roberts & Co. L.P. since 1996. Prior to that, he was a general partner of Kohlberg Kravis Roberts & Co. L.P. Mr. Michelson is also a director of Accellent, Inc., Alliance Imaging,Bionet, Inc. and Jazz Pharmaceuticals, Inc.


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James C. Momtazeehas been an executive of Kohlberg Kravis Roberts & Co. L.P. since 1996. From 1994 to 1996, Mr. Momtazee was with Donaldson, Lufkin & Jenrette in its investment banking department. Mr. Momtazee is also a director of Accellent, Inc., Alliance Imaging, Inc. and Jazz Pharmaceuticals, Inc.
 
Stephen G. Pagliucahas been a Managing Director of Bain Capital Partners, LLC since 1989, when he founded the Information Partners private equity fund for Bain Capital. Mr. Pagliuca currently serves as a director of Burger King Corporation, Gartner, Inc., ProSieben.Sat1 Media AG, Warner Chilcott, Ltd., Quintiles Transnational Corporation and The Boston Celtics.
 
Peter M. Stavrosjoined Kohlberg Kravis Roberts & Co. L.P. as a Principal in 2005. Prior to joining Kohlberg Kravis Roberts & Co. L.P., Mr. Stavros was a Vice President with GTCR Golder Rauner and an Associate at Vestar Capital Partners.
 
Nathan C. Thorneis a Senior Vice President of Merrill Lynch & Co., Inc. and President of Merrill Lynch Global Private Equity. Mr. Thorne joined Merrill Lynch in 1984.
 
R. Milton Johnsonhas served as Executive Vice President and Chief Financial Officer of the Company since July 2004. Mr. Johnson served as Senior Vice President and Controller of the Company from July 1999 until July 2004. Mr. Johnson served as Vice President and Controller of the Company from November 1998 to July 1999. Prior to that time, Mr. Johnson served as Vice President — Tax of the Company from April 1995 to October 1998. Prior to that time, Mr. Johnson served as Director of Tax for Healthtrust from September 1987 to April 1995.
 
David G. Andersonhas served as Senior Vice President — Finance and Treasurer of the Company since July 1999. Mr. Anderson served as Vice President — Finance of the Company from September 1993 to July 1999 and was elected to the additional position of Treasurer in November 1996. From March 1993 until September 1993, Mr. Anderson served as Vice President — Finance and Treasurer of Galen Health Care, Inc. From July 1988 to March 1993, Mr. Anderson served as Vice President — Finance and Treasurer of Humana Inc.
 
Victor L. Campbellhas served as Senior Vice President of the Company since February 1994. Prior to that time, Mr. Campbell served as HCA-Hospital Corporation of America’s Vice President for Investor, Corporate and Government Relations. Mr. Campbell joined HCA-Hospital Corporation of America in 1972. Mr. Campbell serves on the Board of HRET, a subsidiary of the American Hospital Association, and on the Board of the Federation of American Hospitals, where he serves on the Executive Committee.
 
Rosalyn S. Eltonhas served as Senior Vice President — Operations Finance of the Company since July 1999. Ms. Elton served as Vice President — Operations Finance of the Company from August 1993 to July 1999. From October 1990 to August 1993, Ms. Elton served as Vice President — Financial Planning and Treasury for the Company.
 
V. Carl Georgehas served as Senior Vice President — Development of the Company since July 1999. Mr. George served as Vice President — Development of the Company from April 1995 to July 1999. From September 1987 to April 1995, Mr. George served as Director of Development for Healthtrust. Prior to working for Healthtrust, Mr. George served with HCA-Hospital Corporation of America in various positions.
 
Charles J. Hallwas appointed President — Eastern Group of the Company in October 2006. Prior to that time, Mr. Hall had served as President — North Florida Division since April 2003. Mr. Hall had previously served the Company as President of the East Florida Division from January 1999 until April 2003, as a Market

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President in the East Florida Division from January 1998 until December 1998, as President of the South Florida Division from February 1996 until December 1997, and as President of the Southwest Florida Division from October 1994 until February 1996, and in various other capacities since 1987.
 
R. Sam Hankins, Jr. was appointed Chief Financial Officer — Outpatient Services Group in May 2004. Mr. Hankins served as Chief Financial Officer — West Florida Division from January 1998 until May 2004. Prior to that time, Mr. Hankins served as Chief Financial Officer — Northeast Division from March 1997 until December 1997, and as Chief Financial Officer — Richmond Division from March 1996 until February 1997. Prior to that time, Mr. Hankins served in various positions with CJW Medical Center in Richmond, Virginia and with several hospitals.


60

Russell K. Harmswas appointed Chief Financial Officer — Central Group in October 2005. From January 2001 to October 2005, Mr. Harms served as Chief Financial Officer of HCA’s MidAmerica Division. From December 1997 to December 2000, Mr. Harms served as Chief Financial Officer of Presbyterian/St. Lukes Medical Center.
 
Samuel N. Hazenwas appointed President — Western Group of the Company in July 2001. Mr. Hazen served as Chief Financial Officer — Western Group of the Company from August 1995 to July 2001. Mr. Hazen served as Chief Financial Officer — North Texas Division of the Company from February 1994 to July 1995. Prior to that time, Mr. Hazen served in various hospital and regional Chief Financial Officer positions with Humana Inc. and Galen Health Care, Inc.
 Patricia T. Lindlerhas served as Senior Vice President — Government Programs of the Company since July 1999. Ms. Lindler served as Vice President — Reimbursement of the Company from September 1998 to July 1999. Prior to that time, Ms. Lindler was the President of Health Financial Directions, Inc. from March 1995 to November 1998. From September 1980 to February 1995, Ms. Lindler served as Director of Reimbursement of the Company’s Florida Group.
A. Bruce Moore, Jr. was appointed President — Outpatient Services Group in January 2006. Mr. Moore had served as Senior Vice President and as Chief Operating Officer — Outpatient Services Group since July 2004 and as Senior Vice President — Operations Administration from July 1999 until July 2004. Mr. Moore served as Vice President — Operations Administration of the Company from September 1997 to July 1999, as Vice President — Benefits from October 1996 to September 1997, and as Vice President — Compensation from March 1995 until October 1996.
 
Dr. Jonathan B. Perlinwas appointed President — Clinical Services Group and Chief Medical Officer in November 2007. Dr. Perlin had served as Chief Medical Officer and Senior Vice President — Quality of the Company infrom August 2006.2006 to November 2007. Prior to joining the Company, Dr. Perlin had served as Undersecretary ofUnder Secretary for Health in the U.S. Department of Veterans Affairs since April 2004. Dr. Perlin joined the Veterans Health Administration in November 1999 where he served in various capacities, including as Deputy Undersecretary ofUnder Secretary for Health from July 2002 to April 2004, and as Chief Quality and Performance Officer from November 1999 to September 2002.
 
W. Paul Rutledgewas appointed as President — Central Group in October 2005. Mr. Rutledge had served as President of the MidAmerica Division since January 2001. He served as President of TriStar Health System from June 1996 to January 2001 and served as presidentPresident of Centennial Medical Center from May 1993 to June 1996. He has served in leadership capacities with HCA for more than 2025 years, working with hospitals in the Southeast.
 
Richard J. Shallcrosswas appointed Chief Financial Officer — Western Group of the Company in August 2001. Mr. Shallcross served as Chief Financial Officer — Continental Division of the Company from September 1997 to August 2001. From October 1996 to August 1997, Mr. Shallcross served as Chief Financial Officer — Utah/Idaho Division of the Company. From November 1995 until September 1996, Mr. Shallcross served as Vice President of Finance and Managed Care for the Colorado Division of the Company.
 
Joseph N. Steakleyhas served as Senior Vice President — Internal Audit Services of the Company since July 1999. Mr. Steakley served as Vice President — Internal Audit Services from November 1997 to July

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1999. From October 1989 until October 1997, Mr. Steakley was a partner with Ernst & Young LLP. Mr. Steakley is a member of the board of directors of J. Alexander’s Corporation, where he serves on the compensation committee and as chairman of the audit committee.
 
John M. Steelehas served as Senior Vice President — Human Resources of the Company since November 2003. Mr. Steele served as Vice President — Compensation and Recruitment of the Company from November 1997 to October 2003. From March 1995 to November 1997, Mr. Steele served as Assistant Vice President — Recruitment.
 
Donald W. Stinnettwas appointed Chief Financial Officer — Eastern Group in October 2005. Mr. Stinnett had served as Chief Financial Officer of the Far West Division since July 1999. Mr. Stinnett served as Chief Financial Officer and Vice President of Finance of Franciscan Health System of the Ohio Valley from 1995 until 1999, and served in various capacities with Franciscan Health System of Cincinnati and Providence Hospital in Cincinnati prior to that time.
 
Beverly B. Wallacewas appointed President — Shared Services Group in March 2006. From January 2003 until March 2006, Ms. Wallace served as President — Financial Services Group. Ms. Wallace served as Senior Vice President — Revenue Cycle Operations Management of the Company from July 1999 to January 2003. Ms. Wallace


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served as Vice President — Managed Care of the Company from July 1998 to July 1999. From 1997 to 1998, Ms. Wallace served as President — Homecare Division of the Company. From 1996 to 1997, Ms. Wallace served as Chief Financial Officer — Nashville Division of the Company. From 1994 to 1996, Ms. Wallace served as Chief Financial Officer —Mid-America Division of the Company.
 
Robert A. Watermanhas served as Senior Vice President and General Counsel of the Company since November 1997. Mr. Waterman served as a partner in the law firm of Latham & Watkins from September 1993 to October 1997; he was also Chair of the firm’s healthcare group during 1997.
 
Noel Brown Williamshas served as Senior Vice President and Chief Information Officer of the Company since October 1997. From October 1996 to September 1997, Ms. Williams served as Chief Information Officer for American Service Group/Prison Health Services, Inc. From September 1995 to September 1996, Ms. Williams worked as an independent consultant. From June 1993 to June 1995, Ms. Williams served as Vice President, Information Services for HCA Information Services. From February 1979 to June 1993, she held various positions with HCA-Hospital Corporation of America Information Services.
 
Alan R. Yuspehhas served as Senior Vice President and Chief Ethics and Compliance Officer of the Company since May 2007. From October 1997 to May 2007, Mr. Yuspeh served as Senior Vice President — Ethics, Compliance and Corporate Responsibility of the Company since October 1997.Company. From September 1991 until October 1997, Mr. Yuspeh was a partner with the law firm of Howrey & Simon. As a part of his law practice, Mr. Yuspeh served from 1987 to 1997 as Coordinator of the Defense Industry Initiative on Business Ethics and Conduct.
Audit Committee Financial Expert
 
Our Audit and Compliance Committee is composed of Christopher J. Birosak, Thomas F. Frist III, Christopher R. Gordon and James C. Momtazee. In light of our status as a closely held company and the absence of a public trading market for our common stock, our Board has not designated any member of the Audit and Compliance Committee as an “audit committee financial expert.” Though not formally considered by our Board given that our securities are not registered or traded on any national securities exchange, based upon the listing standards of the New York Stock Exchange (the “NYSE”), the national securities exchange upon which our common stock was listed prior to the Merger, we do not believe that any of Messrs. Birosak, Frist, Gordon or Momtazee would be considered independent because of their relationships with certain affiliates of the funds and other entities which hold significant interests in Hercules Holding, which owns approximately 97.5% of our outstanding common stock, and other relationships with us. See Item 13, “Certain Relationships and Related Transactions.”
Code of Ethics
 
We have a Code of Conduct which is applicable to all our directors, officers and employees (the “Code of Conduct”). The Code of Conduct is available on the Ethics and Compliance and Corporate Governance pages

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of our website at www.hcahealthcare.com. To the extent required pursuant to applicable SEC regulations, we intend to post amendments to or waivers from our Code of Conduct (to the extent applicable to our chief executive officer, principal financial officer or principal accounting officer) at this location on our website or report the same on a Current Report onForm 8-K. Our Code of Conduct is available free of charge upon request to our Corporate Secretary, HCA Inc., One Park Plaza, Nashville, TN 37203.
Item 11.Executive Compensation
Compensation Discussion and Analysis
 
The Compensation Committee (the “Committee”) of the Board of Directors is generally charged with the oversight of our executive compensation and rewards programs. The Committee is currently composed of Michael W. Michelson, George A. Bitar, John P. Connaughton and Thomas F. Frist, Jr., M.D. Responsibilities of the Committee include the review and approval of the following items:
 • Executive compensation strategy and philosophy;
 
 • Compensation arrangements for executive management;


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 • Design and administration of the annual cash-based Senior Officer Performance Excellence Program (“PEP”);
 
 • Design and administration of our equity incentive plans;
 
 • Executive benefits and perquisites (including the HCA Restoration Plan and the Supplemental Executive Retirement Plan); and
 
 • Any other executive compensation or benefits related items deemed noteworthy by the Committee.
 
In addition, the Committee considers the proper alignment of executive pay policies with Company values and strategy by overseeing employee compensation policies, corporate performance measurement and assessment, and Chief Executive Officer performance assessment. The Committee may retain the services of independent outside consultants, as it deems appropriate, to assist in the strategic review of programs and arrangements relating to executive compensation and performance.
The views and recommendations of our Chief Executive Officer are also solicited by the Committee with respect tofollowing executive compensation discussion and analysis describes the principles underlying our executive compensation policies and decisions as an additional factor inwell as the finalmaterial elements of compensation decisions with respect to persons other than the Chief Executive Officer.for our named executive officers. Our named executive officers for 2007 were:
 In 2006, the Committee was composed of C. Michael Armstrong, Martin Feldstein, Frederick W. Gluck and Charles O. Holliday, Jr., who served on our Board of Directors prior to the Merger. Determinations with respect to 2006 compensation were made by this prior Committee.
Compensation Philosophy• Jack O. Bovender, Jr., Chairman of the Board and Chief Executive Officer;
• Richard M. Bracken, President and Chief Operating Officer;
• R. Milton Johnson, Executive Vice President and Chief Financial Officer;
• Samuel N. Hazen, President — Western Group; and
• Beverly B. Wallace, President — Shared Services Group
 
As discussed in more detail below, substantially all of the named executive officers’ compensation for 2007 was negotiated and determined in connection with the Merger.
Compensation Philosophy and Objectives
The Committee believes the most effectivecore philosophy of our executive compensation program alignsis to support the interests of our executives with those of our stakeholders while encouraging long term executive retention. OurCompany’s primary objective is to provideof providing the highest quality health care to our patients while enhancing the long term value of the Company to our shareholders. Specifically, the Committee believes the most effective executive compensation program (for all executives, including named executive officers):
• Reinforces HCA’s strategic imperatives;
• Aligns the economic interests of our executives with those of our shareholders; and
• Encourages attraction and long term retention of key contributors.
The Committee is committed to a strong, positive link between our objectives and our compensation and benefits practices.
Compensation Policies with Respect to Executive Officers for 2006
Our compensation philosophy also allows for flexibility in establishing executive compensation structure for 2006 consistedbased on an evaluation of base salary (designed to be reasonable and competitive), annual PEP awards payable in cash (designed to reward short term performance and provide incentive for meeting financial, strategicinformation prepared by management or other advisors and other objectives),subjective and restricted stockobjective considerations deemed appropriate by the Committee. This flexibility is important to ensure our compensation programs are competitive and stock option grants (designed to enhancethat our compensation decisions appropriately reflect the mutualityunique contributions and characteristics of interests between our officers and our shareholders and reward long term performance). In addition, we provided an opportunity for executives to participate in a stock purchase plan and two supplemental retirement plans (designed to reward their long term commitment and contributions to the Company, and Company performance over an extended period of time).executives.


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      While
Compensation Structure and Benchmarking
Our compensation program is heavily weighted towards performance-based compensation, reflecting our philosophy of increasing the long-term value of the Company and supporting strategic imperatives. Total direct compensation and other benefits in 2007 consisted of the following elements:
Total Direct Compensation
• Base Salary
• Annual Cash-Based Incentives (offered through our PEP)
• Long-Term Equity Incentives (in the form of Stock Options)
Other Benefits
• Retirement Plans
• Limited Perquisites and Other Personal Benefits
• Severance Benefits
The Committee does not support rigid adherence to benchmarks or compensatory formulas and strives to make compensation decisions which effectively support our compensation objectives and reflect the unique attributes of the Company and each employee, ourexecutive. Our general policypractice, however, with respect to pay positioning is that executive base salaries and annual incentive (PEP) target value should generally position total annual cash compensation between the median and 75th percentile of similarly-sized general industry companies. We utilize the general industry as our primary source for competitive pay levels because HCA is significantly larger than its industry peers. See benchmarking discussion below for further information. Mr. Bovender’s total annual cash compensation for 2007 approximated the competitive median, and Mr. Johnson’s total annual cash compensation was slightly less than the median, while the other named executive officers’ pay fell within the range noted above for jobs that are compared to the market.
Cash compensation is currently more weighted towards salary rather than PEP than competitive practice among our general industry peers would suggest. Over time, we intend to continue moving towards a mix of cash compensation that will place a greater emphasis on annual performance-based compensation.
Although we look at competitive long-term equity incentive award values in 2006similarly-sized general industry companies when assessing the competitiveness of our compensation programs, we did not base our 2007 stock option grants on these levels since equity is structured differently in closely held companies than in publicly-traded companies. As is typical in similar situations, the Investors wanted to share a certain percentage of the equity with executives shortly after the consummation of the Merger to establish performance objectives and incentives up front in lieu of annual grants to ensure our executive’s long-term economic interests would be aligned with those of the Investors. This pool of equity was as follows:then further allocated based on the executive’s anticipated impact on, and potential for, driving Company strategy and performance. The resulting total direct pay mix is heavily weighted towards performance-based pay (PEP plus stock options) rather than fixed pay, which the Committee believes reflects the compensation philosophy and objectives discussed above.
• Pay positioning should reflect both market competitiveness and internal job value.
• Generally, executive base salaries and short term target incentives should position total annual cash compensation between the median and 75th percentile of the competitive marketplace.
• The target value of long term incentive grants (stock options and restricted stock) should reference market median, internal job value and individual performance.
Compensation Process
 To ensure
While our 2007 named executive officer compensation was largely determined at the time of the Merger, the Committee ensures that executives’ pay levels are generally consistent with the compensation strategy described above, in part, by conducting annual assessments of competitive executive compensation. Management (but no named executive officer), in collaboration with the Committee collectedCommittee’s independent consultant, Semler Brossy Consulting Group, LLC, collects and presents compensation data from similarly sizedsimilarly-sized general industry companies. companies, based to the extent possible on comparable position matches and compensation components. The following nationally recognized survey sources were utilized in anticipation of establishing 2008 executive compensation:
Number of
Companies in
Survey
Revenue Scope (Median Revenue)
Sample
Towers PerrinGreater than $20B ($35B)61
Hewitt Associates$10B - $25B ($14.0B)66
Hewitt AssociatesGreater than $25B ($46.9B)43
Pearl Meyer$20B - $30B ($25.4B)12


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These particular revenue scopes were selected because they were the closest approximations to HCA’s revenue size. Each survey that provided an appropriate position match and sufficient sample size to be used as a benchmark was weighted equally. For this purpose, the two Hewitt Associates surveys were considered as one survey, and we used a weighted average of the two surveys (65% for the $10B — $25B cut and 35% for the Greater than $25B).
Data was also collected from other health care providers within our industry including Community Health Systems, Inc., Health Management Associates, Inc., Kindred Healthcare, Inc., LifePoint Hospitals, Inc., Tenet Healthcare Corporation, Triad Hospitals, Inc. (acquired by Community Health Systems, Inc. in July 2007) and Universal Health Services, Inc. These health care providers are used only as ana secondary point of reference for industry reference, althoughpractices since we are significantly larger than these companies. The data from this analysis did not affect named executive officer pay level decisions in 2007.
Consistent with our flexible compensation philosophy, the Committee is not required to approve compensation precisely reflecting the results of these surveys applied to our general benchmarks, and may also consider, among other companiesfactors (typically not reflected in these surveys): the requirements of the applicable employment agreements, the executive’s individual performance during the year, his or her projected role and responsibilities for the coming year, his or her actual and potential impact on the successful execution of Company strategy, recommendations from our industry that reportchief executive officer and compensation data.consultants, an officer’s prior compensation, experience, and professional status, internal pay equity considerations, and employment market conditions and compensation practices within our peer group. The Committee believed this information provided an appropriateweighting of these and other relevant factors is determined on acase-by-case basis for a competitiveeach executive compensation assessment. With respectupon consideration of the relevant facts and circumstances.
Employment Agreements
It has been our past practice not to 2006 compensation, the Committee evaluated our executive total pay positioningenter into employment agreements with any executive. However, in connection with the assistanceMerger, we entered into employment agreements with each of Semler Brossy Consulting Group, LLC (“Semler Brossy”). In particular, Semler Brossy assistedour named executive officers and certain other members of senior management to help ensure the Committee withretention of those executives critical to the peerfuture success of the Company. Among other things, these agreements set the executive’s compensation terms, their rights upon a termination of employment, and market surveyrestrictive covenants around non-competition, non-solicitation, and analysesconfidentiality. These terms and conditions are further explained in the assessmentremaining portion of our performance-based shortthis Compensation Discussion and long term compensation programs. Semler Brossy was selected dueAnalysis and under “Narrative Disclosure to its national recognition as a compensation consulting firm and the fact that the Committee believed Semler Brossy was independent of conflicts with either the Board members or management. The compensation of Jack O. Bovender, Jr., our Chairman and Chief Executive Officer; Richard M. Bracken, our President and Chief Operating Officer; R. Milton Johnson, our Executive Vice President and Chief Financial Officer; Samuel N. Hazen, our President — Western Group; W. Paul Rutledge, our President — Central Group; and Charles R. Evans, who served as President — Eastern Group until October 1, 2006 (together, the “named executive officers”) for 2006 is listed in the Summary Compensation Table.Table and Grants of Plan-Based Awards Table — Employment Agreements.”
Base Salary
Elements of Compensation
 In 2006, the Committee evaluated
Base Salary
Base salaries are intended to provide reasonable and competitive fixed compensation for regular job duties. The threshold base salaries for our executives and assigned eachare set forth in their employment agreements. Given the employment agreements were executed in November 2006, we did not increase named executive position aofficer base salaries in 2007. In light of our goal of decreasing the emphasis of base salary range based on market competitiveness and internal job value. In determining appropriate salary levels andin our cash compensation mix, we do not intend to provide salary increases within that range, the Committee considered a position’s levelto any of responsibility, projected role and responsibilities, required impact on execution of Company strategy, external pay practices, total cash and total direct compensation positioning, and other factors it deemed appropriate. The Committee also considered individual performance and vulnerability to recruitment by other companies.
      In January 2006, after conducting this assessment, we increased salaries for all executives, including theour named executive officers. The averageofficers in 2008, other than an approximate 5.3% increase in Mr. Johnson’s base salary increases in 2006 for our executive officers, as well as for Messrs. Bovender, Bracken, Johnson, Hazen and Evans as a group, was 3.5%. Because of the increase to base salary Mr. Rutledge received in October 2005 in connection with his promotion to President — Central Group, Mr. Rutledge did not receive a salary increase in January 2006. However, in October 2006, the Committee increased Mr. Rutledge’s base salary approximately 8.3% in order to better align the salaries of the presidents of our three operating groups.his salary with market for his position based on general industry surveys.
Short Term Incentive Compensation
Annual Incentive Compensation: PEP
 
The purpose of the PEP is intended to reward participating employeesnamed executive officers for annual financial and/or nonfinancial performance, with the goals of providing high quality health care for our patients and increasing shareholder value. In 2006, the Committee adopted separate programs for ourEach named executive officers (the “Senior Officer PEP”) and for our employees who are not executive officers.
      Each participantofficer in the Senior Officer PEP is assigned an annual award target expressed as a percentage of salary ranging from 30%60% to 120% (see individual targets in table below). These targets are intended to provide a meaningful incentive for executives to achieve or exceed performance goals. They were set in 2007 based on the requirements of the applicable employment agreements.
The 2007 PEP was designed to provide 100% of the target award for target performance, 50% of the target award for a minimum acceptable (threshold) level of performance, and a maximum of 200% of the target award for


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maximum performance, while no payments are made for performance below threshold levels. The Committee believes this payout curve is consistent with competitive practice. More importantly, it promotes and rewards continuous growth as performance goals have consistently been set at increasingly higher levels each year. Actual awards under the Senior Officer PEP are generally determined using three steps. First, the executivefollowing two steps:
1. The executive’s conduct must exhibitreflect our missionMission and values, upholdValues by upholding our Code of Conduct and followfollowing our compliance policies and procedures. This step is critical to reinforcing our commitment to integrity

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and the delivery of high quality health care. In the event the Committee determines the participant’s conduct during the fiscal year is not in compliance with the first step, he or she will not be eligible for an incentive award. Second, an initial
2. The actual award amount is determined based upon one or more measures of Company performance. In 2006,2007, the Senior Officer PEP for all named executive officers, other than Mr. Hazen, incorporated twoone Company financial performance measures (earnings per share, or “EPS,” andmeasure, Earnings before Interest, Taxes, Depreciation and Amortization (and excluding share-based compensation costs under SFAS 123(R)), or “EBITDA,“EBITDA.” each as defined in the Senior Officer PEP). Generally, we then integrate an individual performance component into most participants’ awards, although awardsThe Company EBITDA target for certain participants, including the named executive officers, remain tied exclusively to the financial performance measures. The Senior Officer PEP is designed to provide 100% of the target award2007 was $4.457 billion ($4.533 billion after adjustment) for target performance, 50% of the target award for a minimum acceptable (threshold) level of performance, and a maximum of 200% of the target award for maximum performance. Payouts between threshold and maximum amounts are calculated by the Committee, in its sole discretion, using interpolation. No payments are made for performance below threshold levels. The Committee approves the threshold, target and maximum performance levels at the beginning of the fiscal year.
      The Committee may make adjustments to the terms of awards under the Senior Officer PEP in recognition of unusual or nonrecurring events affecting a participant or the Company, or our financial statements; in the event of changes in applicable laws, regulations, or accounting principles; or in the event that the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits available under the Senior Officer PEP. The Committee is also authorized to adjust performance targets or awards to avoid unwarranted penalties or windfalls, although adjustments to avoid unwarranted penalties were not permitted under the 2006 Senior Officer PEP with respect to awards to Covered Officers (as defined in the 2006 Senior Officer PEP), which includes the named executive officers. ExceptMr. Hazen’s PEP, as the Committee may otherwise determine in its soleWestern Group President was based 50% on Company EBITDA and absolute discretion, termination50% on Western Group EBITDA (with a Western Group EBITDA target for 2007 of a participant’s employment prior$2.196 billion) to the end of the year, other thanensure his accountability for reasons of death or disability, will result in the forfeiture of the award by the participant.
      For 2006, the Committee set Messrs. Bovender’s, Bracken’s, Johnson’s, Hazen’s, Rutledge’s and Evans’s Senior Officer PEP targets at 120%, 90%, 60%, 60%, 60% and 60%, respectively, of base salary for target performance. Awards under the 2006 Senior Officer PEP to Covered Officers, including the named executive officers, were made under the HCA 2005 Equity Incentive Plan (the “2005 Plan”) and were structured in an effort to meet the requirements for deductibility under Section 162(m) of the Internal Revenue Code. As further discussed below under “Long Term Equity Incentive Compensation,” pursuant to the terms of the 2005 Plan, all awards made under the 2005 Plan vest upon a “change of control” of the Company. As a result, pursuant to the terms of the 2006 Senior Officer PEP and the 2005 Plan, and in accordance with the Merger Agreement, upon consummation of the Merger, awards under the 2006 Senior Officer PEP vested and were paid out to the Covered Officers, including the named executive officers, at the target level. Messrs. Bovender, Bracken, Johnson, Hazen, Rutledge and Evans received $1,944,274, $954,785, $450,227, $473,203, $390,000 and $326,034, respectively, under the 2006 Senior Officer PEP upon consummation of the Merger. Mr. Evans’s payment under the 2006 Senior Officer PEP was prorated for the nine months he served as President — Eastern Group.
      We do not intend to publicly disclose the specific performance targets for 2006 as they reflect competitive, sensitive information regarding our budget. However, we consider our budget a reach and we deliberately set aggressive individual goals where applicable. Thus, while designed to be attainable, target performance levels for 2006 required strong performance and execution which in our view provided a bonus incentive firmly aligned with stockholder interests. Our named executive officers in our proxy statement for 2005 did not receive any payout in 2005 with respect to financial performance targets under the 2004 Senior Officer PEP. Our named executive officers in our proxy statement for our 2006 annual meeting of shareholders received payouts under the 2005 Senior Officer PEP at the maximum level, or 200% of the target award, for maximum performance with respect to our 2005 financial measures.his group’s results. The Committee has historically attemptedchose to maintain consistency year over year with respect to the difficultybase annual incentives on EBITDA for a number of achieving the threshold, target and maximum performance levels.reasons:

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Long Term Equity Incentive Awards
 With respect to 2006 compensation, the Committee utilized long term incentives, including stock options and restricted shares issued pursuant to the 2005 Plan, to achieve three objectives:
 • Retain key executive talent;It effectively measures overall Company performance;
 
 • Link executive compensationIt is an important surrogate for cash flow, a critical metric related to our long term performance;paying down the Company’s significant debt obligation;
• It is the key metric driving the valuation in the internal Company model, consistent with the valuation approach used by industry analysts; and
 
 • Deliver value to employees in a manner that maximizes economic and tax effectiveness toIt is consistent with the Company, while reducing shareholder dilution where possible.metric used for the vesting of the financial performance portion of our option grants.
 In 2006, executive officers received long term incentive awards under
SFAS 123(R) costs are excluded from the 2005 Plan consistingcalculation because like depreciation and amortization, which are also excluded from EBITDA, they do not represent a current cash cost. These EBITDA targets should not be understood as management’s predictions of stock optionsfuture performance or other guidance and restricted shares. The stock optionsinvestors should not apply these in any other context. Our 2007 threshold and restricted share awardsmaximum goals were each intended to comprise 50%set at approximately +/- 3.6% of the total award value. Thetarget goal to reflect likely performance volatility.
Pursuant to the terms of the 2007 PEP and the named executive officer employment agreements, the Committee believed this policy,exercised its ability to make adjustments to the Company’s 2007 EBITDA performance target for dispositions of facilities and accounting changes occurring during the 2007 fiscal year.
While the named executive officers’ 2007 PEP targets were set in conjunction withtheir applicable employment agreements, the Committee intends to set 2008 target performance goals based on realistic, though slightly aggressive, expectations of Company performance ensuring successful execution of our plans in order to realize the most value from these awards. While we do not intend to disclose our 2008 PEP EBITDA target as an increased dividend on our common stock, wasunderstanding of that target is not necessary for a fair understanding of the named executive officers’ compensation for 2007 and could result in competitive harm and market confusion, we consistently set targets that require an increase in EBITDA year over year to promote continuous growth consistent with its goalsour business plan.
Upon review of executive retention and focusing executives on our long term performance. The issuance of restricted shares, rather than stock options, was also intended to reduce future dilution to our shareholders because we issued approximately one restricted share for every four stock options we would have issued if we had continued to primarily issue stock options, thus reducing the aggregate number of shares granted in long term incentive awards. The Committee felt that a balanced approach to long term incentives, rather than reliance on a single equity vehicle, was consistent with emerging competitive practices and served to benefit shareholders and award recipients. Consistent with our pay positioning policy, target stock option and restricted share grant values were based on a number of factors, including an assessment of ourCompany’s 2007 financial performance, the executive’s level of responsibility, past and anticipated contributionsCommittee determined that Company EBITDA performance for the fiscal year ended December 31, 2007 exceeded the 2007 maximum performance goal, as adjusted; therefore, pursuant to the Company, competitive practices, and the potential dilution resulting from equity-based grants.
      As a privately held company, we no longer have a policy regarding stock ownership guidelines. However, in 2006 as a public company, we maintained ownership guidelines requiring executive officers to own shares equal to a multipleterms of the executive officer’s base salary. We maintained these guidelines in an effort to firmly align2007 PEP, awards for the interests of our executives with those of our shareholders and to ensure our executives maintained a significant stake in our long term performance.
Stock Options
      In 2006, option grants tonamed executive officers were made pursuantpaid out at the maximum level, with the exception of Mr. Hazen, whose award was paid out at 175.6% of his target amount, due to the 2005 Plan, had a 10 year term, and an exercise price equal to the fair market value50% of our common stock on the date of granthis PEP based on the closing price of our common stock as reported onWestern Group EBITDA, which exceeded the New York Stock Exchange ontarget but did not reach the date of grant. In order to havemaximum performance level (such amounts are included in the exercise price reflect the value of our stock during the course of the award year and to encourage employee retention, options awarded as long term incentive compensation in 2006 were granted on a quarterly basis on pre-determined dates in equal installments of one-fourth of the total number of shares awarded, and were to vest ratably in increments of 25% on each of the first, second, third and fourth anniversaries of the initial grant date. In 2006, Messrs. Bovender, Bracken, Johnson, Hazen, Rutledge and Evans received long term incentive awards of options to purchase 267,000 shares, 119,600 shares, 72,500 shares, 72,500 shares, 72,500 shares and 72,500 shares, respectively. For additional information concerning the options awarded in 2006, see the Grants of Plan-Based Awards Table.“Non-Equity Incentive Plan Compensation” column


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Restricted Shares
      In 2006, restricted share grants were made pursuant to the 2005 Plan. To encourage retention, the restricted shares granted as long term incentive compensation in 2006 were to vest ratably in increments of 20% on each of the first, second, third, fourth and fifth anniversaries of the date of grant. In 2006, Messrs. Bovender, Bracken, Johnson, Hazen, Rutledge and Evans received 66,750 restricted shares, 29,900 restricted shares, 18,100 restricted shares, 18,100 restricted shares, 18,100 restricted shares and 18,100 restricted shares, respectively. For additional information concerning the restricted shares awarded in 2006, see the Grants of Plan-Based Awards Table.

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      The Committee’s meeting schedule in 2006 was set at the beginning
of the year, andSummary Compensation Table). Accordingly, the proximity of these awards2007 PEP paid out as follows to earnings announcements or other market events was coincidental. Prior to the Merger, we generally did not impose performance-based vesting restrictions with respect to equity awards. While we considered the merits of performance-based vesting, we believed time-based equity awards directly and firmly aligned the interests of our executives with those of our shareholders. Time-based vesting provides economic benefit only to the extent the employee remains employed by us, and the multi-year vesting of these awards ensured long term performance and stock price appreciation was required in order to realize significant value from these awards. All awards made under the 2005 Plan were subject to a provision requiring the vesting of such awards in full upon a “change of control” of the Company. The Committee believed this acceleration feature to be appropriate when adopting the 2005 Plan as it was generally consistent with predecessor plans, and further based on the Committee’s belief as to competitive market practices and that the lack of an accelerated vesting provision may have put us at a competitive disadvantage in our recruiting and retention efforts as employees often consider equity upside opportunities in an acquisition context a critical element of compensation.
      As a result of the Merger, all unvested awards under the 2005 Plan (and all predecessor equity incentive plans) vested in November 2006. Except to the extent any options awarded under the 2005 Plan (or any predecessor plans) were rolled over into the reorganized HCA, participants in the 2005 Plan (and all predecessor plans) received consideration in the Merger for their awards. Participants who held restricted shares pursuant to the 2005 Plan (and any predecessor plans) received $51.00 per share, less any applicable withholding taxes. Participants who held options under the 2005 Plan (and any predecessor plans) received a cash payment equal to the excess (if any) of (a) the product of the number of shares subject to such options and the $51.00 per share Merger consideration, over (b) the aggregate exercise price of the options, less any applicable withholding taxes. As a result of the Merger, no further awards will be made under the 2005 Plan or any predecessor equity incentive plan. As discussed below under “2007 Compensation,” we adopted a new equity plan in connection with the consummation of the Merger which is designed to reflect our status as a sponsor-backed closely held company.
Management Stock Purchase Plan
      The HCA Inc. Amended and Restated Management Stock Purchase Plan, or MSPP, allowed select executives, including the named executive officers:
         
  2007 Target PEP
 2007 Actual PEP Award
Named Executive Officer
 (% of Salary) (% of Salary)
 
Jack O. Bovender, Jr. (Chairman and CEO)  120%  240%
Richard M. Bracken (President and COO)  90%  180%
R. Milton Johnson (Executive Vice President and CFO)  60%  120%
Samuel N. Hazen (President, Western Group)  60%  105%
Beverly B. Wallace (President, Shared Services Group)  60%  120%
For purposes of 2008 compensation, in consultation with Semler Brossy Consulting Group, the Committee re-evaluated the PEP structure including the use of EBITDA as the sole performance metric and the payout curve. We determined that the current structure continues to achieve our compensation objectives for our named executive officers, to convert up to 25%and therefore, with the exception of their annual baseincreasing PEP target opportunities by approximately 6% in lieu of salary into restricted shares granted at a discount of 25% of the average closing price as reported on the New York Stock Exchange on all trading days during a defined purchase period. The MSPP was approved by shareholders in 1995 and amended in 1998 in connectionincreases, consistent with our elimination of a cash incentive plan. The MSPP was amended again in 2004goal to extend its term. The MSPP provided that shares granted thereunder wouldfurther emphasize performance-based pay, we generally vest three years fromintend to leave the date of grant, encouraging a long term focus. With certain exceptions, upon termination of employment during the restricted period, the employee would receive a cash payment equal to the lesser of (a) the then current fair market value of the restricted shares or (b) the aggregate salary foregone by the employee as a condition to receiving the restricted shares.
      As a result of the Merger, all unvested shares awarded under the MSPP vested in November 2006. In addition, pursuant to the Merger Agreement, participants in the MSPP during the purchase period in which the Merger closed were refunded the amount of salary they had deferred toward the future purchase of shares under the MSPP and received the benefit of the gain on shares that would have been purchased through such deferral. See footnote (6) to the Summary Compensation Table. The MSPP was terminated upon consummation of the Merger. Each ofprogram structure unchanged for the named executive officers participated in the MSPP.officers.
2007 Compensation
Long-Term Equity Incentive Awards: Options
 
In connection with the Merger, each of Messrs. Bovender, Bracken, Johnson, Hazen and Rutledge, and certain other members of senior management, entered into employment agreements (the material terms of which are described under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements”) which, among other things, set the executive’s annual base salary (subject to any annual increases which may be approved by the Board of Directors), and set PEP

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targets and equity grants for 2007. Given that the compensation of many of our executive officers had recently been renegotiated in connection with the Merger, the Committee (as reconstituted following the Merger) did not engage the services of a compensation consultant with respect to, or otherwise undertake an extensive reassessment of, executive compensation for 2007. Accordingly, Messrs. Bovender, Bracken, Johnson, Hazen and Rutledge did not receive base salary increases or changes to their PEP opportunities in 2007. With respect to the other executive officers, in light of our strategies to manage expenses in 2007, the Committee determined that none of the executive officers should receive increases to their base salaries or PEP opportunities in 2007. The 2007 Senior Officer PEP incorporates EBITDA (defined as earnings before income taxes, depreciation and amortization (but excluding any expenses for share-based compensation under SFAS 123(R) with respect to any awards granted under the 2006 Plan (as defined below)), as determined in good faith by the Board in consultation with the Chief Executive Officer) as the sole Company financial performance measure. The change from two financial performance measures (EPS and EBITDA) to one was made because we are now a closely held company (and therefore EPS is a less meaningful performance measure to our shareholders) and because EBITDA is the Company financial performance measure used in our new option agreements (which are described below).
      Mr. Evans retired from the Company effective December 31, 2006. In lieu of paying Mr. Evans the lump sum severance payment pursuant to our severance policy applicable to our employees generally, we have agreed that Mr. Evans will continue to receive base salary and benefits for a period of six months which ends June 30, 2007. See “Potential Payments Upon Termination or Change in Control — Charles R. Evans.”
      On November 17, 2006, the Board of Directors approved and adopted the 2006 Stock Incentive Plan for Key Employees of HCA Inc. and its Affiliates (the “2006 Plan”). The purpose of the 2006 Plan is to promote our long term financial interests and growth by attracting and retaining management and other personnel and key service providers with the training, experience and ability to enable them to make a substantial contribution to the success of our business; to motivate management personnel by means of growth-related incentives to achieve long range goals; and to furtherto:
• Promote our long term financial interests and growth by attracting and retaining management and other personnel and key service providers with the training, experience and ability to enable them to make a substantial contribution to the success of our business;
• Motivate management personnel by means of growth-related incentives to achieve long range goals; and
• Further the alignment of interests of participants with those of our shareholders through opportunities for increased stock or stock-based ownership in the Company.
In January 2007, pursuant to the terms of the named executive officers’ respective employment agreements, the Committee approved long-term stock option grants to our named executive officers under the 2006 Plan consisting solely of a one-time stock option grant in lieu of annual long-term equity incentive award grants (“New Options”). In addition to the New Options granted in 2007, the Company committed to grant the named executive officers 2x Time Options in their respective employment agreements, as described in more detail below under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.” The Committee believes that stock options are the most effective long-term vehicle to directly align the interests of executives with those of our shareholders through opportunities for increased stock or stock-based ownershipby motivating performance that results in the Company.
      In January 2007,long-term appreciation of the Company’s value, since they only provide value to the executive if the value of the Company increases. As is typical in leveraged buyout situations, the Committee approved grantsdetermined that granting all of the stock options (except the 2x Time Options) up front rather than annually was appropriate to Messrs. Bovender, Bracken, Johnson, Hazenaid in retaining key leaders critical to the Company’s success over the next several years and, Rutledgecoupled with the executives’ personal investments, provide an equity incentive and stake in the Company that directly aligns the long-term economic interests of options to purchase 399,604 shares, 349,654 shares, 249,753 shares, 159,841 sharesthe executives with those of the Investors.
The New Options have a ten year term and 139,861 shares, respectively, of our common stock. The options are divided so that 1/1/3 are time vested options, 1/1/3 are EBITDA-based performance vested options and 1/1/3 are performance options that vest based on investment return to the Sponsors, each as described below. The combination of time, performance and investor return based vesting of these awards is designed to compensate executives for long term commitment to the Company, while motivating sustained increases in our financial performance and helping ensure the Sponsors have received an appropriate return on their invested capital before executives receive significant value from these grants.
 
The time vested options are granted to aid in retention. Consistent with this goal, the time vested options granted in 2007 vest and become exercisable in equal increments of 20% on each of the first five anniversaries of the date of grant.grant date. The time vested options have a strikean exercise price equivalent to fair market value on the date of grant (asgrant. Since our common stock is not currently traded on a national securities exchange, fair market value was determined


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reasonably and in good faith by the Board of Directors after consultation with the Chief Executive Officer).Officer and other advisors.
 
The EBITDA-based performance vested options are intended to motivate sustained improvement in long-term performance. Consistent with this goal, the EBITDA-based performance vested options granted in 2007 are eligible to vest and become exercisable in equal increments of 20% at the end of fiscal years 2007, 2008, 2009, 2010 and 2011 but will vest on those dates only if we achieve certain annual EBITDA performance targets as determined in good faithare achieved. These EBITDA performance targets were established at the time of the Merger and can be adjusted by the Board of Directors in consultation with the CEO).Chief Executive Officer as described below. We chose EBITDA as the performance metric since it is a key driver of our valuation and for other reasons as described above in the “Annual Incentive Compensation: PEP” section of this Compensation Discussion and Analysis. Due to the number of events that can occur within our industry in any given year that are beyond the control of management but may significantly impact our financial performance (e.g., health care regulations, industry-wide significant fluctuations in volume, etc.), we have incorporated“catch-up” vesting provisions. The EBITDA-based performance vested options alsomay vest and become exercisable on a “catch up” basis, if at the end of any year noted above or at the end of fiscal years 2008, 2009, 2010 or 2011,year 2012, the cumulative total EBITDA earned in all prior completed fiscal years or the 2012 fiscal year exceeds the cumulative totalEBITDA target at the end of all EBITDA targets in effect for such years. Similar to 2006 performance-based awards,fiscal year.
As discussed above, we do not intend to publicly disclose the specific2008-2011 EBITDA performance targets for these options.as they reflect competitive, sensitive information regarding our budget. However, we intend todeliberately set theseour targets at levelsincreasingly higher levels. Thus, while designed to be generally consistentattainable, target performance levels for these years require strong, improving performance and execution which in our view provides an incentive firmly aligned with shareholder interests.
As with the levelEBITDA targets under our 2007 PEP, pursuant to the terms of difficultythe 2006 Plan and the Stock Option Agreements governing the 2007 grants, the Board of achievement associatedDirectors, in consultation with prior year performance-based awards.our Chief Executive Officer, has the ability to adjust the established EBITDA targets for significant events, changes in accounting rules and other customary adjustment events. We believe these adjustments may be necessary in order to effectuate the intents and purposes of our compensation plans and to avoid unintended consequences that are inconsistent with these intents and purposes. The Board of Directors exercised its ability to make adjustments to the Company’s2007-2011 EBITDA performance targets (including cumulative EBITDA targets) for facility dispositions and accounting changes occurring during the 2007 fiscal year.
 
The options that vest based on investment return to the Sponsors are eligibleintended to align the interests of executives with those of our principal shareholders to ensure shareholders receive their expected return on their investment before the executives can receive their gains on this portion of the option grant. These options vest and become exercisable with respect to 10% of the common stock subject to such options on eachat the end of the first five anniversaries of the closing date of the Mergerfiscal years 2007, 2008, 2009, 2010 and 2011 if the Investor Return (as defined below) is at least equal to two times the price paid to shareholders in the Merger (or $102.00), and with respect to an additional 10% on eachat the end of the first five anniversaries of the closing datefiscal years 2007, 2008, 2009, 2010 and 2011 if the Investor Return is at least equal totwo-and-a-half

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times the price paid to shareholders in the Merger (or $127.50). “Investor Return” means, on any of the first five anniversaries of the closing date of the Merger, or any date thereafter, all cash proceeds actually received by affiliates of the Sponsors after the closing date in respect of their common stock, including the receipt of any cash dividends or other cash distributions (but including(including the fair market value of any distribution of common stock by the Sponsors to their limited partners), determined on a fully diluted, per share basis. The Sponsor investment return options also may become vested and exercisable on a “catch up” basis if the relevant Investor Return is achieved at any time occurring prior to the expiration of such options.
 The combination
Upon review of time,the Company’s 2007 financial performance, and investor return based vestingthe Committee determined that the Company achieved the 2007 EBITDA performance target of these awards is designed to compensate executives for long term commitment$4.407 billion ($4.420 billion after adjustment) under the New Option awards; therefore, pursuant to the Company, while motivating sustained increasesterms of the 2007 Stock Option Agreements, 20% of each named executive officer’s EBITDA-based performance vested options vested as of December 31, 2007. Further, 20% of each named executive officer’s time vested options vested on the first anniversary of their grant date, January 30, 2008. No portion of the options that vest based on Investor Return vested as of the end of the 2007 fiscal year; however, such options remain subject to the “catch up” vesting provisions described above.


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For additional information concerning the options awarded in our financial performance and helping ensure2007, see the Sponsors have received an appropriate return on their invested capital.Grants of Plan-Based Awards Table.
 Our retirement and supplemental retirement plans were maintained following
As discussed above, except in the Merger and are further described below.
HCA 401(k) Plan and Retirement Plan
      Generally, all employees, includingcases of promotions or new hires, the Committee does not intend to award additional stock options to our named executive officers (other than the 2x Time Options the Company committed to grant the named executive officers are eligiblein their respective employment agreements, as described in more detail below under “Narrative Disclosure to participateSummary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements”). Grants made in connection with promotions and new hires will be formally approved by the HCA 401(k)Committee. The exercise price of grants made in connection with promotions and new hires will be based on the quarterly fair market value as determined reasonably and in good faith by the Board of Directors after consultation with the Chief Executive Officer and other advisors. Any option grants approved under the 2006 Plan after they have completed two consecutive monthsin 2008 (other than the 2x Time Options) will be structured identical to those granted in 2007 except that the options will vest over a four year period rather than a five year period, with the time vested options vesting and becoming exercisable in equal increments of service. Employees contribute funds from their paychecks to the 401(k) Plan25% on a before-tax basis. Employees can direct their contributions to any of the offered range of investment funds. We match 50%each of the first three percentfour anniversaries of the grant date, the EBITDA-based performance vested options being eligible pay an employee contributes to his or her account,vest and those matching contributionsbecome exercisable in equal increments of 25% at the end of fiscal years 2008, 2009, 2010 and 2011 if the applicable EBITDA performance targets are automatically invested accordingachieved (with the same “catch up” provision as described above), and the options that vest based on investment return to the employee’s investment choices.Sponsors vesting and becoming exercisable with respect to 12.5% of the common stock subject to such options at the end of fiscal years 2008, 2009, 2010 and 2011 if the Investor Return (as defined above) is at least equal to two times the price paid to shareholders in the Merger (or $102.00), and with respect to an additional 12.5% at the end of fiscal years 2008, 2009, 2010 and 2011 if the Investor Return is at least equal totwo-and-a-half times the price paid to shareholders in the Merger (or $127.50) (provided that the investor return options granted in 2008 may also become vested and exercisable on a “catch up” basis if the relevant Investor Return is achieved prior to the ninth anniversary of the grant date).
 Generally,
Ownership Guidelines
While we have maintained stock ownership guidelines in the past, as a non-listed company, we no longer have a policy regarding stock ownership guidelines. However, we do believe equity ownership aligns our executive officers’ interests with those of the Investors. Accordingly, all employees, including theof our named executive officers are also eligiblewere required to participaterollover at least half their pre-Merger equity and, therefore, maintain significant stock ownership in the HCA Retirement Plan after completing one yearCompany. See “Security Ownership of serviceCertain Beneficial Owners and having at least 1,000 hours of service during a plan year during which they were employed on both January 1Management and December 31. The amount of our annual contribution to an employee’s account is based on a contribution schedule and the amount of an employee’s pay, with a higher contribution applied to an employee’s eligible pay that exceeds the Social Security wage base, if any. An employee’s Retirement Plan account is invested in diversified investment vehicles, such as domestic and international stocks, fixed income securities and short term securities.Related Stockholder Matters.”
 Each of the named executive officers participates in
Retirement Plans
We maintain two qualified retirement plans, the HCA 401(k) Plan and the HCA Retirement Plan.Plan, to aid in retention and to assist employees in providing for their retirement. Generally all employees who have completed the required service are eligible to participate in these plans. Each of our named executive officers participates in both plans. For additional information on thethese plans, including amounts contributed by HCA in 2007 to those plans by us in 2006,the named executive officers, see footnote (6) to the Summary Compensation Table.Table and related footnotes and narratives and “Pension Benefits.”
Restoration Plan and Supplemental Executive Retirement Plan
Our key executives, including the named executive officers, also participate in two supplemental retirement programs. The Committee and the Board initially approved these supplemental retirement programs to recognize significant long term contributions and commitments by our executive officers to our growth and the creation of stockholder value, to induce our executives to continue in our employ through a specified retirement age (initially 62 through 65, based on length of service) and to help us remain competitive in attracting and retaining key executive talent. to:
• Recognize significant long-term contributions and commitments by executives to the Company and to performance over an extended period of time;
• Induce our executives to continue in our employ through a specified normal retirement age (initially 62 through 65, but reduced to 60 upon the change in control at the time of the Merger in 2006); and
• Provide a competitive benefit to aid in attracting and retaining key executive talent.
The Restoration Plan provides a benefit to replace the lost contributions due to the IRS compensation limit under Internal Revenue Code Section 401(a)(17). For additional information concerning the Restoration Plan, see “Nonqualified Deferred Compensation.”


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Key executives also participate in the Supplemental Executive Retirement Plan, or the SERP.“SERP,” adopted in 2001. The SERP benefit brings the total value of annual retirement income to a specific income replacement level. For named executive officers with 25 years or more of service, this income replacement level is 60% of final average pay (base salary and PEP payouts) at normal retirement, a competitive level of benefit at the time the plan was implemented. Due to the Merger, all participants are fully vested in their SERP benefits and the plan is now frozen to new entrants. For additional information concerning the SERP, see “Pension Benefits.”
Personal Benefits
In the event a participant renders service to another health care organization within five years following retirement or termination of employment, he or she forfeits the rights to any further payment, and must repay any payments already made. This non-competition provision is subject to waiver by the Committee with respect to the named executive officers.
 
Personal Benefits
Our executive officers generally do not receive limited, if any, benefits outside of those offered to our other employees. Generally, we provide these benefits to increase travel and work efficiencies which allows for more productive use of the executive’s time. Mr. Bovender and Mr. Bracken are permitted to use the Company aircraft for personal trips, subject to the aircraft’s availability. Other named executive officers including Messrs. Johnson, Hazen, Rutledge and Evans may

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have their spouses accompany them on business trips taken on the Company aircraft, subject to seat availability. In addition, there are times when it is appropriate for an executive’s spouse to attend events related to our business. On those occasions, we will pay for the travel expenses of the executive’s spouse. We will, upon request,on an as needed basis, provide mobile telephones and personal digital assistants to our employees and certain of our executive officers have obtained such devices through us. The value of these personal benefits, if any, is included in the executive officersofficer’s income for tax purposes and, in certain limited circumstances, the additional income attributed to an executive officer as a result of one or more of these benefits will be grossed up to cover the taxes due on that income. The HCA Foundation matches charitable contributions by executive officers up to an aggregate of $10,000 per executive annually. Except as otherwise discussed herein, other welfare and employee-benefit programs are the same for all of our eligible employees, including our executive officers. SeeFor additional information, see footnote (6) to the Summary Compensation Table.
Legal Fees
Severance and Change in Control Benefits
 In accordance with our Restated Certificate of Incorporation (prior to the Merger) and the laws of the State of Delaware, we advanced payments for legal fees and expenses to certain
As noted above, all of our officers for retention of legal counsel in connection with matters relating to their actions as an officer of the Company. Currently, certain of our officers have been named in various lawsuits, and we are cooperating with certain investigations being conducted by the United States Attorney for the Southern District of New York and the SEC. The proceedings and investigations are described in greater detail in Item 3, “Legal Proceedings.” In accordance with our Restated Certificate of Incorporation and Delaware law, any officer who is advanced payments for legal fees will reimburse us for such amounts in the event it is ultimately determined that the individual is not entitled to indemnification under such provisions. In 2006, we advanced payments for legal fees in the amount of approximately $75,000 to Mr. Bracken.
      In connection with the Merger, we paid substantial legal fees which included fees for counsel retained by us on behalf of management, including the named executive officers to represent them in the negotiation of certain agreements and other matters related to the Merger. We paid legal fees of approximately $2 million which related to the rollover program described under “Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table — Option and Restricted Share Awards,” and the 2006 Plan and related agreements (see Item 13, “Certain Relationships and Related Transactions”) for the benefit of up to 1,600 HCA employees, and for the negotiation of individual employment agreements in connection with the Merger. These legal fees represent a flat fee for group representation and it is not practicable to specify which portions of these legal fees were incurred with respect to any particular named executive officer or any other employee.
Severance and Change in Control Agreements
      As noted above, certain of our executive officers, including Messrs. Bovender, Bracken, Johnson, Hazen and Rutledge,have entered into employment agreements in connection with the Merger, which agreements provide, among other things, for each executive’s rights upon a termination of employment.employment in exchange for non-competition, non-solicitation, and confidentiality covenants. We believe that reasonable and appropriate severance and change in control benefits are appropriate in order to be competitive in our executive retention efforts. These benefits should reflect the fact that it may be difficult for such executives to find comparable employment within a short period of time. We also believe that these types of agreements are appropriate and customary in situations such as the Merger wherein the executives have made significant personal investments in the Company and that investment is generally illiquid for a significant period of time. Finally, we believe formalized severance and change in control arrangements are common benefits offered by employers competing for similar senior executive talent. Information
If employment is terminated by the Company without “cause” or by the executive for “good reason” (whether or not the termination was in connection with achange-in-control), the executive would be entitled to “accrued rights” (Cause, good reason and accrued rights are as defined in “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements”) plus:
• Subject to restrictive covenants and the signing of a general release of claims, an amount equal to two times for Mr. Hazen and Ms. Wallace and three times in the case of Messrs. Bovender, Bracken, and Johnson the sum of base salary plus PEP paid or payable in respect of the fiscal year immediately preceding the fiscal year in which termination occurs, payable over a two year period;
• Pro-rata bonus; and
• Continued coverage under our group health plans during the period over which the cash severance is paid.
Additionally, unvested options will be forfeited, except as described below for Mr. Bovender.


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Because we believe that a termination by the executive for good reason (a constructive termination) is conceptually the same as an actual termination by the Company without cause, we believe it is appropriate to provide severance benefits following such a constructive termination of the named executive officer’s employment. All of our severance provisions are believed to be within the realm of competitive practice and are intended to provide fair and reasonable compensation to the executive upon a termination event.
In light of his long-term service to the Company, in the event Mr. Bovender is terminated for any reason other than Cause after he has attained 62 years of age, (A) neither Mr. Bovender nor the Company will have any put or call rights with respect to his New Options granted following the Merger or stock acquired upon exercise of such options (see Item 13. “Certain Relationships and Related Transactions — Stockholder Agreements”), (B) the unvested New Options held by Mr. Bovender that vest solely based on the passage of time will vest as if his employment had continued through the next three anniversaries of their date of grant, (C) the unvested New Options held by Mr. Bovender that are performance options will remain outstanding and will vest, if at all, on the next three dates that they would have otherwise vested had his employment continued, based upon the extent to which performance goals are met, and (D) Mr. Bovender’s New Options will remain exercisable until the second anniversary of the last date on which his performance based New Options are eligible to vest, except that his new options that are granted with an option exercise price equal to two times that of his performance based options (“2x Time Options”) (the 2x Time Options were not granted in 2007) will remain exercisable until the fifth anniversary of the last date on which his performance based New Options are eligible to vest. Furthermore, we will continue to provide coverage for Mr. Bovender and his spouse under our group health plan (on the same basis as such coverage was provided immediately prior to termination of employment) until, in each case, he and his spouse attain 65 years of age.
Pursuant to the Stock Option Agreements governing the New Options granted in 2007 under the 2006 Plan, upon a Change in Control of the Company (as defined below), all unvested time vesting New Options (that have not otherwise terminated or become exercisable) shall become immediately exercisable. Performance vesting options that vest subject to the achievement of EBITDA targets will become exercisable upon a Change in Control of the Company if: (i) prior to the date of the occurrence of such event, all EBITDA targets have been achieved for years ending prior to such date; (ii) on the date of the occurrence of such event, the Company’s actual cumulative total EBITDA earned in all years occurring after the performance option grant date, and ending on the date of the Change in Control, exceeds the cumulative total of all EBITDA targets in effect for those same years; or (iii) the Investor Return is at least two-and-a-half times the price paid to the shareholders in the Merger (or $127.50). For purposes of the vesting provision set forth in clause (ii) above, the EBITDA target for the year in which the Change in Control occurs shall be equitably adjusted by the Board of Directors in good faith in consultation with the chief executive officer (which adjustment shall take into account the time during such year at which the Change in Control occurs). Performance vesting options that vest based on the investment return to the Sponsors will only vest upon the occurrence of a Change in Control if, as a result of such event, the applicable Investor Return (i.e., at least two times the price paid to the shareholders in the Merger for half of these options and at least two-and-one-half times the price paid to the shareholders in the Merger for the other half of these options) is also achieved in such transaction (if not previously achieved). “Change in Control” means in one or more of a series of transactions (i) the transfer or sale of all or substantially all of the assets of the Company (or any direct or indirect parent of the Company) to an Unaffiliated Person (as defined below); (ii) a merger, consolidation, recapitalization or reorganization of the Company (or any direct or indirect parent of the Company) with or into another Unaffiliated Person, or a transfer or sale of the voting stock of the Company (or any direct or indirect parent of the Company), an Investor, or any affiliate of any of the Investors to an Unaffiliated Person, in any such event that results in more than 50% of the common stock of the Company (or any direct or indirect parent of the Company) or the resulting company being held by an Unaffiliated Person; or (iii) a merger, consolidation, recapitalization or reorganization of the Company (or any direct or indirect parent of the Company) with or into another Unaffiliated Person, or a transfer or sale by the Company (or any direct or indirect parent of the Company), an Investor or any affiliate of any of the Investors, in any such event after which the Investors and their affiliates (x) collectively own less than 15% of the Common Stock of and (y) collectively have the ability to appoint less than 50% of the directors to the Board (or any resulting company after a merger). For purposes of this definition, the term “Unaffiliated Person” means a person or group who is not an Investor, an affiliate of any of the Investors or an entity in which any Investor holds, directly or indirectly, a majority of the economic interest in such entity.


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Additional information regarding applicable payments under such agreements for the named executive officers is provided under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements” and “Potential Payments Upon Termination or Change in Control.”
Tax and Accounting Implications
Recoupment of Compensation
 As part
While we do not presently have any formal policies or practices that provide for the recovery or adjustment of its roleamounts previously paid to a named executive officer in 2006, the Committee reviewedevent the operating results on which the payment was based were restated or otherwise adjusted, in such event we would reserve the right to seek all appropriate remedies available under the law.
Tax and consideredAccounting Implications
Following the deductibilityMerger and during 2007, the equity securities of executive compensation underHCA were not registered with the SEC; accordingly, Section 162(m) of the Internal Revenue Code, which provides that we may not deduct

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compensation of more than $1,000,000 that is paid to certain individuals. At the time of the review, we believed that compensation paid in 2006 under the senior management cash and equity incentive plans would generally be fully deductible for federal income tax purposes. However, in certain situations, the Committee approved compensation thatas amended (the “Code”) did not meet these requirements in orderapply to ensure competitive levels of total compensation for our executive officers. However, because the Company was privately held on the last day of 2006, Section 162(m) will not limit the tax deductibility of any executive compensation for 2006. Similarly, Section 162(m)and was not a consideration with respect toconsidered in determining 2007 compensation as our common stock is no longer registered or publicly traded.compensation.
 
The Committee operates its compensation programs with the good faith intention of complying with Section 409A of the Internal Revenue Code. Effective January 1, 2006, we began accountingWe account for stock based payments with respect to our long term equity incentive award programs in accordance with the requirements of SFAS 123(R).
Conclusion
      The Committee’s compensation philosophy for an executive officer for 2006 was intended to reflect the unique attributes of the Company and each employee individually in the context of our pay positioning policies, emphasizing an overall analysis of the executive’s performance for the prior year, projected role and responsibilities, required impact on execution of our strategy, vulnerability to recruitment by other companies, external pay practices, total cash compensation and equity positioning internally, current equity holdings, and other factors the Committee deemed appropriate. We believe our approach to executive compensation emphasized significant time and performance-based elements intended to promote long term shareholder value and strongly aligned the interests of our executive officers with those of our shareholders.
Compensation Committee Report
 
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on our review and discussed itdiscussion with management, and, based on such review, haswe have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report onForm 10-K.
Michael W. Michelson, (Chair)Chairperson
George A. Bitar
John P. Connaughton
Thomas F. Frist, Jr., M.D.


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Summary Compensation Table
 
The following table sets forth information regarding the compensation earned by the Chief Executive Officer, the Chief Financial Officer and our other three most highly compensated executive officers during 2006, and one additional person who would have been one of our most highly compensated executive officers had he not stepped down as an executive officer on September 30, 2006 (named executive officers).2007.
                                  
            Changes in    
            Pension Value    
          Non-Equity and    
      Restricted   Incentive Nonqualified    
      Stock Option Plan Deferred All Other  
Name and Principal   Salary Awards Awards Compensation Compensation Compensation  
Positions Year ($)(1) ($)(2) ($)(3) ($)(4) Earnings ($)(5) ($)(6) Total ($)
                 
Jack O. Bovender, Jr.   2006  $1,535,137  $6,393,996  $6,714,520  $1,944,274  $10,715,751  $1,013,576  $28,317,254 
 Chairman and
Chief Executive Officer		                                
Richard M. Bracken  2006  $952,420  $2,937,283  $2,966,787  $954,785  $4,912,088  $514,772  $13,238,135 
 President, Chief Operating Officer, Director                                
R. Milton Johnson  2006  $655,016  $1,820,053  $1,787,629  $450,227  $1,848,700  $295,160  $6,856,785 
 Executive Vice President
and Chief Financial Officer		                                
Samuel N. Hazen  2006  $688,438  $1,812,299  $1,787,629  $473,203  $1,828,748  $329,324  $6,919,641 
 President — Western Group                                
W. Paul Rutledge  2006  $537,520  $1,276,441  $2,093,442  $390,000  $1,648,053  $242,908  $6,188,364 
 President — Central Group                                
Charles R. Evans  2006  $668,455  $1,738,282  $2,129,118  $326,034  $2,999,679  $240,148  $8,101,716 
 President — Eastern Group*                                
                                 
            Changes in
    
            Pension
    
          Non-Equity
 Value and
    
      Restricted
   Incentive
 Nonqualified
    
      Stock
 Option
 Plan
 Deferred
 All Other
  
Name and Principal
   Salary
 Awards
 Awards
 Compensation
 Compensation
 Compensation
  
Positions
 Year ($)(1) ($)(2) ($)(3) ($)(4) Earnings ($)(5) ($)(6) Total ($)
 
Jack O. Bovender, Jr.   2007  $1,620,228   —  $1,165,087  $3,888,547   —  $197,092  $6,870,954 
Chairman and  2006  $1,535,137  $6,393,996  $6,714,520  $1,944,274  $10,715,751  $1,013,576  $28,317,254 
Chief Executive Officer                                
Richard M. Bracken  2007  $1,060,872   —  $1,019,458  $1,909,570  $590,370  $142,932  $4,723,202 
President, Chief  2006  $952,420  $2,937,283  $2,966,787  $954,785  $4,912,088  $514,772  $13,238,135 
Operating Officer, Director                                
R. Milton Johnson  2007  $750,379   —  $728,189  $900,455  $509,442  $82,462  $2,970,927 
Executive Vice President  2006  $655,016  $1,820,053  $1,787,629  $450,227  $1,848,700  $295,160  $6,856,785 
and Chief Financial Officer                                
Samuel N. Hazen  2007  $788,672   —  $466,037  $830,779  $258,787  $84,767  $2,429,042 
President — Western  2006  $688,438  $1,812,299  $1,787,629  $473,203  $1,828,748  $329,324  $6,919,641 
Group                                
Beverly B. Wallace  2007  $700,000   —  $407,781  $840,000  $676,111  $75,013  $2,698,905 
President — Shared Services Group                                
(1)*Mr. Evans retired from his position as President — Eastern Group effective October 1, 2006, and retired from the Company effective December 31, 2006.
(1) Salary amounts for 2006 do not include the value of restricted stock awards granted pursuant to the MSPPHCA Inc. Amended and Restated Management Stock Purchase Plan, which was terminated upon consummation of the Merger, (the “MSPP”) in lieu of a portion of annual salary. Such awards are included in the “Restricted Stock Awards” column. The 2006 base salary for each of Messrs. Bovender, Bracken, Johnson Hazen, Rutledge and EvansHazen, were $1,615,662, $1,057,882, $748,265 $786,450, $612,500 and $722,479,$786,450, respectively.
 
(2)Restricted Stock Awards for 2006 include all compensation expense recognized in our financial statements in 2006 in accordance with SFAS 123(R) with respect to restricted shares awarded to the named executive officers, including restricted shares awarded pursuant to the HCA 2005 Equity Incentive Plan (the “2005 Plan”) and predecessor plans, and restricted shares awarded pursuant to the MSPP. As a result of the Merger, all outstanding restricted shares vested and therefore all compensation expense with respect to restricted shares was recognized in 2006 in accordance with SFAS 123(R). See Note 3 to our consolidated financial statements.
 
(3)IncludesOption Awards for 2007 include the compensation expense recognized in our financial statements for fiscal year 2007 in accordance with SFAS 123(R) with respect to New Options to purchase shares of our common stock awarded to the named executive officers under the 2006 Plan. See Note 3 to our consolidated financial statements.
Option Awards for 2006 include all compensation expense recognized in our financial statements for fiscal year 2006 in accordance with SFAS 123(R) with respect to options to purchase shares of our common stock awarded to the named executive officers, including options awarded pursuant to the 2005 Plan and predecessor plans. As a result of the Merger, all options outstanding optionsat the time of the Merger vested and therefore all compensation expense with respect to thesuch options was recognized in 2006 in accordance with SFAS 123(R). See Note 3 to our consolidated financial statements.
 
(4)ReflectsNon-Equity Incentive Plan Compensation for 2007 reflects amounts earned for the year ended December 31, 2007 under the 2007 PEP, which amounts will be paid in the first quarter of 2008 pursuant to the terms of the 2007 PEP. For 2007, the Company exceeded its maximum performance level, as adjusted, with respect to the Company’s EBITDA; therefore, pursuant to the terms of the 2007 PEP, awards under the 2007 PEP will be paid out to the named executive officers, at the maximum level, with the exception of Mr. Hazen, whose award will be paid out at 175.6% of the target amount, due to the 50% of his PEP based on the Western Group EBITDA, which exceeded the target but did not reach the maximum performance level.


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Non-Equity Incentive Plan Compensation for 2006 reflects amounts paid under the 2006 Senior Officer PEP in November 2006, which amounts became due and payable to certain of our executive officers, including the named executive officers, as a result of the change in control of the Company upon consummation of the Merger. Mr. Evans’s payment under the 2006 Senior Officer PEP was prorated for his service as President — Eastern Group for the first nine months of 2006.
 
(5)All amounts for 2007 are attributable to increaseschanges in value toof the SERP benefits. Assumptions used to calculate these figures are provided under the table titled “Pension Benefits.” Messrs. Bovender’s, Bracken’sThe changes in the SERP benefit value during 2007 were impacted mainly by: (i) the passage of time which reflects another year of pay and service, (ii) the discount rate changing from 5.75% to 6.00%, which resulted in a decrease in the value and (iii) the use of the named executive officers’ actual elections compared to 2006 when benefits were valued assuming a 50% probability of electing a lump sum and a 50% probability of electing an annuity. All named executive officers elected a lump sum payment at retirement, with the exception of Mr. Bovender, who elected an annuity. The impact of each of these events on the SERP benefit values were:

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  Bovender Bracken Johnson Hazen Wallace
 
Passage of Time $(966,974) $399,630  $510,118  $266,066  $549,404 
Discount Rate Change $(542,195) $(351,603) $(145,992) $(186,325) $(165,945)
Actual Election $(1,322,788) $542,343  $145,315  $179,046  $292,652 
All amounts for 2006 are attributable to increases in value to the SERP benefits. In addition to the assumptions set forth under the table titled “Pension Benefits,” for the purposes of calculating the 2006 figures, benefits are valued assuming a 50% probability of electing a lump sum and a 50% probability of electing an annuity. Messrs. Bovender’s, Bracken’s Johnson’s Hazen’s, Rutledge’s and Evans’sHazen’s SERP benefit value increased in 2006 by $4,185,617, $1,272,074, $299,972, $287,717, $199,078 and $1,406,032,$287,717, respectively, as a result of the passage of time. In 2006, their SERP benefit value further increased due to three special, one-time events: (i) the payments made under the 2006 Senior Officer PEP in November 2006 described in footnote (4) to the Summary Compensation Table, which had the effect of increasing the named executive officers’ current final average earnings; (ii) the Merger constituted a change in control under the terms of the SERP, which triggered a decrease in the normal retirement age under the SERP from age 65 (or 62 with 10 years of service) to age 60; and (iii) the Committee approved the amendment of the SERP to include a lump sum payment provision and to revise certain actuarial factors. The impact of each of these events on the SERP benefit values were:
                         
  Bovender Bracken Johnson Hazen Rutledge Evans
             
Timing of PEP payment $2,593,533  $732,167  $293,215  $263,193  $307,300  $316,971 
Change to retirement age $1,250,090  $1,535,685  $576,907  $620,300  $556,513  $746,179 
Lump sum provision and actuarial factors $2,686,511  $1,372,162  $678,606  $657,538  $585,162  $530,497 
                 
  Bovender Bracken Johnson Hazen
 
Timing of PEP payment $2,593,533  $732,167  $293,215  $263,193 
Change to retirement age $1,250,090  $1,535,685  $576,907  $620,300 
Lump sum provision and actuarial factors $2,686,511  $1,372,162  $678,606  $657,538 
(6)2007 Amounts consist of:
• Company contributions to our Retirement Plan, matching Company contributions to our 401(k) Plan and Company accruals for our Restoration Plan as set forth below.
                     
  Bovender Bracken Johnson Hazen Wallace
 
HCA Retirement Plan $19,388  $19,388  $19,388  $19,388  $19,388 
HCA 401(k) matching contribution $2,250  $3,375  $3,375  $3,375  $3,375 
HCA Restoration Plan $153,475  $91,946  $57,792  $62,004  $52,250 
• Personal use of corporate aircraft. In 2007, Messrs. Bovender and Bracken were allowed personal use of the Company airplane with an incremental cost of approximately $21,350 and $26,895, respectively, to the Company. Messrs. Johnson and Hazen and Ms. Wallace did not have any personal travel on the Company plane in 2007. We calculate the aggregate incremental cost of the personal use of Company aircraft based on a methodology that includes the average aggregate cost, on a per nautical mile basis, of variable expenses incurred in connection with personal plane usage, including trip-related maintenance, landing fees, fuel, crew hotels and meals, on-board catering, trip-related hangar and parking costs and other variable costs. Because our aircraft are used primarily for business travel, our incremental cost methodology does not include fixed costs of owning and operating aircraft that do not change based on usage. We grossed up the income attributed to Messrs. Bovender and Bracken with respect to certain trips on the Company plane. The additional income


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attributed to them as a result of gross ups was $629 and $863, respectively. In addition, we will pay the travel expenses of our executives’ spouses associated with travel to business related events at which spouse attendance is appropriate. We paid approximately $342 for travel by Mr. Bracken’s wife on a commercial airline and related expenses for such an event, and additional income of $123 was attributed to Mr. Bracken as a result of the gross up on such amount.
2006 Amounts consist of:
 • The cash payment received as a result of the deemed purchase under the MSPP. Salary amounts withheld on behalf of the participants in the MSPP through the closing date of the Merger were deemed to have been used to purchase shares of our common stock under the terms of the MSPP, using the closing date of the Merger as the last date of the applicable offering period, and then converted into the right to receive a cash payment equal to the number of shares deemed purchased under the MSPP multiplied by $51.00. Salary amounts were refunded to the participants, and they also received a cash payment equal to the difference between $51.00 and the deemed purchase price, multiplied by the number of shares the participant was deemed to have purchased. Messrs. Bovender, Bracken, Johnson Hazen, Rutledge and EvansHazen received cash payments of $20,860, $27,326, $24,157 $25,379, $19,709 and $13,982,$25,379, respectively.
 
 • Company contributions to our Retirement Plan, matching Company contributions to our 401(k) Plan and Company accruals for our Restoration Plan in 2006 as set forth below.
                         
  Bovender Bracken Johnson Hazen Rutledge Evans
             
HCA Retirement Plan $19,019  $19,019  $19,019  $19,019  $19,019  $17,290 
HCA 401(k) matching contribution $3,125  $3,300  $3,300  $3,300  $3,300  $3,300 
HCA Restoration Plan $856,424  $409,933  $212,109  $247,060  $172,696  $181,516 
                 
  Bovender Bracken Johnson Hazen
 
HCA Retirement Plan $19,019  $19,019  $19,019  $19,019 
HCA 401(k) matching contribution $3,125  $3,300  $3,300  $3,300 
HCA Restoration Plan $856,424  $409,933  $212,109  $247,060 
 • Dividends on restricted shares. On March 1, 2006, June 1, 2006 and September 1, 2006, we paid dividends of $0.15 per share, $0.17 per share and $0.17 per share, respectively, for each issued and outstanding share of common stock of HCA, including restricted shares. Messrs. Bovender, Bracken, Johnson Hazen, Rutledge and EvansHazen received aggregate dividends of $82,525, $42,030, $25,267 $27,754, $26,500 and $24,060,$27,754, respectively, in 2006 in respect of restricted shares held by them.
 
 • Personal use of corporate aircraft. In 2006, each of Messrs. Bovender, Bracken, Johnson Hazen and RutledgeHazen were allowed personal use of the Company airplane with an incremental cost of approximately $30,336, $12,173, $11,308 $6,812 and $1,684,$6,812, respectively, to the Company. Mr. Evans did not have any personal travel on the Company, plane in 2006. We calculate the aggregate incremental cost of the personal use of Company aircraft based on a methodology that includes the average aggregate cost, on a per nautical mile basis, of variable expenses incurred in connection with personal plane usage, including trip-related maintenance, landing fees, fuel, crew hotels and meals, on-board catering, trip-related hangar and parking costs and other variable costs. Because our aircraft are used primarily for business travel, our incremental cost methodology does not include fixed costs of owning and operating aircraft that do not change based on usage.calculated as described above. We grossed up the income attributed to

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Messrs. Bovender and Bracken with respect to certain trips on the Company plane. The additional income attributed to them as a result of gross ups was $1,287 and $522, respectively. In addition, we will pay the travel expenses of our executives’ spouses associated with travel to business related events at which spouse attendance is appropriate. We paid approximately $469 for travel by Mr. Bracken’s wife on a commercial airline for such an event.


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Grants of Plan-Based Awards
 
The following table provides information with respect to our 2006 Senior Officer2007 PEP as well restricted shares granted under the MSPP in 2006, and restricted shares and options granted as part of the named executive officers’ long term equity incentive compensation awards made under the 20052006 Plan during the 20062007 fiscal year.
                                     
        Fair Value All Other    
    Estimated Possible Payouts   of All Option   Fair Value of
    Under Non-Equity Incentive All Other Other Awards: Exercise or All Other
    Plan Awards ($)(1) Stock Awards: Stock Number of Base Price of Option
      Number of Awards at Securities Option Awards at
    Threshold Target Maximum Shares of Date of Underlying Awards Date of
Name Grant Date ($) ($) ($) Stock(2) Grant(2) Options(3) ($/sh)(3) Grant(3)
                   
Jack O. Bovender, Jr.   1/01/2006   —   —   —   2,092  $26,087   —   —   — 
Jack O. Bovender, Jr.   1/26/2006   —   —   —   66,750  $3,330,825   66,750  $49.90  $956,374 
Jack O. Bovender, Jr.   4/26/2006   —   —   —   —   —   66,750  $45.08  $877,422 
Jack O. Bovender, Jr.   7/01/2006   —   —   —   2,367  $26,842   —   —   — 
Jack O. Bovender, Jr.   7/26/2006   —   —   —   —   —   66,750  $49.60  $937,384 
Jack O. Bovender, Jr.   10/26/2006   —   —   —   —   —   66,750  $50.34  $44,055 
Jack O. Bovender, Jr.   N/A  $972,137  $1,944,274  $3,888,547   —   —   —   —   — 
Richard M. Bracken  1/01/2006   —   —   —   2,740  $34,168   —   —   — 
Richard M. Bracken  1/26/2006   —   —   —   29,900  $1,492,010   29,900  $49.90  $428,398 
Richard M. Bracken  4/26/2006   —   —   —   —   —   29,900  $45.08  $393,041 
Richard M. Bracken  7/01/2006   —   —   —   3,100  $35,154   —   —   — 
Richard M. Bracken  7/26/2006   —   —   —   —   —   29,900  $49.60  $419,892 
Richard M. Bracken  10/26/2006   —   —   —   —   —   29,900  $50.34  $19,734 
Richard M. Bracken  N/A  $477,392  $954,785  $1,909,570   —   —   —   —   — 
R. Milton Johnson  1/01/2006   —   —   —   1,938  $24,167   —   —   — 
R. Milton Johnson  1/26/2006   —   —   —   18,100  $903,190   18,125  $49.90  $259,690 
R. Milton Johnson  4/26/2006   —   —   —   —   —   18,125  $45.08  $238,257 
R. Milton Johnson  7/01/2006   —   —   —   2,741  $31,083   —   —   — 
R. Milton Johnson  7/26/2006   —   —   —   —   —   18,125  $49.60  $254,533 
R. Milton Johnson  10/26/2006   —   —   —   —   —   18,125  $50.34  $11,963 
R. Milton Johnson  N/A  $225,114  $450,227  $900,455   —   —   —   —   — 
Samuel N. Hazen  1/01/2006   —   —   —   2,546  $31,749   —   —   — 
Samuel N. Hazen  1/26/2006   —   —   —   18,100  $903,190   18,125  $49.90  $259,690 
Samuel N. Hazen  4/26/2006   —   —   —   —   —   18,125  $45.08  $238,257 
Samuel N. Hazen  7/01/2006   —   —   —   2,881  $32,671   —   —   — 
Samuel N. Hazen  7/26/2006   —   —   —   —   —   18,125  $49.60  $254,533 
Samuel N. Hazen  10/26/2006   —   —   —   —   —   18,125  $50.34  $11,963 
Samuel N. Hazen  N/A  $236,602  $473,203  $946,406   —   —   —   —   — 
W. Paul Rutledge  1/01/2006   —   —   —   1,855  $23,132   —   —   — 
W. Paul Rutledge  1/26/2006   —   —   —   18,100  $903,190   18,125  $49.90  $259,690 
W. Paul Rutledge  4/26/2006   —   —   —   —   —   18,125  $45.08  $238,257 
W. Paul Rutledge  7/01/2006   —   —   —   2,204  $24,993   —   —   — 
W. Paul Rutledge  7/26/2006   —   —   —   —   —   18,125  $49.60  $254,533 
W. Paul Rutledge  10/26/2006   —   —   —   —   —   18,125  $50.34  $11,963 
W. Paul Rutledge  N/A  $195,000  $390,000  $780,000   —   —   —   —   — 
Charles R. Evans  1/01/2006   —   —   —   1,404  $17,508   —   —   — 
Charles R. Evans  1/26/2006   —   —   —   18,100  $903,190   18,125  $49.90  $259,690 
Charles R. Evans  4/26/2006   —   —   —   —   —   18,125  $45.08  $238,257 
Charles R. Evans  7/01/2006   —   —   —   1,588  $18,008   —   —   — 

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        Fair Value All Other    
    Estimated Possible Payouts   of All Option   Fair Value of
    Under Non-Equity Incentive All Other Other Awards: Exercise or All Other
    Plan Awards ($)(1) Stock Awards: Stock Number of Base Price of Option
      Number of Awards at Securities Option Awards at
    Threshold Target Maximum Shares of Date of Underlying Awards Date of
Name Grant Date ($) ($) ($) Stock(2) Grant(2) Options(3) ($/sh)(3) Grant(3)
                   
Charles R. Evans  7/26/2006   —   —   —   —   —   18,125  $49.60  $254,533 
Charles R. Evans  10/26/2006   —   —   —   —   —   18,125  $50.34  $11,963 
Charles R. Evans  N/A  $163,017  $326,034  $652,069   —   —   —   —   — 
                                       
                All Other
    
                Option
    
    Estimated Possible Payouts
 Estimated Possible Payouts
 Awards:
 Exercise or
  
    Under Non-Equity Incentive
 Under Equity Incentive
 Number of
 Base Price
 Grant Date
    Plan Awards ($)(1) Plan Awards (#)(2) Securities
 of Option
 Fair Value
    Threshold
 Target
 Maximum
 Threshold
 Target
 Maximum
 Underlying
 Awards
 of Option
Name
 Grant Date ($) ($) ($) (#) (#) (#) Options(2) ($/sh)(2) Awards(2)
 
Jack O. Bovender, Jr 1/30/2007  —   —   —   —   266,402   —   133,202  $51.00  $6,355,037 
Jack O. Bovender, Jr N/A $972,137  $1,944,274  $3,888,547   —   —   —   —   —   — 
Richard M. Bracken 1/30/2007  —   —   —   —   233,102   —   116,552  $51.00  $5,560,666 
Richard M. Bracken N/A $477,392  $954,785  $1,909,570   —   —   —   —   —   — 
R. Milton Johnson 1/30/2007  —   —   —   —   166,502   —   83,251  $51.00  $3,971,905 
R. Milton Johnson N/A $225,114  $450,227  $900,455   —   —   —   —   —   — 
Samuel N. Hazen 1/30/2007  —   —   —   —   106,560   —   53,281  $51.00  $2,542,007 
Samuel N. Hazen N/A $236,602  $473,203  $946,406   —   —   —   —   —   — 
Beverly B. Wallace 1/30/2007  —   —   —   —   93,240   —   46,621  $51.00  $2,224,258 
Beverly B. Wallace N/A $210,000  $420,000  $840,000   —   —   —   —   —   — 
(1)Our 2006 Senior Officer PEP was administered pursuant to the termsNon-equity incentive awards granted each of the 2005 Plan with respect to certain of our officers, including the named executive officers and ispursuant to our 2007 PEP, as described in more detail under “Compensation Discussion and Analysis — Short TermAnnual Incentive Compensation.Compensation: PEP.” The amounts shown in the “Threshold” column reflect the threshold payment, which is 50% of the amount shown in the “Target” column. The amount shown in the “Maximum” column is 200% of the target amount. These amounts are based on the individual’s salary and position as of the date the 20062007 Senior Officer PEP was approved by the Compensation Committee. Pursuant to the terms of the 2006 Senior Officer2007 PEP, and the 2005 Plan, and in accordance with the Merger Agreement, upon consummation of the Merger, awards under the 2006 Senior Officer PEP vestedhave already been determined and were paid out to certain of our officers, including the named executive officers, at the maximum level, with the exception of Mr. Hazen, whose award vested and was paid out at 175.6% of the target level.amount. Messrs. Bovender, Bracken, Johnson and Hazen Rutledge and Evans received $1,944,274, $954,785, $450,227, $473,203, $390,000Ms. Wallace will receive $3,888,547, $1,909,570, $900,455, $830,779 and $326,034,$840,000, respectively, under the 20062007 Senior Officer PEP upon consummationPEP; such amounts are reflected in the “Non-Equity Incentive Plan Compensation” column of the Merger. Mr. Evans’s payment under the 2006 Senior Officer PEP was prorated for his service as President — Eastern Group for the first nine months of 2006.Summary Compensation Table.
 
(2)Includes restricted sharesStock options awarded under the 20052006 Plan by the Compensation Committee as part of the named executive officer’s long term equity incentive award. The termsNew Options granted in 2007 are structured so that 1/3 are time vested options (vesting in five equal installments on the first five anniversaries of these restricted share awardsthe grant date), 1/3 are describedEBITDA-based performance vested options and 1/3 are performance options that vest based on investment return to the Sponsors. The time vested options are reflected in more detail under “Compensation Discussionthe “All Other Option Awards: Number of Securities Underlying Options” column, and Analysis — Long Termthe EBITDA-based performance vested options and investment return performance vested options are both reflected in the “Estimated Possible Payouts Under Equity Incentive Plan Awards — Restricted Shares.” Also includes restricted shares received in lieu of base salary pursuant to the MSPP. The shares were purchased at a 25% discount from the average market price of the stock during the deferral period. Amounts with respect to MSPP shares included in the table reflect the value of the 25% discount on the date of grant. Because the Merger closed in November 2006, shares were purchased under the MSPP only with respect to the first semi-annual deferral period in 2006. As a result of the Merger, all outstanding equity awards vested.
(3) Includes stock options awarded under the 2005 Plan by the Compensation Committee as part of the named executive officer’s long term incentive award.Target” column. The terms of these option awards are described in more detail under “Compensation Discussion and Analysis — Long Term Equity Incentive Awards — Stock Options.” As a resultThe compensation expense recognized in our financial statements for fiscal year 2007 in accordance with SFAS 123(R) with respect to these option grants is reflected in the “Option Awards” column of the Merger, all outstanding equity awards vested.Summary Compensation Table.
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Total Compensation
Total Compensation
In 2007, total direct compensation, as described in the Summary Compensation Table, consisted primarily of base salary, annual PEP awards payable in cash, and long term stock option grants. This mix was intended to reflect our philosophy that a significant portion of an executive’s compensation should be equity-linkedand/or tied to our operating performance. In addition, we provided an opportunity for executives to participate in two supplemental retirement plans. In 2006, by contrast, total compensation, as described in the Summary Compensation Table, was significantly impacted by the Merger and related one time events. However, the design for our executive compensation structure for 2006 originally consisted primarily of base salary, annual PEP awards payable in cash, and restricted stock and stock option grants. We weighted these components so that annual incentive targets would generally be a multiple of 0.6 times to 1.2 times base salary, and long term incentive targets would generally be a multiple of three to five times base salary. This mix was intended to reflect our philosophy that a significant portion of an executive’s compensation should be equity-linked and/or tied to our operating performance. In addition, we provided an opportunity for executives to participate in the MSPP and two supplemental retirement plans. The one time events which impacted our total executive compensation in 2006 are described in more detail below.


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80

Options
Option and Restricted Share Awards
 
In January 2007, New Options to purchase common stock of the Company were granted under the 2006 Plan to members of management and key employees, including the named executive officers. The most significant oneNew Options were designed to be long term equity incentive awards, constituting a one-time stock option grant in lieu of annual equity grants. The New Options granted in 2007 have a ten year term and are structured so that1/3 are time event effectingvested options (vesting in five equal installments on the first five anniversaries of the grant date),1/3 are EBITDA-based performance vested options and1/3 are performance options that vest based on investment return to the Sponsors. The terms of the New Options granted in 2007 are described in greater detail under “Compensation Discussion and Analysis — Long Term Equity Incentive Awards: Options.” Compensation expense associated with the New Option awards was recognized in 2007 in accordance with SFAS 123(R) and is included under the “Option Awards” column of the Summary Compensation Table. New Options granted to the named executive compensationofficers in 2006 was2007 are described in the Merger. Grants of Plan-Based Awards Table.
As a result of the Merger, all unvested awards under the 2005 Plan (and all predecessor equity incentive plans) and the MSPP vested in November 2006, including the options and restricted shares awarded in 2006. Accordingly, all previously unrecognized compensation expense associated with these awards was recognized in 2006 in accordance with SFAS 123(R) and is included under the “Stock Options” and “Restricted Stock Awards” columns of the Summary Compensation Table.
Generally, all outstanding options under the 2005 Plan (and any predecessor plans) were cancelled and converted into the right to receive a cash payment equal to the number of shares of common stock underlying the option multiplied by the amount by which the Merger consideration of $51.00 per share exceeded the exercise price for the options (without interest and less any applicable withholding taxes). However, certain members of management, including the named executive officers, were given the opportunity to convert options held by them prior to consummation of the Merger into options to purchase shares of common stock of the surviving corporation (“Rollover Options”). Immediately after the consummation of the Merger, all Rollover Options (other than those with an exercise price below $12.75) were adjusted so that they retained the same “spread value” (as defined below) as immediately prior to the Merger, but the new per share exercise price for all Rollover Options would be $12.75. The term “spread value” means the difference between (x) the aggregate fair market value of the common stock (determined using the Merger consideration of $51.00 per share) subject to the outstanding options held by the participant immediately prior to the Merger that became Rollover Options, and (y) the aggregate exercise price of those options. Members of management, includingAll previously unrecognized compensation expense associated with the named executive officers, receivedRollover Options was recognized in 2006; therefore, we did not record any compensation expense related to the Merger consideration described above with respect to all options other than Rollover Options.
Options in 2007. New Options and Rollover Options held by the named executive officers are described in the Outstanding Equity Awards at Fiscal Year-End Table. Messrs. Bovender, Bracken, Johnson, Hazen, Rutledge and Evans received aggregate Merger consideration of $14,253,903, $4,673,206, $333,966, $2,487,893, $170 and $2,125,188, respectively, with respect to options other than Rollover Options. These amounts are included in the Option Exercises and Stock Vested Table. The Rollover Options were exchanged on a tax-free basis and we did not record additional compensation expense related to the rollover of those options in 2006. The inherent value of the Rollover Options, based on the exchange ratio at the time of the closing of the Merger, for each of Messrs. Bovender, Bracken, Johnson, Hazen and Rutledge was $13,788,896, $5,844,332, $6,000,239, $4,479,840 and $1,338,865, respectively. Due to his imminent retirement, Mr. Evans did not roll over any options.
 Participants who held restricted shares pursuant to the 2005 Plan (and any predecessor plans) and the MSPP received $51.00 per share, less any applicable withholding taxes, as Merger consideration. These amounts are included in the Option Exercises and Stock Vested Table.
Employment Agreements
 Because of the timing of the close of the Merger in November 2006, the second annual deferral period with respect to the MSPP terminated early. Upon the close of the Merger, all salary amounts withheld on behalf of the participants in the MSPP through the closing date of the Merger were deemed to have been used to purchase shares of common stock under the terms of the MSPP, using the closing date of the Merger as the last date of the applicable offering period. Participants, including the named executive officers, then received a cash payment equal to the number of shares deemed purchased under the MSPP multiplied by $51.00, less any salary amounts deferred pursuant to the MSPP toward the purchase, which salary amounts were refunded. These amounts are included in the “All Other Compensation” column of the Summary Compensation Table.
2006 Senior Officer PEP
      Our 2006 Senior Officer PEP was administered pursuant to the terms of the 2005 Plan with respect to certain of our officers, including the named executive officers. Accordingly, pursuant to the terms of the 2006 Senior Officer PEP and the 2005 Plan, upon consummation of the Merger, awards under the 2006 Senior Officer PEP vested and were paid out to certain of our executive officers, including the named executive

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officers, at the target level. These amounts are included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
SERP Benefits
      Increases in the SERP benefit value during 2006 were impacted by three special one-time events: (i) the payments made to Messrs. Bovender, Bracken, Johnson, Hazen, Rutledge and Evans under the 2006 Senior Officer PEP upon consummation of the Merger which had the effect of increasing the named executive officers’ current final average earnings; (ii) the Merger constituted a change in control under the terms of the SERP, which triggered a decrease in the normal retirement age under the SERP from age 65 (or 62 with 10 years of service) to age 60; and (iii) the Compensation Committee approved the amendment of the SERP to include a lump sum payment provision and to revise certain actuarial factors, as described in more detail under “Pension Benefits.” The amounts associated with the impact of these events are included in the “Changes in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table and described in more detail in footnote (5) thereto.
Employment Agreements
In connection with the Merger, on November 16, 2006, Hercules Holding entered into substantially similar employment agreements with each of Jack O. Bovender, Jr., Richard M. Bracken, R. Milton Johnson, Samuel N. Hazen, W. Paul Rutledge, Beverly B. Wallace, Charles J. Hall,the named executive officers and Robert A. Waterman,certain other executives, which agreements were shortly thereafter assumed by the Company and which agreements will govern the terms of each executive’s employment. Although the employment agreements did not impact the compensation paid in 2006 and discussed in the Summary Compensation Table and Grants of Plan-Based Awards Table, they are important to an understanding of our executive compensation policies for 2007. The respective offices held by each executive have not changed as a result of execution of these employment agreements, although the agreements provide that Jack O. Bovender, Jr. and Richard M. Bracken will be members of our Board of Directors so long as they remain officers of the Company, with Mr. Bovender continuing to serve as the Chairman. The term of employment under each of these agreements is indefinite and they are terminable by either party at any time; provided that an executive must give no less than 90 days notice prior to a resignation.
 
Each employment agreement sets forth the executive’s annual base salary, which will be subject to discretionary annual increases upon review by the Board of Directors, and states that the executive will be eligible to earn an annual bonus as a percentage of salary with respect to each fiscal year, based upon the extent to which annual performance targets established by the Board of Directors are achieved. With respect to the 2007 fiscal year, each executive iswas eligible to earn under the 2007 Senior Officer PEP (i) a target bonus, if 2007 performance targets arewere met; (ii) a specified percentage of the target bonus, if “threshold” levels of performance arewere achieved but performance targets arewere not met; or (iii) a multiple of the target bonus if “maximum” performance goals arewere achieved, with the annual bonus amount being interpolated, in the sole discretion of the Board of Directors, for performance results that exceedexceeded “threshold” levels but do not meet or exceed “maximum” levels. As described above, awards under the 2007 PEP have already been determined and paid out to the named executive officers, at the maximum level, with the exception of Mr. Hazen, whose award was paid out at 175.6% of his target amount. The employment agreements commit us to provide each executive with annual bonus opportunities in 2008 that are consistent with those applicable to the 2007 fiscal year, unless doing so would be adverse to our interests or the interests of our shareholders. For later fiscal years, ourthe Board of Directors will set bonus opportunities in consultation with our Chief Executive Officer. Each employment agreement also sets forth the number of options that the executive will be granted


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received pursuant to the 2006 Plan as a percentage of the total equity initially to be made available for grants pursuant to the 2006 Plan. Such option awards, the New Options, were made January 30, 2007 and are described above.
 
Pursuant to each employment agreement, if an executive’s employment terminates due to death or disability, the executive would be entitled to receive (i) any base salary and any bonus that is earned and unpaid through the date of termination; (ii) reimbursement of any unreimbursed business expenses properly incurred by the executive; (iii) such employee benefits, if any, as to which the executive may be entitled under our employee benefit plans (the payments and benefits described in (i) through (iii) being “accrued rights”); and (iv) a pro rata portion of any annual bonus that the executive would have been entitled to receive pursuant to the employment agreement based upon our actual results for the year of termination (with such proration based on the percentage of the fiscal year that shall have elapsed through the date of termination of employment, payable to the executive when the annual bonus would have been otherwise payable (the “pro rata bonus”)).

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If an executive’s employment is terminated by us without “cause” (as defined below) or by the executive for “good reason” (as defined below) (each a “qualifying termination”), the executive would be (i) entitled to the accrued rights; (ii) subject to compliance with certain confidentiality, non-competition and non-solicitation covenants contained in his or her employment agreement and execution of a general release of claims on behalf of the Company, an amount equal to the product of (x) two (three in the case of Jack O. Bovender, Jr., Richard M. Bracken and R. Milton Johnson) and (y) the sum of (A) the executive’s base salary and (B) annual bonus paid or payable in respect of the fiscal year immediately preceding the fiscal year in which termination occurs, payable over a two-year period; (iii) entitled to the pro rata bonus; and (iv) entitled to continued coverage under our group health plans during the period over which the cash severance described in clause (ii) is paid. However, in lieu of receiving the payments and benefits described in (ii), (iii) and (iv) immediately above, the executive may instead elect to have his or her covenants not to compete waived by us. The same severance applies regardless of whether the termination was in connection with a change in control of the Company.
 “Cause”
“Cause” is defined as an executive’s (i) willful and continued failure to perform his material duties to the Company which continues beyond 10 business days after a written demand for substantial performance is delivered; (ii) willful or intentional engagement in material misconduct that causes material and demonstrable injury, monetarily or otherwise, to the Company or the Sponsors; (iii) conviction of, or a plea ofnolo contendereto, a crime constituting a felony, or a misdemeanor for which a sentence of more than six months’ imprisonment is imposed; or (iv) willful and material breach of his covenants under the employment agreement which continues beyond the designated cure period or of the agreements relating to the new equity. “Good Reason” is defined as (i) a reduction in the executive’s base salary (other than a general reduction that affects all similarly situated employees in substantially the same proportions which is implemented by the Board in good faith after consultation with the chief executive officer and chief operating officer, a reduction in the executive’s annual incentive compensation opportunity, or the reduction of benefits payable to the executive under the SERP; (ii) a substantial diminution in the executive’s title, duties and responsibilities; or (iii) a transfer of the executive’s primary workplace to a location that is more than 20 miles from his current workplace (other than, in the case of (i) and (ii), any isolated, insubstantial and inadvertent failure that is not in bad faith and is cured within 10 business days after executive’s written notice to the Company).
 
In the event of an executive’s termination of employment that is not a qualifying termination or a termination due to death or disability, he or she will only be entitled to the “accrued rights” (as defined above).
 
In each of the employment agreements with the executives (exclusive of Robert A. Waterman),named executive officers, we also commit to grant, among the named executive officers and certain other executives, (exclusive of Robert A. Waterman), 10% of the options initially authorized for grant under the 2006 Plan at some time before November 17, 2011 (but with a good faith commitment to do so before a “change in control” (as defined in the 2006 Plan and set forth above) or a “public offering” (as those terms are defined in the new stock incentive plan)2006 Plan) and before the time when our Board of Directors reasonably believes that the fair market value of our common stock is likely to exceed the equivalent of $102.00 per share) at an exercise price per share that is the equivalent of $102.00 per share.share (“2x Time Options”). A percentage of these options will be vested at the time of the grant, such percentage corresponding to the elapsed percentage of the period measured between November 17, 2006 and November 17, 2011. When granted, these options will be allocated among the recipients by our Board of Directors in consultation with our chief executive officer based upon the perceived contributions of each recipient since November 17, 2006.


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The terms of these optionsthe 2x Time Options will otherwise be consistent with other time vesting options granted under the new stock incentive plan.2006 Plan. Additionally, pursuant to the employment agreements, we agree to indemnify each executive against any adverse tax consequences (including, without limitation, under Section 409A and 4999 of the Internal Revenue Code), if any, that result from the adjustment by us of stock options held by the executive in connection with Merger or the future payment of any extraordinary cash dividends.
 The
In light of his long-term service to the Company, Mr. Bovender’s employment agreement with Jack O. Bovender Jr. also provides that in the eventfor certain continued vesting of (i)Mr. Bovender’s New Options and any issued 2x Time Options, upon any termination of Mr. Bovender’shis employment after he has attained 62 years of age (other than a termination for cause) or (ii) a termination of. Mr. Bovender’s employment by us without cause, then (A)agreement further provides that neither Mr. Bovender nor we will have any put or call rights with respect to Mr. Bovender’s “new options”his options granted

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pursuant to the 2006 Plan or stock acquired upon exercise of such options (see Item 13. “Certain Relationships and Related Transactions — Stockholder Agreements”), (B) the unvested new options held by Mr. Bovender that vest solely based on the passageoptions. The terms of time will vest as if his employment had continued through the next three anniversaries of their date of grant, (C) the unvested new options held by Mr. Bovender that are performance options will remain outstanding and will vest, if at all, on the next three dates that they would have otherwise vested had his employment continued, based upon the extent to which performance goals are met, (D) Mr. Bovender’s new options will remain exercisable until the second anniversary of the last date on which his performance based new options are eligible to vest, except that his new options that are grantedemployment agreement with a strike price equal to two times that of his performance based new options will remain exercisable until the fifth anniversary of the last date on which his performance based new options are eligible to vest, and (E) we will continue to provide coverage for Mr. Bovender and his spouse under our group health plan (on the same basis as such coverage was provided immediately priorrespect to termination of employment) until,his employment are described in each case, hegreater detail under “Compensation Discussion and his spouse attain 65 years of age.Analysis — Severance and Change in Control Agreements.”
 
Additional information with respect to potential payments to the named executive officers pursuant to their employment agreements and the 2006 Plan is contained in “Potential Payments Upon Termination or Change in Control.”

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Outstanding Equity Awards at Fiscal Year-End
 
The following table includes certain information with respect to options and restricted shares held by the named executive officers as of December 31, 2006.2007.
                         
  Number of Number of     Number of Market Value
  Securities Securities     Shares of of Shares
  Underlying Underlying Option   Units or Units
  Unexercised Unexercised Exercise Option of Stock that of Stock That
  Options Options Price Expiration Have not Have Not
Name Exercisable(1) Unexercisable(1) ($)(2) Date Vested(3) Vested(3)
             
Jack O. Bovender, Jr.   143,058   —  $12.75   1/25/2011   —   — 
Jack O. Bovender, Jr.   53,882   —  $12.75   1/24/2012   —   — 
Jack O. Bovender, Jr.   69,411   —  $12.75   1/29/2013   —   — 
Jack O. Bovender, Jr.   53,751   —  $12.75   1/29/2014   —   — 
Jack O. Bovender, Jr.   24,549   —  $12.75   1/27/2015   —   — 
Jack O. Bovender, Jr.   15,843   —  $12.75   1/26/2016   —   — 
Richard M. Bracken  8,052   —  $12.75   3/22/2011   —   — 
Richard M. Bracken  26,248   —  $12.75   7/26/2011   —   — 
Richard M. Bracken  29,934   —  $12.75   1/24/2012   —   — 
Richard M. Bracken  40,490   —  $12.75   1/29/2013   —   — 
Richard M. Bracken  30,235   —  $12.75   1/29/2014   —   — 
Richard M. Bracken  10,739   —  $12.75   1/27/2015   —   — 
Richard M. Bracken  7,095   —  $12.75   1/26/2016   —   — 
R. Milton Johnson  87,180   —  $12.75   3/4/2009   —   — 
R. Milton Johnson  6,039   —  $12.75   3/22/2011   —   — 
R. Milton Johnson  9,579   —  $12.75   1/24/2012   —   — 
R. Milton Johnson  9,254   —  $12.75   1/29/2013   —   — 
R. Milton Johnson  8,062   —  $12.75   1/29/2014   —   — 
R. Milton Johnson  26,013   —  $12.75   7/22/2014   —   — 
R. Milton Johnson  6,441   —  $12.75   1/27/2015   —   — 
R. Milton Johnson  4,301   —  $12.75   1/26/2016   —   — 
Samuel N. Hazen  28,123   —  $12.75   3/4/2009   —   — 
Samuel N. Hazen  6,039   —  $12.75   3/22/2011   —   — 
Samuel N. Hazen  13,124   —  $12.75   7/26/2011   —   — 
Samuel N. Hazen  19,158   —  $12.75   1/24/2012   —   — 
Samuel N. Hazen  23,137   —  $12.75   1/29/2013   —   — 
Samuel N. Hazen  16,797   —  $12.75   1/29/2014   —   — 
Samuel N. Hazen  6,441   —  $12.75   1/27/2015   —   — 
Samuel N. Hazen  4,301   —  $12.75   1/26/2016   —   — 
W. Paul Rutledge  8,381   —  $12.75   1/24/2012   —   — 
W. Paul Rutledge  9,254   —  $12.75   1/29/2013   —   — 
W. Paul Rutledge  5,375   —  $12.75   1/29/2014   —   — 
W. Paul Rutledge  2,297   —  $12.75   1/27/2015   —   — 
W. Paul Rutledge  5,395   —  $12.75   10/01/2015   —   — 
W. Paul Rutledge  4,301   —  $12.75   1/26/2016   —   — 
Charles R. Evans  —   —   —   —   —   — 
                     
      Equity Incentive
    
  Number of
 Number of
 Plan Awards: Number
    
  Securities
 Securities
 of Securities
    
  Underlying
 Underlying
 Underlying
 Option
  
  Unexercised
 Unexercised
 Unexercised
 Exercise
 Option
  Options
 Options
 Unearned
 Price
 Expiration
Name
 Exercisable(#)(1)(2) Unexercisable(#)(2) Options(#)(2) ($)(3)(4) Date
 
Jack O. Bovender, Jr  143,058   —   —  $12.75   1/25/2011 
Jack O. Bovender, Jr  53,882   —   —  $12.75   1/24/2012 
Jack O. Bovender, Jr  69,411   —   —  $12.75   1/29/2013 
Jack O. Bovender, Jr  53,751   —   —  $12.75   1/29/2014 
Jack O. Bovender, Jr  24,549   —   —  $12.75   1/27/2015 
Jack O. Bovender, Jr  15,843   —   —  $12.75   1/26/2016 
Jack O. Bovender, Jr  26,640   133,202   239,762  $51.00   1/30/2017 
Richard M. Bracken  8,052   —   —  $12.75   3/22/2011 
Richard M. Bracken  26,248   —   —  $12.75   7/26/2011 
Richard M. Bracken  29,934   —   —  $12.75   1/24/2012 
Richard M. Bracken  40,490   —   —  $12.75   1/29/2013 
Richard M. Bracken  30,235   —   —  $12.75   1/29/2014 
Richard M. Bracken  10,739   —   —  $12.75   1/27/2015 
Richard M. Bracken  7,095   —   —  $12.75   1/26/2016 
Richard M. Bracken  23,310   116,552   209,792  $51.00   1/30/2017 
R. Milton Johnson  87,180   —   —  $12.75   3/4/2009 
R. Milton Johnson  6,039   —   —  $12.75   3/22/2011 
R. Milton Johnson  9,579   —   —  $12.75   1/24/2012 
R. Milton Johnson  9,254   —   —  $12.75   1/29/2013 
R. Milton Johnson  8,062   —   —  $12.75   1/29/2014 
R. Milton Johnson  26,013   —   —  $12.75   7/22/2014 
R. Milton Johnson  6,441   —   —  $12.75   1/27/2015 
R. Milton Johnson  4,301   —   —  $12.75   1/26/2016 


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      Equity Incentive
    
  Number of
 Number of
 Plan Awards: Number
    
  Securities
 Securities
 of Securities
    
  Underlying
 Underlying
 Underlying
 Option
  
  Unexercised
 Unexercised
 Unexercised
 Exercise
 Option
  Options
 Options
 Unearned
 Price
 Expiration
Name
 Exercisable(#)(1)(2) Unexercisable(#)(2) Options(#)(2) ($)(3)(4) Date
 
R. Milton Johnson  16,650   83,251   149,852  $51.00   1/30/2017 
Samuel N. Hazen  28,123   —   —  $12.75   3/4/2009 
Samuel N. Hazen  6,039   —   —  $12.75   3/22/2011 
Samuel N. Hazen  13,124   —   —  $12.75   7/26/2011 
Samuel N. Hazen  19,158   —   —  $12.75   1/24/2012 
Samuel N. Hazen  23,137   —   —  $12.75   1/29/2013 
Samuel N. Hazen  16,797   —   —  $12.75   1/29/2014 
Samuel N. Hazen  6,441   —   —  $12.75   1/27/2015 
Samuel N. Hazen  4,301   —   —  $12.75   1/26/2016 
Samuel N. Hazen  10,656   53,281   95,904  $51.00   1/30/2017 
Beverly B. Wallace  6,039   —   —  $12.75   3/22/2011 
Beverly B. Wallace  9,579   —   —  $12.75   1/24/2012 
Beverly B. Wallace  13,882   —   —  $12.75   1/29/2013 
Beverly B. Wallace  11,422   —   —  $12.75   1/29/2014 
Beverly B. Wallace  4,601   —   —  $12.75   1/27/2015 
Beverly B. Wallace  3,559   —   —  $12.75   1/26/2016 
Beverly B. Wallace  9,324   46,621   83,916  $51.00   1/30/2017 
 
(1)The options described in this table representReflects Rollover Options, as further described under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Options,” and Restricted Share Awards.” There were no options grantedthe 20% of the named executive officer’s EBITDA-based performance vested New Options that vested as of December 31, 2007 (upon the Committee’s determination that the Company achieved the 2007 EBITDA performance target under the 2006 Planoption awards, as adjusted, as described in 2006.more detail under “Compensation Discussion and Analysis — Long Term Equity Incentive Awards: Options”).
 
(2)Reflects New Options awarded in January 2007 under the 2006 Plan by the Compensation Committee as part of the named executive officer’s long term equity incentive award. The New Options granted in 2007 are structured so that 1/3 are time vested options (vesting in five equal installments on the first five anniversaries of the January 30, 2007 grant date), 1/3 are EBITDA-based performance vested options (vesting in equal increments of 20% at the end of fiscal years 2007, 2008, 2009, 2010 and 2011 if certain annual EBITDA performance targets are achieved, subject to “catch up” vesting if at the end of any year noted above or at the end of fiscal year 2012, the cumulative total EBITDA earned in all prior years exceeds the cumulative EBITDA target at the end of such fiscal year) and 1/3 are performance options that vest based on investment return to the Sponsors (vesting with respect to 10% of the common stock subject to such options at the end of fiscal years 2007,2008, 2009, 2010 and 2011 if the Investor Return is at least $102.00 and with respect to an additional 10% at the end of fiscal years 2007, 2008, 2009, 2010 and 2011 if the Investor Return is at least $127.50, subject to “catch up” vesting if the relevant Investor Return is achieved at any time occurring prior to January 30, 2017, so long as the named executive officer remains employed by the Company). The time vested options are reflected in the “Number of Securities Underlying Unexercised Options Unexercisable” column, and the EBITDA-based performance vested options and investment return performance vested options are both reflected in the “Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options” column (with the exception of the 20% of the EBITDA-based performance vested options that vested as of December 31, 2007, which are reflected in the “Number of Securities Underlying Unexercised Options Exercisable” column). The terms of these option awards are described in more detail under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Options.”

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(3)Immediately after the consummation of the Merger, all Rollover Options (other than those with an exercise price below $12.75) were adjusted such that they retained the same “spread value” (as defined below) as immediately prior to the Merger, but the new per share exercise price for all Rollover Options would be $12.75. The term “spread value” means the difference between (x) the aggregate fair market value of the common stock (determined using the Merger consideration of $51.00 per share) subject to the outstanding options held by the participant immediately prior to the Merger that became Rollover Options, and (y) the aggregate exercise price of those options.
 
(3) (4)As a result ofThe exercise price for the Merger, all unvested restricted sharesNew Options granted under our equity incentive plans became fully vested. Participants who held restricted shares, includingthe 2006 Plan to the named executive officers receivedon January 30, 2007 was equal to the merger considerationfair value of $51.00 per share for each restricted share heldour common stock on the date of the grant, as determined by them, less any applicable withholding taxes.our Board of Directors in consultation with our Chief Executive Officer and other advisors, pursuant to the terms of the 2006 Plan.
Option Exercises and Stock Vested
 
The following table includes certain information with respect to thenamed executive officers did not exercise any options exercised and restricted shares that vested during the fiscal year ended December 31, 2006.2007.
                 
  Option Awards Stock Awards
     
  Number of Shares   Number of Shares  
  Acquired on Value Realized on Acquired on Value Realized on
Name Exercise(1) Exercise ($)(1) Vesting(2) Vesting ($)(2)
         
Jack O. Bovender, Jr.   420,660  $14,253,643   178,168  $9,024,985 
Richard M. Bracken  137,912  $4,673,010   92,829  $4,701,665 
R. Milton Johnson  9,850  $333,757   56,428  $2,861,852 
Samuel N. Hazen  73,419  $2,487,729   62,100  $3,140,286 
W. Paul Rutledge  —   —   57,879  $2,928,404 
Charles R. Evans  315,575  $2,125,188   52,818  $2,670,339 
 
(1) As a result of the Merger, all options outstanding under our equity incentive plans at the time of the Merger became fully vested and immediately exercisable. Certain members of management, including the named executive officers, were given the opportunity to convert options held by them prior to consummation of the Merger into Rollover Options. With respect to Messrs. Bovender, Bracken, Johnson, Hazen and Rutledge, the options and amounts described in this table reflect options held by the named executive officers that were not rolled over into the surviving corporation, and the gross amount payable with respect to such options in the Merger (including any amounts which were withheld from the participant to pay applicable withholding taxes). Due to his imminent retirement, Mr. Evans did not roll over any options. See “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” and the Outstanding Equity Awards at Fiscal-Year End Table.
(2) Includes an aggregate of 13,093 shares with respect to Mr. Bovender, 7,590 shares with respect to Mr. Bracken, 4,225 shares with respect to Mr. Johnson, 5,706 shares with respect to Mr. Hazen, 9,291 shares with respect to Mr. Rutledge, and 4,591 shares with respect to Mr. Evans which vested in 2006 in accordance with their terms. The value realized on vesting with respect to those restricted shares is determined based upon the close price of our common stock on the New York Stock Exchange on the date of vesting. As a result of the Merger, all outstanding restricted shares under our equity incentive plans became fully vested. Participants who held restricted shares, including the named executive officers, received the Merger consideration of $51.00 per share for each restricted share held by them, less any applicable withholding taxes. The value disclosed in the table reflects the gross amount payable with respect to such restricted shares (including any amounts which were withheld from the participant to pay applicable withholding taxes).

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Pension Benefits
 
Our SERP is intended to qualify as a “top-hat” plan designed to benefit a select group of management or highly compensated employees. There are no other defined benefit plans that provide for payments or benefits to any of the named executive officers. Information about benefits provided by the SERP is as follows:
                 
    Number of Years Present Value of Payments During
Name Plan Name Credited Service Accumulated Benefit Last Fiscal Year
         
Jack O. Bovender, Jr.   SERP   27  $21,078,516  $0 
Richard M. Bracken  SERP   25  $7,876,338  $0 
R. Milton Johnson  SERP   23  $1,940,003  $0 
Samuel N. Hazen  SERP   24  $2,536,329  $0 
W. Paul Rutledge  SERP   25  $2,305,297  $0 
Charles R. Evans  SERP   20(1) $4,678,005  $0 
 
                 
    Number of Years
 Present Value of
 Payments During
Name
 Plan Name Credited Service Accumulated Benefit Last Fiscal Year
 
Jack O. Bovender, Jr  SERP   28  $18,246,560  $0 
Richard M. Bracken  SERP   26  $8,466,708  $0 
R. Milton Johnson  SERP   25  $2,449,445  $0 
Samuel N. Hazen  SERP   25  $2,795,116  $0 
Beverly B. Wallace  SERP   24  $4,568,671  $0 
(1)Mr. Evans was granted three additional years of service in accordance with the SERP’s provision for Termination for Good Reason following a Change in Control, which increased the present value of his accumulated benefit by $800,280.
Mr. Bovender is eligible for normal retirement. Mr. Evans isBracken and Ms. Wallace are eligible for early retirement. The remaining named executive officers have not satisfied the eligibility requirements for normal or early retirement. All of the named executive officers are 100% vested in their accrued SERP benefit.
Plan Provisions
Plan Provisions
 
In the event the employee’s “accrued benefits under the Company’s Plans” (computed using “actuarial factors”) are insufficient to provide the “life annuity amount,” the SERP will provide a benefit equal to the amount of the shortfall. Benefits can be paid in the form of an annuity or a lump sum. The lump sum is calculated by converting the annuity benefit using the “actuarial factors.” All benefits with a present value not exceeding one million dollars are paid as a lump sum regardless of the election made.
 
Normal retirement eligibility requires attainment of age 60 for employees who were participants at the time of the change in control which occurred as a result of the Merger, including all of the named executive officers. Early retirement eligibility requires age 55 with 20 or more years of service. The service requirement for early retirement is waived for employees participating in the SERP at the time of its inception in 2001, including all of the named executive officers. The “life annuity amount” payable to a participant who takes early retirement is reduced by three percent for each full year or portion thereof that the participant retires prior to normal retirement age.
 
The “life annuity amount” is the annual benefit payable as a life annuity to a participant upon normal retirement. It is equal to the participant’s “accrual rate” multiplied by the product of the participant’s “years of service” times the participant’s “pay average.” The SERP benefit for each year equals the life annuity amount less the annual life annuity amount produced by the employee’s “accrued benefit under the Company’s Plans.”
 
The “accrual rate” is a percentage assigned to each participant, and is either 2.2% or 2.4%. All of the named executive officers are assigned a percentage of 2.4%.


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A participant is credited with a “year of service” for each calendar year that the participant performs 1,000 hours of service for HCA or one of our subsidiaries, or for each year the participant is otherwise credited by us, subject to a maximum credit of 25 years of service.
 
A participant’s “pay average” is an amount equal to one-fifth of the sum of the compensation during the period of 60 consecutive months for which total compensation is greatest within the 120 consecutive month period immediately preceding the participant’s retirement. For purposes of this calculation, the participant’s compensation includes base compensation, payments under the PEP, and bonuses paid prior to the establishment of the PEP.

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The “accrued benefits under the Company’s Plans” for an employee equals the sum of the employer-funded benefits accrued under the HCA Retirement Plan, the HCA 401(k) Plan and any other tax-qualified plan maintained by us or one of our subsidiaries, the income/loss adjusted amount distributed to the participant under any of these plans, the account credit and the income/loss adjusted amount distributed to the participant under the Restoration Plan and any other nonqualified retirement plans sponsored by us or one of our subsidiaries.
 
The “actuarial factors” include (a) interest at the long term Applicable Federal Rate under Section 1274(d) of the Internal Revenue Code as amended (the “Code”) or any successor thereto as of the first day of November preceding the plan year in or for which a benefit amount is calculated, and (b) mortality based on the prevailing commissioner’s standard table (as described in Code section 807(d)(5)(A)) used in determining reserves for group annuity contracts.
 
Credited service does not include any amount other than service with us or one of our subsidiaries.
Assumptions
Assumptions
 
The Present Value of Accumulated Benefit is based on a measurement date of December 31, 2006.2007. The measurement date for valuing plan liabilities on our balance sheet is September 30, 2006,2007, but the measurement date will be changed inat the end of Fiscal 2008 in accordance with the requirements of Statement of Financial Accounting Standards No. 158. Using a December 31 measurement date will produce consistent results year to year reflect the change in control which occurred as a result of the Merger more accurately, and make sure the mostup-to-date up-to-date pay information is included.
 Benefits are valued assuming a 50% probability of electing a lump sum and a 50% probability of electing an annuity which is consistent with the valuation of liabilities in this annual report. However, actual benefit elections were collected after the measurement date of September 30, 2006. All named executive officers elected a lump sum payment at retirement, with the exception of Mr. Bovender. Mr. Bovender elected an annuity. Reflecting actual elections would change the present value of accumulated benefit in column (d) by decreasing Mr. Bovender’s present value by $1,485,860, and increasing Messrs. Bracken’s, Johnson’s, Hazen’s, Rutledge’s and Evans’s present value by $559,186, $137,733, $180,068, $163,664 and $332,117, respectively.
The assumption is made that there is no probability of pre-retirement death or termination. Retirement age is assumed to be the Normal Retirement Age as defined in the SERP for all named executive officers, as adjusted by the provisions relating to change in control, or age 60. Age 60 also represents the earliest date the named executive officers are eligible to receive an unreduced benefit.
 
All other assumptions used in the calculations are the same as those used for the valuation of the plan liabilities in this annual report.
Supplemental Information
      In the event any participant terminates with good reason or is terminated without cause within six months of a change in control, an additional three years of credited service are granted, subject to a maximum of twenty five years of total credited service. This provision would enhance the accumulated benefit value for Messrs. Johnson and Hazen by $324,516 and $171,591, respectively. Messrs. Bovender, Bracken and Rutledge are each already credited with 25 years of service, and Mr. Evans has elected to retire.
 
In the event a participant renders service to another health care organization within five years following retirement or termination of employment, he or she forfeits his rights to any further payment, and must repay any benefits already paid. This noncompetitionnon-competition provision is subject to waiver by the Compensation Committee with respect to the named executive officers.

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Nonqualified Deferred Compensation
 
Amounts shown in the table are attributable to the HCA Restoration Plan, an unfunded, nonqualified defined contribution plan designed to restore benefits under the HCA Retirement Plan based on compensation in excess of Code Section 401(a)(17) compensation limit ($220,000225,000 in 2006)2007).
                     
  Executive Registrant Aggregate   Aggregate
  Contributions Contributions Earnings Aggregate Balance
  in Last in Last in Last Withdrawals/ at Last
Name Fiscal Year Fiscal Year Fiscal Year Distributions Fiscal Year
           
Jack O. Bovender, Jr.  $0  $856,424  $178,899  $0  $2,696,069 
Richard M. Bracken $0  $409,933  $96,222  $0  $1,403,673 
R. Milton Johnson $0  $212,109  $32,249  $0  $549,363 
Samuel N. Hazen $0  $247,060  $49,129  $0  $757,286 
W. Paul Rutledge $0  $172,696  $21,858  $0  $404,137 
Charles R. Evans $0  $181,516  $26,378  $0  $464,014 
 


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  Executive
 Registrant
 Aggregate
   Aggregate
  Contributions
 Contributions
 Earnings
 Aggregate
 Balance
  in Last
 in Last
 in Last
 Withdrawals/
 at Last
Name
 Fiscal Year Fiscal Year Fiscal Year Distributions Fiscal Year
 
Jack O. Bovender, Jr $0  $153,475  $193,899  $0  $3,043,444 
Richard M. Bracken $0  $91,946  $101,171  $0  $1,596,790 
R. Milton Johnson $0  $57,792  $46,985  $0  $654,139 
Samuel N. Hazen $0  $62,004  $54,424  $0  $873,713 
Beverly B. Wallace $0  $52,250  $32,384  $0  $538,766 
All of the amounts in the column titled “Registrant Contributions in Last Fiscal Year” above were also included in the column titled “All Other Compensation” of the Summary Compensation Table. The following amounts from the column titled “Aggregate Balance at Last Fiscal Year” have been reported in the Summary Compensation Tables in prior years:
                     
  Restoration Contribution
   
Name 2001 2002 2003 2004 2005
           
Jack O. Bovender, Jr.  $187,193  $268,523  $289,899  $363,481  $295,062 
Richard M. Bracken $87,924  $146,549  $162,344  $192,858  $172,571 
R. Milton Johnson  —   —   —   —  $71,441 
Samuel N. Hazen  —   —  $79,510  $101,488  $97,331 
 Neither Mr. Rutledge nor Mr. Evans have appeared in the Summary Compensation table in prior years.
                         
  Restoration Contribution
Name
 2001 2002 2003 2004 2005 2006
 
Jack O. Bovender, Jr $187,193  $268,523  $289,899  $363,481  $295,062  $856,424 
Richard M. Bracken $87,924  $146,549  $162,344  $192,858  $172,571  $409,933 
R. Milton Johnson  —   —   —   —  $71,441  $212,109 
Samuel N. Hazen  —   —  $79,510  $101,488  $97,331  $247,060 
Plan Provisions
Plan Provisions
 
Hypothetical accounts for each participant are credited each year with the following percentages of eligible compensation in excess of the pay limit established by the Internal Revenue Service (the “IRS”), based on years of service. Eligible compensation is based on the same definition as the HCA Retirement Plan, without regard to the IRS compensation limit. No employee deferrals are allowed under this or any other nonqualified deferred compensation plan.
     
  Contribution
Service
 Credit
 
0 to 4 years  4.5%
5 to 9 years  6.0%
10 to 14 years  8.0%
15 to 19 years  10.0%
20 or more years  11.0%
 
Messrs. Bovender, Bracken, Johnson and Hazen Rutledge and EvansMs. Wallace have 2728 years of service, 2526 years of service, 23 years of service, 2425 years of service, 25 years of service and 1724 years of service, respectively. Hypothetical account balances are increased or decreased with investment earnings based on the actual investment return in the underlying qualified retirement plan trust (the HCA Retirement Plan).
 
Eligible employees make a one time election prior to participation (or prior to December 31, 2007,2006, if later)earlier) regarding the form of distribution of the benefit. Participants choose between a lump sum and five or ten installments. Distributions are paid (or begin) during the July following the year of termination of

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employment or retirement. All balances not exceeding $500,000 are automatically paid as a lump sum. If no election is made, the benefit is paid in a lump sum.
Supplemental Information
Supplemental Information
 
In the event a participant renders service to another health care organization within five years following retirement or termination of employment, he or she forfeits the rights to any further payment, and must repay any payments already made. This noncompetitionnon-competition provision is subject to waiver by the Committee with respect to the named executive officers.

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Potential Payments Upon Termination or Change in Control
 
The following tables show the estimated amount of potential cash severance payable to each of the named executive officers, as well as the estimated value of continuing benefits, based on compensation and benefit levels in effect on December 31, 2006,2007, assuming the executive’s employment terminates or the Company undergoes a Change in Control (as defined in the 2006 Plan and set forth above under “Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table — Options”) effective December 31, 2006.2007. Due to the numerous factors involved in estimating these amounts, the actual value of benefits and amounts to be paid can only be determined upon an executive’s termination of employment.
Jack O. Bovender, Jr.
                                     
        Involuntary
   Voluntary
      
        Termination
   Termination
      
  Voluntary
 Early
 Normal
 Without
 Termination
 for Good
     Change in
  Termination Retirement Retirement Cause for Cause Reason Disability Death Control
 
                                     
Cash Severance(1)  —   —   —  $10,693,505   —  $10,693,505   —   —   — 
                                     
Non-Equity Incentive Bonus(2) $3,888,547  $3,888,547  $3,888,547  $3,888,547   —  $3,888,547  $3,888,547  $3,888,547  $3,888,547 
                                     
Unvested Stock Options(3) $2,656,008  $2,656,008  $2,656,008  $2,656,008   —  $2,656,008  $2,656,008  $2,656,008  $3,718,451 
                                     
SERP(4) $18,187,579  $18,187,579  $18,187,579  $18,187,579  $18,187,579  $18,187,579  $18,187,579  $15,161,849   — 
                                     
Retirement Plans(5) $3,312,944  $3,312,944  $3,312,944  $3,312,944  $3,312,944  $3,312,944  $3,312,944  $3,312,944   — 
                                     
Health and Welfare Benefits(6)  —   —   —  $20,126   —   —   —   —   — 
                                     
Disability Income(7)  —   —   —   —   —   —  $1,193,168   —   — 
                                     
Life Insurance Benefits(8)  —   —   —   —   —   —   —  $2,021,000   — 
                                     
Accrued Vacation Pay $224,339  $224,339  $224,339  $224,339  $224,339  $224,339  $224,339  $224,339   — 
                                     
Total $28,269,417  $28,269,417  $28,269,417  $38,983,048  $21,724,862  $38,962,922  $29,462,585  $27,264,687  $7,606,998 
Jack O. Bovender, Jr.
                                 
        Involuntary   Voluntary    
        Termination   Termination    
  Voluntary Early Normal Without Termination for Good    
  Termination Retirement Retirement Cause for Cause Reason Disability Death
                 
Cash Severance(1)  —   —   —  $16,131,834   —  $16,131,834   —   — 
Unvested Stock Options(2)  —   —   —   —   —   —   —   — 
SERP(3) $18,392,005  $18,392,005  $18,392,005  $18,392,005  $18,392,005  $18,392,005  $18,392,005  $15,715,068 
Retirement Plans(4) $2,927,127  $2,927,127  $2,927,127  $2,927,127  $2,927,127  $2,927,127  $2,927,127  $2,927,127 
Health and Welfare Benefits(5)  —   —   —  $40,162   —   —   —   — 
Disability Income(6)  —   —   —   —   —   —  $1,346,299   — 
Life Insurance Benefits(7)  —   —   —   —   —   —   —  $2,021,000 
Accrued Vacation Pay $224,339  $224,339  $224,339  $224,339  $224,339  $224,339  $224,339  $224,339 
(1)Represents the amounts Mr. Bovender would be entitled to receive pursuant to his employment agreement. See “Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”
 
(2)As a resultRepresents the amount Mr. Bovender would be entitled to receive for the 2007 fiscal year pursuant to the 2007 PEP and his employment agreement, which amount is also included in the “Non-Equity Incentive Plan Compensation” column of the Merger, all outstanding options vested so that Mr. Bovender had no unvested options asSummary Compensation Table. See “Narrative to Summary Compensation Table and Grants of December 31, 2006.Plan-Based Awards Table — 2007 PEP and — Employment Agreements.”
 
(3)The amount set forth in the “Voluntary Termination,” “Early Retirement,” “Normal Retirement,” “Involuntary Termination Without Cause,” “Voluntary Termination for Good Reason,” “Disability” and “Death” columns represents the intrinsic value of all unvested stock options, which, pursuant to Mr. Bovender’s employment agreement, will continue to vest after the termination of his employment (other than a termination for cause), calculated as the difference between the exercise price of Mr. Bovender’s unvested New Options subject to such continued vesting provision and the fair value price of our common stock on December 31, 2007 as determined by our Board of Directors in consultation with our Chief Executive Officer and other advisors for internal purposes ($60.97 per share). For the purposes of this calculation, it is assumed that the 2008, 2009 and 2010 EBITDA performance targets under the option awards are achieved by the Company and that the Company achieves an Investor Return of at least 2.5 times the Base Price of $51.00 at the end of each of the 2008, 2009 and 2010 fiscal years, respectively. See “Compensation Discussion and Analysis — Severance and Change in Control Agreements.”
The amount set forth in the “Change in Control” column represents the intrinsic value of all unvested stock options, which will become vested upon the Change in Control, calculated as the difference between the exercise price of Mr. Bovender’s unvested New Options and the fair value price of our common stock on December 31, 2007 as determined by our Board of Directors in consultation with our Chief Executive Officer and other advisors for internal purposes ($60.97 per share). For the purposes of this calculation, it is assumed that the Company achieved an Investor Return of at least 2.5 times the Base Price of $51.00 at the end of the 2007 fiscal year.
(4)Reflects the present value of the stream of payments from the SERP. Does not reflect changes to the SERP effective for terminationsbased on or after January 1, 2007, including the additionMr. Bovender’s election of a lump sum option and revision of the actuarial factors.an annuity.


84

(5)
(4) Reflects the estimated lump sum present value of qualified and nonqualified retirement plans to which Mr. Bovender would be entitled. The value includes $196,650$230,447 from the HCA Retirement Plan, $34,408$39,053 from the HCA 401(k) Plan (which represents the value of the Company’s matching contributions), and $2,696,069$3,043,444 from the HCA Restoration Plan.
 
(5) (6)Reflects the present value of the medical premiums for Mr. Bovender and his spouse from termination to age 65 as required pursuant to Mr. Bovender’s employment agreement. See “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”
 
(6) (7)Reflects the estimated lump sum present value of all future payments which Mr. Bovender would be entitled to receive under our disability program, including five months of salary continuation, monthly long term disability benefits of $10,000 per month payable after the five-month elimination period until age 65, and monthly benefits of $10,000 per month from our Super Supplemental Insurance Program payable for 42 months after the six-month elimination period.period until age 65.
 
(7) (8)No post-retirement or post-termination life insurance or death benefits are provided to Mr. Bovender. Mr. Bovender’s payment upon death while actively employed includes $1,621,000 of Company-paid life insurance and $400,000 from the Executive Death Benefit Plan.

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Richard M. Bracken
                                     
        Involuntary
   Voluntary
      
        Termination
   Termination
      
  Voluntary
 Early
 Normal
 Without
 Termination
 for Good
     Change in
  Termination Retirement Retirement Cause for Cause Reason Disability Death Control
 
                                     
Cash Severance(1)  —   —   —  $6,046,970   —  $6,046,970   —   —   — 
                                     
Non-Equity Incentive Bonus(2) $1,909,570  $1,909,570  $1,909,570  $1,909,570   —  $1,909,570  $1,909,570  $1,909,570  $1,909,570 
                                     
Unvested Stock Options(3)  —   —   —   —   —   —   —   —  $3,253,650 
                                     
SERP(4) $11,301,668  $11,301,668   —  $11,301,668  $11,301,668  $11,301,668  $11,301,668  $10,091,220   — 
                                     
Retirement Plans(5) $2,851,439  $2,851,439  $2,851,439  $2,851,439  $2,851,439  $2,851,439  $2,851,439  $2,851,439   — 
                                     
Health and Welfare Benefits  —   —   —   —   —   —   —   —   — 
                                     
Disability Income(6)  —   —   —   —   —   —  $1,840,091   —   — 
                                     
Life Insurance Benefits(7)  —   —   —   —   —   —   —  $1,136,000   — 
                                     
Accrued Vacation Pay $146,890  $146,890  $146,890  $146,890  $146,890  $146,890  $146,890  $146,890   — 
                                     
Total $16,209,567  $16,209,567  $4,907,899  $22,256,537  $14,299,997  $22,256,537  $18,049,658  $16,135,119  $5,163,220 
Richard M. Bracken
                                 
        Involuntary   Voluntary    
        Termination   Termination    
  Voluntary Early Normal Without Termination for Good    
  Termination Retirement Retirement Cause for Cause Reason Disability Death
                 
Cash Severance(1)  —   —   —  $7,795,101   —  $7,795,101   —   — 
Unvested Stock Options(2)  —   —   —   —   —   —   —   — 
SERP(3) $9,083,224   —   —  $9,083,224  $9,083,224  $9,083,224  $9,083,224  $8,230,949 
Retirement Plans(4) $2,555,631  $2,555,631  $2,555,631  $2,555,631  $2,555,631  $2,555,631  $2,555,631  $2,555,631 
Health and Welfare Benefits  —   —   —   —   —   —   —   — 
Disability Income(5)  —   —   —   —   —   —  $1,937,132   — 
Life Insurance Benefits(6)  —   —   —   —   —   —   —  $1,136,000 
Accrued Vacation Pay $146,890  $146,890  $146,890  $146,890  $146,890  $146,890  $146,890  $146,890 
(1)Represents amounts Mr. Bracken would be entitled to receive pursuant to his employment agreement. See “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”
 
(2)As a resultRepresents the amount Mr. Bracken would be entitled to receive for the 2007 fiscal year pursuant to the 2007 PEP and his employment agreement, which amount is also included in the “Non-Equity Incentive Plan Compensation” column of the Merger, all outstanding options vested so that Mr. Bracken had no unvested options asSummary Compensation Table. See “Narrative to Summary Compensation Table and Grants of December 31, 2006.Plan-Based Awards Table — 2007 PEP and — Employment Agreements.”
 
(3)ReflectsRepresents the presentintrinsic value of all unvested stock options, which will become vested upon the streamChange in Control, calculated as the difference between the exercise price of payments fromMr. Bracken’s unvested New Options and the SERP. Does not reflect changes tofair value price of our common stock on December 31, 2007 as determined by our Board of Directors in consultation with our Chief Executive Officer and other advisors for internal purposes ($60.97 per share). For the SERP effective for terminations on or after January 1, 2007, includingpurposes of this calculation, it is assumed that the additionCompany achieved an Investor Return of a lump sum option and revisionat least 2.5 times the Base Price of $51.00 at the end of the actuarial factors. Mr. Bracken was not eligible for early or normal retirement under the SERP at December 31, 2006.2007 fiscal year.
 
(4)Reflects the actual lump sum value of the SERP based on the 2007 interest rate of 4.90%.
(5)Reflects the estimated lump sum present value of qualified and nonqualified retirement plans to which Mr. Bracken would be entitled. The value includes $763,321$838,974 from the HCA Retirement Plan, $388,636$415,675 from the HCA 401(k) Plan (which represents the value of the Company’s matching contributions), and $1,403,674$1,596,790 from the HCA Restoration Plan.
 
(5) (6)Reflects the estimated lump sum present value of all future payments which Mr. Bracken would be entitled to receive under our disability program, including five months of salary continuation, monthly long term disability benefits of $10,000 per month payable after the five-month elimination period until age 65, and monthly


85

benefits of $10,000 per month from our Super Supplemental Insurance Program payable after the six-month elimination period to age 65.
 
(6) (7)No post-retirement or post-termination life insurance or death benefits are provided to Mr. Bracken. Mr. Bracken’s payment upon death while actively employed includes $1,061,000 of Company-paid life insurance and $75,000 from the Executive Death Benefit Plan.

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R.  R. Milton Johnson
                                 
        Involuntary   Voluntary    
        Termination   Termination    
  Voluntary Early Normal Without Termination for Good    
  Termination Retirement Retirement Cause for Cause Reason Disability Death
                 
Cash Severance(1)  —   —   —  $4,426,149   —  $4,426,149   —   — 
Unvested Stock Options(2)  —   —   —   —   —   —   —   — 
SERP(3) $2,254,672   —   —  $2,627,200  $2,254,672  $2,627,200  $2,254,672  $1,958,523 
Retirement Plans(4) $1,554,747  $1,554,747  $1,554,747  $1,554,747  $1,554,747  $1,554,747  $1,554,747  $1,554,747 
Health and Welfare Benefits  —   —   —   —   —   —   —   — 
Disability Income(5)  —   —   —   —   —   —  $2,162,557   — 
Life Insurance Benefits(6)  —   —   —   —   —   —   —  $751,000 
Accrued Vacation Pay $103,899  $103,899  $103,899  $103,899  $103,899  $103,899  $103,899  $103,899 
 
                                     
        Involuntary
   Voluntary
      
        Termination
   Termination
      
  Voluntary
 Early
 Normal
 Without
 Termination
 for Good
     Change in
  Termination Retirement Retirement Cause for Cause Reason Disability Death Control
 
                                     
Cash Severance(1)  —   —   —  $3,601,819   —  $3,601,819   —   —   — 
                                     
Non-Equity Incentive Bonus(2) $900,455  $900,455  $900,455  $900,455   —  $900,455  $900,455  $900,455  $900,455 
                                     
Unvested Stock Options(3)  —   —   —   —   —   —   —   —  $2,324,037 
                                     
SERP(4) $3,784,405   —   —  $3,784,405  $3,784,405  $3,784,405  $3,784,405  $3,614,021   — 
                                     
Retirement Plans(5) $1,751,272  $1,751,272  $1,751,272  $1,751,272  $1,751,272  $1,751,272  $1,751,272  $1,751,272   — 
                                     
Health and Welfare Benefits  —   —   —   —   —   —   —   —   — 
                                     
Disability Income(6)  —   —   —   —   —   —  $2,087,441   —   — 
                                     
Life Insurance Benefits(7)  —   —   —   —   —   —   —  $751,000   — 
                                     
Accrued Vacation Pay $103,899  $103,899  $103,899  $103,899  $103,899  $103,899  $103,899  $103,899   — 
                                     
Total $6,540,031  $2,755,626  $2,755,626  $10,141,850  $5,639,576  $10,141,850  $8,627,472  $7,120,647  $3,224,492 
(1)Represents amounts Mr. Johnson would be entitled to receive pursuant to his employment agreement. See “Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”
 
(2)As a resultRepresents the amount Mr. Johnson would be entitled to receive for the 2007 fiscal year pursuant to the 2007 PEP and his employment agreement, which amount is also included in the “Non-Equity Incentive Plan Compensation” column of the Merger, all outstanding options vested so that Mr. Johnson had no unvested options asSummary Compensation Table. See “Narrative to Summary Compensation Table and Grants of December 31, 2006.Plan-Based Awards Table — 2007 PEP and — Employment Agreements.”
 
(3)ReflectsRepresents the presentintrinsic value of all unvested stock options, which will become vested upon the streamChange in Control, calculated as the difference between the exercise price of payments fromMr. Johnson’s unvested New Options and the SERP. Does not reflect changes tofair value price of our common stock on December 31, 2007 as determined by our Board of Directors in consultation with our Chief Executive Officer and other advisors for internal purposes ($60.97 per share). For the SERP effective for terminations on or after January 1, 2007, includingpurposes of this calculation, it is assumed that the additionCompany achieved an Investor Return of a lump sum option and revisionat least 2.5 times the Base Price of $51.00 at the end of the actuarial factors. Mr. Johnson was not eligible for early or normal retirement under the SERP at December 31, 2006.2007 fiscal year.
 
(4)Reflects the actual lump sum value of the SERP based on the 2007 interest rate of 4.90%.
(5)Reflects the estimated lump sum present value of qualified and nonqualified retirement plans to which Mr. Johnson would be entitled. The value includes $241,186$286,055 from the HCA Retirement Plan, $764,199$811,078 from the HCA 401(k) Plan (which represents the value of the Company’s matching contributions), and $549,362$654,139 from the HCA Restoration Plan.
 
(5) (6)Reflects the estimated lump sum present value of all future payments which Mr. Johnson would be entitled to receive under our disability program, including five months of salary continuation, monthly long term disability benefits of $10,000 per month payable after the five-month elimination period until age 65, and monthly benefits of $10,000 per month from our Super Supplemental Insurance Program payable after the six-month elimination period to age 65.
 
(6) (7)No post-retirement or post-termination life insurance or death benefits are provided to Mr. Johnson. Mr. Johnson’s payment upon death while actively employed includes $751,000 of Company-paid life insurance.


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92

Samuel N. Hazen
                                     
        Involuntary
   Voluntary
      
        Termination
   Termination
      
  Voluntary
 Early
 Normal
 Without
 Termination
 for Good
     Change in
  Termination Retirement Retirement Cause for Cause Reason Disability Death Control
 
                                     
Cash Severance(1)  —   —   —  $2,523,750   —  $2,523,750   —   —   — 
                                     
Non-Equity Incentive Bonus(2) $830,779  $830,779  $830,779  $830,779   —  $830,779  $830,779  $830,779  $830,779 
                                     
Unvested Stock Options(3)  —   —   —   —   —   —   —   —  $1,487,374 
                                     
SERP(4) $4,180,799   —   —  $4,180,799  $4,180,799  $4,180,799  $4,180,799  $4,150,932   — 
                                     
Retirement Plans(5) $1,447,316  $1,447,316  $1,447,316  $1,447,316  $1,447,316  $1,447,316  $1,447,316  $1,447,316   — 
                                     
Health and Welfare Benefits  —   —   —   —   —   —   —   —   — 
                                     
Disability Income(6)  —   —   —   —   —   —  $2,354,661   —   — 
                                     
Life Insurance Benefits(7)  —   —   —   —   —   —   —  $789,000   — 
                                     
Accrued Vacation Pay $109,201  $109,201  $109,201  $109,201  $109,201  $109,201  $109,201  $109,201   — 
                                     
Total $6,568,095  $2,387,296  $2,387,296  $9,091,845  $5,737,316  $9,091,845  $8,922,756  $7,327,228  $2,318,153 
Samuel N. Hazen
                                 
        Involuntary   Voluntary    
        Termination   Termination    
  Voluntary Early Normal Without Termination for Good    
  Termination Retirement Retirement Cause for Cause Reason Disability Death
                 
Cash Severance(1)  —   —   —  $3,406,149   —  $3,406,149   —   — 
Unvested Stock Options(2)  —   —   —   —   —   —   —   — 
SERP(3) $2,935,987   —   —  $3,132,967  $2,935,987  $3,132,967  $2,935,987  $2,427,649 
Retirement Plans(4) $1,272,753  $1,272,753  $1,272,753  $1,272,753  $1,272,753  $1,272,753  $1,272,753  $1,272,753 
Health and Welfare Benefits  —   —   —   —   —   —   —   — 
Disability Income(5)  —   —   —   —   —   —  $2,418,906   — 
Life Insurance Benefits(6)  —   —   —   —   —   —   —  $789,000 
Accrued Vacation Pay $109,201  $109,201  $109,201  $109,201  $109,201  $109,201  $109,201  $109,201 
(1)Represents amounts Mr. Hazen would be entitled to receive pursuant to his employment agreement. See “Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”
 
(2)As a resultRepresents the amount Mr. Hazen would be entitled to receive for the 2007 fiscal year pursuant to the 2007 PEP and his employment agreement, which amount is also included in the “Non-Equity Incentive Plan Compensation” column of the Merger, all outstanding options vested so that Mr. Hazen had no unvested options asSummary Compensation Table. See “Narrative to Summary Compensation Table and Grants of December 31, 2006.Plan-Based Awards Table — 2007 PEP and — Employment Agreements.”
 
(3)ReflectsRepresents the presentintrinsic value of all unvested stock options, which will become vested upon the streamChange in Control, calculated as the difference between the exercise price of payments fromMr. Hazen’s unvested New Options and the SERP. Does not reflect changes tofair value price of our common stock on December 31, 2007 as determined by our Board of Directors in consultation with our Chief Executive Officer and other advisors for internal purposes ($60.97 per share). For the SERP effective for terminations on or after January 1, 2007, includingpurposes of this calculation, it is assumed that the additionCompany achieved an Investor Return of a lump sum option and revisionat least 2.5 times the Base Price of $51.00 at the end of the actuarial factors. Mr. Hazen was not eligible for early or normal retirement under the SERP at December 31, 2006.2007 fiscal year.
 
(4)Reflects the actual lump sum value of the SERP based on the 2007 interest rate of 4.90%.
(5)Reflects the estimated lump sum present value of qualified and nonqualified retirement plans to which Mr. Hazen would be entitled. The value includes $275,223$314,823 from the HCA Retirement Plan, $240,244$258,780 from the HCA 401(k) Plan (which represents the value of the Company’s matching contributions), and $757,286$873,713 from the HCA Restoration Plan.
 
(5) (6)Reflects the estimated lump sum present value of all future payments which Mr. Hazen would be entitled to receive under our disability program, including five months of salary continuation, monthly long term disability benefits of $10,000 per month payable after the five-month elimination period until age 65, and monthly benefits of $10,000 per month from our Super Supplemental Insurance Program payable after the six-month elimination period to age 65.
 
(6) (7)No post-retirement or post-termination life insurance or death benefits are provided to Mr. Hazen. Mr. Hazen’s payment upon death while actively employed with the Company includes $789,000 of the Company-paid life insurance.


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93

Beverly B. Wallace
                                     
        Involuntary
   Voluntary
      
        Termination
   Termination
      
  Voluntary
 Early
 Normal
 Without
 Termination
 for Good
     Change in
  Termination Retirement Retirement Cause for Cause Reason Disability Death Control
 
                                     
Cash Severance(1)  —   —   —  $2,240,000   —  $2,240,000   —   —   — 
                                     
Non-Equity Incentive Bonus(2) $840,000  $840,000  $840,000  $840,000   —  $840,000  $840,000  $840,000  $840,000 
                                     
Unvested Stock Options(3)  —   —   —   —   —   —   —   —  $1,301,454 
                                     
SERP(4) $5,408,794  $5,408,794   —  $5,675,914  $5,408,794  $5,675,914  $5,408,794  $4,895,534   — 
                                     
Retirement Plans(5) $1,001,983  $1,001,983  $1,001,983  $1,001,983  $1,001,983  $1,001,983  $1,001,983  $1,001,983   — 
                                     
Health and Welfare Benefits  —   —   —   —   —   —   —   —   — 
                                     
Disability Income(6)  —   —   —   —   —   —  $1,515,467   —   — 
                                     
Life Insurance Benefits(7)  —   —   —   —   —   —   —  $700,000   — 
                                     
Accrued Vacation Pay $96,923  $96,923  $96,923  $96,923  $96,923  $96,923  $96,923  $96,923   — 
                                     
Total $7,347,700  $7,347,700  $1,938,906  $9,854,820  $6,507,700  $9,854,820  $8,863,167  $7,534,440  $2,141,454 
W. Paul Rutledge
                                 
        Involuntary   Voluntary    
        Termination   Termination    
  Voluntary Early Normal Without Termination for Good    
  Termination Retirement Retirement Cause for Cause Reason Disability Death
                 
Cash Severance(1)  —   —   —  $1,745,299   —  $1,745,299   —   — 
Unvested Stock Options(2)  —   —   —   —   —   —   —   — 
SERP(3) $2,667,902   —   —  $2,667,902  $2,667,902  $2,667,902  $2,667,902  $2,388,808 
Retirement Plans(4) $1,261,470  $1,261,470  $1,261,470  $1,261,470  $1,261,470  $1,261,470  $1,261,470  $1,261,470 
Health and Welfare Benefits  —   —   —   —   —   —   —   — 
Disability Income(5)  —   —   —   —   —   —  $1,973,470   — 
Life Insurance Benefits(6)  —   —   —   —   —   —   —  $725,000 
Accrued Vacation Pay $90,000  $90,000  $90,000  $90,000  $90,000  $90,000  $90,000  $90,000 
(1)Represents amounts Mr. RutledgeMs. Wallace would be entitled to receive pursuant to hisher employment agreement. See “Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”
 
(2)As a resultRepresents the amount Ms. Wallace would be entitled to receive for the 2007 fiscal year pursuant to the 2007 PEP and her employment agreement, which amount is also included in the “Non-Equity Incentive Plan Compensation” column of the Merger, all outstanding options vested so that Mr. Rutledge had no unvested options asSummary Compensation Table. See “Narrative to Summary Compensation Table and Grants of December 31, 2006.Plan-Based Awards Table — 2007 PEP and — Employment Agreements.”
 
(3)ReflectsRepresents the presentintrinsic value of all unvested stock options, which will become vested upon the streamChange in Control, calculated as the difference between the exercise price of payments fromMs. Wallace’s unvested New Options and the SERP. Does not reflect changes tofair value price of our common stock on December 31, 2007 as determined by our Board of Directors in consultation with our Chief Executive Officer and other advisors for internal purposes ($60.97 per share). For the SERP effective for terminations on or after January 1, 2007, includingpurposes of this calculation, it is assumed that the additionCompany achieved an Investor Return of a lump sum option and revisionat least 2.5 times the Base Price of $51.00 at the end of the actuarial factors. Mr. Rutledge was not eligible for early or normal retirement under the SERP at December 31, 2006.2007 fiscal year.
 
(4)Reflects the actual lump sum value of the SERP based on the 2007 interest rate of 4.90%.
(5)Reflects the estimated lump sum present value of qualified and nonqualified retirement plans to which Mr. RutledgeMs. Wallace would be entitled. The value includes $588,732$290,057 from the HCA Retirement Plan, $268,601$173,160 from the HCA 401(k) Plan (which represents the value of the Company’s matching contributions), and $404,137$538,766 from the HCA Restoration Plan.
 
(5) (6)Reflects the estimated lump sum present value of all future payments which Mr. RutledgeMs. Wallace would be entitled to receive under our disability program, including five months of salary continuation, monthly long term disability benefits of $10,000 per month payable after the five-month elimination period until age 65, and monthly benefits of $10,000 per month from our Super Supplemental Insurance Program payable after the six-month elimination period to age 65.
 
(6) (7)No post-retirement or post-termination life insurance or death benefits are provided to Mr. Rutledge. Mr. Rutledge’sMs. Wallace. Ms. Wallace’s payment upon death while actively employed includes $650,000 of Company-paid life insurance and $75,000 from the Executive Death Benefit Plan.

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Charles R. Evans
                                 
        Involuntary   Voluntary    
        Termination   Termination    
  Voluntary Early Normal Without Termination for Good    
  Termination Retirement Retirement Cause for Cause Reason Disability Death
                 
Cash Severance(1)  —   —   —  $362,261   —  $362,261   —   — 
Unvested Stock Options(2)  —   —   —   —   —   —   —   — 
SERP(3) $4,229,867  $4,229,867   —  $4,985,027  $4,229,867  $4,985,027  $4,229,867  $3,743,767 
Retirement Plans(4) $698,925  $698,925  $698,925  $698,925  $698,925  $698,925  $698,925  $698,925 
Health and Welfare Benefits  —   —   —   —   —   —   —   — 
Disability Income(5)  —   —   —   —   —   —  $1,094,130   — 
Life Insurance Benefits(6)  —   —   —   —   —   —   —  $725,000 
Accrued Vacation Pay $100,318  $100,318  $100,318  $100,318  $100,318  $100,318  $100,318  $100,318 
(1) Represents amounts owing to Mr. Evans pursuant to our severance policy applicable to all employees, which provides that an employee who is involuntarily terminated for reasons other than a reduction in force or cause will receive a lump sum equal to 50% of the employee’s base compensation that would have been payable over a certain period of time. The period of time for which payment is due is determined based upon the employee’s salary level and the duration of his or her employment with the Company at the time of termination. Based upon his length of service and pay level, Mr. Evans would receive a lump sum equal to 50% of his base salary that would have been due for one year. In lieu of paying Mr. Evans a lump sum, we have agreed that he will continue to receive base salary and benefits for a period of six months which ends June 30, 2007.
(2) As a result of the Merger, all outstanding options vested so that Mr. Evans had no unvested options as of December 31, 2006
(3) Reflects the present value of the stream of payments from the SERP. Does not reflect changes to the SERP effective for terminations on or after January 1, 2007, including the addition of a lump sum option and revision of the actuarial factors. Mr. Evans was not eligible for normal retirement under the SERP as of December 31, 2006.
(4) Reflects the estimated lump sum present value of qualified and nonqualified retirement plans to which Mr. Evans would be entitled. The value includes $197,919 from the HCA Retirement Plan, $36,992 from the HCA 401(k) Plan (which represents the value of the Company’s matching contributions), and $464,014 from the HCA Restoration Plan.
(5) Reflects the estimated lump sum present value of all future payments which Mr. Evans would be entitled to receive under our disability program, including five months of salary continuation, monthly long term disability benefits of $10,000 per month payable until age 65, and monthly benefits of $8,159 per month from our Super Supplemental Insurance Program payable to age 65.
(6) No post-retirement or post-termination life insurance or death benefits are provided to Mr. Evans. Mr. Evans payment upon death while actively employed with the Company includes $725,000$700,000 of Company-paid life insurance.

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Director Compensation
 The following table provides compensation information for
During the year ended December 31, 2006 for each of our non-employee directors prior to the consummation of the Merger. Employee directors are not eligible for any additional compensation for service on the Board or its committees.
                     
  Fees Earned        
  or Paid in Stock Option All Other  
  Cash Awards Awards Compensation Total
Name ($)(1) ($)(2) ($)(3) ($)(4) ($)
           
C. Michael Armstrong $21,500  $245,144  $183,803  $16,514  $466,961 
Magdalena H. Averhoff, M.D.  $34,000  $126,295  $189,384  $5,104  $354,783 
Jack O. Bovender, Jr.   —   —   —   —   — 
Richard M. Bracken  —   —   —   —   — 
Martin Feldstein $38,500  $159,973  $189,384  $20,537  $408,394 
Thomas F. Frist, Jr., M.D.  $11,500  $186,911  $157,221  $6,473  $362,105 
Frederick W. Gluck $145,500  $177,974  $189,384  $39,740  $552,598 
Glenda A. Hatchett $88,000  $172,580  $189,384  $29,968  $479,932 
Charles O. Holliday, Jr.  $107,375  $152,317  $156,738  $22,129  $438,559 
T. Michael Long $89,000  $163,840  $189,384  $34,962  $477,186 
John H. McArthur $87,000  $90,049  $189,384  $33,725  $400,158 
Kent C. Nelson $99,500  $159,973  $189,384  $19,573  $468,430 
Frank S. Royal, M.D.  $28,500  $163,839  $189,384  $23,188  $404,911 
Harold T. Shapiro $41,000  $182,944  $171,455  $36,393  $431,792 
(1) Amounts include portions of annual Board and committee retainers which directors elected to receive in cash and meeting fees. With respect to Mr. Gluck, amounts also include $100,000 paid as a retainer for service as Chair of the Special Committee appointed for purposes of evaluating the Merger. With respect to Messrs. Holliday, Long and Nelson and Ms. Hatchett, amounts include $60,000 paid as a retainer for service on the Special Committee.
(2) Amounts include restricted shares and restricted share units that directors received as all or a portion of their annual retainer in lieu of cash, and restricted shares units that all directors received as part of their long term incentive awards in 2006. The terms of the restricted share and restricted share unit awards granted in 2006 are described in more detail under “Narrative to Director Compensation Table.” As a result of the Merger, all outstanding equity awards vested and therefore all compensation expense associated with such awards was recognized in 2006 in accordance with SFAS 123(R).
(3) Amounts include stock options granted as part of the directors’ long term incentive awards. The terms of the option awards granted in 2006 are described in more detail under “Narrative to Director Compensation Table.” As a result of the Merger, all outstanding equity awards vested and therefore all compensation expense associated with such awards was recognized in 2006 in accordance with SFAS 123(R).
(4) Amounts consist of:
• Dividends on restricted shares and restricted share units. On March 1, 2006, June 1, 2006 and September 1, 2006, we paid dividends of $0.15 per share, $0.17 per share and $0.17 per share for each issued and outstanding share of common stock of HCA, including restricted shares. Additionally, we accrued dividends with respect to certain restricted share units held by the directors. As a result of the Merger, all accrued but previously unpaid dividends on restricted share units were paid in 2006.
• Personal use of corporate aircraft. In 2006, Dr. Frist and Dr. Shapiro were allowed personal travel on our airplane with an incremental cost of approximately $2,793 and $1,939, respectively, to us. The aggregate incremental cost of Drs. Frist and Shapiro’s travel on the plane was calculated based on the same methodology used to determine the cost of the named executive officers’ personal airplane usage,

96

which is described in footnote (6) to the “Summary Compensation Table.” We grossed up the income attributed to Dr. Frist with respect to one trip he made on the Company airplane, which amount is also included.
• Amounts paid by The HCA Foundation in 2006 to charities of the directors’ selection through our matching charitable contribution program.

Narrative to Director Compensation Table
      In 2006, non-management directors received an annual retainer of $55,000, which they could elect to receive in the form of cash, restricted shares or restricted share units. A director received a 25% premium over the annual retainer amount with respect to any retainer amount he or she elected to receive in the form of restricted shares or restricted share units. Awards were made pursuant to the 2005 Plan. Non-management directors also received long term incentive awards under the 2005 Plan having a value of $100,000. The long term incentive awards were paid 50% in the form of stock options having a Black-Scholes value of approximately $50,000 on the date of grant. Twenty percent of the options were to vest on the date of grant, with an additional 20% of the options granted vesting on the first, second, third and fourth anniversaries of the date of grant. The remaining 50% of the long term incentive award was paid in the form of restricted share units having a value of $50,000 on the date of grant (based on the close price of our common stock of $43.49 per share on the New York Stock Exchange on May 25, 2006, the date of grant). The awards were to vest on the second anniversary of the date of grant. The awards were made pursuant to the 2005 Plan. In 2006, in addition to the annual retainer, the Board meeting fee was $2,000 per meeting for non-management directors.
      Non-management director committee members received an annual committee retainer of $3,000 and committee chairpersons, other than the audit committee chairperson, received a $10,000 annual committee retainer in 2006. The audit committee chairperson received an annual committee retainer of $20,000 in 2006. The presiding director also received an annual retainer of $10,000 in 2006. These retainers were payable in cash, restricted shares or restricted share units. As was the case with the annual retainer, a director received a 25% premium with respect to any committee-related retainer amounts he or she elected to receive in the form of restricted shares or restricted share units. Committee members received a meeting fee of $1,500 per committee meeting. We also reimbursed directors for expenses incurred relating to attendance at Board and committee meetings.
      We have occasionally asked a director, as part of his or her service as a director, to participate in a business related meeting or in meetings which we believe will further his or her education as a director of a public company. In such event, we reimburse the director for reasonable travel expenses and pay the director an additional fee equal to the Board meeting fee. We paid Dr. Averhoff $2,000 in 2006 with respect to her attendance at an HCA division meeting.
      The HCA Foundation matches charitable contributions by directors up to an aggregate $15,000 annually for each director.
      In connection with its consideration of the Merger, in 2006 the Board appointed a Special Committee consisting of Messrs. Gluck, Holliday, Long and Nelson and Ms. Hatchett. Mr. Gluck served as chairman of the Special Committee. As compensation for their service on the Special Committee, the chairman received a retainer of $100,000 and the Committee members received retainers of $60,000. Committee members did not receive meeting fees with respect to Special Committee meetings. All amounts paid with respect to service on the Special Committee were paid in cash.
      In 2006, as a publicly held company, we maintained ownership guidelines requiring directors to own shares of our common stock equal in value to five times the annual retainer for service on our Board. However, because we are now a privately held company, we no longer maintain stock ownership guidelines.
      In accordance with our Restated Certificate of Incorporation (prior to the Merger) and the laws of the State of Delaware, we advanced payments for legal fees and expenses to certain of our directors for retention of legal counsel in connection with matters relating to their actions as a director of the Company. Currently,

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certain of our directors have been named in various lawsuits, and we are cooperating with certain investigations being conducted by the United States Attorney for the Southern District of New York and the SEC. The proceedings and investigations are described in greater detail in Item 3, “Legal Proceedings.” In accordance with our Restated Certificate of Incorporation and Delaware law, any director who is advanced legal fees will reimburse us for such amounts in the event it is ultimately determined that the individual is not entitled to indemnification under such provisions. In 2006, we advanced legal fees in the amount of approximately $116,000 to Dr. Frist.
      In addition, in connection with the Merger, we paid substantial legal fees which included fees for counsel retained by Dr. Frist and his affiliates with respect to the negotiation of certain agreements and other matters related to the Merger. We paid legal fees of approximately $1.1 million with respect to such representation in connection with the Merger.
      Currently,2007, none of our directors receivereceived compensation for their service as a member of our Board. TheyOur directors are reimbursed for any expenses incurred in connection with their service.
Compensation Committee Interlocks and Insider Participation
 
During 2006, prior to the closing of the Merger,2007, the Compensation Committee of the Board of Directors was composed of C. Michael Armstrong, Martin Feldstein, Frederick W. GluckMichelson, George A. Bitar, John P. Connaughton and Charles O. Holliday,Thomas F. Frist, Jr., M.D. Dr. Frist served as an executive officer and Chairman of our Board of Directors from January 2001 to January 2002. From July 1997 to January 2001, Dr. Frist served as our Chairman and Chief Executive Officer. Dr. Frist served as Vice Chairman of the Board of Directors from April 1995 to July 1997 and as Chairman from February 1994 to April 1995. He was Chairman, Chief Executive Officer and President of HCA-Hospital Corporation of America from 1988 to February 1994.


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Dr. Frist is the father of Thomas F. Frist III, who also serves as a director. None of these persons hasthe other members of the Compensation Committee have at any time been an officer or employee of HCA or any of its subsidiaries. In addition, there were no relationships among our executive officers, membersEach member of the Compensation Committee or entities whose executives servedis also a manager of Hercules Holding, and the Amended and Restated Limited Liability Company Agreement of Hercules Holding requires that the members of Hercules Holding take all necessary action to ensure that the persons who serves as managers of Hercules Holding also serve on our Board of Directors. Messrs. Michelson, Bitar and Connaughton are affiliated with Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity, and Bain Capital Partners, respectively, each of which is a party to the Compensation Committee that required disclosure under applicable SEC rulessponsor management agreement with us. Dr. Frist and regulations.certain other members of the Frist family, are also party to the sponsor management agreement with us. The Amended and Restated Limited Liability Company Agreement of Hercules Holding and the sponsor management agreement are described in greater detail in Item 13, “Certain Relationships and Related Transactions.”
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table sets forth information regarding the beneficial ownership of our common stock as of February 28, 200729, 2008 for:
 • each person who is known by us to own beneficially more than 5% of the outstanding shares of our common stock;
 
 • each of our directors;
 
 • each of our executive officers named in the Summary Compensation Table; and
 
 • all of our directors and executive officers as a group.
 
The percentages of shares outstanding provided in the tables are based on 93,003,95094,171,740 shares of our common stock, par value $0.01 per share, outstanding as of February 28, 2007.29, 2008. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares issuable upon the exercise of options that are exercisable within 60 days of February 28, 200729, 2008 are considered outstanding for the purpose of calculating the percentage of outstanding shares of our common stock held by the individual, but not for the purpose of calculating the percentage of outstanding shares held by any other individual.


89

The address of each of our directors and executive officers listed below isc/o HCA Inc., One Park Plaza, Nashville, Tennessee 37203.

98

         
Name of Beneficial Owner Number of Shares Percent
     
Hercules Holding II, LLC  90,666,870(1)  97.5%
Christopher J. Birosak   (1)  — 
George A. Bitar   (1)  — 
Jack O. Bovender, Jr.   482,276(2)  * 
Richard M. Bracken  234,276(3)  * 
John P. Connaughton   (1)  — 
Charles R. Evans  —   — 
Thomas F. Frist, Jr., M.D.    (1)  — 
Thomas F. Frist III   (1)  — 
Christopher R. Gordon   (1)  — 
Samuel N. Hazen  137,120(4)  * 
R. Milton Johnson  156,869(5)  * 
Michael W. Michelson   (1)  — 
James C. Momtazee   (1)  — 
Stephen G. Pagliuca   (1)  — 
W. Paul Rutledge  67,753(6)  * 
Peter M. Stavros   (1)  — 
Nathan C. Thorne   (1)  — 
All directors and executive officers as a group (34 persons)  1,936,942(7)  2.0 
 
       
Name of Beneficial Owner
 Number of Shares Percent
 
Hercules Holding II, LLC 91,845,692(1)  97.5%
Christopher J. Birosak (1)  — 
George A. Bitar (1)  — 
Jack O. Bovender, Jr.  535,556(2)  * 
Richard M. Bracken 280,896(3)  * 
John P. Connaughton (1)  — 
Thomas F. Frist, Jr., M.D.  (1)  — 
Thomas F. Frist III (1)  — 
Christopher R. Gordon (1)  — 
Samuel N. Hazen 158,432(4)  * 
R. Milton Johnson 190,169(5)  * 
Michael W. Michelson (1)  — 
James C. Momtazee (1)  — 
Stephen G. Pagliuca (1)  — 
Peter M. Stavros (1)  — 
Nathan C. Thorne (1)  — 
Beverly B. Wallace 70,130(6)  * 
All directors and executive officers as a group (34 persons) 2,260,886(7)  2.4 
*Less than one percent.
 
(1)Hercules Holding holds 90,666,87091,845,692 shares, or 97.5%, of our outstanding common stock. Hercules Holding is held by a private investor group, including affiliates of Bain Capital Partners (“Bain”), Kohlberg Kravis Roberts & Co. LLC (“KKR”) and Merrill Lynch Global Private Equity (“MLGPE”), and affiliates of HCA founder Dr. Thomas F. Frist, Jr., who is a director of the Company, including Mr. Thomas F. Frist III, who also serves as a director. Messrs. Connaughton, Gordon and Pagliuca are affiliated with Bain, which indirectly holds 22,980,39223,373,333 shares, or 24.7%24.8%, of our outstanding common stock through the interests of certain of its affiliated funds in Hercules Holding. Messrs. Michelson, Momtazee and Stavros are affiliated with KKR, which indirectly holds 22,980,39223,373,332 shares, or 24.7%24.8%, of our outstanding common stock through the interests of certain of its affiliated funds in Hercules Holding. Messrs. Birosak, Bitar and Thorne are affiliated with MLGPE, which indirectly holds 22,980,39223,373,333 shares, or 24.7%24.8%, of our outstanding common stock through the interests of certain of its affiliated funds in Hercules Holding. Dr. Frist may be deemed to indirectly beneficially hold 17,804,125 shares, or 19.1%18.9%, of our outstanding common stock through his interests in Hercules Holding; and Mr. Frist may be deemed to indirectly beneficially hold 8,130,780 shares, or 9.0%8.6%, of our outstanding common stock through his interests in Hercules Holding. The principal office addresses of Hercules Holding arec/o Bain Capital Partners, LLC, 111 Huntington Avenue, Boston, MA 02199,c/o Kohlberg Kravis Roberts & Co. L.P., 2800 Sand Hill Road, Suite 200, Menlo Park, CA 94025, and c/o Merrill Lynch Global Private Equity, Four World Financial Center, Floor 23, New York, NY 10080. The telephone number at each of the principal offices is (617) 516-2000, (650) 233-656010080 and (212) 449-1000, respectively.c/o Dr. Thomas F. Frist, Jr., 3100 West End Ave., Suite 500, Nashville, TN 37203.
 
(2)Includes 360,494413,774 shares issuable upon exercise of options.
 
(3)Includes 152,793199,413 shares issuable upon exercise of options.
 
(4)Includes 117,120138,432 shares issuable upon exercise of options.
 
(5)Includes 156,869190,169 shares issuable upon exercise of options.
 
(6)Includes 35,00367,730 shares issuable upon exercise of options.
 
(7)Includes 1,506,9461,830,890 shares issuable upon exercise of options.


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This table provides certain information as of December 31, 20062007 with respect to our equity compensation plans (shares in thousands):
EQUITY COMPENSATION PLAN INFORMATION
             
  (a) (b) (c)
       
  Number of securities Weighted-average Number of securities remaining
  to be issued exercise price of available for future issuance
  upon exercise of outstanding under equity compensation
  outstanding options, options, plans (excluding securities
  warrants and rights warrants and rights reflected in column(a))
       
Equity compensation plans approved by security holders  2,285  $12.50   10,656 
Equity compensation plans not approved by security holders  —   —   — 
          
Total  2,285  $12.50   10,656 
          
 
             
  (a) (b) (c)
  Number of securities
 Weighted-average
 Number of securities remaining
  to be issued
 exercise price of
 available for future issuance
  upon exercise of
 outstanding
 under equity compensation
  outstanding options,
 options,
 plans (excluding securities
  warrants and rights warrants and rights reflected in column(a) )
 
Equity compensation plans approved by security holders  11,171,500  $43.54   1,733,700 
Equity compensation plans not approved by security holders  —   —   — 
             
Total  11,171,500  $43.54   1,733,700 
             
*For additional information concerning our equity compensation plans, see the discussion in Note 3 — Share-Based Compensation in the notes to the consolidated financial statements.
Item 13.Certain Relationships and Related Transactions
 
In accordance with its charter, our Audit and Compliance Committee reviews and approves all material related party transactions. Prior to its approval of any material related party transaction, the Audit and Compliance Committee will discuss the proposed transaction with management and our independent auditor. In addition, our Code of Conduct requires that all of our employees, including our executive officers, remain free of conflicts of interest in the performance of their responsibilities to the Company. An executive officer who wishes to enter into a transaction in which their interests might conflict with ours must first receive the approval of the Audit and Compliance Committee. The Amended and Restated Limited Liability Company Agreement of Hercules Holding II, LLC generally requires that an Investor must obtain the prior written consent of each other Investor before it or any of its affiliates (including our directors) enter into any transaction with us.
Stockholder Agreements
 In connection with the Merger, Hercules Holding offered certain members of management, including our executive officers, the opportunity (i) to exchange unrestricted shares of our common stock outstanding prior to the Merger for shares of common stock in the surviving company (“Rollover Stock”), (ii) to purchase shares of our common stock after the Merger (“Purchased Stock” and, together with the Rollover Stock, “Stock”), and (iii) to exchange a portion of their outstanding options to purchase our common stock prior to the Merger for fully exercisable options to purchase shares of the surviving company (referred to herein as the Rollover Options). In addition, on
On January 30, 2007, our Board of Directors awarded to members of management and certain key employees new optionsNew Options to purchase shares of our common stock (“New Options” and,(New Options together with the Rollover Options, “Options”) pursuant to the 2006 Plan. Our Compensation Committee approved additional option awards periodically throughout the year ended December 31, 2007 to members of management and certain key employees in cases of promotions and new hires. In connection with their equity ownership inoption awards, the surviving company,participants under the participants2006 Plan were required to enter into an Exchange and Purchase Agreement, an Option Rollover Agreement, a Management Stockholder’s Agreement, a Sale Participation Agreement, and an Option Agreement with respect to the new options.New Options. Below are brief summaries of the principal terms of the Management Stockholder’s Agreement and the Sale Participation Agreement, the Option Rollover Agreement and the Exchange and Purchase Agreement each of which are qualified in their entirety by reference to the agreements themselves, forms of which are attached heretowere filed as Exhibits 10.12 and 10.13, 10.14 and 10.15 respectively.respectively, to our Annual Report onForm 10-K for the fiscal year ended December 31, 2006. The terms of the Option Agreement with respect to New Options and the 2006 Plan are described in more detail in Item 11, “Executive Compensation — Compensation Discussion and Analysis — 2007 Compensation.Long Term Equity Incentive Awards.”

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Exchange and Purchase Agreement. The Exchange and Purchase Agreement provided for the exchange of shares of our common stock outstanding prior to the Merger for shares of common stock in the recapitalized company by (i) transferring such shares to Hercules Holding in exchange for membership interests in Hercules Holding immediately prior to the Merger and (ii) immediately after the Merger receiving from Hercules Holding, in liquidation of such membership interests, shares of common stock in the surviving company equal to the value of the shares contributed. The Exchange and Purchase Agreement also provided for the purchase by Hercules Holding of any shares of a participant’s common stock which were not rolled over.
 Option Rollover Agreement. Participants who rolled over their options to purchase shares of our common stock prior to the Merger into Rollover Options entered into an Option Rollover Agreement, which provides that all Rollover Options will remain outstanding in accordance with the terms set forth in the stock incentive plan and grant agreement pursuant to which the options were originally granted. The Option Rollover Agreement also provided that the Rollover Options retain the same “spread value” (as defined below) as the outstanding options held by the participant immediately prior to the Merger, but required the number of shares of our common stock subject to such Rollover Options following the Merger to be adjusted such that the per share exercise price for all Rollover Options be $12.75. The term “spread value” means the difference between (x) the aggregate fair market value immediately prior to the Merger of the common stock (determined using the Merger consideration of $51.00 per share) subject to the outstanding options a participant rolled over and (y) the aggregate exercise price of those options.
Management Stockholder’s Agreement.  The Management Stockholder’s Agreement imposes significant restrictions on transfers of shares of our common stock. Generally, shares will be nontransferable by any means at any time prior to the earlier of a “Change in Control” (as defined in the Management Stockholder’s Agreement) or the fifth anniversary of the closing date of the Merger, except (i) sales pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”) filed by the Company in accordance with the Management Stockholder’s Agreement, (ii) a sale pursuant to the Sale Participation Agreement (described below), (iii) a sale to certain “Permitted Transferees” (as defined in the Management Stockholder’s Agreement), or (iv) as otherwise permitted by our Board of Directors or pursuant to a waiver of the restrictions on transfers given by


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unanimous agreement of the Sponsors. On and after such fifth anniversary through the earlier of a Change in Control or the eighth anniversary of the closing date of the Merger, a management stockholder will be able to transfer shares of our common stock, but only to the extent that, on a cumulative basis, the management stockholders in the aggregate do not transfer a greater percentage of their equity than the percentage of equity sold or otherwise disposed of by the Sponsors.
 
In the event that a management stockholder wishes to sell their stock at any time following the fifth anniversary of the closing date of the Merger but prior to an initial public offering of our common stock, the Management Stockholder’s Agreement provides the Company with a right of first offer on those shares upon the same terms and conditions pursuant to which the management stockholder would sell them to a third party. In the event that a registration statement is filed with respect to our common stock in the future, the Management Stockholder’s Agreement prohibits management stockholders from selling shares not included in the registration statement from the time of receipt of notice until 180 days (in the case of an initial public offering) or 90 days (in the case of any other public offering) of the date of the registration statement. The Management Stockholder’s Agreement also provides for the management stockholder’s ability to cause us to repurchase their outstanding stock and options in the event of the management stockholder’s death or disability, and for our ability to cause the management stockholder to sell their stock or options back to the Company upon certain termination events.
 
The Management Stockholder’s Agreement provides that, in the event we propose to sell shares to the Sponsors, certain members of senior management, including the executive officers (the “Senior Management Stockholders”) have a preemptive right to purchase shares in the offering. The maximum shares a Senior Management Stockholder may purchase is a proportionate number of the shares offered to the percentage of shares owned by the Senior Management Stockholder prior to the offering. Additionally, following the initial public offering of our common stock, the Senior Management Stockholders will have limited “piggyback” registration rights with respect to their shares of common stock. The maximum number of shares of Common

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Stock which a Senior Management Stockholder may register is generally proportionate with the percentage of common stock being sold by the Sponsors (relative to their holdings thereof).
 
Sale Participation Agreement.  The Sale Participation Agreement grants the Senior Management Stockholders the right to participate in any private direct or indirect sale of shares of common stock by the Sponsors (such right being referred to herein as the “Tag-Along Right”), and requires all management stockholders to participate in any such private sale if so elected by the Sponsors in the event that the Sponsors are proposing to sell at least 50% of the outstanding common stock held by the Sponsors, whether directly or through their interests in Hercules Holding (such right being referred to herein as the “Drag-Along Right”). The number of shares of common stock which would be required to be sold by a management stockholder pursuant to the exercise of the Drag-Along Right will be the sum of the number of shares of common stock then owned by the management stockholder and his affiliates plus all shares of common stock the management stockholder is entitled to acquire under any unexercised Options (to the extent such Options are exercisable or would become exercisable as a result of the consummation of the proposed sale), multiplied by a fraction (x) the numerator of which shall be the aggregate number of shares of common stock proposed to be transferred by the Sponsors in the proposed sale and (y) the denominator of which shall be the total number of shares of common stock owned by the sponsors entitled to participate in the proposed sale. Management stockholders will bear their pro rata share of any fees, commissions, adjustments to purchase price, expenses or indemnities in connection with any sale under the Sale Participation Agreement.
Amended and Restated Limited Liability Company Agreement of Hercules Holding II, LLC
 
The Investors and certain other investment funds who agreed to co-invest with them through a vehicle jointly controlled by the Investors to provide equity financing for the Recapitalization entered into a limited liability company operating agreement in respect of Hercules Holding (the “LLC Agreement”). The LLC Agreement contains agreements among the parties with respect to the election of our directors, restrictions on the issuance or transfer of interests in us, including a right of first offer, tag-along rights and drag-along rights, and other corporate governance provisions (including the right to approve various corporate actions).
 
Pursuant to the LLC Agreement, Hercules Holding and its members are required to take necessary action to ensure that each manager on the board of Hercules Holding also serves on our Board of Directors. Each of the


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Sponsors has the right to appoint three managers to Hercules Holding’s board, the Frist family has the right to appoint two managers to the board, and the remaining two managers on the board are to come from our management team (currently Messrs. Bovender and Bracken). The rights of the Sponsors and the Frist family to designate managers are subject to their ownership percentages in Hercules Holding remaining above a specified percentage of the outstanding ownership interests in Hercules Holding.
 
The LLC Agreement also requires that, in addition to a majority of the total number of managers being present to constitute a quorum for the transaction of business at any board or committee meeting, at least one manager designated by each of the Investors must be present, unless waived by that Investor. The LLC Agreement further provides that, for so long as at least two Sponsors are entitled to designate managers to Hercules Holding’s board, at least one manager from each of two Sponsors must consent to any board or committee action in order for it to be valid. The LLC Agreement requires that our organizational and governing documents contain provisions similar to those described in this paragraph.
Registration Rights Agreement
 
Hercules Holding and the Investors entered into a registration rights agreement with us upon completion of the Recapitalization. Pursuant to this agreement, the Investors can cause us to register shares of our common stock held by Hercules Holding under the Securities Act and, if requested, to maintain a shelf registration statement effective with respect to such shares. The Investors are also entitled to participate on a pro rata basis in any registration of our common stock under the Securities Act that we may undertake.

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Sponsor Management Agreement
 
In connection with the Merger, we entered into a management agreement with affiliates of each of the Sponsors and certain members of the Frist family, including Thomas F. Frist, Jr., M.D. and Thomas F. Frist III, pursuant to which such entities or their affiliates will provide management services to us. Pursuant to the agreement, in 2007, we paid aggregate transactionmanagement fees of $16.85 million (comprised of approximately $175$1.85 million in connection with services provided by such entitiesfor the period of 2006 following the Merger and $15 million for 2007) and reimbursed out-of-pocket expenses incurred in connection with the Merger and related transactions. In addition, we will pay anprovision of services pursuant to the agreement. The agreement provides that the aggregate annual management fee, ofinitially set at $15 million, which amount increases annually beginning in 2008 at a rate equal to the percentage increase of Adjusted EBITDA (as defined in the Management Agreement) in the applicable year compared to the preceding year, and will reimburseout-of-pocket expenses incurred in connection with the provision of services pursuant to the agreement.year. The agreement also provides that we will pay a one percent fee in connection with certain subsequent financing, acquisition, disposition and change of control transactions, as well as a termination fee based on the net present value of future payment obligations under the management agreement, in the event of an initial public offering or under certain other circumstances. No fees were paid under either of these provisions in 2007. The agreement includes customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates and the Frists.
Other Relationships
 On February
In connection with the Merger, pursuant to the Offer to Purchase and Consent Solicitation dated October 6, 2006, we issued $1.0repurchased approximately $1.3 billion in the aggregate of 6.500% notesour outstanding 8.850% Medium Term Notes due 2016.2007, 7.000% Notes due 2007, 7.250% Notes due 2008, 5.250% Notes due 2008 and 5.500% Notes due 2009. Merrill Lynch & Co., along with other institutions, served as joint book-runninga dealer manager and solicitation agent in connection with the issuance of those notes. The institutions involved in the underwriting of the notes received an aggregate underwriting discount of 1.125%, or $11,250,000, inoffer and consent solicitation. In consideration of their services in thatsuch capacity, of which $400,000$415,000 was paid to Merrill Lynch & Co.
 
On May 25, 2006, the CompanyFebruary 16, 2007, we entered into aAmendment No. 1 to our senior secured Credit Agreement, withdated November 17, 2006, among HCA Inc., HCA UK Capital Limited and the several banks and other financiallending institutions from time to time parties thereto, Merrill Lynch & Co.,thereto. Merrill Lynch, Pierce, Fenner & Smith Incorporated as sole lead arranger and sole bookrunner (“MLPFS”), and Merrill Lynch Capital Corporation, as administrative agent (“MLCC”). The Credit Agreement was for an aggregate principal amount of $400 million, had a one year term and contained terms and conditions similar to our previous credit agreements. MLPFS received a commitment fee of $400,000 with respect to the Credit Agreement. In connection with the Merger, on November 17, 2006, the Company repaid in full all amounts outstanding under the Credit Agreement. No penalties were due in connection with such repayments.
      Effective July 1, 2006, we sold four hospitals (three in West Virginia and one in Virginia) to LifePoint Hospitals, Inc. for consideration of $256 million. Merrill Lynch & Co. acted as our financial advisor in respect of the transaction and, upon closing of the sale, we paid a fee of $2.1 million in respect of those services.
      In connection with the Merger, on November 17, 2006, we issued $5.7 billion of senior secured notes due 2016. Merrill Lynch & Co., along with other institutions, served as joint book-running manager in connection with the issuance of those notes. The institutions involved in the underwriting of the notes received an aggregate underwriting discount of 2.0%, or $114 million, in consideration of their services in that capacity, of which $13.3 million was paid to Merrill Lynch & Co.
      Also in connection with the Merger, on November 17, 2006, we entered into (i) a $2.0 billion senior secured asset-based revolving loan agreement, and (ii) a new senior secured credit agreement, consisting of a $2.0 billion revolving credit facility, a $2.75 billion term loan A, a $8.8 billion term loan B and a€1.0 billion term loan. Obligations under the senior secured credit facilities are guaranteed by all of our material, unrestricted wholly-owned U.S. subsidiaries. In addition, borrowings under the€1.0 billion term loan are guaranteed by all of our material, wholly-owned European subsidiaries. MLPFS, along with other institutions, served as joint lead arranger and joint bookrunner, and MLCCMerrill Lynch Capital Corporation (“MLCC”) served as documentation agent with respectagent. In consideration of their services in such capacity, $765,000 was paid to the senior secured credit facilities. We paid a commitment fee of 1.5% with respect to the senior secured credit facilities, or approximately $252 million in the aggregate, of which MLPFS received $36.4 million.and MLCC.


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Merrill Lynch & Co., MLPFS and MLCC are affiliates of certain funds which hold substantial interests in Hercules Holding and of Christopher J. Birosak, George A. Bitar and Nathan C. Thorne, who serve on our Board of Directors.
 
In 2006,2007, we paid approximately $24.4$25 million to Health Care Property Investors,HCP, Inc. (“HCPI”)(NYSE: HCP), representing the aggregate annual lease payments for certain medical office buildings leased by the Company. Charles A. Elcan is an executive officer of HCPIHCP, Inc. and is theson-inson-in-law-law andbrother-inbrother-in-law-law of Dr. Thomas F. Frist, Jr. and Thomas F. Frist, III, respectively, who are members of our Board of Directors.
 In 2006, two hospitals owned and operated by affiliates of HCA were party to a professional medical services agreement with Commonwealth Perinatal Associates, P.C. (“Commonwealth Perinatal”). The total fees paid to Commonwealth Perinatal by HCA pursuant to the agreement in consideration of services provided in 2006 totaled $300,000. Dr. Rodrick Love is employed by Commonwealth Perinatal and is theson-in-law of Dr. Frank S. Royal, one of our former directors prior to the consummation of the Merger.
Christopher S. George serves as the chief executive officer of an HCA-affiliated hospital, and in 2006,2007, Mr. George received total compensation in respect of base salary and bonus of approximately $400,000$272,000 for his services. Mr. George also received certain other benefits, including awards of equity, customary to similar positions within the Company. Mr. George’s father, V. Carl George, is an executive officer of HCA.
Director Independence
 
Our Board of Directors is composed of Jack O. Bovender, Jr., Chairman, Christopher J. Birosak, George A. Bitar, Richard M. Bracken, John P. Connaughton, Thomas F. Frist, Jr., M.D., Thomas F. Frist III, Christopher R. Gordon, Michael W. Michelson, James C. Momtazee, Stephen G. Pagliuca, Peter M. Stavros and Nathan C. Thorne. Our Board of Directors currently has four standing committees: the Audit and Compliance Committee, the Compensation Committee, the Executive Committee and the Patient Safety and Quality of Care Committee. Each of the Investors has the right to have at least one director serve on all standing committees.
         
        Patient
 ��Safety and
Audit andQuality of
Name of DirectorComplianceCompensationExecutiveCare
Christopher J. BirosakChair       Safety and
Audit and
Quality of
Name of Director
ComplianceCompensationExecutiveCare
Christopher J. BirosakChair      
George A. Bitar   X    
Jack O. Bovender, Jr.*     Chair  
Richard M. Bracken*        
John P. Connaughton   X    
Thomas F. Frist, Jr., M.D.    X XX  
Thomas F. Frist III X      
Christopher R. Gordon X      
Michael W. Michelson   Chair X  
James C. Momtazee X      
Stephen G. Pagliuca     X Chair
Peter M. Stavros       X
Nathan C. Thorne     X XX
 
*Indicates management director.
 
Though not formally considered by our Board because our common stock is no longernot currently registered with the SEC or traded on any national securities exchange, based upon the listing standards of the NYSE, the national securities exchange upon which our common stock was traded prior to the Merger, we do not believe that any of our directors would be considered “independent” because of their relationships with certain affiliates of the funds and other entities which hold significant interests in Hercules Holding, which owns

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approximately 97.5% of our outstanding common stock, and other relationships with us. See “Certain Relationships and Related Transactions.” Accordingly, we do not believe that any of Messrs. Birosak, Frist, Gordon or Momtazee, the members of our Audit and Compliance committee, would meet the independence requirements orRule 10A-1 of the Exchange Act or the NYSE’s audit committee independence requirements, or that Messrs. Michelson, Bitar, Connaughton or Frist, the members of our


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Compensation Committee, would meet the NYSE’s independence requirements. We do not have a nominating/corporate governance committee, or a committee that serves a similar purpose.
Item 14.Principal Accountant Fees and Services
Item 14.Principal Accountant Fees and Services
The Audit and Compliance Committee has appointed Ernst & Young LLP as our independent registered public accounting firm. The independent registered public accounting firm will audit our consolidated financial statements for 20072008 and management’s assessment as to whether the Company maintained effectiveeffectiveness of our internal controls over financial reporting as of December 31, 2007.2008.
 
Audit Fees.  The aggregate audit fees billed by Ernst & Young LLP for professional services rendered for the audit of our annual consolidated financial statements, for the reviews of the condensed consolidated financial statements included in our quarterly reports onForm 10-Q, for the audit of management’s report on the effectiveness of the Company’s internal control over financial reporting, under the Sarbanes-Oxley Act of 2002, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings totaled $8.9 million for 2007 and $9.0 million for 2006 and $8.8 million for 2005.2006.
 
Audit-Related Fees.  The aggregate fees billed by Ernst & Young LLP for assurance and related services not described above under “Audit Fees” were $1.3 million for 2007 and $1.5 million for both 2006 and 2005.2006. Audit-related services principally include audits of certain of our subsidiaries and benefit plans.
 
Tax Fees.  The aggregate fees billed by Ernst & Young LLP for professional services rendered for tax compliance, tax advice and tax planning were $2.2 million for 2007 and $1.6 million for 2006 and $2.1 million for 2005.2006.
 
All Other Fees.  The aggregate fees billed by Ernst & Young LLP for products or services other than those described above were $749,000 for 2007 and $79,000 for 2006 and $227,000 for 2005.2006.
 
The Board of Directors has adopted an Audit and Compliance Committee Charter which, among other things, requires the Audit and Compliance Committee to preapprove all audit and permitted nonaudit services (including the fees and terms thereof) to be performed for us by our independent registered public accounting firm.
 
All services performed for us by Ernst & Young LLP in 20062007 were preapproved by the Audit and Compliance Committee. The Audit and Compliance Committee concluded that the provision of audit-related services, tax services and other services by Ernst & Young LLP was compatible with the maintenance of the firm’s independence in the conduct of its auditing functions. Our preapproval policy provides that the Audit and Compliance Committee shall preapprove nonaudit services and audit-related services. Any decisions to preapprove any services shall be presented to the Audit and Compliance Committee at its next scheduled meeting.


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PART IV
Item 15.Exhibits and Financial Statement Schedules
 
(a) Documents filed as part of the report:
 
1. Financial Statements.The accompanying Index to Consolidated Financial Statements onpage F-1 of this Annual Report onForm 10-K is provided in response to this item.
 
2. List of Financial Statement Schedules.All schedules are omitted because the required information is either not present, not present in material amounts or presented within the consolidated financial statements.
 
3. List of Exhibits
2.1—Agreement and Plan of Merger, dated July 24, 2006, by and among HCA Inc., Hercules Holding II, LLC and Hercules Acquisition Corporation (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 25, 2006, and incorporated herein by reference).
3.1—Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
3.2—Amended and Restated Bylaws of the Company.
4.1—Specimen Certificate for shares of Common Stock, par value $0.01 per share, of the Company (filed as Exhibit 3 to the Company’s Form 8-A/A, Amendment No. 2, dated March 11, 2004, and incorporated herein by reference).
4.2—Indenture, dated November 17, 2006, among HCA Inc., the guarantors party thereto and The Bank of New York, as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
4.3—Security Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary grantors party thereto and The Bank of New York, as collateral agent (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
4.4—Pledge Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary pledgors party thereto and The Bank of New York, as collateral agent (filed as Exhibit 4.3 to the Company’s Current Report of Form 8-K filed November 24, 2006, and incorporated herein by reference).
4.5—Registration Rights Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary guarantors party thereto and the Initial Purchasers (filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
4.6(a)—Form of 91/8% Senior Secured Notes due 2014 (included in Exhibit 4.2).
4.6(b)—Form of 91/4% Senior Secured Notes due 2016 (included in Exhibit 4.2).
4.6(c)—Form of 95/8%/103/8% Senior Secured Toggle Notes due 1016 (included in Exhibit 4.2).
4.7(a)—$13,550,000,000 —€1,000,000,000 Credit Agreement, dated as of November 17, 2006, among HCA Inc., HCA UK Capital Limited, the lending institutions from time to time parties thereto, Banc of America Securities LLC, J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers and joint bookrunners, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citicorp North America, Inc., as co-syndication agents and Merrill Lynch Capital Corporation, as documentation agent (filed as Exhibit 4.8 to the Company’s Current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
       
 2.1 — Agreement and Plan of Merger, dated July 24, 2006, by and among HCA Inc., Hercules Holding II, LLC and Hercules Acquisition Corporation (filed as Exhibit 2.1 to the Company’s Current Report onForm 8-K filed July 25, 2006, and incorporated herein by reference).
 3.1 — Amended and Restated Certificate of Incorporation of the Company.
 3.2 — Amended and Restated Bylaws of the Company.
 4.1 — Specimen Certificate for shares of Common Stock, par value $0.01 per share, of the Company (filed as Exhibit 3 to the Company’sForm 8-A/A, Amendment No. 2, dated March 11, 2004, and incorporated herein by reference).
 4.2 — Indenture, dated November 17, 2006, among HCA Inc., the guarantors party thereto and The Bank of New York, as trustee (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.3 — Security Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary grantors party thereto and The Bank of New York, as collateral agent (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.4 — Pledge Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary pledgors party thereto and The Bank of New York, as collateral agent (filed as Exhibit 4.3 to the Company’s Current Report ofForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.5 — Registration Rights Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary guarantors party thereto and the Initial Purchasers (filed as Exhibit 4.4 to the Company’s Current Report onForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.6(a) — Form of 91/8% Senior Secured Notes due 2014 (included in Exhibit 4.2).
 4.6(b) — Form of 91/4% Senior Secured Notes due 2016 (included in Exhibit 4.2).
 4.6(c) — Form of 95/8%/103/8% Senior Secured Toggle Notes due 1016 (included in Exhibit 4.2).
 4.7(a) — $13,550,000,000 — €1,000,000,000 Credit Agreement, dated as of November 17, 2006, among HCA Inc., HCA UK Capital Limited, the lending institutions from time to time parties thereto, Banc of America Securities LLC, J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers and joint bookrunners, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citicorp North America, Inc., asco-syndication agents and Merrill Lynch Capital Corporation, as documentation agent (filed as Exhibit 4.8 to the Company’s Current Report onForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.7(b) — Amendment No. 1 to the Credit Agreement, dated as of February 16, 2007, among HCA Inc., HCA UK Capital Limited, the lending institutions from time to time parties thereto, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Citicorp North America, Inc., asCo-Syndication Agents, Banc of America Securities, LLC, J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Lead Arrangers and Bookrunners, Deutsche Bank Securities and Wachovia Capital Markets LLC, as Joint Bookrunners and Merrill Lynch Capital Corporation, as Documentation Agent (filed as Exhibit 4.7(b) to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).


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4.7(b)—Amendment No. 1 to the Credit Agreement, dated as of February 16, 2007, among HCA Inc., HCA UK Capital Limited, the lending institutions from time to time parties thereto, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., and Citicorp North America, Inc., as Co- Syndication Agents, Banc of America Securities, LLC, J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Lead Arrangers and Bookrunners, Deutsche Bank Securities and Wachovia Capital Markets LLC, as Joint Bookrunners and Merrill Lynch Capital Corporation, as Documentation Agent.
4.8—U.S. Guarantee, dated November 17, 2006, among HCA Inc., the subsidiary guarantors party thereto and Bank of America, N.A., as administrative agent (filed as Exhibit 4.9 to the Company’s Current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
4.9—Security Agreement, dated November 17, 2006, among HCA Inc., the subsidiary grantors party thereto and Bank of America, N.A., as collateral agent (filed as Exhibit 4.10 to the Company’s Current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
4.10—Pledge Agreement, dated November 17, 2006, among HCA Inc., the subsidiary pledgors party thereto and Bank of America, N.A., as collateral agent (filed as Exhibit 4.11 to the Company’s Current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
4.11—$2,000,000,000 Credit Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary borrowers parties thereto, the lending institutions from time to time parties thereto, Banc of America Securities LLC, J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers and joint bookrunners, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citicorp North America, Inc., as co-syndication agents and Merrill Lynch Capital Corporation, as documentation agent (filed as Exhibit 4.12 to the Company’s Current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
4.12—Security Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary borrowers party thereto and Bank of America, N.A., as collateral agent (filed as Exhibit 4.13 to the Company’s Current Report on Form 8-K filed November 24, 2006, and incorporated herein by reference).
4.13—Registration Rights Agreement, dated as of November 17, 2006, among HCA Inc., Hercules Holding II, LLC and certain other parties thereto.
4.14—Registration Rights Agreement, dated as of March 16, 1989, by and among HCA-Hospital Corporation of America and the persons listed on the signature pages thereto (filed as Exhibit (g)(24) to Amendment No. 3 to the Schedule 13E-3 filed by HCA-Hospital Corporation of America, Hospital Corporation of America and The HCA Profit Sharing Plan on March 22, 1989, and incorporated herein by reference).
4.15—Assignment and Assumption Agreement, dated as of February 10, 1994, between HCA-Hospital Corporation of America and the Company relating to the Registration Rights Agreement, as amended (filed as Exhibit 4.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).
4.16(a)—Indenture, dated as of December 16, 1993 between the Company and The First National Bank of Chicago, as Trustee (filed as Exhibit 4.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).
4.16(b)—First Supplemental Indenture, dated as of May 25, 2000 between the Company and Bank One Trust Company, N.A., as Trustee (filed as Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference).
4.16(c)—Second Supplemental Indenture, dated as of July 1, 2001 between the Company and Bank One Trust Company, N.A., as Trustee (filed as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, and incorporated herein by reference).
4.16(d)—Third Supplemental Indenture, dated as of December 5, 2001 between the Company and The Bank of New York, as Trustee (filed as Exhibit 4.5(d) to the Company’s Annual Report of Form 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference).
       
 4.8 — U.S. Guarantee, dated November 17, 2006, among HCA Inc., the subsidiary guarantors party thereto and Bank of America, N.A., as administrative agent (filed as Exhibit 4.9 to the Company’s Current Report onForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.9 — Security Agreement, dated November 17, 2006, among HCA Inc., the subsidiary grantors party thereto and Bank of America, N.A., as collateral agent (filed as Exhibit 4.10 to the Company’s Current Report onForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.10 — Pledge Agreement, dated November 17, 2006, among HCA Inc., the subsidiary pledgors party thereto and Bank of America, N.A., as collateral agent (filed as Exhibit 4.11 to the Company’s Current Report onForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.11 — $2,000,000,000 Credit Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary borrowers parties thereto, the lending institutions from time to time parties thereto, Banc of America Securities LLC, J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers and joint bookrunners, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citicorp North America, Inc., as co-syndication agents and Merrill Lynch Capital Corporation, as documentation agent (filed as Exhibit 4.12 to the Company’s Current Report onForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.12 — Security Agreement, dated as of November 17, 2006, among HCA Inc., the subsidiary borrowers party thereto and Bank of America, N.A., as collateral agent (filed as Exhibit 4.13 to the Company’s Current Report onForm 8-K filed November 24, 2006, and incorporated herein by reference).
 4.13(a) — General Intercreditor Agreement, dated as of November 17, 2006, between Bank of America, N.A., as First Lien Collateral Agent, and The Bank of New York, as Junior Lien Collateral Agent (filed as Exhibit 4.13(a) to the Company’s Registration Statement on Form S-4 (File No. 333-145054), and incorporated herein by reference).
 4.13(b) — Receivables Intercreditor Agreement, dated as of November 17, 2006, among Bank of America, N.A., as ABL Collateral Agent, Bank of America, N.A., as CF Collateral Agent and The Bank of New York, as Bonds Collateral Agent (filed as Exhibit 4.13(b) to the Company’s Registration Statement on Form S-4 (File No. 333-145054), and incorporated herein by reference).
 4.14 — Registration Rights Agreement, dated as of November 17, 2006, among HCA Inc., Hercules Holding II, LLC and certain other parties thereto.
 4.15 — Registration Rights Agreement, dated as of March 16, 1989, by and among HCA-Hospital Corporation of America and the persons listed on the signature pages thereto (filed as Exhibit(g)(24) to Amendment No. 3 to theSchedule 13E-3 filed by HCA-Hospital Corporation of America, Hospital Corporation of America and The HCA Profit Sharing Plan on March 22, 1989, and incorporated herein by reference).
 4.16 — Assignment and Assumption Agreement, dated as of February 10, 1994, between HCA-Hospital Corporation of America and the Company relating to the Registration Rights Agreement, as amended (filed as Exhibit 4.7 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).
 4.17(a) — Indenture, dated as of December 16, 1993 between the Company and The First National Bank of Chicago, as Trustee (filed as Exhibit 4.11 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).
 4.17(b) — First Supplemental Indenture, dated as of May 25, 2000 between the Company and Bank One Trust Company, N.A., as Trustee (filed as Exhibit 4.4 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference).
 4.17(c) — Second Supplemental Indenture, dated as of July 1, 2001 between the Company and Bank One Trust Company, N.A., as Trustee (filed as Exhibit 4.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2001, and incorporated herein by reference).
 4.17(d) — Third Supplemental Indenture, dated as of December 5, 2001 between the Company and The Bank of New York, as Trustee (filed as Exhibit 4.5(d) to the Company’s Annual Report ofForm 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference).
 4.17(e) — Fourth Supplemental Indenture, dated as of November 14, 2006, between the Company and The Bank of New York, as Trustee (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K filed November 16, 2006, and incorporated herein by reference).

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4.16(e)—Fourth Supplemental Indenture, dated as of November 14, 2006, between the Company and The Bank of New York, as Trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed November 16, 2006, and incorporated herein by reference).
4.17—Form of 7.5% Debentures due 2023 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated December 15, 1993, and incorporated herein by reference).
4.18—Form of 8.36% Debenture due 2024 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated April 20, 1994, and incorporated herein by reference).
4.19—Form of Fixed Rate Global Medium Term Note (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated July 11, 1994, and incorporated herein by reference).
4.20—Form of Floating Rate Global Medium Term Note (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated July 11, 1994, and incorporated herein by reference).
4.21—Form of 7.69% Note due 2025 (filed as Exhibit 4.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and incorporated herein by reference).
4.22—Form of 7.19% Debenture due 2015 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 20, 1995, and incorporated herein by reference).
4.23—Form of 7.50% Debenture due 2095 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated November 20, 1995, and incorporated herein by reference).
4.24—Form of 7.05% Debenture due 2027 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated December 5, 1995, and incorporated herein by reference).
4.25—Form of Fixed Rate Global Medium Term Note (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated July 2, 1996, and incorporated herein by reference).
4.26(a)—8.750% Note in the principal amount of $400,000,000 due 2010 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 23, 2000, and incorporated herein by reference).
4.26(b)—8.750% Note in the principal amount of $350,000,000 due 2010 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated August 23, 2000, and incorporated herein by reference).
4.27—8.75% Note due 2010 in the principal amount of £150,000,000 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated October 25, 2000, and incorporated herein by reference).
4.28(a)—77/8% Note in the principal amount of $100,000,000 due 2011 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated January 23, 2001, and incorporated herein by reference).
4.28(b)—77/8% Note in the principal amount of $400,000,000 due 2011 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated January 23, 2001, and incorporated herein by reference).
4.29(a)—6.95% Note due 2012 in the principal amount of $400,000,000. (filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K dated April 23, 2002, and incorporated herein by reference).
4.29(b)—6.95% Note due 2012 in the principal amount of $100,000,000. (filed as Exhibit 4.6 to the Company’s Current Report on Form 8-K dated April 23, 2002, and incorporated herein by reference).
4.30(a)—6.30% Note due 2012 in the principal amount of $400,000,000. (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated September 18, 2002, and incorporated herein by reference).
4.30(b)—6.30% Note due 2012 in the principal amount of $100,000,000. (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated September 18, 2002, and incorporated herein by reference).
4.31(a)—6.25% Note due 2013 in the principal amount of $400,000,000 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated February 5, 2003, and incorporated herein by reference).
       
 4.18 — Form of 7.5% Debentures due 2023 (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated December 15, 1993, and incorporated herein by reference).
 4.19 — Form of 8.36% Debenture due 2024 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated April 20, 1994, and incorporated herein by reference).
 4.20 — Form of Fixed Rate Global Medium Term Note (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated July 11, 1994, and incorporated herein by reference).
 4.21 — Form of Floating Rate Global Medium Term Note (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated July 11, 1994, and incorporated herein by reference).
 4.22 — Form of 7.69% Note due 2025 (filed as Exhibit 4.10 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2004, and incorporated herein by reference).
 4.23 — Form of 7.19% Debenture due 2015 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated November 20, 1995, and incorporated herein by reference).
 4.24 — Form of 7.50% Debenture due 2095 (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated November 20, 1995, and incorporated herein by reference).
 4.25 — Form of 7.05% Debenture due 2027 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated December 5, 1995, and incorporated herein by reference).
 4.26 — Form of Fixed Rate Global Medium Term Note (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated July 2, 1996, and incorporated herein by reference).
 4.27(a) — 8.750% Note in the principal amount of $400,000,000 due 2010 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated August 23, 2000, and incorporated herein by reference).
 4.27(b) — 8.750% Note in the principal amount of $350,000,000 due 2010 (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated August 23, 2000, and incorporated herein by reference).
 4.28 — 8.75% Note due 2010 in the principal amount of £150,000,000 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated October 25, 2000, and incorporated herein by reference).
 4.29(a) — 77/8% Note in the principal amount of $100,000,000 due 2011 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated January 23, 2001, and incorporated herein by reference).
 4.29(b) — 77/8% Note in the principal amount of $400,000,000 due 2011 (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated January 23, 2001, and incorporated herein by reference).
 4.30(a) — 6.95% Note due 2012 in the principal amount of $400,000,000. (filed as Exhibit 4.5 to the Company’s Current Report onForm 8-K dated April 23, 2002, and incorporated herein by reference).
 4.30(b) — 6.95% Note due 2012 in the principal amount of $100,000,000. (filed as Exhibit 4.6 to the Company’s Current Report onForm 8-K dated April 23, 2002, and incorporated herein by reference).
 4.31(a) — 6.30% Note due 2012 in the principal amount of $400,000,000. (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated September 18, 2002, and incorporated herein by reference).
 4.31(b) — 6.30% Note due 2012 in the principal amount of $100,000,000. (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated September 18, 2002, and incorporated herein by reference).
 4.32(a) — 6.25% Note due 2013 in the principal amount of $400,000,000 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated February 5, 2003, and incorporated herein by reference).
 4.32(b) — 6.25% Note due 2013 in the principal amount of $100,000,000 (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated February 5, 2003, and incorporated herein by reference).
 4.33(a) — 63/4% Note due 2013 in the principal amount of $400,000,000 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated July 23, 2003, and incorporated herein by reference).
 4.33(b) — 63/4% Note due 2013 in the principal amount of $100,000,000 (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated July 23, 2003, and incorporated herein by reference).
 4.34 — 7.50% Note due 2033 in the principal amount of $250,000,000 (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated November 6, 2003, and incorporated herein by reference).
 4.35 — 5.75% Note due 2014 in the principal amount of $500,000,000 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated March 8, 2004, and incorporated herein by reference).
 4.36 — 5.500% Note due 2009 in the principal amount of $500,000,000 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K dated November 16, 2004, and incorporated herein by reference).

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4.31(b)—6.25% Note due 2013 in the principal amount of $100,000,000 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated February 5, 2003, and incorporated herein by reference).
4.32(a)—63/4% Note due 2013 in the principal amount of $400,000,000 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated July 23, 2003, and incorporated herein by reference).
4.32(b)—63/4% Note due 2013 in the principal amount of $100,000,000 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated July 23, 2003, and incorporated herein by reference).
4.33—7.50% Note due 2033 in the principal amount of $250,000,000 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated November 6, 2003, and incorporated herein by reference).
4.34—5.75% Note due 2014 in the principal amount of $500,000,000 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated March 8, 2004, and incorporated herein by reference).
4.35—5.500% Note due 2009 in the principal amount of $500,000,000 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 16, 2004, and incorporated herein by reference).
4.36(a)—6.375% Note due 2015 in the principal amount of $500,000,000 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated November 16, 2004, and incorporated herein by reference).
4.36(b)—6.375% Note due 2015 in the principal amount of $250,000,000 (filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K dated November 16, 2004, and incorporated herein by reference).
4.37(a)—6.500% Note due 2016 in the principal amount of $500,000,000 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 8, 2006, and incorporated herein by reference).
4.37(b)—6.500% Note due 2016 in the principal amount of $500,000,000 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on February 8, 2006, and incorporated herein by reference).
10.1(a)—Amended and Restated Columbia/ HCA Healthcare Corporation 1992 Stock and Incentive Plan (filed as Exhibit 10.7(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and incorporated herein by reference).*
10.1(b)—First Amendment to Amended and Restated Columbia/ HCA Healthcare Corporation 1992 Stock and Incentive Plan (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference).*
10.2—HCA-Hospital Corporation of America Nonqualified Initial Option Plan (filed as Exhibit 4.6 to the Company’s Registration Statement on Form S-3 (File No. 33-52379), and incorporated herein by reference).*
10.3—Form of Indemnity Agreement with certain officers and directors (filed as Exhibit 10(kk) to Galen Health Care, Inc.’s Registration Statement on Form 10, as amended, and incorporated herein by reference).
10.4—Form of Galen Health Care, Inc. 1993 Adjustment Plan (filed as Exhibit 4.15 to the Company’s Registration Statement on Form S-8 (File No. 33-50147), and incorporated herein by reference).*
10.5—HCA-Hospital Corporation of America 1992 Stock Compensation Plan (filed as Exhibit 10(t) to HCA-Hospital Corporation of America’s Registration Statement on Form S-1 (File No. 33-44906), and incorporated herein by reference).*
10.6—Columbia/HCA Healthcare Corporation 2000 Equity Incentive Plan (filed as Exhibit A to the Company’s Proxy Statement for the Annual Meeting of Stockholders on May 25, 2000, and incorporated herein by reference).*
       
 4.37(a) — 6.375% Note due 2015 in the principal amount of $500,000,000 (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K dated November 16, 2004, and incorporated herein by reference).
 4.37(b) — 6.375% Note due 2015 in the principal amount of $250,000,000 (filed as Exhibit 4.3 to the Company’s Current Report onForm 8-K dated November 16, 2004, and incorporated herein by reference).
 4.38(a) — 6.500% Note due 2016 in the principal amount of $500,000,000 (filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K filed on February 8, 2006, and incorporated herein by reference).
 4.38(b) — 6.500% Note due 2016 in the principal amount of $500,000,000 (filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K filed on February 8, 2006, and incorporated herein by reference).
 10.1(a) — Amended and Restated Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan (filed as Exhibit 10.7(b) to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 1998, and incorporated herein by reference).*
 10.1(b) — First Amendment to Amended and Restated Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan (filed as Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference).*
 10.2 — HCA-Hospital Corporation of America Nonqualified Initial Option Plan (filed as Exhibit 4.6 to the Company’s Registration Statement onForm S-3 (FileNo. 33-52379), and incorporated herein by reference).*
 10.3 — Form of Indemnity Agreement with certain officers and directors (filed as Exhibit 10(kk) to Galen Health Care, Inc.’s Registration Statement on Form 10, as amended, and incorporated herein by reference).
 10.4 — Form of Galen Health Care, Inc. 1993 Adjustment Plan (filed as Exhibit 4.15 to the Company’s Registration Statement onForm S-8 (FileNo. 33-50147), and incorporated herein by reference).*
 10.5 — HCA-Hospital Corporation of America 1992 Stock Compensation Plan (filed as Exhibit 10(t) toHCA-Hospital Corporation of America’s Registration Statement onForm S-1 (FileNo. 33-44906), and incorporated herein by reference).*
 10.6 — Columbia/HCA Healthcare Corporation 2000 Equity Incentive Plan (filed as Exhibit A to the Company’s Proxy Statement for the Annual Meeting of Stockholders on May 25, 2000, and incorporated herein by reference).*
 10.7 — Form of Non-Qualified Stock Option Award Agreement (Officers) (filed as Exhibit 99.2 to the Company’s Current Report onForm 8-K dated February 2, 2005, and incorporated herein by reference).*
 10.8 — HCA 2005 Equity Incentive Plan (filed as Exhibit B to the Company’s Proxy Statement for the Annual Meeting of Shareholders on May 26, 2005, and incorporated herein by reference);.*
 10.9 — Form of 2005 Non-Qualified Stock Option Agreement (Officers) (filed as Exhibit 99.2 to the Company’s Current Report onForm 8-K dated October 6, 2005, and incorporated herein by reference).*
 10.10 — Form of 2006 Non-Qualified Stock Option Award Agreement (Officers) (filed as Exhibit 10.2 to the Company’s Current Report onForm 8-K dated February 1, 2006, and incorporated herein by reference).*
 10.11 — 2006 Stock Incentive Plan for Key Employees of HCA Inc. and its Affiliates (filed as Exhibit 10.11 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).*
 10.12 — Management Stockholder’s Agreement dated November 17, 2006 (filed as Exhibit 10.12 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).
 10.13 — Sale Participation Agreement dated November 17, 2006 (filed as Exhibit 10.13 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).
 10.14 — Form of Option Rollover Agreement (filed as Exhibit 10.14 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).*
 10.15 — Form of Option Agreement (2007) (filed as Exhibit 10.15 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).*

99

109

10.7—Form of Non-Qualified Stock Option Award Agreement (Officers) (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated February 2, 2005, and incorporated herein by reference).*
10.8—HCA 2005 Equity Incentive Plan (filed as Exhibit B to the Company’s Proxy Statement for the Annual Meeting of Shareholders on May 26, 2005, and incorporated herein by reference);.*
10.9—Form of 2005 Non-Qualified Stock Option Agreement (Officers) (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated October 6, 2005, and incorporated herein by reference).*
10.10—Form of 2006 Non-Qualified Stock Option Award Agreement (Officers) (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 1, 2006, and incorporated herein by reference).*
10.11—2006 Stock Incentive Plan for Key Employees of HCA Inc. and its Affiliates.*
10.12—Management Stockholder’s Agreement dated November 17, 2006.
10.13—Sale Participation Agreement dated November 17, 2006.
10.14—Form of Option Rollover Agreement.*
10.15—Form of Option Agreement (2007).*
10.16—Exchange and Purchase Agreement.
10.17—Civil and Administrative Settlement Agreement, dated December 14, 2000 between the Company, the United States Department of Justice and others (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated December 20, 2000, and incorporated herein by reference).
10.18—Plea Agreement, dated December 14, 2000 between the Company, Columbia Homecare Group, Inc., Columbia Management Companies, Inc. and the United States Department of Justice (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K dated December 20, 2000, and incorporated herein by reference).
10.19—Corporate Integrity Agreement, dated December 14, 2000 between the Company and the Office of Inspector General of the United States Department of Health and Human Services (filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K dated December 20, 2000, and incorporated herein by reference).
10.20—Management Agreement, dated November 17, 2006, among HCA Inc., Bain Capital Partners, LLC, Kohlberg Kravis Roberts & Co. L.P., Dr. Thomas F. Frist Jr., Patricia F. Elcan, William R. Frist and Thomas F. Frist, III, and Merrill Lynch Global Partners, Inc.
10.21—Retirement Agreement between the Company and Thomas F. Frist, Jr., M.D. dated as of January 1, 2002 (filed as Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference).*
10.22(a)—HCA Supplemental Executive Retirement Plan dated as of July 1, 2001 (filed as Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference).*
10.22(b)—First Amendment to the HCA Supplemental Executive Retirement Plan (filed as Exhibit 10.21(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).*
10.22(c)—Second Amendment to Supplemental Executive Retirement Plan dated November 16, 2006.*
10.23—HCA Restoration Plan dated as of January 1, 2001 (filed as Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference).*
10.24—HCA Inc. 2005 Senior Officer Performance Excellence Program (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 30, 2005, and incorporated herein by reference).*
10.25—HCA Inc. 2006 Senior Officer Performance Excellence Program (filed as Exhibit 10.3 to the Company’s Current Report on 8-K filed February 1, 2006, and incorporated herein by reference).*
10.26—HCA Inc. 2007 Senior Officer Performance Excellence Program.*
       
 10.16 — Form of Option Agreement (2008).*
 10.17 — Exchange and Purchase Agreement (filed as Exhibit 10.16 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).
 10.18 — Civil and Administrative Settlement Agreement, dated December 14, 2000 between the Company, the United States Department of Justice and others (filed as Exhibit 99.2 to the Company’s Current Report onForm 8-K dated December 20, 2000, and incorporated herein by reference).
 10.19 — Plea Agreement, dated December 14, 2000 between the Company, Columbia Homecare Group, Inc., Columbia Management Companies, Inc. and the United States Department of Justice (filed as Exhibit 99.3 to the Company’s Current Report onForm 8-K dated December 20, 2000, and incorporated herein by reference).
 10.20 — Corporate Integrity Agreement, dated December 14, 2000 between the Company and the Office of Inspector General of the United States Department of Health and Human Services (filed as Exhibit 99.4 to the Company’s Current Report onForm 8-K dated December 20, 2000, and incorporated herein by reference).
 10.21 — Management Agreement, dated November 17, 2006, among HCA Inc., Bain Capital Partners, LLC, Kohlberg Kravis Roberts & Co. L.P., Dr. Thomas F. Frist Jr., Patricia F. Elcan, William R. Frist and Thomas F. Frist, III, and Merrill Lynch Global Partners, Inc. (filed as Exhibit 10.20 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).
 10.22 — Retirement Agreement between the Company and Thomas F. Frist, Jr., M.D. dated as of January 1, 2002 (filed as Exhibit 10.30 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference).*
 10.23(a) — HCA Supplemental Executive Retirement Plan dated as of July 1, 2001 (filed as Exhibit 10.31 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference).*
 10.23(b) — First Amendment to the HCA Supplemental Executive Retirement Plan (filed as Exhibit 10.21(b) to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).*
 10.23(c) — Second Amendment to Supplemental Executive Retirement Plan dated November 16, 2006.*
 10.24 — HCA Restoration Plan dated as of January 1, 2001 (filed as Exhibit 10.32 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference).*
 10.25 — HCA Inc. 2006 Senior Officer Performance Excellence Program (filed as Exhibit 10.3 to the Company’s Current Report on8-K filed February 1, 2006, and incorporated herein by reference).*
 10.26 — HCA Inc. 2007 Senior Officer Performance Excellence Program (filed as Exhibit 10.26 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).*
 10.27 — HCA Inc.2008-2009 Senior Officer Performance Excellence Program.*
 10.28(a) — Employment Agreement dated November 16, 2006 (Jack O. Bovender Jr.) (filed as Exhibit 10.27(a) to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).*
 10.28(b) — Employment Agreement dated November 16, 2006 (Richard M. Bracken) (filed as Exhibit 10.27(b) to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).*
 10.28(c) — Employment Agreement dated November 16, 2006 (R. Milton Johnson) (filed as Exhibit 10.27(c) to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).*
 10.28(d) — Employment Agreement dated November 16, 2006 (Samuel N. Hazen) (filed as Exhibit 10.27(d) to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference).*
 10.28(e) — Employment Agreement dated November 16, 2006 (Beverly B. Wallace).*

100

110

10.27(a)—Employment Agreement dated November 16, 2006 (Jack O. Bovender Jr.).*
10.27(b)—Employment Agreement dated November 16, 2006 (Richard M. Bracken).*
10.27(c)—Employment Agreement dated November 16, 2006 (R. Milton Johnson).*
10.27(d)—Employment Agreement dated November 16, 2006 (Samuel N. Hazen).*
10.27(e)—Employment Agreement dated November 16, 2006 (W. Paul Rutledge).*
10.28—Administrative Settlement Agreement dated June 25, 2003 by and between the United States Department of Health and Human Services, acting through the Centers for Medicare and Medicaid Services, and the Company (filed as Exhibit 10.1 to the Company’s Quarterly Report of Form 10-Q for the quarter ended June 30, 2003, and incorporated herein by reference).
10.29—Civil Settlement Agreement by and among the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services, the TRICARE Management Activity (filed as Exhibit 10.2 to the Company’s Quarterly Report of Form 10-Q for the quarter ended June 30, 2003, and incorporated herein by reference).
10.30(a)—$2.5 billion Credit Agreement, dated November 9, 2004, by and among the Company, the several banks and other financial institutions from time to time parties hereto, J.P. Morgan Securities Inc., as Sole Advisor, Lead Arranger and Bookrunner, certain other agents and arrangers and JPMorgan Chase Bank, as Administrative Agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 10, 2004, and incorporated herein by reference).
10.30(b)—First Amendment to $2.5 billion Credit Agreement, dated November 3, 2005 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 3, 2005, and incorporated herein by reference).
10.31—$1.0 billion Credit Agreement, dated November 3, 2005, by and among the Company, the Several banks and other financial institutions from time to time parties thereto, J.P. Morgan Securities Inc., Merrill Lynch & Co., and Merrill Lynch, Pierce, Fenner & Smith, incorporated, as Joint Lead Arrangers & Joint Bookrunners, Merrill Lynch Capital Corporation, as Syndication Agent, and J.P. Morgan Chase Bank, as Administrative Agent (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 3, 2005, and incorporated herein by reference).
12—Statement re Computation of Ratio of Earnings to Fixed Charges.
21—List of Subsidiaries.
23—Consent of Ernst & Young LLP.
31.1—Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2—Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32—Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 10.28(f) — 2008 Named Executive Officer Salaries and Performance Excellence Program Targets.*
 10.29 — Administrative Settlement Agreement dated June 25, 2003 by and between the United States Department of Health and Human Services, acting through the Centers for Medicare and Medicaid Services, and the Company (filed as Exhibit 10.1 to the Company’s Quarterly Report ofForm 10-Q for the quarter ended June 30, 2003, and incorporated herein by reference).
 10.30 — Civil Settlement Agreement by and among the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services, the TRICARE Management Activity (filed as Exhibit 10.2 to the Company’s Quarterly Report ofForm 10-Q for the quarter ended June 30, 2003, and incorporated herein by reference).
 10.31(a) — $2.5 billion Credit Agreement, dated November 9, 2004, by and among the Company, the several banks and other financial institutions from time to time parties hereto, J.P. Morgan Securities Inc., as Sole Advisor, Lead Arranger and Bookrunner, certain other agents and arrangers and JPMorgan Chase Bank, as Administrative Agent (filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K dated November 10, 2004, and incorporated herein by reference).
 10.31(b) — First Amendment to $2.5 billion Credit Agreement, dated November 3, 2005 (filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K filed November 3, 2005, and incorporated herein by reference).
 10.32 — $1.0 billion Credit Agreement, dated November 3, 2005, by and among the Company, the Several banks and other financial institutions from time to time parties thereto, J.P. Morgan Securities Inc., Merrill Lynch & Co., and Merrill Lynch, Pierce, Fenner & Smith, incorporated, as Joint Lead Arrangers & Joint Bookrunners, Merrill Lynch Capital Corporation, as Syndication Agent, and J.P. Morgan Chase Bank, as Administrative Agent (filed as Exhibit 10.2 to the Company’s Current Report onForm 8-K filed on November 3, 2005, and incorporated herein by reference).
 10.33 — $2,000,000,000 Amended and Restated Credit Agreement, dated as of June 20, 2007, among HCA Inc., the subsidiary borrowers parties thereto, the lending institutions from time to time parties thereto, Banc of America Securities LLC, J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers and joint bookrunners, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citicorp North America, Inc., as co-syndication agents, and Merrill Lynch Capital Corporation, as documentation agent (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 26, 2007, and incorporated herein by reference).
 21  — List of Subsidiaries.
 23  — Consent of Ernst & Young LLP.
 31.1 — Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2 — Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 32  — Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.
 
* Management compensatory plan or arrangement.
* Management compensatory plan or arrangement.

101

111

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HCA INC.
HCA INC.
 By: 
/s/Jack O. Bovender, Jr.
Jack O. Bovender, Jr.
Chief Executive Officer
Jack O. Bovender, Jr.
Chief Executive Officer
Dated: March 27, 20072008
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
       
Signature
 
Title
 
Date
     
/s/Jack O. Bovender, Jr.

Jack O. Bovender, Jr.		 Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)		 March 27, 20072008
 
 
/s/Richard M. Bracken

Richard M. Bracken		 President, Chief Operating Officer and Director March 27, 20072008
 
 
/s/R. Milton Johnson

R. Milton Johnson		 Executive Vice President and Chief Financial Officer (Principal Financial Officer) March 27, 2007
/s/Christopher J. Birosak
Christopher J. Birosak		DirectorMarch 27, 2007
/s/George A. Bitar
George A. Bitar		DirectorMarch 27, 2007
/s/John P. Connaughton
John P. Connaughton		DirectorMarch 27, 2007
/s/Thomas F. Frist, Jr., M.D.
Thomas F. Frist, Jr., M.D.		DirectorMarch 27, 2007
/s/Thomas F. Frist, III
Thomas F. Frist, III		DirectorMarch 27, 2007
/s/Christopher R. Gordon
Christopher R. Gordon		DirectorMarch 27, 2007
/s/Michael W. Michelson
Michael W. Michelson		DirectorMarch 27, 2007
/s/James C. Momtazee
James C. Momtazee		DirectorMarch 27, 2007

112

SignatureTitleDate2008
     
/s/Stephen G. PagliucaChristopher J. Birosak

Christopher J. Birosak
Stephen G. Pagliuca		 Director March 27, 20072008
 
/s/Peter M. StavrosGeorge A. Bitar

George A. Bitar
Peter M. Stavros		 Director March 27, 20072008
 
/s/Nathan C. ThorneJohn P. Connaughton

John P. Connaughton
Nathan C. Thorne		 Director March 27, 20072008

113

HCA INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
   
/s/  Thomas F. Frist, Jr., M.D.

Thomas F. Frist, Jr., M.D.		DirectorMarch 27, 2008
/s/  Thomas F. Frist, III

Thomas F. Frist, III		DirectorMarch 27, 2008
/s/  Christopher R. Gordon

Christopher R. Gordon		DirectorMarch 27, 2008
/s/  Michael W. Michelson

Michael W. Michelson		DirectorMarch 27, 2008
/s/  James C. Momtazee

James C. Momtazee		DirectorMarch 27, 2008
/s/  Stephen G. Pagliuca

Stephen G. Pagliuca		DirectorMarch 27, 2008
/s/  Peter M. Stavros

Peter M. Stavros		DirectorMarch 27, 2008
/s/  Nathan C. Thorne

Nathan C. Thorne		DirectorMarch 27, 2008


102

HCA INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
   
  Page
 
Report of Independent Registered Public Accounting Firm
 F-2
Consolidated Financial Statements:
  
Consolidated Income Statements for the years ended December 31, 2007, 2006 2005 and 2004
2005 F-3
Consolidated Balance Sheets, December 31, 20062007 and 2005
2006 F-4
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended December 31, 2007, 2006 2005 and 2004
2005 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 2005 and 2004
2005 F-6
Notes to Consolidated Financial Statements
 F-7
Quarterly Consolidated Financial Information (Unaudited)
 F-36F-44


F-1

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders

HCA Inc.
 
We have audited the accompanying consolidated balance sheets of HCA Inc. as of December 31, 20062007 and 2005,2006, and the related consolidated statements of income, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2006.2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HCA Inc. at December 31, 20062007 and 2005,2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006,2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” on January 1, 2007. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of FASB Staff Position No. 45-3, “Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or its Owners” andon January 1, 2006. As discussed in Note 3 to the consolidated financial statements, effective January 1, 2006 the Company adopted the provisions of FASB Statement No. 123(R), “Share-Based Payment.” Also, as discussed in Note 12 to the consolidated financial statements, the Company adopted the provisions of FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” on January 1, 2006. Also, as discussed in Note 3 to the consolidated financial statements, effective January 1, 2006 the Company adopted the provisions of FASB Statement No. 123(R), “Share-Based Payment.”
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of HCA Inc.’s internal control over financial reporting as of December 31, 2006,2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 22, 200726, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Nashville, Tennessee

March 22, 200726, 2008


F-2

F-2

HCA INC.

CONSOLIDATED INCOME STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Dollars in millions)
              
  2006 2005 2004
       
Revenues $25,477  $24,455  $23,502 
Salaries and benefits  10,409   9,928   9,419 
Supplies  4,322   4,126   3,901 
Other operating expenses  4,057   4,039   3,797 
Provision for doubtful accounts  2,660   2,358   2,669 
Gains on investments  (243)  (53)  (56)
Equity in earnings of affiliates  (197)  (221)  (194)
Depreciation and amortization  1,391   1,374   1,250 
Interest expense  955   655   563 
Gains on sales of facilities  (205)  (78)  — 
Transaction costs  442   —    — 
Impairment of long-lived assets  24   —   12 
          
   23,615   22,128   21,361 
          
Income before minority interests and income taxes  1,862   2,327   2,141 
Minority interests in earnings of consolidated entities  201   178   168 
          
Income before income taxes  1,661   2,149   1,973 
Provision for income taxes  625   725   727 
          
 Net income $1,036  $1,424  $1,246 
          
             
  2007  2006  2005 
 
Revenues $26,858  $25,477  $24,455 
             
Salaries and benefits  10,714   10,409   9,928 
Supplies  4,395   4,322   4,126 
Other operating expenses  4,241   4,056   4,034��
Provision for doubtful accounts  3,130   2,660   2,358 
Gains on investments  (8)  (243)  (53)
Equity in earnings of affiliates  (206)  (197)  (221)
Depreciation and amortization  1,426   1,391   1,374 
Interest expense  2,215   955   655 
Gains on sales of facilities  (471)  (205)  (78)
Impairment of long-lived assets  24   24   — 
Transaction costs  —   442   — 
             
   25,460   23,614   22,123 
             
Income before minority interests and income taxes  1,398   1,863   2,332 
Minority interests in earnings of consolidated entities  208   201   178 
             
Income before income taxes  1,190   1,662   2,154 
Provision for income taxes  316   626   730 
             
Net income $874  $1,036  $1,424 
             
The accompanying notes are an integral part of the consolidated financial statements.


F-3

F-3

HCA INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 20062007 AND 2005
2006
(Dollars in millions)
          
  2006 2005
     
ASSETS
Current assets:        
 Cash and cash equivalents $634  $336 
 Accounts receivable, less allowance for doubtful accounts of $3,428 and $2,897  3,705   3,332 
 Inventories  669   616 
 Deferred income taxes  476   372 
 Other  594   559 
       
   6,078   5,215 
Property and equipment, at cost:        
 Land  1,238   1,212 
 Buildings  8,178   8,063 
 Equipment  11,170   10,594 
 Construction in progress  1,321   949 
       
   21,907   20,818 
 Accumulated depreciation  (10,238)  (9,439)
       
   11,669   11,379 
Investments of insurance subsidiary  1,886   2,134 
Investments in and advances to affiliates  679   627 
Goodwill  2,601   2,626 
Deferred loan costs  614   85 
Other  148   159 
       
  $23,675  $22,225 
       
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:        
 Accounts payable $1,415  $1,484 
 Accrued salaries  675   561 
 Other accrued expenses  1,193   1,264 
 Long-term debt due within one year  293   586 
       
   3,576   3,895 
Long-term debt  28,115   9,889 
Professional liability risks  1,309   1,336 
Deferred income taxes and other liabilities  1,017   1,414 
Minority interests in equity of consolidated entities  907   828 
Equity securities with contingent redemption rights  125   — 
Stockholders’ (deficit) equity:        
 Common stock $0.01 par; authorized 125,000,000 shares — 2006 and 1,650,000,000 — 2005; outstanding 92,217,800 shares — 2006 and 417,512,700 shares — 2005  1   4 
 Accumulated other comprehensive income  16   130 
 Retained (deficit) earnings  (11,391)  4,729 
       
   (11,374)  4,863 
       
  $23,675  $22,225 
       
         
  2007  2006 
 
ASSETS
Current assets:        
Cash and cash equivalents $393  $634 
Accounts receivable, less allowance for doubtful accounts of $4,289 and $3,428  3,895   3,705 
Inventories  710   669 
Deferred income taxes  592   476 
Other  615   594 
         
   6,205   6,078 
Property and equipment, at cost:        
Land  1,240   1,238 
Buildings  8,518   8,178 
Equipment  12,088   11,170 
Construction in progress  733   1,321 
         
   22,579   21,907 
Accumulated depreciation  (11,137)  (10,238)
         
   11,442   11,669 
Investments of insurance subsidiary  1,669   1,886 
Investments in and advances to affiliates  688   679 
Goodwill  2,629   2,601 
Deferred loan costs  539   614 
Other  853   148 
         
  $24,025  $23,675 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:        
Accounts payable $1,370  $1,415 
Accrued salaries  780   675 
Other accrued expenses  1,391   1,193 
Long-term debt due within one year  308   293 
         
   3,849   3,576 
Long-term debt  27,000   28,115 
Professional liability risks  1,233   1,309 
Income taxes and other liabilities  1,379   1,017 
Minority interests in equity of consolidated entities  938   907 
Equity securities with contingent redemption rights  164   125 
Stockholders’ deficit:        
Common stock $0.01 par; authorized 125,000,000 shares — 2007 and 2006; outstanding 94,182,400 shares — 2007 and 92,217,800 shares — 2006  1   1 
Capital in excess of par value  112   — 
Accumulated other comprehensive (loss) income  (172)  16 
Retained deficit  (10,479)  (11,391)
         
   (10,538)  (11,374)
         
  $24,025  $23,675 
         
The accompanying notes are an integral part of the consolidated financial statements.


F-4

F-4

HCA INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 20042005
(Dollars in millions)
                                 
  Common Stock Capital in   Accumulated    
    Excess of   Other Retained  
  Shares Par Par   Comprehensive Earnings  
  (000) Value Value Other Income (Deficit) Total
               
Balances, December 31, 2003  490,718  $5  $—  $5  $168  $6,031  $6,209 
 Comprehensive income:                            
  Net income                      1,246   1,246 
  Other comprehensive income:                            
   Change in net unrealized gains on investment securities                  10       10 
   Foreign currency translation adjustments                  21       21 
   Defined benefit plans                  (6)      (6)
                      
    Total comprehensive income                  25   1,246   1,271 
 Cash dividends declared                      (251)  (251)
 Stock repurchases  (77,382)  (1)  (292)          (2,816)  (3,109)
 Stock options exercised  7,032       224   (5)          219 
 Employee benefit plan issuances  2,274       68               68 
                      
Balances, December 31, 2004  422,642   4   —   —   193   4,210   4,407 
 Comprehensive income:                            
  Net income                      1,424   1,424 
  Other comprehensive income:                            
   Change in net unrealized gains on investment securities                  (30)      (30)
   Foreign currency translation adjustments                  (37)      (37)
   Defined benefit plans                  4       4 
                      
    Total comprehensive income                  (63)  1,424   1,361 
 Cash dividends declared                      (257)  (257)
 Stock repurchases  (36,692)      (1,208)          (648)  (1,856)
 Stock options exercised  27,034       1,106               1,106 
 Employee benefit plan issuances  4,529       102               102 
                      
Balances, December 31, 2005  417,513   4   —   —   130   4,729   4,863 
 Comprehensive income:                            
  Net income                      1,036   1,036 
  Other comprehensive income:                            
   Change in net unrealized gains on investment securities                  (102)      (102)
   Foreign currency translation adjustments                  19       19 
   Defined benefit plans                  (49)      (49)
   Change in fair value of derivative instruments                  18       18 
                      
    Total comprehensive income                  (114)  1,036   922 
 Recapitalization — repurchase of common stock  (411,957)  (4)  (5,005)          (16,364)  (21,373)
 Recapitalization — equity contribution  92,218   1   4,476               4,477 
 Cash dividends declared                      (139)  (139)
 Stock repurchases  (13,057)                  (653)  (653)
 Stock options exercised  3,970       163               163 
 Employee benefit plan issuances  3,531       366               366 
                      
Balances, December 31, 2006  92,218  $1  $—  $—  $16  $(11,391) $(11,374)
                      
                         
        Capital in
  Accumulated
       
  Common Stock  Excess of
  Other
  Retained
    
  Shares
  Par
  Par
  Comprehensive
  Earnings
    
  (000)  Value  Value  Income (Loss)  (Deficit)  Total 
 
Balances, December 31, 2004  422,642  $4  $—  $193  $4,210  $4,407 
Comprehensive income:                        
Net income                  1,424   1,424 
Other comprehensive income:                        
Change in net unrealized gains on investment securities              (30)      (30)
Foreign currency translation adjustments              (37)      (37)
Defined benefit plans              4       4 
                         
Total comprehensive income              (63)  1,424   1,361 
Cash dividends declared                  (257)  (257)
Stock repurchases  (36,692)      (1,208)      (648)  (1,856)
Stock options exercised  27,034       1,106           1,106 
Employee benefit plan issuances  4,529       102           102 
                         
Balances, December 31, 2005  417,513   4   —   130   4,729   4,863 
Comprehensive income:                        
Net income                  1,036   1,036 
Other comprehensive income:                        
Change in net unrealized gains on investment securities              (102)      (102)
Foreign currency translation adjustments              19       19 
Defined benefit plans              9       9 
Change in fair value of derivative instruments              18       18 
                         
Total comprehensive income              (56)  1,036   980 
Recapitalization — repurchase of common stock  (411,957)  (4)  (5,005)      (16,364)  (21,373)
Recapitalization — equity contributions  92,218   1   4,476           4,477 
Cash dividends declared                  (139)  (139)
Stock repurchases  (13,057)              (653)  (653)
Stock options exercised  3,970       163           163 
Employee benefit plan issuances  3,531       366           366 
Adjustment to initially apply FAS 158, net of tax              (58)      (58)
                         
Balances, December 31, 2006  92,218   1   —   16   (11,391)  (11,374)
Comprehensive income:                        
Net income                  874   874 
Other comprehensive income:                        
Change in net unrealized gains on investment securities              (2)      (2)
Foreign currency translation adjustments              (15)      (15)
Defined benefit plans              23       23 
Change in fair value of derivative instruments              (194)      (194)
                         
Total comprehensive income              (188)  874   686 
Equity contributions  1,961       60           60 
Share-based compensation          24           24 
Adjustment to initially apply FIN 48                  38   38 
Other  3       28           28 
                         
Balances, December 31, 2007  94,182  $1  $112  $(172) $(10,479) $(10,538)
                         
The accompanying notes are an integral part of the consolidated financial statements.


F-5

F-5

HCA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 20042005
(Dollars in millions)
                
  2006 2005 2004
       
Cash flows from operating activities:            
 Net income $1,036  $1,424  $1,246 
 Adjustments to reconcile net income to net cash provided by operating activities:            
  Provision for doubtful accounts  2,660   2,358   2,669 
  Depreciation and amortization  1,391   1,374   1,250 
  Income taxes  (552)  162   333 
  Gains on sales of facilities  (205)  (78)  — 
  Impairment of long-lived assets  24   —   12 
  Increase (decrease) in cash from operating assets and liabilities:            
   Accounts receivable  (3,043)  (2,649)  (2,648)
   Inventories and other assets  (12)  28   (179)
   Accounts payable and accrued expenses  115   343   157 
   Share-based compensation  324   30   5 
   Change in minority interests  58   (13)  109 
  Other  49   (8)  — 
          
   Net cash provided by operating activities  1,845   2,971   2,954 
          
Cash flows from investing activities:            
 Purchase of property and equipment  (1,865)  (1,592)  (1,513)
 Acquisition of hospitals and health care entities  (112)  (126)  (44)
 Disposal of hospitals and health care entities  651   320   48 
 Change in investments  26   (311)  (178)
 Other  (7)  28   (1)
          
   Net cash used in investing activities  (1,307)  (1,681)  (1,688)
          
Cash flows from financing activities:            
 Issuances of long-term debt  21,758   858   2,500 
 Net change in revolving bank credit facility  (435)  (225)  190 
 Repayment of long-term debt  (3,728)  (739)  (912)
 Repurchases of common stock  (653)  (1,856)  (3,109)
 Recapitalization-repurchase of common stock  (20,364)  —    — 
 Recapitalization-equity contributions  3,782   —    — 
 Payment of debt issuance costs  (586)  —    — 
 Issuances of common stock  108   1,009   224 
 Payment of cash dividends  (201)  (258)  (199)
 Other  79   (1)  (41)
          
   Net cash used in financing activities  (240)  (1,212)  (1,347)
          
 Change in cash and cash equivalents  298   78   (81)
 Cash and cash equivalents at beginning of period  336   258   339 
          
 Cash and cash equivalents at end of period $634  $336  $258 
          
 Interest payments $893  $624  $533 
 Income tax payments, net of refunds $1,087  $563  $394 
             
  2007  2006  2005 
 
Cash flows from operating activities:            
Net income $874  $1,036  $1,424 
Adjustments to reconcile net income to net cash provided by operating activities:            
Provision for doubtful accounts  3,130   2,660   2,358 
Depreciation and amortization  1,426   1,391   1,374 
Income taxes  (105)  (552)  162 
Gains on sales of facilities  (471)  (205)  (78)
Impairment of long-lived assets  24   24   — 
Increase (decrease) in cash from operating assets and liabilities:            
Accounts receivable  (3,345)  (3,043)  (2,649)
Inventories and other assets  (241)  (12)  28 
Accounts payable and accrued expenses  (29)  115   343 
Change in minority interests  40   58   (13)
Share-based compensation  24   324   30 
Other  69   49   (8)
             
Net cash provided by operating activities  1,396   1,845   2,971 
             
Cash flows from investing activities:            
Purchase of property and equipment  (1,444)  (1,865)  (1,592)
Acquisition of hospitals and health care entities  (32)  (112)  (126)
Disposal of hospitals and health care entities  767   651   320 
Change in investments  207   26   (311)
Other  23   (7)  28 
             
Net cash used in investing activities  (479)  (1,307)  (1,681)
             
Cash flows from financing activities:            
Issuances of long-term debt  24   21,758   858 
Net change in revolving bank credit facility  (520)  (435)  (225)
Repayment of long-term debt  (750)  (3,728)  (739)
Issuances of common stock  100   108   1,009 
Repurchases of common stock  (2)  (653)  (1,856)
Recapitalization-repurchase of common stock  —   (20,364)  — 
Recapitalization-equity contributions  —   3,782   — 
Payment of debt issuance costs  (9)  (586)  — 
Payment of cash dividends  —   (201)  (258)
Other  (1)  79   (1)
             
Net cash used in financing activities  (1,158)  (240)  (1,212)
             
Change in cash and cash equivalents  (241)  298   78 
Cash and cash equivalents at beginning of period  634   336   258 
             
Cash and cash equivalents at end of period $393  $634  $336 
             
Interest payments $2,163  $893  $624 
Income tax payments, net of refunds $421  $1,087  $563 
The accompanying notes are an integral part of the consolidated financial statements.


F-6

F-6

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
NOTE 1 —Merger, Recapitalization and Reporting EntityACCOUNTING POLICIES
 
Merger, Recapitalization and Reporting Entity
On November 17, 2006 HCA Inc. (the “Company”) completed its merger (the “Merger”) with Hercules Acquisition Corporation, (the “Merger Sub”) pursuant to which the Company was acquired by Hercules Holding II, LLC, a Delaware limited liability company owned by a private investor group including affiliates of Bain Capital, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity (each a “Sponsor”), entities associated with and affiliates of HCA founder, Dr. Thomas F. Frist Jr., (the “Frist Entities,” and together with the Sponsors, the “Investors”), and by members of management and certain members of management.other investors. The Merger, the financing transactions related to the Merger and other related transactions are collectively referred to in this annual report as the “Recapitalization.” The Merger has beenwas accounted for as a recapitalization in HCA’sour financial statements, with no adjustments to the historical basis of HCA’sour assets and liabilities. As a result of the Recapitalization, our outstanding capital stock is owned by the Investors, certain members of management and key employees and certain other investors. Our common stock is no longernot registered under the Securities Exchange Act of 1934, as amended, and is not traded on a national securities exchange. Effective September 26, 2007, we registered certain of our senior secured notes issued in connection with the Recapitalization with the Securities and Exchange Commission, (the “SEC”) and is no longer traded on a national securities exchange.thus subjecting us to the reporting requirements of Section 15(d) of the Securities Exchange Act of 1934.
 
HCA Inc. is a holding company whose affiliates own and operate hospitals and related health care entities. The term “affiliates” includes direct and indirect subsidiaries of HCA Inc. and partnerships and joint ventures in which such subsidiaries are partners. At December 31, 2006,2007, these affiliates owned and operated 166161 hospitals, 9899 freestanding surgery centers and provided extensive outpatient and ancillary services. Affiliates of HCA are also partners in joint ventures that own and operate seveneight hospitals and nine freestanding surgery centers, which are accounted for using the equity method. The Company’s facilities are located in 20 states England and Switzerland.England. The terms “HCA,” “Company,” “we,” “our” or “us,” as used in this annual report onForm 10-K, refer to HCA Inc. and its affiliates unless otherwise stated or indicated by context.
Basis of Presentation
Basis of Presentation
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
 
The consolidated financial statements include all subsidiaries and entities controlled by HCA. We generally define “control” as ownership of a majority of the voting interest of an entity. The consolidated financial statements include entities in which we absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Significant intercompany transactions have been eliminated. Investments in entities that we do not control, but in which we have a substantial ownership interest and can exercise significant influence, are accounted for using the equity method.
 
We have completed various acquisitions and joint venture transactions. The accounts of these entities have been included in our consolidated financial statements for periods subsequent to our acquisition of controlling interests. The majority of our expenses are “cost of revenue” items. Costs that could be classified as general and administrative include theour corporate office costs, which were $169 million, $187 million $185 million and $162$185 million for the years ended December 31, 2007, 2006 2005 and 2004,2005, respectively.
Revenues
 
Revenues
Revenues consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from the patients and third-party payers. Third-party payers


F-7

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 —ACCOUNTING POLICIES (Continued)

Revenues (Continued)
include federal and state agencies (under the Medicare and Medicaid programs), managed

F-7

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 — ACCOUNTING POLICIES (Continued)
     Revenues (Continued)
care health plans, commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Contractual payment terms in managed care agreements are generally based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates.
 
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount. The estimated reimbursement amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process). The adjustments to estimated reimbursement amounts, which resulted in net increases to revenues, related primarily to cost reports filed during the respective year were $47 million, $55 million and $49 million in 2007, 2006 and $44 million in 2006, 2005, and 2004, respectively. The adjustments to estimated reimbursement amounts, which resulted in net increases to revenues, related primarily to cost reports filed during previous years were $83 million, $62 million and $36 million in 2007, 2006 and $26 million in 2006, 2005, and 2004, respectively.
 
The Emergency Medical Treatment and Active Labor Act (“EMTALA”) requires any hospital that participatesparticipating in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize thatthe condition or make an appropriate transfer of the individual to a facility that canable to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. Federal and state laws and regulations, including but not limited to EMTALA, require, and our commitment to providing quality patient care encourages, us to provide services to patients who are financially unable to pay for the health care services they receive. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. Patients treated at hospitals for nonelective care, who have income at or below 200% of the federal poverty level, are eligible for charity care. The federal poverty level is established by the federal government and is based on income and family size. On January 1, 2005, we modified our policies toWe provide a discountdiscounts to uninsured patients who do not qualify for Medicaid or charity care. These discounts are similar to those provided to many local managed care plans. In implementing the discount policy, we first attempt to qualify uninsured patients for Medicaid, other federal or state assistance or charity care. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.
Cash and Cash Equivalents
 
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with a maturity of three months or less when purchased. Our insurance subsidiary’s cash equivalent investments in excess of the amounts required to pay estimated professional liability claims during the next twelve months are not included in cash and cash equivalents as these funds are not available for general corporate purposes. Carrying values of cash and cash equivalents approximate fair value due to the short-term nature of these instruments.
 
Our cash management system provides for daily investment of available balances and the funding of outstanding checks when presented for payment. Outstanding, but unpresented, checks totaling $429$370 million and $493$429 million at December 31, 20062007 and 2005,2006, respectively, have been included in accounts payable“accounts payable” in the consolidated balance sheets. Upon presentation for payment, these checks are funded through available cash balances or our credit facility.


F-8

F-8

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 — ACCOUNTING POLICIES (Continued)
NOTE 1 —Accounts ReceivableACCOUNTING POLICIES (Continued)
 
Accounts Receivable
We receive payments for services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients. During the years ended December 31, 2007, 2006 and 2005, 24%, 26% and 2004, approximately 26%, 27% and 28%, respectively, of our revenues related to patients participating in thefee-for-service Medicare program. We recognize that revenues and receivables from government agencies are significant to our operations, but do not believe there are significant credit risks associated with these government agencies. We do not believe there are any other significant concentrations of revenues from any particular payer that would subject us to any significant credit risks in the collection of our accounts receivable.
 
Additions to the allowance for doubtful accounts are made by means of the provision for doubtful accounts. Accounts written off as uncollectable are deducted from the allowance for doubtful accounts and subsequent recoveries are added. The amount of the provision for doubtful accounts is based upon management’s assessment of historical and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to “uninsured” amounts (including copayment and deductible amounts from patients who have health care coverage) due directly from patients. Accounts are written off when all reasonable internal and external collection efforts have been performed. We consider the return of an account from the primarysecondary external collection agency to be the culmination of our reasonable collection efforts and the timing basis for writing off the account balance.balance (prior to August 1, 2007, we wrote accounts off upon their return from the primary external agency). Writeoffs are based upon specific identification and the writeoff process requires a writeoff adjustment entry to the patient accounting system. Management relies on the results of detailed reviews of historical writeoffs and recoveries at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information to utilize in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and writeoff data. At December 31, 2007 and 2006, our allowance for doubtful accounts represented approximately 89% and 86%, respectively, of the $4.825 billion and $3.972 billion, respectively, patient due accounts receivable balance, including accounts, net of estimated contractual discounts, related to patients for which eligibility for Medicaid coverage was being evaluated (“pending Medicaid accounts”). At December 31, 2005, our allowance for doubtful accounts represented approximately 85% of the $3.404 billion patient due accounts receivable balance, including net pending Medicaid accounts. Revenue days in accounts receivable were 53 days, 5053 days and 4850 days at December 31, 2007, 2006 2005 and 2004,2005, respectively. Adverse changes in general economic conditions, patient accounting service center operations, payer mix or trends in federal or state governmental health care coverage could affect our collection of accounts receivable, cash flows and results of operations.
Inventories
Inventories
 
Inventories are stated at the lower of cost(first-in, first-out) or market.
Property and Equipment and Amortizable Intangibles
Property and Equipment and Amortizable Intangibles
 
Depreciation expense, computed using the straight-line method, was $1.421 billion in 2007, $1.384 billion in 2006, and $1.371 billion in 2005, and $1.248 billion in 2004.2005. Buildings and improvements are depreciated over estimated useful lives ranging generally from 10 to 40 years. Estimated useful lives of equipment vary generally from four to 10 years.
 
Debt issuance costs are amortized based upon the terms of the respective debt obligations. The gross carrying amount of deferred loan costs at December 31, 2007 and 2006 and 2005 was $668$652 million and $138$668 million, respectively, and accumulated amortization was $54$113 million and $53$54 million at December 31, 2007 and 2006, and 2005,

F-9

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 — ACCOUNTING POLICIES (Continued)
     Property and Equipment and Amortizable Intangibles (Continued)
respectively. Amortization of deferred loan costs is included in interest expense and was $18$78 million, $14$18 million and $14 million for 2007, 2006 and 2005, and 2004, respectively.


F-9

HCA INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 —ACCOUNTING POLICIES (Continued)

Property and Equipment and Amortizable Intangibles (Continued)
When events, circumstances or operating results indicate that the carrying values of certain long-lived assets and related identifiable intangible assets (excluding goodwill) that are expected to be held and used, might be impaired, we prepare projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts are not expected to be recoverable, such amounts are reduced to estimated fair value. Fair value may be estimated based upon internal evaluations that include quantitative analyses of revenues and cash flows, reviews of recent sales of similar facilities and independent appraisals.
 
Long-lived assets to be disposed of are reported at the lower of their carrying amounts or fair value less costs to sell or close. The estimates of fair value are usually based upon recent sales of similar assets and market responses based upon discussions with and offers received from potential buyers.
Investments of Insurance Subsidiary
 
Investments of Insurance Subsidiary
At December 31, 20062007 and 2005,2006, the investments of our wholly-owned insurance subsidiary were classified as “available-for-sale” as defined in Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and are recorded at fair value. The investment securities are held for the purpose of providing the funding source to pay professional liability claims covered by the insurance subsidiary. Management performs a quarterly assessment of individual investment securities to determine whether declines in market value are temporary or other-than-temporary. Management’s investment securities evaluation process involves multiple subjective judgments, often involves estimating the outcome of future events, and requires a significant level of professional judgment in determining whether an impairment has occurred. We evaluate, among other things, the financial position and near term prospects of the issuer, conditions in the issuer’s industry, liquidity of the investment, changes in the amount or timing of expected future cash flows from the investment, and recent downgrades of the issuer by a rating agency, to determine if, and when, a decline in the fair value of an investment below amortized cost is considered other-than-temporary. The length of time and extent to which the fair value of the investment is less than amortized cost and our ability and intent to retain the investment, to allow for any anticipated recovery of the investment’s fair value, are important components of management’s investment securities evaluation process.
Goodwill
 
Goodwill
Goodwill is not amortized, but is subject to annual impairment tests. In addition to the annual impairment reviews, impairment reviews are performed whenever circumstances indicate a possible impairment may exist. Impairment testing for goodwill is done at the reporting unit level. Reporting units are one level below the business segment level, and our impairment testing is performed at the operating division or market level. We compare the fair value of the reporting unit assets to the carrying amount, on at least an annual basis, to determine if there is potential impairment. If the fair value of the reporting unit assets is less than their carrying value, we compare the fair value of the goodwill to its carrying value. If the fair value of the goodwill is less than its carrying value, an impairment loss is recognized. Fair value of goodwill is estimated based upon internal evaluations of the related long-lived assets for each reporting unit that include quantitative analyses of revenues and cash flows and reviews of recent sales of similar facilities. No goodwill impairment losses were recognized during 2007, 2006 2005 or 2004.

F-10

HCA INC.2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 — ACCOUNTING POLICIES (Continued)
     Goodwill (Continued)
During 2007, goodwill increased by $44 million related to acquisitions, decreased by $45 million related to facility sales and increased by $29 million related to foreign currency translation and other adjustments. During 2006, goodwill increased by $38 million related to acquisitions, decreased by $86 million related to facility sales and increased by $23 million related to foreign currency translation and other adjustments. During 2005, goodwill increased by $129 million related to acquisitions, decreased by $35 million related to facility sales and decreased by $8 million related to foreign currency translation and other adjustments.


F-10

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 —Physician Recruiting AgreementsACCOUNTING POLICIES (Continued)
 
Physician Recruiting Agreements
In order to recruit physicians to meet the needs of our hospitals and the communities they serve, we enter into minimum revenue guarantee arrangements to assist the recruited physicians during the period they are relocating and establishing their practices. In November 2005, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff PositionNo. 45-3, “Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners” (“FSPFIN 45-3”). Under FSPFIN 45-3, a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the stand-ready obligation undertaken in issuing the guarantee.
 
FSPFIN 45-3 is effective for minimum revenue guarantees issued or modified on or after January 1, 2006. For periods before January 1, 2006, we expensed physician recruitment agreement amounts as the expenses to be reimbursed were incurred by the recruited physicians, which was generally over a 12 month period. For post January 1, 2006 minimum revenue guarantees, we have expensedexpense the total estimated guarantee liability amount at the time the physician recruiting agreement becomes effective. We determined that expensing the total estimated liability amount at the agreement effective date was the proper accounting treatment as we could not justify recording a contract-based asset based upon our analysis of the related control, regulatory and legal considerations.
 
The physician recruiting liability of $22 million and $14 million at December 31, 2007 and 2006, respectively, represents the amount of expense recognized in excess of estimated payments made through December 31, 2006.2007 and 2006, respectively. At December 31, 20062007 the maximum amount of all effective, post January 1, 2006 minimum revenue guarantees that could be paid prospectively was $51$66 million.
Professional Liability Claims
 
Professional Liability Claims
A substantial portion of our professional liability risks is insured through a wholly-owned insurance subsidiary. Reserves for professional liability risks were $1.584$1.513 billion and $1.621$1.584 billion at December 31, 20062007 and 2005,2006, respectively. The current portion of the reserves, $275$280 million and $285$275 million at December 31, 20062007 and 2005,2006, respectively, is included in “other accrued expenses” in the consolidated balance sheet. Provisions for losses related to professional liability risks were $163 million, $217 million and $298 million for 2007, 2006 and $291 million for the years ended December 31, 2006, 2005, and 2004, respectively, and are included in “other operating expenses” in our consolidated income statement. Provisions for losses related to professional liability risks are based upon actuarially determined estimates. Loss and loss expense reserves represent the estimated ultimate net cost of all reported and unreported losses incurred through the respective consolidated balance sheet dates. The reserves for unpaid losses and loss expenses are estimated using individual case-basis valuations and actuarial analyses. Those estimates are subject to the effects of trends in loss severity and frequency. The estimates are continually reviewed and adjustments are recorded as experience develops or new information becomes known. Adjustments to the estimated reserve amounts are included in current operating results. The declining provision for losses for 2006, 2005trend reflects the recognition by the external actuaries of our improving claim frequency and 2004 include reductions of $136 million, $83 million and $59 million, respectively, to our estimated professional liability reserves. The amounts of the changes to the estimated professional liability reserves were determined based upon the semiannual, independent actuarial analyses,

F-11

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 — ACCOUNTING POLICIES (Continued)
     Professional Liability Claims (Continued)
which recognized decliningseverity trends. This improving frequency and moderating severity claims trends at our facilities. We believe these favorable trends arecan be primarily attributableattributed to tort reforms enacted in key states, particularly Texas, and our risk management and patient safety initiatives, particularly in the areasarea of obstetrics and emergency services.obstetrics. The reserves for professional liability risks cover approximately 3,0002,600 and 3,3003,000 individual claims at December 31, 20062007 and 2005,2006, respectively, and estimates for unreported potential claims. The time period required to resolve these claims can vary depending upon the jurisdiction and whether the claim is settled or litigated. During 2007 and 2006, and 2005, $253$236 million and $242$253 million, respectively, of payments (net of reinsurance recoveries of $5 million and $12 million, respectively)during each year) were made for professional and general liability claims. The estimation of the timing of payments beyond a year can vary significantly. Although considerable variability is inherent in professional liability reserve estimates, management believes that the reserves for losses and loss expenses are adequate; however, there can be no assurance that the ultimate liability will not exceed management’s estimates.


F-11

 Our
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 —ACCOUNTING POLICIES (Continued)

Professional Liability Claims (Continued)
Subject to a $5 million per occurrence self-insured retention (in place since January 1, 2007), our facilities are insured by our wholly-owned insurance subsidiary for losses up to $50 million per occurrence. The insurance subsidiary has obtained reinsurance for professional liability risks generally above a retention level of $15 million per occurrence. We also maintain professional liability insurance with unrelated commercial carriers for losses in excess of amounts insured by our insurance subsidiary. Effective January 1, 2007, our facilities will generally be self-insured for the first $5 million of per occurrence losses.
 
The obligations covered by reinsurance contracts are included in the reserves for professional liability risks, as the insurance subsidiary remains liable to the extent that the reinsurers do not meet their obligations under the reinsurance contracts. The amounts receivable under the reinsurance contracts of $42$44 million and $43$42 million at December 31, 20062007 and 2005,2006, respectively, are included in other assets“other assets” (including $10$30 million and $25$10 million December 31, 20062007 and 2005,2006, respectively, included in other“other current assets)assets”). A return of premiums relating to reinsurance contracts resulted in a net increase to the reserves for professional liability risks of $8 million during 2005.
Financial Instruments
 
Financial Instruments
Derivative financial instruments are employed to manage risks, including foreign currency and interest rate exposures, and are not used for trading or speculative purposes. We recognize derivative instruments, such as interest rate swap agreements and foreign exchange contracts, in the consolidated balance sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders’ equity, as a component of other comprehensive income, depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in earnings, along with the changes in the fair value of the hedged items that relate to the hedged risk. Gains and losses on derivatives designated as cash flow hedges, to the extent they are effective, are recorded in other comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. In the event the forecasted transaction to which a cash flow hedge relates is no longer likely, the amount in other comprehensive income is recognized in earnings and generally the derivative is terminated. Changes in the fair value of derivatives used as hedges of the net investment in foreign operations are reported in other comprehensive income. Changes in the fair value of derivatives not qualifying as hedges, and for any portion of a hedge that is ineffective, are reported in earnings.
 
The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses resulting from the early termination of interest rate swap agreements are deferred and amortized as

F-12

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 — ACCOUNTING POLICIES (Continued)
     Financial Instruments (Continued)
adjustments to interest expense over the remaining periodterm of the debt originally covered by the terminated swap.
Minority Interests in Consolidated Entities
 
Minority Interests in Consolidated Entities
The consolidated financial statements include all assets, liabilities, revenues and expenses of less than 100% owned entities that we control. Accordingly, we have recorded minority interests in the earnings and equity of such entities.
Recent Pronouncements
 
Recent Pronouncements
In JulySeptember 2006, the FASB issued the final InterpretationStatement of Financial Accounting Standards No. 48, “Accounting157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a generally accepted accounting principles (“GAAP”) framework for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 creates a single model to address uncertainty in income tax positions andmeasuring fair value, clarifies the accounting for income taxes by prescribingdefinition of fair value within that framework and expands disclosures about the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 requires expanded disclosures, which include a tabular rollforwarduse of the beginning and ending aggregate unrecognized tax benefits, as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within twelve months. These disclosures will be required at each annual reporting period unless a significant change occurs in an interim period. FIN 48fair value measurements. SFAS 157 is effective for fiscal years beginning after DecemberNovember 15, 2006.2007. We do not expect the adoption of SFAS 157 to have a material effect on our financial position or results of operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities to voluntarily


F-12

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 1 —ACCOUNTING POLICIES (Continued)

Recent Pronouncements (Continued)
choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain nonfinancial instruments that are similar to financial instruments) at fair value. The election is made on aninstrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, then all subsequent changes in fair value for that instrument should be reported in results of operations. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48SFAS 159 and the amounts recognized after adoption will be accounted for as a cumulative effect adjustment recorded to the beginning balance of retained earnings. We do not expect the adoption of SFAS 159 to have a material effect on our financial position or results of operations.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS 141(R)”). This new standard will change the financial accounting and reporting of business combination transactions in consolidated financial statements. SFAS 141(R) replaces FASB Statement No. 141, “Business Combinations” (“SFAS 141”). SFAS 141(R) retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. The scope of SFAS 141(R) is broader than that of SFAS 141, which applied only to business combinations in which control was obtained by transferring consideration. SFAS 141(R) applies the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141(R) is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). This new standard will change the financial accounting and reporting of noncontrolling (or minority) interests in consolidated financial statements. SFAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations. SFAS 160 amends certain of ARB 51’s consolidation procedures to provide consistency with the requirements of SFAS 141(R). SFAS 160 is required to be adopted concurrently with SFAS 141(R) and is effective for the first annual reporting period beginning on or after December 15, 2008. SFAS 160 will require retroactive restatement to provide for consistent presentation of noncontrolling interests for all periods presented. We are currently evaluating the impact of adopting FIN 48.SFAS 160.
 During September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 represents the completion of the first phase in the FASB’s postretirement benefits accounting project and requires an entity to: recognize in its balance sheet an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status; measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year; and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. SFAS 158 does not change the amount of net periodic benefit cost included in results of operations. On December 31, 2006, we adopted the recognition and disclosure provisions of SFAS 158. The effect of adopting SFAS 158 on financial condition at December 31, 2006 has been included in the accompanying consolidated financial statements. SFAS 158 did not have an effect on our consolidated financial condition at December 31, 2005 or for prior periods.
Reclassifications
Reclassifications
 
Certain prior year amounts have been reclassified to conform to the 20062007 presentation.
NOTE 2 — MERGER AND RECAPITALIZATION
 
NOTE 2 —MERGER AND RECAPITALIZATION
On July 24, 2006, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hercules Holding II, LLC, a Delaware limited liability company (“Hercules Holding”), and Hercules

F-13

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 2 — MERGER AND RECAPITALIZATION (Continued)
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Hercules Holding.Holding (“Merger Sub”). Our board of directors approved the Merger Agreement on the unanimous recommendation of a special committee comprised entirely of disinterested directors. The Merger was approved by a majority of HCA’s shareholders at a special meeting of shareholders held on November 16, 2006.
 
On November 17, 2006, pursuant to the terms of the Merger Agreement, the Investors consummated the acquisition of the Company through the merger of Merger Sub with and into the Company. The Company was the surviving corporation in the Merger. Approximately 98%At December 31, 2007, 97.5% of our common stock is owned directly by


F-13

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 2 —MERGER AND RECAPITALIZATION (Continued)
Hercules Holding, with the remainder being owned by certain members of management of the Company. Affiliates of each of the Sponsors indirectly own approximately 25%24.8% of the common stock of the Company through their ownership in Hercules Holding, and affiliates of the Frist Entities and certain coinvestors directly and indirectly own approximately 20%23.1% of the common stock of the Company through direct ownership and through their ownership in Hercules Holding. On the effective date of the Merger, each outstanding share of HCA common stock, other than shares contributed by the rollover shareholders or shares owned by HCA, Merger Sub or any shareholders who were entitled to appraisal rights, were cancelled and converted into the right to receive $51.00 in cash. The aggregate purchase price paid for all of the equity securities of the Company was $20.364 billion which purchase priceand was funded by $3.782 billion of equity contributions from the Investors, certain members of management and certain other coinvestors and by incurring $19.964 billion of indebtedness through bank credit facilities and the issuance of debt securities.
 
The Recapitalization transactions included retaining $7.750 billion of the Company’s existing indebtedness, the retirement of $3.182 billion of the Company’s existing indebtedness and the payment of $745 million of Recapitalization related fees and expenses.
Rollover and Stockholder Agreements And Equity Securities with Contingent Redemption Rights
Rollover and Stockholder Agreements And Equity Securities with Contingent Redemption Rights
 
In connection with the Merger, the Frist Entities and certain members of our management entered into agreements with the Company and/or Hercules Holding, pursuant to which they elected to invest in the Company, as the surviving corporation in the Merger, through a rollover of employee stock options, a rollover of shares of common stock of the Company, or a combination thereof. Pursuant to the rollover agreements the Frist Entities and management team made rollover investments of $885 million and $125 million, respectively.
 
The stockholder agreements, among other things, contain agreements among the parties with respect to restrictions on the transfer of shares, including tag along rights and drag along rights, registration rights (including customary indemnification provisions) and other rights. Pursuant to the management stockholder agreements, the applicable employees can elect to have the Company redeem their common stock and vested stock options in the events of death or permanent disability, prior to the consummation of the initial public offering of common stock by the Company. At December 31, 2006, 727,6002007, 1,513,400 common shares and 2,285,2002,249,100 vested stock options were subject to these contingent redemption terms.
Management Agreement
Management Agreement
 
Affiliates of the Investors entered into a management agreement with us pursuant to which such affiliates will provide us with management services. Under the management agreement, the affiliates of the Investors are entitled to receive an aggregate annual management fee of $15 million, which amount will increase annually, beginning in 2008, at a rate equal to the percentage increase in our “EBITDA” in the applicable year compared to the preceding year, and reimbursement ofout-of-pocket out-of-pocket expenses incurred in connection with the provision of services pursuant to the agreement. The management agreement has an initial term expiring on December 31, 2016, provided that the term will be extended annually for one additional year unless we or the Investors provide notice to the other of their desire not to automatically extend the term. The management

F-14

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 2 — MERGER AND RECAPITALIZATION (Continued)
     Management Agreement (Continued)
agreement provided that affiliates of the Investors receive aggregate transaction fees of $175 million in connection with certain services provided in connection with the Merger and related transactions. In addition, the management agreement provides that the affiliates of the Investors will beare entitled to receive a fee equal to 1% of the gross transaction value in connection with certain subsequent financing, acquisition, disposition, and change of control transactions, as well as a termination fee based on the net present value of future payment obligations under the management agreement in the event of an initial public offering or under certain other circumstances. The agreement also contains customary exculpation and indemnification provisions in favor of the Investors and their affiliates.


F-14

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 2 —Recapitalization Transaction CostsMERGER AND RECAPITALIZATION (Continued)
 
Recapitalization Transaction Costs
For the year ended December 31, 2006, our results of operations include the following chargesexpenses related to the Recapitalization (dollars in millions):
      
Compensation expense related to accelerated vesting of stock options and restricted stock, and other employee benefits $258 
Consulting, legal, accounting and other transaction costs  131 
Loss on extinguishment of debt  53 
    
 Total $442 
    
 
     
Compensation expense related to accelerated vesting of stock options and restricted stock, and other employee benefits $258 
Consulting, legal, accounting and other transaction costs  131 
Loss on extinguishment of debt  53 
     
Total $442 
     
In addition to these amounts, approximately $77 million of transaction costs were recorded directly to shareholders’ deficit, and an additional $568 million of transaction costs were capitalized as deferred loan costs.
NOTE 3 — SHARE-BASED COMPENSATION
 
NOTE 3 —SHARE-BASED COMPENSATION
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective application transition method. Under this method, compensation cost is recognized, beginning January 1, 2006, based on the requirements of SFAS 123(R) for all share-based awards granted after the effective date, and based on Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), for all awards granted to employees prior to January 1, 2006 that were unvested on the effective date. Prior to January 1, 2006, we applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for our employee stock benefit plans. Accordingly, no compensation cost was recognized for stock options granted under the plans because the exercise prices for options granted were equal to the quoted market prices on the option grant dates and all option grants were to employees or directors. Results for periods prior to January 1, 2006 have not been restated.
 
As a result of adopting SFAS 123(R), income before taxes for the year ended December 31, 2006 was lower by $78 million ($48 million after tax), than if we had continued to account for share-based compensation under APB 25. Upon consummation of the Merger, all outstanding stock options (other than certain options held by certain rollover shareholders) became fully vested, were cancelled and converted into the right to receive a cash payment equal to the number of shares underlying the options multiplied by the amount (if any) by which $51.00 exceeded the option exercise price. The acceleration of vesting of stock options resulted in the recognition of $42 million of additional share-based compensation expense for the year ended December 31, 2006.
Certain management holders of outstanding HCA stock options were permitted to retain certain of their stock options (the “Rollover Options”) in lieu of receiving the merger consideration

F-15

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 — SHARE-BASED COMPENSATION (Continued)
(the (the amount, if any, by which $51.00 exceeded the option exercise price). The Rollover Options remain outstanding in accordance with the terms of the governing stock incentive plans and grant agreements pursuant to which the holder originally received the stock option grants. However, immediately after the Recapitalization, the exercise price and number of shares subject to the rollover option agreement were adjusted so that the aggregate intrinsic value for each applicable option holder was maintained and the exercise price for substantially all the options was adjusted to $12.75 per option. Pursuant to the rollover option agreement, 10,967,500 prerecapitalization HCA stock options were converted into 2,285,200 Rollover Options.Options, of which 2,249,100 are outstanding and exercisable at December 31, 2007.
 
SFAS 123(R) requires that the benefits of tax deductions in excess of amounts recognized as compensation cost be reported as a financing cash flow, rather than an operating cash flow, as required under prior accounting guidance. Tax benefits of $1 million and $97 million from tax deductions in excess of amounts recognized as


F-15

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 —SHARE-BASED COMPENSATION (Continued)
compensation cost were reported as financing cash flows in the year ended December 31,2007 and 2006, respectively, compared to $163 million and $50 million being reported as operating cash flows for the years ended December 31, 2005 and 2004, respectively.2005.
 
For periods prior to the adoption of SFAS 123(R), SFAS 123 required us to determine pro forma net income as if compensation cost for our employee stock option and stock purchase plans had been determined based upon fair values at the grant dates. TheseFor 2005, reported net income of $1.424 billion would have been reduced to $1.401 billion on a pro forma amounts for the years ended December 31, 2005 and 2004 are as follows (dollars in millions):basis.
          
  2005 2004
     
Net income:        
 As reported $1,424  $1,246 
 Share-based employee compensation expense determined under a fair value method, net of income taxes  23   191(a)
       
 Pro forma $1,401  $1,055 
       
 
(a) In December 2004, we accelerated the vesting of all unvested stock options awarded to employees and officers which had exercise prices greater than the closing price at December 14, 2004 of $40.89 per share. Options to purchase approximately 19.1 million shares became exercisable immediately as a result of the vesting acceleration. The effect of accelerating the vesting for the 19.1 million shares was an increase to the pro forma share-based compensation expense for the year ended December 31, 2004 of $112 million after-tax. The decision to accelerate vesting of the identified stock options resulted in us not being required to recognize share-based compensation expense, net of taxes, of approximately $57 million in 2006. The elimination of the requirement to recognize compensation expense in future periods related to the unvested stock options was management’s basis for the decision to accelerate the vesting.
During the year ended December 31, 2006,2007 we had the following share-based compensation plans:
2006 Stock Incentive Plan
2006 Stock Incentive Plan
 
In connection with the Recapitalization, the 2006 Stock Incentive Plan for Key Employees of HCA Inc. and its Affiliates (the “2006 Plan”) was established. The 2006 Plan is designed to promote the long term financial interests and growth of the Company and its subsidiaries by attracting and retaining management and other personnel and key service providers with the training, experience and ability to enable them to make a substantial contribution to the success of business, motivate management personnel by means of growth-related incentives to achieve long range goals and further the alignment of interests of participants with those of our stockholders through opportunities for increased stock, or stock-based, ownership in the Company. The

F-16

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 — SHARE-BASED COMPENSATION (Continued)
     2006 Stock Incentive Plan (Continued)
2006 Plan permits the granting of awards covering 10% of our fully diluted equity immediately after consummation of the Recapitalization. A portion of the options under the 2006 Plan will vestvests solely based upon continued employment over a specific period of time, and a portion of the options will vest based both upon continued employment over a specific period of time and upon the achievement of predetermined performance Investor return and market targets over time. AtWe granted 9,328,000 options under the 2006 Plan during 2007. As of December 31, 2006,2007, no options had been granted under the 2006 Plan have vested, and there were 10,656,1001,733,700 shares available for future grants under the 2006 Plan.
2005 Equity Incentive Plan
 
2005 Equity Incentive Plan
Prior to the Recapitalization, the HCA 2005 Equity Incentive Plan was the primary plan under which stock options and restricted stock were granted to officers, employees and directors. Prior to 2005, we primarily utilized stock option grants for equity compensation purposes. During 2005, an increasing equity compensation emphasis was placed on restricted share grants. The restricted shares granted in 2005 were originally subject to back-end vesting provisions, with no shares vesting in the first two years after grant and then a third of the shares vesting in each of the third, fourth and fifth years. The restricted shares granted in 2006 were originally scheduled to vest in equal annual increments over a five-year period. Upon consummation of the Recapitalization, all shares of restricted stock became fully vested, were cancelled and converted into the right to receive a cash payment of $51.00 per restricted share. During the years ended December 31, 2006 2005, and 20042005, we recognized $247 million $30 million and $5$30 million, respectively, of compensation costs related to restricted share grants. The acceleration of vesting of restricted stock resulted in the recognition of $201 million of the total compensation expense related to restricted stock for the year ended December 31, 2006.


F-16

HCA INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 —SHARE-BASED COMPENSATION (Continued)

2005 Equity Incentive Plan (Continued)
A summary of restricted share activity during 2006 and 2005 follows (share amounts in thousands):
         
  Number
 Weighted Average
  of
 Grant Date Fair
  Shares Value
 
Restricted shares, December 31, 2004  1,520  $40.43 
Granted  3,277   44.45 
Vested  (908)  42.20 
Cancelled  (141)  43.07 
         
Restricted shares, December 31, 2005  3,748   43.42 
Granted  2,979   49.11 
Vested  (494)  41.40 
Cancelled  (232)  45.98 
Settled in Recapitalization  (6,001)  46.31 
         
Restricted shares, December 31, 2006  —   — 
         
Employee Stock Purchase Plan (“ESPP”)
Prior to the Recapitalization, our ESPP provided an opportunity to purchase shares of HCA common stock at a discount (through payroll deductions over six-month periods) to substantially all employees. During 2006 and 2005, ESPP purchases of 931,000 shares and 1,662,400 shares, respectively, were made. Due to the Recapitalization, the second six-month ESPP purchase for 2006 was cash settled. The fair value of the right to purchase ESPP shares was estimated using a valuation model with the weighted average assumptions indicated in the following table.
         
  2006 2005
 
Risk-free interest rate  4.58%  2.78%
Expected volatility  14%  23%
Expected life, in years  0.5   0.5 
Expected dividend yield  0.79%  1.20%
Grant date fair value $9.38  $9.98 
Management Stock Purchase Plan (“MSPP”)
Prior to the Recapitalization, our MSPP allowed eligible employees to defer an elected percentage (not to exceed 25%) of their base salaries through the purchase of restricted stock at a 25% discount from the average market price. Purchases of restricted shares were made twice a year and the shares vested after three years. During 2006 and 2005, MSPP purchases of 156,600 shares and 145,600 shares, respectively, were made at weighted average purchase date discounted (25% discount) fair values of $35.77 per share and $33.22 per share, respectively. For the plan period July 1, 2006 through November 17, 2006, the MSPP was cash settled due to the Recapitalization. The purchase date discounted price for this period would have been $36.79.
Stock Option Activity — All Plans
The fair value of each stock option award is estimated on the grant date, using the Black-Scholes option valuation model withmodels and the weighted average assumptions indicated in the following table. Generally, awards are subject to graded vesting.Awards under the 2006 Plan generally vest based on continued employment and based upon achievement of certain financial and Investor return-based targets. Each


F-17

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 —SHARE-BASED COMPENSATION (Continued)

Stock Option Activity — All Plans (Continued)
grant is valued as a single award with an expected term equal to the average expected term of the component vesting tranches. We use historical option exercise behavior data and other factors to estimate the expected term of the options. The expected term of the option is limited by the contractual term, and employee post-vesting termination behavior is incorporated in the historical option exercise behavior data. Compensation cost is recognized on the straight-line attribution method. The straight-line attribution method requires that total compensation expense recognized must at least equal the vested portion of the grant-date fair value. The expected volatility is derived using weekly, historical datastock price information of certain peer group companies for periods precedinga period of time equal to the date of grant.expected option term. The risk-free interest rate is the approximate yield on United States Treasury Strips having a life equal to the expected option life on the date of grant. The expected life is an estimate of the number of years an option will be held before it is exercised. The valuation model was not adjusted for nontransferability, risk of forfeiture or the vesting restrictions of the options, all of which would reduce the value if factored into the calculation.
             
  2006 2005 2004
       
Risk-free interest rate  4.70%  3.99%  2.56%
Expected volatility  24%  33%  35%
Expected life, in years  5   5   4 
Expected dividend yield  1.09%  1.27%  1.18%

F-17

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
             
  2007 2006 2005
 
Risk-free interest rate  4.86%  4.70%  3.99%
Expected volatility  30%  24%  33%
Expected life, in years  5   5   5 
Expected dividend yield  —   1.09%  1.27%
NOTE 3 — SHARE-BASED COMPENSATION (Continued)
2005 Equity Incentive Plan (Continued)
Information regarding stock option activity during 2007, 2006 2005 and 20042005 is summarized below (share amounts in thousands):
                  
    Weighted Weighted  
    Average Average Aggregate
  Stock Exercise Remaining Intrinsic Value
  Options Price Contractual Term (dollars in millions)
         
Options outstanding, December 31, 2003  51,681  $31.64         
 Granted  9,306   45.62         
 Exercised  (7,208)  23.79         
 Cancelled  (1,517)  41.11         
             
Options outstanding, December 31, 2004  52,262   34.94         
 Granted  2,644   49.25         
 Exercised  (27,034)  34.87         
 Cancelled  (66)  42.54         
             
Options outstanding, December 31, 2005  27,806   36.35         
 Granted  2,566   48.64         
 Exercised  (5,220)  26.24         
 Cancelled  (1,008)  49.76         
 Settled in Recapitalization  (13,177)  36.22         
 Rolled over in Recapitalization — existing  (10,967)  42.98         
 Rolled over in Recapitalization — new  2,285   12.50��        
             
Options outstanding, December 31, 2006  2,285   12.50   5.3  $88 
             
Options exercisable, December 31, 2006  2,285  $12.50   5.3  $88 
 
                 
    Weighted
 Weighted
  
    Average
 Average
 Aggregate
  Stock
 Exercise
 Remaining
 Intrinsic Value
  Options Price Contractual Term (dollars in millions)
 
Options outstanding, December 31, 2004  52,262  $34.94         
Granted  2,644   49.25         
Exercised  (27,034)  34.87         
Cancelled  (66)  42.54         
                 
Options outstanding, December 31, 2005  27,806   36.35         
Granted  2,566   48.64         
Exercised  (5,220)  26.24         
Cancelled  (1,008)  49.76         
Settled in Recapitalization  (13,177)  36.22         
Rolled over in Recapitalization — existing  (10,967)  42.98         
Rolled over in Recapitalization — new  2,285   12.50         
                 
Options outstanding, December 31, 2006  2,285   12.50         
Granted  9,328   51.34         
Exercised  (36)  12.75         
Cancelled  (405)  51.00         
                 
Options outstanding, December 31, 2007  11,172   43.54   8.2  $195 
                 
Options exercisable, December 31, 2007  2,249  $12.50   4.3  $109 
The weighted average fair values of stock options granted during the years ended December 31,2007, 2006 and 2005 were $16.01, $10.76 and 2004 were $10.76, $15.53 and $12.90 per share, respectively. The total intrinsic value of stock options exercised in the year ended December 31, 20062007 was $123$1.5 million.


F-18

F-18

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 — SHARE-BASED COMPENSATION (Continued)
NOTE 4 —2005 Equity Incentive Plan (Continued)ACQUISITIONS AND DISPOSITIONS
 A summary
During 2007, we received proceeds of restricted share activity during 2006, 2005$661 million and 2004 follows (share amounts in thousands):
          
  Number Weighted Average
  of Grant Date Fair
  Shares Value
     
Restricted shares, December 31, 2003  1,739  $39.96 
 Granted  880   42.13 
 Vested  (1,003)  41.17 
 Cancelled  (96)  39.65 
       
Restricted shares, December 31, 2004  1,520   40.43 
 Granted  3,277   44.45 
 Vested  (908)  42.20 
 Cancelled  (141)  43.07 
       
Restricted shares, December 31, 2005  3,748   43.42 
 Granted  2,979   49.11 
 Vested  (494)  41.40 
 Cancelled  (232)  45.98 
 Settled in Recapitalization  (6,001)  46.31 
       
Restricted shares, December 31, 2006  —   — 
       
Employee Stock Purchase Plan (“ESPP”)
      Prior torecognized a net pretax gain of $443 million ($272 million after tax) on the Recapitalization, our ESPP provided an opportunity to purchase sharessales of HCA common stock atthree hospitals. We also received proceeds of $106 million and recognized a discount (through payroll deductions over six-month periods) to substantially all employees. Duringnet pretax gain of $28 million ($18 million after tax) on the years ended December 31, 2006, 2005 and 2004, ESPP purchasessales of 931,000, 1,662,400 and 1,805,500 shares, respectively were made. Due to the Recapitalization, the second six month ESPP purchase for 2006 was cash settled. The fair value of the right to purchase ESPP shares was estimated using a valuation model with the weighted average assumptions indicated in the following table.
             
  2006 2005 2004
       
Risk-free interest rate  4.58%  2.78%  1.32%
Expected volatility  14%  23%  20%
Expected life, in years  0.5   0.5   0.5 
Expected dividend yield  0.79%  1.20%  1.26%
Grant date fair value $9.38  $9.98  $8.48 
Management Stock Purchase Plan (“MSPP”)
      Prior to the Recapitalization, our MSPP allowed eligible employees to defer an elected percentage (not to exceed 25%) of their base salaries through the purchase of restricted stock at a 25% discount from the average market price. Purchases of restricted shares were made twice a year and the shares vested after three years. During the years ended December 31, 2006, 2005 and 2004, MSPP purchases of 156,600 shares, 145,600 shares and 158,900 shares, respectively, were made at weighted average purchase date discounted (25% discount) fair values of $35.77 per share, $33.22 per share and $29.64 per share, respectively. For the

F-19

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 — SHARE-BASED COMPENSATION (Continued)
Management Stock Purchase Plan (“MSPP”) (Continued)
plan period July 1, 2006 through November 17, 2006, the MSPP was cash settled due to the Recapitalization. The purchase date discounted price for this period would have been $36.79.
NOTE 4 — ACQUISITIONS AND DISPOSITIONS
real estate investments. During 2006, we received proceeds of $560 million and recognized a net pretax gain of $176 million ($85 million after tax) on the sales of nine hospitals. We also received proceeds of $91 million and recognized a net pretax gain of $29 million ($18 million after tax) on the sales of real estate investments and our equity investment in a hospital joint venture. During 2005, we received proceeds of $260 million and recognized a net pretax gain of $49 million ($19 million after-tax)after tax) on the sales of five hospitals, and we received proceeds of $60 million and recognized a net pretax gain of $29 million ($17 million after tax) related to the sales of real estate investments.
During 2004,2007 and 2005, we opened one hospital, sold one hospital,did not acquire any hospitals, but paid $32 million and closed two hospitals. During 2006, 2005 and 2004, the proceeds from the sales were used to repay bank borrowings.
$126 million, respectively, for other health care entities. During 2006, we paid $63 million to acquire three hospitals and $49 million to acquire other health care entities. During 2005 and 2004, we did not acquire any hospitals, but paid $126 million and $44 million, respectively, for other health care entities. Purchase price amounts have been allocated to the related assets acquired and liabilities assumed based upon their respective fair values. The purchase price paid in excess of the fair value of identifiable net assets of acquired entities aggregated $44 million, $38 million and $129 million in 2007, 2006 and 2005, respectively. The consolidated financial statements include the accounts and operations of the acquired entities subsequent to the respective acquisition dates. The pro forma effects of the acquired entities on our results of operations for periods prior to the respective acquisition dates were not significant.
 The purchase price paid in excess
NOTE 5 —IMPAIRMENTS OF LONG-LIVED ASSETS
During 2007, we recorded a pretax charge of $24 million to adjust the fair value of identifiable net assets of acquired entities aggregated $38 million, $129 million and $38 milliona building in 2006, 2005 and 2004, respectively. In 2004, goodwill increased $15 million relatedour Central Group to adjustments to 2003 acquisitions.
NOTE 5 — IMPAIRMENTS OF LONG-LIVED ASSETS
estimated fair value. The carrying value for a hospital closed during 2006 was reduced to fair value of $5 million, based upon estimates of sales value, resulting in a pretax charge of $16 million that affected our EasternCorporate and Other Group. During 2006 we also decided to terminate a construction project and incurred a pretax charge of $8 million that affected our Corporate and Other Group. No asset impairment charges were incurred during 2005.
 The carrying value for a hospital we closed during 2004 was reduced to fair value of $39 million, based upon estimates of sales value, resulting in a pretax charge of $12 million that affected our Western Group.
The asset impairment charges did not have a significant impact on our operations or cash flows and are not expected to significantly impact cash flows for future periods. The impairment charges affected our property and equipment asset category.

F-20

HCA INC.
NOTE 6 —INCOME TAXES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 6 — INCOME TAXES
The provision for income taxes consists of the following (dollars in millions):
              
  2006 2005 2004
       
Current:            
 Federal $993  $668  $466 
 State  62   63   63 
 Foreign  35   37   25 
Deferred:            
 Federal  (427)  (43)  132 
 State  (43)  3   17 
 Foreign  5   (3)  24 
          
  $625  $725  $727 
          
 
             
  2007  2006  2005 
 
Current:            
Federal.  $566  $993  $668 
State  37   62   63 
Foreign  32   35   37 
Deferred:            
Federal  (391)  (426)  (39)
State  (62)  (43)  4 
Foreign  134   5   (3)
            
   $316  $626  $730 
            


F-19

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 6 —INCOME TAXES (Continued)
A reconciliation of the federal statutory rate to the effective income tax rate follows:
             
  2006 2005 2004
       
Federal statutory rate  35.0%  35.0%  35.0%
State income taxes, net of federal income tax benefit  0.4   2.1   2.6 
Nondeductible intangible assets  1.5   0.6   — 
IRS settlement  —   (2.2)  — 
Repatriation of foreign earnings  —   (1.1)  — 
Other items, net  0.7   (0.6)  (0.8)
          
Effective income tax rate  37.6%  33.8%  36.8%
          
             
  2007 2006 2005
 
Federal statutory rate  35.0%  35.0%  35.0%
State income taxes, net of federal income tax benefit  0.2   0.4   2.1 
Change in liability for uncertain tax positions  (7.2)  —   — 
Settlements of tax examinations  —   —   (2.2)
Nondeductible intangible assets  —   1.5   0.6 
Repatriation of foreign earnings  —   —   (1.1)
Other items, net  (1.4)  0.7   (0.5)
             
Effective income tax rate  26.6%  37.6%  33.9%
             
Based on new information received in 2007, related primarily to tax positions taken in prior taxable periods, we reduced our provision for income taxes by $85 million. During 2007, we also recorded reductions to the provision for income taxes of $39 million to adjust 2006 state tax accruals to the amounts recorded on completed tax returns and based upon an analysis of the Recapitalization costs. During 2005, HCAwe recognized tax benefits of $48 million related to a favorable tax settlement regarding the Company’sour divestiture of certain noncore business units in 1998 and 2001 and $24 million related to the repatriation of foreign earnings.
 
A summary of the items comprising the deferred tax assets and liabilities at December 31 follows (dollars in millions):
                 
  2006 2005
     
  Assets Liabilities Assets Liabilities
         
Depreciation and fixed asset basis differences $—  $485  $—  $632 
Allowances for professional liability and other risks  118   —   124   — 
Doubtful accounts  424   —   155   — 
Compensation  129   —   185   — 
Other  272   372   235   525 
             
  $943  $857  $699  $1,157 
             
 Deferred income tax benefits of $476 million and $372 million at December 31, 2006 and 2005, respectively, are included in other current assets. Noncurrent deferred income tax liabilities totaled $390 million and $830 million at December 31, 2006 and 2005, respectively.

F-21

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                 
  2007  2006 
  Assets  Liabilities  Assets  Liabilities 
 
Depreciation and fixed asset basis differences $—  $329  $—  $485 
Allowances for professional liability and other risks  197   —   118   — 
Accounts receivable  884   —   424   — 
Compensation  156   —   129   — 
Other  633   259   475   215 
                 
  $1,870  $588  $1,146  $700 
                 
NOTE 6 — INCOME TAXES (Continued)
The tax benefits associated with share-based compensation decreased the current tax payable by $1 million in 2007 and increased the current tax receivable by $97 million $163 million, and $50$163 million in 2006 2005 and 2004,2005, respectively. Such benefits were recorded as increases to stockholders’ equity.
 
At December 31, 2006,2007, state net operating loss carryforwards (expiring in years 20072008 through 2026)2027) available to offset future taxable income approximated $142$106 million. Utilization of net operating loss carryforwards in any one year may be limited and, in certain cases, result in an adjustment to intangible assets. Net deferred tax assets related to such carryforwards are not significant.
IRS Disputes
      HCA isWe are currently contesting before the Appeals Division of the Internal Revenue Service (the “IRS”), the United States Tax Court (the “Tax Court”), and the United States Court of Federal Claims, certain claimed deficiencies and adjustments proposed by the IRS in conjunctionconnection with its examinationsexamination of HCA’s 1994 throughthe 2001 and 2002 federal income tax returns Columbia Healthcare Corporation’sfor HCA and 15 affiliates that are treated as partnerships for federal income tax purposes (“CHC”affiliated partnerships”) 1993. We expect the IRS will complete its examination of the 2003 and 19942004 federal income tax returns HCA-Hospital Corporationfor HCA and 19 affiliated partnerships during the first quarter of America’s (“Hospital Corporation of America”) 1991 through 1993 federal income tax returns2008 and Healthtrust, Inc. — The Hospital Company’s (“Healthtrust”) 1990 through 1994 federal income tax returns.
      During 2003, the United States Court of Appeals for the Sixth Circuit affirmed a Tax Court decision received in 1996 relatedintend to contest certain claimed deficiencies and adjustments proposed by the IRS examination of Hospital Corporation of America’s 1987 through 1988 federal income tax returns, in whichconnection with these audits before the IRS contestedAppeals Division.


F-20

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 6 —INCOME TAXES (Continued)
The disputed items pending before the method that Hospital Corporation of America used to calculate its tax allowanceIRS Appeals Division for doubtful accounts. HCA filed a petition for review2001 and 2002, or proposed by the United States Supreme Court, which was denied in October 2004. Due to the volumeIRS Examination Division for 2003 and complexity of calculating the tax allowance for doubtful accounts, the IRS has not determined the amount of additional tax and interest that it may claim for taxable years after 1988. In December 2004, HCA made a deposit of $109 million for additional tax and interest, based on its estimate of amounts due for taxable periods through 1998.
      Other disputed items include the deductibility of a portion of the 2001 and 2003 government settlement payment,payments, the timing of recognition of certain patient service revenues in 20002001 through 2002,2004, the method for calculating the tax allowance for doubtful accounts in 2002 through 2004, and the amount of insurance expense deducted in 19992001 and 2002.
Thirty-two taxable periods of HCA, its predecessors, subsidiaries and affiliated partnerships ended in 1987 through 2002. 2000, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, are pending before the IRS Examination Division or the United States Tax Court as of December 31, 2007. HCA, its predecessors and subsidiaries are also subject to examination in approximately 36 states for taxable periods ended in 1987 through 2007. Our international operations are subject to examination by United Kingdom taxing authorities for taxable periods from 2004 through 2007 and by Swiss taxing authorities for taxable periods from 2002 through 2007.
The IRS has claimedbegan an additional $678 millionaudit of the 2005 and 2006 federal income tax returns for HCA during the first quarter of 2008. We expect the IRS will open examinations of the 2005 and 2006 federal income tax returns for one or more affiliated partnerships during 2008.
Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 creates a single model to address uncertainty in income tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, throughaccounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, “Accounting for Income Taxes.” Interest expense of $17 million related to taxing authority examinations is included in the provision for income taxes for the year ended December 31, 2006, with respect2007.
Differences of $38 million between the amounts recognized in the statements of financial position prior to these issues. This amount is netthe adoption of FIN 48 and the amounts recognized after adoption were recorded as a refundablecumulative effect adjustment, decreasing our liability for unrecognized tax depositbenefits and increasing the balance of $177our retained earnings as of January 1, 2007.
The following table summarizes the activity related to our unrecognized tax benefits (dollars in millions):
     
Balance at January 1, 2007 $555 
Additions based on tax positions related to the current year  70 
Additions for tax positions of prior years  112 
Reductions for tax positions of prior years  (101)
Settlements  2 
Lapse of applicable statutes of limitations  (16)
     
Balance at December 31, 2007 $622 
     
Unrecognized tax benefits of $271 million, plus accrued interest of $218 million, as of December 31, 2007, would affect the effective tax rate, if realized. Our liability for unrecognized tax benefits was $760 million and $828 million, including accrued interest of $209 million and $218 million and excluding $4 million and $12 million that were recorded as reductions of the related deferred tax assets, as of January 1, 2007 and December 31, 2007, respectively. The liability for unrecognized tax benefits does not reflect deferred tax assets related to the deductibility of interest and state taxes included therein or a $215 million refundable deposit that we made during 2006.
      Duringin 2006, the IRS began an examination of HCA’s 2003 through 2004 federal income tax returns. The IRS has not determined the amount of any additional income tax, interest and penalties that it may claim upon completion of this examination.
      Management believes that adequate provisions have beenwhich is recorded to satisfy final resolution of the disputed issues. Management believes that HCA, CHC, Hospital Corporation of America and Healthtrust properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS during previous examinations and that final resolution of these disputes will not have a material, adverse effect on results of operations or financial position.noncurrent assets.


F-21

F-22

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 7 — INVESTMENTS OF INSURANCE SUBSIDIARY
 
NOTE 6 —INCOME TAXES (Continued)
Depending on the resolution of the IRS disputes, the completion of examinations by federal, state or international taxing authorities, or the expiration of statutes of limitation for specific taxing jurisdictions, we believe it is reasonably possible that our liability for unrecognized tax benefits may significantly increase or decrease within the next twelve months. However, we are currently unable to estimate the range of any possible change.
NOTE 7 —INVESTMENTS OF INSURANCE SUBSIDIARY
A summary of the insurance subsidiary’s investments at December 31 follows (dollars in millions):
                  
  2006
   
    Unrealized  
    Amounts  
  Amortized   Fair
  Cost Gains Losses Value
         
Debt securities:                
 States and municipalities $1,174  $24  $(3) $1,195 
 Asset-backed securities  64   4   —   68 
 Corporate and other  8   —   —   8 
 Money market funds  858   —   —   858 
             
   2,104   28   (3)  2,129 
             
Equity securities:                
 Preferred stocks  10   —   (1)  9 
 Common stocks  4   1   —   5 
             
   14   1   (1)  14 
             
  $2,118  $29  $(4)  2,143 
             
Amounts classified as current assets              (257)
             
Investment carrying value             $1,886 
             
                  
  2005
   
    Unrealized  
    Amounts  
  Amortized   Fair
  Cost Gains Losses Value
         
Debt securities:                
 States and municipalities $1,199  $27  $(5) $1,221 
 Asset-backed securities  41   4   —   45 
 Corporate and other  22   1   —   23 
 Money market funds  130   —   —   130 
             
   1,392   32   (5)  1,419 
             
Equity securities:                
 Preferred stocks  10   —   —   10 
 Common stocks  798   161   (4)  955 
             
   808   161   (4)  965 
             
  $2,200  $193  $(9)  2,384 
             
Amounts classified as current assets              (250)
             
Investment carrying value             $2,134 
             
 ��
                 
  2007 
     Unrealized
    
  Amortized
  Amounts  Fair
 
  Cost  Gains  Losses  Value 
 
Debt securities:                
States and municipalities $1,675  $23  $(2) $1,696 
Asset-backed securities  59   1   —   60 
Corporate and other  5   —   —   5 
Money market funds  109   —   —   109 
                 
   1,848   24   (2)  1,870 
                 
Equity securities:                
Preferred stocks  26   —   (1)  25 
Common stocks  4   —   —   4 
                 
   30   —   (1)  29 
                 
  $1,878  $24  $(3)  1,899 
                 
Amounts classified as current assets              (230)
                 
Investment carrying value             $1,669 
                 


F-22

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 7 —INVESTMENTS OF INSURANCE SUBSIDIARY (Continued)
                 
  2006 
     Unrealized
    
  Amortized
  Amounts  Fair
 
  Cost  Gains  Losses  Value 
 
Debt securities:                
States and municipalities $1,174  $24  $(3) $1,195 
Asset-backed securities  64   4   —   68 
Corporate and other  8   —   —   8 
Money market funds  858   —   —   858 
                 
   2,104   28   (3)  2,129 
                 
Equity securities:                
Preferred stocks  10   —   (1)  9 
Common stocks  4   1   —   5 
                 
   14   1   (1)  14 
                 
  $2,118  $29  $(4)  2,143 
                 
Amounts classified as current assets              (257)
                 
Investment carrying value             $1,886 
                 
At December 31, 20062007 and 2005,2006 the investments of our insurance subsidiary were classified as “available-for-sale.” The fair value of investment securities is generally based on quoted market prices. Changes in temporary unrealized gains and losses are recorded as adjustments to other comprehensive

F-23

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 7 — INVESTMENTS OF INSURANCE SUBSIDIARY (Continued)
income. At December 31, 2007 and 2006, $108$106 million and $111 million, respectively, of money market fundsour investments were subject to the restrictions included in insurance bond collateralization and assumed reinsurance contracts.
 
Scheduled maturities of investments in debt securities at December 31, 20062007 were as follows (dollars in millions):
         
  Amortized Fair
  Cost Value
     
Due in one year or less $911  $912 
Due after one year through five years  372   375 
Due after five years through ten years  478   490 
Due after ten years  279   284 
       
   2,040   2,061 
Asset-backed securities  64   68 
       
  $2,104  $2,129 
       
 
         
  Amortized
  Fair
 
  Cost  Value 
 
Due in one year or less $226  $227 
Due after one year through five years  327   333 
Due after five years through ten years  344   356 
Due after ten years  892   894 
         
   1,789   1,810 
Asset-backed securities  59   60 
         
  $1,848  $1,870 
         
The average expected maturity of the investments in debt securities approximated 2.52.1 years at December 31, 2006.2007. Expected and scheduled maturities may differ because the issuers of certain securities may have the right to call, prepay or otherwise redeem such obligations.

F-23

 
HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 7 —INVESTMENTS OF INSURANCE SUBSIDIARY (Continued)
The cost of securities sold is based on the specific identification method. Sales of securities for the years ended December 31 are summarized below (dollars in millions):
              
  2006 2005 2004
       
Debt securities:            
 Cash proceeds $401  $173  $181 
 Gross realized gains  1   2   6 
 Gross realized losses  2   1   2 
Equity securities:            
 Cash proceeds $1,509  $440  $338 
 Gross realized gains  256   63   62 
 Gross realized losses  12   9   16 
NOTE 8 — FINANCIAL INSTRUMENTS
             
  2007 2006 2005
 
Debt securities:            
Cash proceeds $272  $401  $173 
Gross realized gains  8   1   2 
Gross realized losses  1   2   1 
Equity securities:            
Cash proceeds $87  $1,509  $440 
Gross realized gains  1   256   63 
Gross realized losses  —   12   9 
NOTE 8 —Interest Rate Swap AgreementsFINANCIAL INSTRUMENTS
 
Interest Rate Swap Agreements
We have entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates. These swap agreements involve the exchange of fixed and variable rate interest payments between two parties based on common notional principal amounts and maturity dates. Pay-fixed interest rate swaps effectively convert LIBOR indexed variable rate instruments to fixed interest rate obligations. The net interest payments, based on the notional amounts in these agreements, generally match the timing of the related liabilities. The notional amounts of the swap agreements represent amounts used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis.

F-24

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 8 — FINANCIAL INSTRUMENTS (Continued)
     Interest Rate Swap Agreements (Continued)
The following table sets forth our interest rate swap agreements, which have been designated as cash flow hedges, at December 31, 20062007 (dollars in millions):
           
  Notional   Fair
  Amount Termination Date Value
       
Pay-fixed interest rate swap $4,000  November 2011 $12 
Pay-fixed interest rate swap  4,000  November 2011  35 
 
             
  Notional
   Fair
  Amount Termination Date Value
 
Pay-fixed interest rate swap $4,000   November 2011  $(141)
Pay-fixed interest rate swap  4,000   November 2011   (123)
The fair value of the interest rate swaps at December 31, 20062007 represents the estimated amounts we would receivepay upon termination of these agreements.
Cross Currency Swaps
Cross Currency Swaps
 
The Company and certain subsidiaries have incurred obligations and entered into various intercompany transactions where such obligations are denominated in a currency (Euro), other than the functional currencies (United States Dollar and Great Britain Pound) of the parties executing the trade. In order to better match the cash flows of our obligations and intercompany transactions with cash flows from operations, we entered into various cross currency swaps. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.


F-24

HCA INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 8 —FINANCIAL INSTRUMENTS (Continued)

Cross Currency Swaps (Continued)
The cross currency swaps were not designated as hedges and changes in fair value are recognized in results of operations. The following table sets forth our cross currency swap agreements at December 31, 20062007 (amounts in millions):
           
  Notional   Fair
  Amount Termination Date Value
       
Euro — United States Dollar Currency Swap 568 Euro  December 2011  $22 
Euro — Great Britain Pound (GBP) Currency Swap 251 GBP  December 2011   (5)
 
             
  Notional
   Fair
  Amount Termination Date Value
 
Euro — United States Dollar Currency Swap  568 Euro   December 2011  $107 
Euro — Great Britain Pound (GBP) Currency Swap  41 GBP   December 2011   7 
The fair value of the cross currency swaps at December 31, 20062007 represents the estimated amounts we would receive or pay upon termination of these agreements.
Fair Value Information
  Fair Value Information
 
At December 31, 20062007 and 2005,2006, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated carrying values due to the short-term nature of these instruments. The estimated fair values of other financial instruments subject to fair value disclosures are generally determined based on quoted market prices. The estimated fair values and the related carrying amounts are as follows (dollars in millions):
                  
  2006 2005
     
  Carrying Fair Carrying Fair
  Amount Value Amount Value
         
Assets:                
 Investments $2,143  $2,143  $2,384  $2,384 
 Interest rate swaps  47   47   —   — 
 Cross currency swaps  17   17   —   — 
Liabilities:                
 Long-term debt $28,408  $28,096  $10,475  $10,733 
 Interest rate swaps  —   —   25   25 
                 
  2007 2006
  Carrying
 Fair
 Carrying
 Fair
  Amount Value Amount Value
 
Assets:                
Investments of insurance subsidiary $1,899  $1,899  $2,143  $2,143 
Interest rate swaps (Other assets)  —   —   47   47 
Cross currency swaps (Other assets)  114   114   17   17 
Liabilities:                
Long-term debt $27,308  $26,127  $28,408  $28,096 
Interest rate swaps (Income taxes and other liabilities)  264   264   —   — 
Physician recruiting liability (Income taxes and other liabilities)  22   22   14   14 


F-25

F-25

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 9 — LONG-TERM DEBT
 
NOTE 9 —LONG-TERM DEBT
A summary of long-term debt at December 31, including related interest rates at December 31, 2006,2007, follows (dollars in millions):
          
  2006 2005
     
Senior secured asset-based revolving credit facility (effective interest rate of 7.1%) $1,830  $— 
Senior secured revolving credit facility (effective interest rate of 7.9%)  40   — 
Senior secured term loan facilities (effective interest rate of 7.5%)  12,870   — 
Other senior secured debt (effective interest rate of 6.7%)  445   281 
       
 First lien debt  15,185   281 
       
Senior secured cash-pay notes (effective interest rate of 9.6%)  4,200   — 
Senior secured toggle notes (effective interest rate of 10.0%)  1,500   — 
       
 Second lien debt  5,700   — 
       
Senior unsecured notes payable through 2095 (effective interest rate of 7.3%)  7,523   8,419 
Senior unsecured revolving credit facility  —   475 
Senior unsecured term loan facilities  —   1,300 
       
Total debt (average life of eight years, rates averaging 7.9%)  28,408   10,475 
Less amounts due within one year  293   586 
       
  $28,115  $9,889 
       
         
  2007  2006 
 
Senior secured asset-based revolving credit facility (effective interest rate of 6.4%) $1,350  $1,830 
Senior secured revolving credit facility  —   40 
Senior secured term loan facilities (effective interest rate of 7.0%)  12,317   12,870 
Other senior secured debt (effective interest rate of 6.7%)  427   445 
         
First lien debt  14,094   15,185 
         
Senior secured cash-pay notes (effective interest rate of 9.6%)  4,200   4,200 
Senior secured toggle notes (effective interest rate of 10.0%)  1,500   1,500 
         
Second lien debt  5,700   5,700 
         
Senior unsecured notes payable through 2095 (effective interest rate of 7.3%)  7,514   7,523 
         
Total debt (average life of seven years, rates averaging 7.6%)  27,308   28,408 
Less amounts due within one year  308   293 
         
  $27,000  $28,115 
         
Senior Secured Credit Facilities
 On November 17, 2006, in
Senior Secured Credit Facilities
In connection with the November 2006 Recapitalization, we entered into (i) a $2.000 billion senior secured asset-based revolving credit facility with a borrowing base of 85% of eligible accounts receivable, subject to customary reserves and eligibility criteria ($4650 million available at December 31, 2006)2007) (the “ABL credit facility”) and (ii) a new senior secured credit agreement (the “cash flow credit facility” and, together with the ABL credit facility, the “senior secured credit facilities”), consisting of a $2.000 billion revolving credit facility ($1.8261.857 billion available at December 31, 20062007 after giving effect to certain outstanding letters of credit), a $2.750 billion term loan A ($2.638 billion outstanding at December 31, 2007), a $8.800 billion term loan B and a€1.0($8.712 billion term loan ($1.320 billionoutstanding at December 31, 2006)2007) and a €1.0 billion European term loan (€663 million, or $967 million, outstanding at December 31, 2007) under which one of our European subsidiaries is the borrower.
 
Borrowings under the senior secured credit facilities bear interest at a rate equal to, as determined by the type of borrowing, either an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the federal funds rate plus 1/1/2 of 1% andor (2) the prime rate of Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period.period, plus, in each case, an applicable margin. The applicable margin for borrowings under the senior secured credit facilities, with the exception of term loan B where the margin is static, may be reduced subject to attaining certain leverage ratios. In additionOn February 16, 2007, we amended the cash flow credit facility to paying interest on outstanding principal underreduce the senior secured credit facilities, we pay a commitment feeapplicable margins with respect to the lenders underterm loan borrowings thereunder. On June 20, 2007, we amended the asset-based loan facility and the revolvingABL credit facility into reduce the applicable margin effective January 1, 2008, with respect of the unutilized commitmentsto borrowings thereunder. The initial commitment fee rate is 0.375% per annum for the asset-based revolving loan facility and 0.50% per annum under the revolving credit facility. The commitment fee rates may be reduced subject to attaining certain leverage ratios.
 Obligations under the senior secured credit facilities are guaranteed by all material, unrestricted wholly-owned U.S. subsidiaries. In addition, borrowings under the€1.0 billion term loan are guaranteed by us and all material, wholly-owned European subsidiaries.

F-26

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 9 — LONG-TERM DEBT (Continued)
Senior Secured Credit Facilities (Continued)
The $2.000 billion senior secured asset-based revolving creditABL facility and the $2.000 billion senior secured revolving credit facility portion of the cash flow credit facility expire November 2012. We arebegan making required, to repay installmentsquarterly installment payments on each of the term loan facilities on a quarterly basis beginningduring March 2007. The final payment under term loan A is in November 2012. The final payments under term loan B and the EuroEuropean term loan are in November 2013. The senior secured credit facilities contain a number of covenants that restrict, subject to certain exceptions, our (and some or all of our subsidiaries’) ability to incur additional indebtedness, repay subordinated indebtedness, create liens on assets, sell assets, make investments,


F-26

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 9 —LONG-TERM DEBT (Continued)

Senior Secured Credit Facilities (Continued)
loans or advances, engage in certain transactions with affiliates, pay dividends and distributions, and enter into sale and leaseback transactions. In addition, we are required to satisfy and maintain a maximum total leverage ratio covenant under the cash flow facility and, in certain situations under the ABL credit facility, a minimum interest coverage ratio.ratio covenant.
 
We use interest rate swap agreements to manage the floating rate exposure of our debt portfolio. In the fourth quarter of 2006, we entered into two interest rate swap agreements, in a total notional amount of $8 billion, in order to hedge a portion of our exposure to variable rate interest payments associated with the senior secured credit facility. The interest rate swaps expire in November 2011. The effect of the interest rate swaps is reflected in the effective interest rate for the senior secured credit facilities in the table above.facilities.
Senior Secured Notes
Senior Secured Notes
 
In November 2006, also in connection with the Recapitalization, we issued $4.200 billion of senior secured notes (comprised of $1.000 billion of 9 1/8%1/8% notes due 2014 and $3.200 billion of 91/4% notes due 2016), and $1.500 billion of 95/8% senior secured toggle notes (which allow us, at our option, to pay interest in-kind during the first five years) due 2016, which are subject to certain standard covenants. The notes are guaranteed by certain of our subsidiaries.
Significant Financing Activities
2006
 
Significant 2006 Financing Activities
Proceeds from the senior secured credit facilities and the senior secured notes were used in connection with the closing of the Recapitalization. Amounts owed under our previous bank credit agreements were repaid at the close of the Recapitalization. In connection with the Recapitalization, we also tendered for all amounts outstanding under the 8.85% notes due 2007, the 7.00% notes due 2007, the 7.25% notes due 2008, the 5.25% notes due 2008 and the 5.50% notes due 2009 (collectively, the “Notes”). Approximately 97% of the $1.365 billion total outstanding amount under the Notes was repurchased pursuant to the tender.
 
In February 2006, we issued $1.000 billion of 6.5% notes due 2016. Proceeds of $625 million were used to refinance the remaining amountamounts outstanding under the 2005a bank term loan and the remaining proceeds were used to pay down amounts advanced under a prior bank revolving credit facility.
2005
General Information
 
The senior secured credit facilities and senior secured notes are fully and unconditionally guaranteed by substantially all existing and future, direct and indirect, wholly-owned material domestic subsidiaries that are “Unrestricted Subsidiaries” under our Indenture dated December 16, 1993 (except for certain special purpose subsidiaries that only guarantee and pledge their assets under our ABL credit facility). In November 2005, we entered intoaddition, borrowings under the 2005European term loan which had a maturity of May 2006. Under this agreement, we borrowed $800 million. Proceeds from the 2005 term loan were used to partially fund the repurchase of our common stock. The 2005 term loan contained a mandatory prepayment clause which required us to prepay amounts outstanding upon receiving proceeds from the issuance of debt or equity securities or from asset sales. Proceeds of $175 million from the sale of hospitals in the fourth quarter of 2005 were used to repay a portion of the amounts outstanding under the 2005 term loan.

F-27

HCA INC.are guaranteed by all material, wholly-owned European subsidiaries.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 9 — LONG-TERM DEBT (Continued)
General Information
Maturities of long-term debt in years 20082009 through 20112012 are $299$400 million, $393 million, $1.495$1.506 billion, $1.091 billion and $1.084$4.097 billion, respectively.
 
The estimated fair value of our long-term debt was $28.096$26.127 billion and $10.733$28.096 billion at December 31, 20062007 and 2005,2006, respectively, compared to carrying amounts aggregating $28.408$27.308 billion and $10.475$28.408 billion, respectively. The estimates of fair value are generally based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities.


F-27

NOTE 10HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINGENCIES(Continued)
NOTE 10 —Significant Legal ProceedingsCONTINGENCIES
 
Significant Legal Proceedings
We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims or legal and regulatory proceedings could have a material, adverse affect on our results of operations andor financial position in a given period.
 
In 2005, the Company and certain of its executive officers and directors were named in various federal securities law class actions and several shareholders filed derivative lawsuits purportedly on behalf of the Company. Additionally, a former employee filed a complaint against certain of our executive officers pursuant to the Employee Retirement Income Security Act (“ERISA”), and the Company has beenwas served with a shareholder demand letter addressed to our Board of Directors. The securities and derivative actions have been settled. We cannot predicthave also reached an agreement in principle to settle the results of the investigations or any related lawsuits, or the effect that findings in such investigations or lawsuits may have on the Company.ERISA action, subject to court approval.
 
In connection with the Merger, we are aware of eight asserted class action lawsuits related to the Merger were filed against us, certain of our executive officers, our directors and the Sponsors, and one lawsuit was filed against us and one of our affiliates seeking enforcement of contractual obligations allegedly arising from the Merger. Certain of theseThese lawsuits though nothave all are the subject of an agreement in principle to settle. Additional lawsuits pertaining to the Merger could be filed in the future.been settled.
General Liability Claims
General Liability Claims
 
We are subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants may seek punitive damages against us which may not be covered by insurance. It is management’s opinion that the ultimate resolution of these pending claims and legal proceedings will not have a material, adverse effect on our results of operations or financial position.
Investigations
Investigations
 
In January 2001, we entered into an eight-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the Department of Health and Human Services. Violation or breach of the CIA, or violation of federal or state laws relating to Medicare, Medicaid or similar programs, could subject us to substantial monetary fines, civil and criminal penaltiesand/or exclusion from participation in the Medicare and Medicaid programs. Alleged violations may be pursued by the government or through privatequi tamactions. Sanctions imposed against us as a result of such actions could have a material, adverse effect on our results of operations or financial position.
 In September 2005, we received a subpoena from the Office of the United States Attorney for the Southern District of New York seeking the production of documents. Also in September 2005, we were

F-28

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 10 — CONTINGENCIES (Continued)
NOTE 11 —Investigations (Continued)CAPITAL STOCK AND STOCK REPURCHASES
informed that the SEC had issued a formal order of investigation. Both the subpoena and the formal order of investigation relate to trading in the Company’s securities. We are cooperating fully with these investigations.
NOTE 11 — CAPITAL STOCK AND STOCK REPURCHASES
Capital Stock
 
In connection with the Recapitalization, the Company’s certificate of incorporation and by-laws were amended and restated, effective November 17, 2006, so that they read, in their entirety, as the certificate of incorporation and by-laws of Merger Sub read immediately prior to the effective time of the Merger. Among other things, the restated certificate of incorporation reduced the number of shares of common stock the Company is authorized to issue from 1,650,000,000 shares to 125,000,000 shares and the amended and restated by-laws set the number of directors constituting the board of directors of the Company at not less than one nor more than 15.
Stock Repurchase Programs
 
In October 2005, we announced the authorization of a modified “Dutch” auction tender offer to purchase up to $2.500 billion of our common stock. In November 2005, we closed the tender offer and repurchased 28.7 million shares of our common stock for $1.437 billion ($50.00 per share). The shares repurchased represented


F-28

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 11 —CAPITAL STOCK AND STOCK REPURCHASES (Continued)

Stock Repurchase Programs (Continued)
approximately 6% of our outstanding shares at the time of the tender offer. During 2005, we also repurchased 8.0 million shares of our common stock for $412 million, through open market purchases. During 2006, we repurchased 13.0 million shares of our common stock for $651 million, through open market purchases, which completed this authorization.
 In October 2004, we announced the authorization of a modified “Dutch” auction tender offer to purchase up to $2.501 billion of our common stock. In November 2004, we closed the tender offer and repurchased 62 million shares of our common stock for $2.466 billion ($39.75 per share). The shares repurchased represented approximately 13% of our outstanding shares at the time of the tender offer. We also repurchased 0.9 million shares of our common stock for $35 million, through open market purchases, which completed this $2.501 billion share repurchase authorization.
      In April 2003, we announced an authorization to repurchase $1.500 billion of our common stock through open market purchases or privately negotiated transactions. During 2003, we repurchased under this authorization 25.3 million shares of our common stock for $900 million, through open market purchases. During 2004, we repurchased 14.5 million shares of our common stock for $600 million, through open market purchases, which completed this authorization.
During 2006 2005 and 2004,2005, the share repurchase transactions reduced stockholders’ equity by $653 million $1.856 billion and $3.109$1.856 billion, respectively.
NOTE 12 — EMPLOYEE BENEFIT PLANS
NOTE 12 —EMPLOYEE BENEFIT PLANS
We maintain noncontributory, defined contribution retirement plans covering substantially all employees. Benefits are determined as a percentage of a participant’s salary and vest over specified periods of employee service. Retirement plan expense was $203 million for 2007, $190 million for 2006 and $210 million for 2005 and $185 million for 2004.2005. Amounts approximately equal to retirement plan expense are funded annually.
 
We maintain contributory, defined contribution benefit plans that are available to employees who meet certain minimum requirements. Certain of the plans require that we match specified percentages of

F-29

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 12 — EMPLOYEE BENEFIT PLANS (Continued)
participant contributions up to certain maximum levels (generally 50% of the first 3% of compensation deferred by participants). The cost of these plans totaled $86 million for 2007, $71 million for 2006 and $60 million for 2005 and $57 million for 2004.2005. Our contributions are funded periodically during each year.
 
We maintain a Supplemental Executive Retirement Plan (“SERP”) for certain executives. The plan is designed to ensure that upon retirement the participant receives the value of a prescribed life annuity from the combination of the SERP and our other benefit plans. Compensation expense under the plan was $20 million for 2007, $15 million for 2006 and $9 million for 2005 and $8 million for 2004.2005. Accrued benefits liabilities under this plan totaled $109 million at December 31, 2007 and $107 million at December 31, 2006 and $42 million at December 31, 2005.2006.
 
We maintain defined benefit pension plans which resulted from certain hospital acquisitions in prior years. Compensation expense under these plans was $27 million for 2007, $31 million for 2006, and $29 million for 2005, and $26 million for 2004.2005. Accrued benefits liabilities under these plans totaled $48 million at December 31, 2007 and $79 million at December 31, 2006.
Adoption of Statement 158
During September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and $56 million at December 31, 2005.
Adoption of Statement 158
Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires an entity to: recognize in its balance sheet an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status; measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year; and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. On December 31, 2006, we adopted the recognition and disclosure provisions of SFAS 158. On January 1, 2008, we adopted the measurement date provisions of SFAS 158. We do not expect the adoption of these provisions to have a material effect on our financial position or results of operations. SFAS 158 required us to recognize the funded status (i.e., the(the difference between the fair value of plan assets and the projected benefit obligations) of our defined benefit plans in the December 31, 2006 consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the unrecognized actuarial losses and unrecognized prior service costs. TheseIn periods subsequent to December 31, 2006, these amounts will be subsequentlyare being recognized as components of net periodic pension cost pursuant to our policy for amortizing such amounts. Actuarial gains and losses and prior service costs or credits that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods, will be recognized as a componentcost.


F-29

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 12 —EMPLOYEE BENEFIT PLANS (Continued)

Adoption of other comprehensive income and will then be recognized as a component of net periodic pension cost in subsequent periods.Statement 158 (Continued)
 
The incremental effects of adopting the provisions of SFAS 158 in our consolidated balance sheet at December 31, 2006 are presented in the following table. The adoption of SFAS 158 had no effect on our consolidated income statement for the year ended December 31, 2006, or for any prior period presented, and it will not effect our operating results in future periods.
             
  At December 31, 2006
   
  Prior to Effect of  
  Adopting Adopting  
  SFAS 158 SFAS 158 As Reported
       
Intangible pension asset $31  $(31) $— 
Accrued pension liability  128   71   199 
Deferred income taxes  6   36   42 
Accumulated other comprehensive income  (15)  (94)  (109)

F-30

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 13 — SEGMENT AND GEOGRAPHIC INFORMATIONpresented.
 
             
  At December 31, 2006
  Prior to
 Effect of
  
  Adopting
 Adopting
  
  SFAS 158 SFAS 158 As Reported
 
Intangible pension asset $31  $(31) $— 
Accrued pension liability  128   71   199 
Deferred income taxes  6   36   42 
Accumulated other comprehensive income  (15)  (94)  (109)
NOTE 13 —SEGMENT AND GEOGRAPHIC INFORMATION
We operate in one line of business, which is operating hospitals and related health care entities. During the three years ended December 31, 2007, 2006 and 2005, approximately 24%, 26% and 2004, approximately 26%, 27% and 28%, respectively, of our revenues related to patients participating in thefee-for-service Medicare program.
 
Our operations are structured into three geographically organized groups: the Eastern Group includes 5349 consolidating hospitals located in the Eastern United States, the Central Group includes 5152 consolidating hospitals located in the Central United States and the Western Group includes 54 consolidating hospitals located in the Western United States. We also operate eightsix consolidating hospitals in England, and Switzerland and these facilities are included in the Corporate and other group.

F-31

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 13 — SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
Adjusted segment EBITDA is defined as income before depreciation and amortization, interest expense, gains on sales of facilities, transaction costs, impairment of long-lived assets, transaction costs, minority interests and income taxes. We use adjusted segment EBITDA as an analytical indicator for purposes of allocating resources to geographic areas and assessing their performance. Adjusted segment EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. Adjusted segment EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from adjusted segment EBITDA are significant components in understanding and assessing financial performance. Because adjusted segment EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, adjusted segment EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. The geographic distributions of our revenues, equity in earnings of affiliates, adjusted segment EBITDA, depreciation and amortization, assets and goodwill are summarized in the following table (dollars in millions):
              
  For the Years Ended December 31,
   
  2006 2005 2004
       
Revenues:            
 Eastern Group $8,609  $8,225  $7,854 
 Central Group  5,514   5,489   5,304 
 Western Group  10,495   9,733   9,382 
 Corporate and other  859   1,008   962 
          
  $25,477  $24,455  $23,502 
          
Equity in earnings of affiliates:            
 Eastern Group $(4) $(4) $(6)
 Central Group  (5)  (6)  — 
 Western Group  (187)  (210)  (192)
 Corporate and other  (1)  (1)  4 
          
  $(197) $(221) $(194)
          
Adjusted segment EBITDA:            
 Eastern Group $1,329  $1,435  $1,368 
 Central Group  854   917   856 
 Western Group  2,088   1,994   1,831 
 Corporate and other  198   (68)  (89)
          
  $4,469  $4,278  $3,966 
          
Depreciation and amortization:            
 Eastern Group $423  $413  $359 
 Central Group  309   308   281 
 Western Group  492   480   435 
 Corporate and other  167   173   175 
          
  $1,391  $1,374  $1,250 
          
Adjusted segment EBITDA $4,469  $4,278  $3,966 
 Depreciation and amortization  1,391   1,374   1,250 
 Interest expense  955   655   563 
 Gains on sales of facilities  (205)  (78)  — 
 Transaction costs  442   —   — 
 Impairment of long-lived assets  24   —   12 
          
Income before minority interests and income taxes $1,862  $2,327  $2,141 
          
             
  For The Years Ended December 31, 
  2007  2006  2005 
 
Revenues:            
Eastern Group $8,204  $7,775  $7,341 
Central Group  6,302   5,917   5,667 
Western Group  11,378   10,495   9,733 
Corporate and other  974   1,290   1,714 
             
  $26,858  $25,477  $24,455 
             


F-30

F-32

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 13 — SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
          
  As of December 31,
   
  2006 2005
     
Assets:        
 Eastern Group $5,270  $5,292 
 Central Group  4,504   4,592 
 Western Group  7,714   7,096 
 Corporate and other  6,187   5,245 
       
  $23,675  $22,225 
       
                      
  Eastern Central Western Corporate  
  Group Group Group and Other Total
           
Goodwill:                    
Balance at December 31, 2005 $701  $974  $698  $253  $2,626 
 Acquisitions  2   —   36   —   38 
 Sales  (57)  (26)  —   (3)  (86)
 Foreign currency translation and other  (10)  2   1   30   23 
                
Balance at December 31, 2006 $636  $950  $735  $280  $2,601 
                
NOTE 13 —SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
             
  For The Years Ended December 31, 
  2007  2006  2005 
 
Equity in earnings of affiliates:            
Eastern Group $(2) $(6) $(5)
Central Group  8   (3)  (6)
Western Group  (212)  (187)  (210)
Corporate and other  —   (1)  — 
             
  $(206) $(197) $(221)
             
Adjusted segment EBITDA:            
Eastern Group $1,268  $1,196  $1,299 
Central Group  1,082   975   998 
Western Group  2,196   2,088   1,994 
Corporate and other  46   211   (8)
             
  $4,592  $4,470  $4,283 
             
Depreciation and amortization:            
Eastern Group $369  $363  $355 
Central Group  364   329   321 
Western Group  529   492   480 
Corporate and other  164   207   218 
             
  $1,426  $1,391  $1,374 
             
Adjusted segment EBITDA $4,592  $4,470  $4,283 
Depreciation and amortization  1,426   1,391   1,374 
Interest expense  2,215   955   655 
Gains on sales of facilities  (471)  (205)  (78)
Impairment of long-lived assets  24   24   — 
Transaction costs  —   442   — 
             
Income before minority interests and income taxes $1,398  $1,863  $2,332 
             
         
  As of December 31, 
  2007  2006 
 
Assets:        
Eastern Group $4,928  $4,803 
Central Group  5,157   4,930 
Western Group  8,152   7,714 
Corporate and other  5,788   6,228 
         
  $24,025  $23,675 
         

F-31

F-33

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 14 — OTHER COMPREHENSIVE INCOME
 
NOTE 13 —SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
                     
  Eastern
  Central
  Western
  Corporate
    
  Group  Group  Group  and Other  Total 
 
Goodwill:                    
Balance at December 31, 2006 $585  $1,001  $735  $280  $2,601 
Acquisitions  34   4   6   —   44 
Sales  —   (1)  —   (44)  (45)
Foreign currency translation and other  9   11   8   1   29 
                     
Balance at December 31, 2007 $628  $1,015  $749  $237  $2,629 
                     
NOTE 14 —OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as follows (dollars in millions):
                      
        Change  
  Unrealized Foreign   in Fair  
  Gains on Currency Defined Value of  
  Available-for-Sale Translation Benefit Derivative  
  Securities Adjustments Plans Instruments Total
           
Balances at December 31, 2003 $138  $46  $(16) $—  $168 
 Unrealized gains on available-for-sale securities, net of $27 of income taxes  46   —   —   —   46 
 Gains reclassified into earnings from other comprehensive income, net of $20 of income taxes  (36)  —   —   —   (36)
 Foreign currency translation adjustments, net of $11 of income taxes  —   21   —   —   21 
 Defined benefit plans, net of $4 income tax benefit  —   —   (6)  —   (6)
                
Balances at December 31, 2004  148   67   (22)  —   193 
 Unrealized gains on available-for-sale securities, net of $3 of income taxes  3   —   —   —   3 
 Gains reclassified into earnings from other comprehensive income, net of $20 of income taxes  (33)  —   —   —   (33)
 Foreign currency translation adjustments, net of $19 income tax benefit  —   (37)  —   —   (37)
 Defined benefit plans, net of $2 of income taxes  —   —   4   —   4 
                
Balances at December 31, 2005  118   30   (18)  —   130 
 Unrealized gains on available-for-sale securities, net of $30 of income taxes  53   —   —   —   53 
 Gains reclassified into earnings from other comprehensive income, net of $88 of income taxes  (155)  —   —   —   (155)
 Foreign currency translation adjustments, net of $10 of income taxes  —   19   —   —   19 
 Defined benefit plans, net of $30 of income tax benefit  —   —   (49)  —   (49)
 Change in fair value of derivative instruments, net of $10 of income taxes  —   —   —   18   18 
                
Balances at December 31, 2006 $16  $49  $(67) $18  $16 
                
                     
        Change
  
  Unrealized
 Foreign
   in Fair
  
  Gains on
 Currency
 Defined
 Value of
  
  Available-for-Sale
 Translation
 Benefit
 Derivative
  
  Securities Adjustments Plans Instruments Total
 
Balances at December 31, 2004 $148  $67  $(22) $—  $193 
Unrealized gains on available-for-sale securities,
net of $3 of income taxes		  3   —   —   —   3 
Gains reclassified into earnings from other
comprehensive income, net of $20 of income taxes		  (33)  —   —   —   (33)
Foreign currency translation adjustments,
net of $19 income tax benefit		  —   (37)  —   —   (37)
Defined benefit plans, net of $2 of income taxes  —   —   4   —   4 
                     
Balances at December 31, 2005  118   30   (18)  —   130 
Unrealized gains on available-for-sale securities,
net of $30 of income taxes		  53   —   —   —   53 
Gains reclassified into earnings from other
comprehensive income, net of $88 of income taxes		  (155)  —   —   —   (155)
Foreign currency translation adjustments, net of $10 of income taxes  —   19   —   —   19 
Defined benefit plans, net of $30 income tax benefit  —   —   (49)  —   (49)
Change in fair value of derivative instruments,
net of $10 of income taxes		  —   —   —   18   18 
                     
Balances at December 31, 2006  16   49   (67)  18   16 
Unrealized gains on available-for-sale securities,
net of $1 of income taxes		  3   —   —   —   3 
Foreign currency translation adjustments,
net of $3 income tax benefit		  —   (7)  —   —   (7)
Gains reclassified into earnings from other comprehensive income, net of $3 and $5, respectively, of income taxes  (5)  (8)  —   —   (13)
Defined benefit plans, net of $14 of income taxes  —   —   23   —   23 
Change in fair value of derivative instruments,
net of $112 income tax benefit		  —   —   —   (194)  (194)
                     
Balances at December 31, 2007 $14  $34  $(44) $(176) $(172)
                     

F-32

F-34

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 15 — ACCRUED EXPENSES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
NOTE 15 —ACCRUED EXPENSES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of other accrued expenses at December 31 follows (dollars in millions):
         
  2006 2005
     
Employee benefit plans $208  $203 
Taxes other than income  168   166 
Professional liability risks  275   285 
Interest  228   149 
Dividends  —   62 
Other  314   399 
       
  $1,193  $1,264 
       
 
         
  2007  2006 
 
Professional liability risks $280  $275 
Interest  223   228 
Employee benefit plans  217   208 
Income taxes  190   — 
Taxes other than income  139   168 
Other  342   314 
         
  $1,391  $1,193 
         
A summary of activity for the allowance of doubtful accounts follows (dollars in millions):
                  
    Provision Accounts  
  Balance at for Written off, Balance
  Beginning Doubtful Net of at End
  of Year Accounts Recoveries of Year
         
Allowance for doubtful accounts:                
 Year ended December 31, 2004 $2,649  $2,669  $(2,376) $2,942 
 Year ended December 31, 2005  2,942   2,358   (2,403)  2,897 
 Year ended December 31, 2006  2,897   2,660   (2,129)  3,428 
                 
    Provision
 Accounts
  
  Balance at
 for
 Written off,
 Balance
  Beginning
 Doubtful
 Net of
 at End
  of Year Accounts Recoveries of Year
 
Allowance for doubtful accounts:                
Year ended December 31, 2005 $2,942  $2,358  $(2,403) $2,897 
Year ended December 31, 2006  2,897   2,660   (2,129)  3,428 
Year ended December 31, 2007  3,428   3,130   (2,269)  4,289 
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION
The senior secured credit facilities and senior secured notes described in Note 9 are fully and unconditionally guaranteed by substantially all existing and future, direct and indirect, wholly-owned material domestic subsidiaries that are “Unrestricted Subsidiaries” under our Indenture dated December 16, 1993 (except for certain special purpose subsidiaries that only guarantee and pledge their assets under our ABL credit facility).
Our condensed consolidating balance sheets at December 31, 2007 and 2006 and condensed consolidating statements of income and cash flows for each of the three years in the period ended December 31, 2007, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, follow.


F-33

F-35

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
For The Year Ended December 31, 2007
(Dollars in millions)
                     
        Subsidiary
       
  Parent
  Subsidiary
  Non-
     Condensed
 
  Issuer  Guarantors  Guarantors  Eliminations  Consolidated 
 
Revenues $—  $15,598  $11,260  $—  $26,858 
                     
Salaries and benefits  —   6,441   4,273   —   10,714 
Supplies  —   2,549   1,846   —   4,395 
Other operating expenses  (2)  2,279   1,964   —   4,241 
Provision for doubtful accounts  —   1,942   1,188   —   3,130 
Gains on investments  —   —   (8)  —   (8)
Equity in earnings of affiliates  (2,245)  (90)  (116)  2,245   (206)
Depreciation and amortization  —   779   647   —   1,426 
Interest expense  2,161   (95)  149   —   2,215 
Gains on sales of facilities  —   (3)  (468)  —   (471)
Impairment of long-lived assets  —   —   24   —   24 
Management fees  —   (392)  392   —   — 
                     
   (86)  13,410   9,891   2,245   25,460 
                     
Income (loss) before minority interests and income taxes  86   2,188   1,369   (2,245)  1,398 
Minority interests in earnings of consolidated entities  —   28   180   —   208 
                     
Income (loss) before income taxes  86   2,160   1,189   (2,245)  1,190 
Provision for income taxes  (788)  712   392   —   316 
                     
Net income (loss) $874  $1,448  $797  $(2,245) $874 
                     


F-34

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
For The Year Ended December 31, 2006
(Dollars in millions)
                     
        Subsidiary
       
  Parent
  Subsidiary
  Non-
     Condensed
 
  Issuer  Guarantors  Guarantors  Eliminations  Consolidated 
 
Revenues $—  $14,913  $10,564  $—  $25,477 
                     
Salaries and benefits  —   6,319   4,090   —   10,409 
Supplies  —   2,487   1,835   —   4,322 
Other operating expenses  —   2,253   1,803   —   4,056 
Provision for doubtful accounts  —   1,652   1,008   —   2,660 
Gains on investments  —   —   (243)  —   (243)
Equity in earnings of affiliates  (1,995)  (79)  (118)  1,995   (197)
Depreciation and amortization  —   755   636   —   1,391 
Interest expense  895   (99)  159   —   955 
Gains on sales of facilities  —   7   (212)  —   (205)
Impairment of long-lived assets  —   5   19   —   24 
Transaction costs  429   25   (12)  —   442 
Management fees  —   (377)  377   —   — 
                     
   (671)  12,948   9,342   1,995   23,614 
                     
Income (loss) before minority interests and income taxes  671   1,965   1,222   (1,995)  1,863 
Minority interests in earnings of consolidated entities  —   21   180   —   201 
                     
Income (loss) before income taxes  671   1,944   1,042   (1,995)  1,662 
Provision for income taxes  (365)  612   379   —   626 
                     
Net income (loss) $1,036  $1,332  $663  $(1,995) $1,036 
                     


F-35

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
For The Year Ended December 31, 2005
(Dollars in millions)
                     
        Subsidiary
       
  Parent
  Subsidiary
  Non-
     Condensed
 
  Issuer  Guarantors  Guarantors  Eliminations  Consolidated 
 
Revenues $—  $14,254  $10,201  $—  $24,455 
                     
Salaries and benefits  —   6,032   3,896   —   9,928 
Supplies  —   2,376   1,750   —   4,126 
Other operating expenses  —   2,234   1,800   —   4,034 
Provision for doubtful accounts  —   1,409   949   —   2,358 
Gains on investments  —   1   (54)  —   (53)
Equity in earnings of affiliates  (1,792)  (88)  (133)  1,792   (221)
Depreciation and amortization  —   762   612   —   1,374 
Interest expense  593   (70)  132   —   655 
Gains on sales of facilities  —   (7)  (71)  —   (78)
Management fees  —   (387)  387   —   — 
                     
   (1,199)  12,262   9,268   1,792   22,123 
                     
Income (loss) before minority interests and income taxes  1,199   1,992   933   (1,792)  2,332 
Minority interests in earnings of consolidated entities  —   15   163   —   178 
                     
Income (loss) before income taxes  1,199   1,977   770   (1,792)  2,154 
Provision for income taxes  (225)  711   244   —   730 
                     
Net income (loss) $1,424  $1,266  $526  $(1,792) $1,424 
                     


F-36

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
HCA INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2007
(Dollars in millions)
                     
        Subsidiary
       
  Parent
  Subsidiary
  Non-
     Condensed
 
  Issuer  Guarantors  Guarantors  Eliminations  Consolidated 
 
ASSETS
                    
Current assets:                    
Cash and cash equivalents $—  $165  $228  $—  $393 
Accounts receivable, net  —   2,248   1,647   —   3,895 
Inventories  —   432   278   —   710 
Deferred income taxes  592   —   —   —   592 
Other  —   123   492   —   615 
                     
   592   2,968   2,645   —   6,205 
                     
                     
Property and equipment, net  —   6,960   4,482   —   11,442 
Investments of insurance subsidiary  —   —   1,669   —   1,669 
Investments in and advances to affiliates  —   221   467   —   688 
Goodwill  —   1,644   985   —   2,629 
Deferred loan costs  539   —   —   —   539 
Investments in and advances to subsidiaries  17,190   —   —   (17,190)  — 
Other  798   18   37   —   853 
                     
  $19,119  $11,811  $10,285  $(17,190) $24,025 
                     
                     
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY                    
Current liabilities:                    
Accounts payable $—  $883  $487  $—  $1,370 
Accrued salaries  —   515   265   —   780 
Other accrued expenses  411   372   608   —   1,391 
Long-term debt due within one year  271   —   37   —   308 
                     
   682   1,770   1,397   —   3,849 
                     
                     
Long-term debt  26,439   103   458   —   27,000 
Intercompany balances  1,368   (6,524)  5,156   —   — 
Professional liability risks  —   —   1,233   —   1,233 
Income taxes and other liabilities  1,004   238   137   —   1,379 
Minority interests in equity of consolidated entities  —   117   821   —   938 
                     
   29,493   (4,296)  9,202   —   34,399 
Equity securities with contingent redemption rights  164   —   —   —   164 
                     
                     
Stockholders’ (deficit) equity  (10,538)  16,107   1,083   (17,190)  (10,538)
                     
  $19,119  $11,811  $10,285  $(17,190) $24,025 
                     


F-37

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
HCA INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2006
(Dollars in millions)
                     
        Subsidiary
       
  Parent
  Subsidiary
  Non-
     Condensed
 
  Issuer  Guarantors  Guarantors  Eliminations  Consolidated 
 
ASSETS
                    
Current assets:                    
Cash and cash equivalents $—  $282  $352  $—  $634 
Accounts receivable, net  —   2,145   1,560   —   3,705 
Inventories  —   408   261   —   669 
Deferred income taxes  476   —   —   —   476 
Other  171   134   289   —   594 
                     
   647   2,969   2,462   —   6,078 
                     
Property and equipment, net  —   7,130   4,539   —   11,669 
Investments of insurance subsidiary  —   —   1,886   —   1,886 
Investments in and advances to affiliates  —   227   452   —   679 
Goodwill  —   1,629   972   —   2,601 
Deferred loan costs  614   —   —   —   614 
Investments in and advances to subsidiaries  14,945   —   —   (14,945)  — 
Other  69   22   57   —   148 
                     
  $16,275  $11,977  $10,368  $(14,945) $23,675 
                     
                     
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY                    
Current liabilities:                    
Accounts payable $—  $1,052  $363  $—  $1,415 
Accrued salaries  —   442   233   —   675 
Other accrued expenses  228   345   620   —   1,193 
Long-term debt due within one year  254   4   35   —   293 
                     
   482   1,843   1,251   —   3,576 
                     
Long-term debt  26,651   194   1,270   —   28,115 
Intercompany balances  —   (5,289)  5,289   —   — 
Professional liability risks  —   —   1,309   —   1,309 
Income taxes and other liabilities  391   441   185   —   1,017 
Minority interests in equity of consolidated entities  —   129   778   —   907 
                     
   27,524   (2,682)  10,082   —   34,924 
Equity securities with contingent redemption rights  125   —   —   —   125 
                     
Stockholders’ (deficit) equity  (11,374)  14,659   286   (14,945)  (11,374)
                     
  $16,275  $11,977  $10,368  $(14,945) $23,675 
                     


F-38

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
HCA INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2007
(Dollars in millions)
                     
        Subsidiary
       
  Parent
  Subsidiary
  Non-
     Condensed
 
  Issuer  Guarantors  Guarantors  Eliminations  Consolidated 
 
Cash flows from operating activities:
                    
Net income $874  $1,448  $797  $(2,245) $874 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                    
Provision for doubtful accounts  —   1,942   1,188   —   3,130 
Depreciation and amortization  —   779   647   —   1,426 
Income taxes  (105)  —   —   —   (105)
Gains on sales of facilities  —   (3)  (468)  —   (471)
Impairment of long-lived assets  —   —   24   —   24 
Equity in earnings of affiliates  (2,245)  —   —   2,245   — 
Decrease in cash from operating assets and liabilities  (6)  (2,127)  (1,482)  —   (3,615)
Change in minority interests  —   16   24   —   40 
Share-based compensation  24   —   —   —   24 
Other  85   18   (34)  —   69 
                     
Net cash provided by (used in) operating activities  (1,373)  2,073   696   —   1,396 
                     
Cash flows from investing activities:
                    
Purchase of property and equipment  —   (640)  (804)  —   (1,444)
Acquisition of hospitals and health care entities  —   (11)  (21)  —   (32)
Disposal of hospitals and health care entities  —   24   743   —   767 
Change in investments  —   3   204   —   207 
Other  —   (8)  31   —   23 
                     
Net cash provided by (used in) investing activities  —   (632)  153   —   (479)
                     
Cash flows from financing activities:
                    
Issuances of long-term debt  —   —   24   —   24 
Net change in revolving bank credit facility  (520)  —   —   —   (520)
Repayment of long-term debt  (255)  (4)  (491)  —   (750)
Issuances of common stock  100   —   —   —   100 
Repurchases of common stock  (2)  —   —   —   (2)
Payment of debt issuance costs  (9)  —   —   —   (9)
Changes in intercompany balances with affiliates, net  2,059   (1,554)  (505)  —   — 
Other  —   —   (1)  —   (1)
                     
Net cash provided by (used in) financing activities  1,373   (1,558)  (973)  —   (1,158)
                     
Change in cash and cash equivalents  —   (117)  (124)  —   (241)
Cash and cash equivalents at beginning of period  —   282   352   —   634 
                     
Cash and cash equivalents at end of period $—  $165  $228  $—  $393 
                     


F-39

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
HCA INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2006
(Dollars in millions)
                     
        Subsidiary
       
  Parent
  Subsidiary
  Non-
     Condensed
 
  Issuer  Guarantors  Guarantors  Eliminations  Consolidated 
 
Cash flows from operating activities:
                    
Net income $1,036  $1,332  $663  $(1,995) $1,036 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                    
Provision for doubtful accounts  —   1,652   1,008   —   2,660 
Depreciation and amortization  —   755   636   —   1,391 
Income taxes  (552)  —   —   —   (552)
Gains on sales of facilities  —   7   (212)  —   (205)
Impairment of long-lived assets  —   5   19   —   24 
Equity in earnings of affiliates  (1,995)  —   —   1,995   — 
Increase (decrease) in cash from operating assets and liabilities  78   (1,552)  (1,466)  —   (2,940)
Change in minority interests  —   18   40   —   58 
Share-based compensation  324   —   —   —   324 
Other  74   2   (27)  —   49 
                     
Net cash provided by (used in) operating activities  (1,035)  2,219   661   —   1,845 
                     
Cash flows from investing activities:
                    
Purchase of property and equipment  —   (1,058)  (807)  —   (1,865)
Acquisition of hospitals and health care entities  —   (29)  (83)  —   (112)
Disposal of hospitals and health care entities  —   108   543   —   651 
Change in investments  —   13   13   —   26 
Other  —   (4)  (3)  —   (7)
                     
Net cash used in investing activities  —   (970)  (337)  —   (1,307)
                     
Cash flows from financing activities:
                    
Issuances of long-term debt  21,207   —   551   —   21,758 
Net change in revolving bank credit facility  (435)  —   —   —   (435)
Repayment of long-term debt  (3,621)  (3)  (104)  —   (3,728)
Issuances of common stock  108   —   —   —   108 
Repurchases of common stock  (653)  —   —   —   (653)
Recapitalization-repurchase of common stock  (20,364)  —   —   —   (20,364)
Recapitalization-equity contributions  3,782   —   —   —   3,782 
Payment of debt issuance costs  (586)  —   —   —   (586)
Payment of cash dividends  (201)  —   —   —   (201)
Changes in intercompany balances with affiliates, net  1,719   (1,095)  (624)  —   — 
Other  79   —   —   —   79 
                     
Net cash provided by (used in) financing activities  1,035   (1,098)  (177)  —   (240)
                     
Change in cash and cash equivalents  —   151   147   —   298 
Cash and cash equivalents at beginning of period  —   131   205   —   336 
                     
Cash and cash equivalents at end of period $—  $282  $352  $—  $634 
                     


F-40

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
HCA INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2005
(Dollars in millions)
                     
        Subsidiary
       
  Parent
  Subsidiary
  Non-
     Condensed
 
  Issuer  Guarantors  Guarantors  Eliminations  Consolidated 
 
Cash flows from operating activities:
                    
Net income $1,424  $1,266  $526  $(1,792) $1,424 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                    
Provision for doubtful accounts  —   1,409   949   —   2,358 
Depreciation and amortization  —   762   612   —   1,374 
Income taxes  162   —   —   —   162 
Gains on sales of facilities  —   (7)  (71)  —   (78)
Equity in earnings of affiliates  (1,792)  —   —   1,792   — 
Increase (decrease) in cash from
operating assets and liabilities		  18   (1,505)  (791)  —   (2,278)
Change in minority interests  —   4   (17)  —   (13)
Share-based compensation  30   —   —   —   30 
Other  —   —   (8)  —   (8)
                     
Net cash provided by (used in) operating activities  (158)  1,929   1,200   —   2,971 
                     
Cash flows from investing activities:
                    
Purchase of property and equipment  —   (816)  (776)  —   (1,592)
Acquisition of hospitals and health care entities  —   (33)  (93)  —   (126)
Disposal of hospitals and health care entities  —   141   179   —   320 
Change in investments  —   12   (323)  —   (311)
Other  —   (4)  32   —   28 
                     
Net cash used in investing activities  —   (700)  (981)  —   (1,681)
                     
Cash flows from financing activities:
                    
Issuances of long-term debt  800   —   58   —   858 
Net change in revolving bank credit
facility		  (225)  —   —   —   (225)
Repayment of long-term debt  (721)  (2)  (16)  —   (739)
Issuances of common stock  1,009   —   —   —   1,009 
Repurchases of common stock  (1,856)  —   —   —   (1,856)
Payment of cash dividends  (258)  —   —   —   (258)
Changes in intercompany balances with affiliates, net  1,410   (1,166)  (244)  —   — 
Other  (1)  —   —   —   (1)
                     
Net cash provided by (used in) financing activities  158   (1,168)  (202)  —   (1,212)
                     
Change in cash and cash equivalents  —   61   17   —   78 
Cash and cash equivalents at beginning of period  —   70   188   —   258 
                     
Cash and cash equivalents at end of
period		 $—  $131  $205  $—  $336 
                     


F-41

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
Healthtrust, Inc. — The Hospital Company (“Healthtrust”) is the first-tier subsidiary of HCA Inc. The common stock of Healthtrust has been pledged as collateral for the senior secured credit facilities and senior secured notes described in Note 9.Rule 3-16 ofRegulation S-X under the Securities Act requires the filing of separate financial statements for any affiliate of the registrant whose securities constitute a substantial portion of the collateral for any class of securities registered or being registered. We believe the separate financial statements requirement applies to Healthtrust due to the pledge of its common stock as collateral for the senior secured notes. Due to the corporate structure relationship of HCA and Healthtrust, HCA’s operating subsidiaries are also the operating subsidiaries of Healthtrust. The corporate structure relationship, combined with the application of push-down accounting in Healthtrust’s consolidated financial statements related to HCA’s debt and financial instruments, results in the consolidated financial statements of Healthtrust being substantially identical to the consolidated financial statements of HCA. The consolidated financial statements of HCA and Healthtrust present the identical amounts for revenues, expenses, net income, assets, liabilities, total stockholders’ (deficit) equity, net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities. Certain individual line items in the HCA consolidated statements of stockholders’ (deficit) equity and cash flows are combined into one line item in the Healthtrust consolidated statements of stockholder’s (deficit) equity and cash flows.
Reconciliations of the HCA Inc. Consolidated Statements of Stockholders’ (Deficit) Equity and Consolidated Statements of Cash Flows presentations to the Healthtrust, Inc. — The Hospital Company Consolidated Statements of Stockholder’s (Deficit) Equity and Consolidated Statements of Cash Flows presentations for the years ended December 31, 2007, 2006 and 2005 are as follows (dollars in millions):
             
  2007  2006  2005 
 
Presentation in HCA Inc. Consolidated Statements of Stockholders’ (Deficit) Equity:            
Recapitalization-repurchase of common stock $—  $(21,373) $— 
Recapitalization-equity contribution  —   4,477   — 
Cash dividends declared  —   (139)  (257)
Stock repurchases  —   (653)  (1,856)
Stock options exercised  —   163   1,106 
Employee benefit plan issuances  —   366   102 
Equity contributions  60   —   — 
Share-based compensation  24   —   — 
Other  28   —   — 
             
Presentation in Healthtrust, Inc. — The Hospital Company Consolidated Statements of Stockholder’s (Deficit) Equity:            
Distributions from (to) HCA Inc., net of contributions to (from) HCA Inc.  $112  $(17,159) $(905)
             


F-42

HCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION AND OTHER COLLATERAL-RELATED INFORMATION (Continued)
             
  2007  2006  2005 
 
Presentation in HCA Inc. Consolidated Statements of Cash Flows (cash flows from financing activities):            
Issuances of common stock $100  $108  $1,009 
Repurchases of common stock  (2)  (653)  (1,856)
Recapitalization-repurchase of common stock  —   (20,364)  — 
Recapitalization-equity contributions  —   3,782   — 
Payment of cash dividends  —   (201)  (258)
             
Presentation in Healthtrust Inc. — The Hospital Company Consolidated Statements of Cash Flows (cash flows from financing activities):            
Net cash distributions from (to) HCA Inc.  $98  $(17,328) $(1,105)
             
Due to the consolidated financial statements of Healthtrust being substantially identical to the consolidated financial statements of HCA, except for the items presented in the tables above, the separate consolidated financial statements of Healthtrust are not presented.

F-43

HCA INC.
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION

(UNAUDITED)

(Dollars in millions)
                 
  2006
   
  First Second Third Fourth
         
Revenues $6,415  $6,360  $6,213  $6,489 
Net income $379  $295(a) $240(b) $122(c)
Cash dividends declared per common share $0.17  $0.17  $—  $— 
                 
  2005
   
  First First First First
         
Revenues $6,182  $6,070  $6,025  $6,178 
Net income $414  $405(d) $280(e) $325(f)
Cash dividends declared per common share $0.15  $0.15  $0.15  $0.15 
 
                 
  2007 
  First  Second  Third  Fourth 
 
Revenues $6,677  $6,729  $6,569  $6,883 
Net income $180(a) $116(b) $300(c) $278(d)
                 
  2006 
  First  Second  Third  Fourth 
 
Revenues $6,415  $6,360  $6,213  $6,489 
Net income $379  $295(e) $240(f) $122(g)
Cash dividends declared per common share $0.17  $0.17  $—  $— 
(a)First quarter results include $2 million of gains on sales of facilities (See NOTE 4 of the notes to consolidated financial statements).
(b)Second quarter results include $7 million of gains on sales of facilities (See NOTE 4 of the notes to consolidated financial statements) and $15 million of costs related to the impairment of long-lived assets (See NOTE 5 of the notes to consolidated financial statements).
(c)Third quarter results include $193 million of gains on sales of facilities (See NOTE 4 of the notes to consolidated financial statements).
(d)Fourth quarter results include $88 million of gains on sales of facilities (See NOTE 4 of the notes to consolidated financial statements).
(e)Second quarter results include $4 million of gains on sales of facilities (See NOTE 4 of the notes to consolidated financial statements).
 
(b)(f)Third quarter results include $25 million of gains on sales of facilities (See NOTE 4 of the notes to consolidated financial statements) and $6 million of transaction costs related to the recapitalization (See NOTE 2 of the notes to consolidated financial statements).
 
(c)(g)Fourth quarter results include $74 million of gains on sales of facilities (See NOTE 4 of the notes to consolidated financial statements), $303 million of transaction costs related to the recapitalization (See NOTE 2 of the notes to consolidated financial statements) and $15 million of costs related to the impairment of long-lived assets (See NOTE 5 of the notes to consolidated financial statements).
(d)Second quarter results include $18 million related to the recognition of a previously deferred gain on the sale of medical office buildings (See NOTE 4 of the notes to consolidated financial statements) and $48 million related to a favorable tax settlement (See NOTE 6 of the notes to consolidated financial statements).
(e)Third quarter results include $22 million related to the repatriation of foreign earnings (See NOTE 6 of the notes to consolidated financial statements).
(f)Fourth quarter results include $19 million of gains on sales of facilities (See NOTE 4 of the notes to consolidated financial statements) and tax benefit of $2 million from the repatriation of foreign earnings (See NOTE 6 of the notes to consolidated financial statements).


F-44

F-36