HCA Healthcare (HCA) 10-Q 2008 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2008
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 1-11239

HCA Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 75-2497104
(I.R.S. Employer
Identification No.)

One Park Plaza
Nashville, Tennessee
(Address of principal executive offices) 37203
(Zip Code)

(615) 344-9551

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ
(Do not check if a smaller reporting company) Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Class of Common Stock	Outstanding at October 31, 2008
Voting common stock, $.01 par value	94,181,800 shares

HCA INC.

Form 10-Q

September 30, 2008

			Page of
			Form 10-Q
	Part I.	Financial Information
	Item 1.	Financial Statements (Unaudited):
		Condensed Consolidated Income Statements — for the quarters and nine months ended September 30, 2008 and 2007		3
		Condensed Consolidated Balance Sheets — September 30, 2008 and December 31, 2007		4
		Condensed Consolidated Statements of Cash Flows — for the nine months ended September 30, 2008 and 2007		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		39
	Item 4.	Controls and Procedures		39
	Part II.	Other Information		39
	Item 1.	Legal Proceedings		39
	Item 1A.	Risk Factors		40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41
	Item 6.	Exhibits		41
Signatures				42
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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HCA INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Unaudited

(Dollars in millions)

	Quarter						Nine Months
	2008			2007			2008			2007
Revenues	$	7,002		$	6,569		$	21,109		$	19,975
Salaries and benefits		2,883			2,701			8,563			8,002
Supplies		1,141			1,085			3,463			3,284
Other operating expenses		1,146			1,076			3,396			3,194
Provision for doubtful accounts		819			774			2,520			2,218
Losses (gains) on investments		1			1			—			(6	)
Equity in earnings of affiliates		(41	)		(51	)		(170	)		(156	)
Depreciation and amortization		350			356			1,062			1,072
Interest expense		497			560			1,521			1,674
Gains on sales of facilities		(50	)		(316	)		(90	)		(332	)
Impairment of long-lived assets		44			—			53			24
		6,790			6,186			20,318			18,974
Income before minority interests and income taxes		212			383			791			1,001
Minority interests in earnings of consolidated entities		49			44			161			160
Income before income taxes		163			339			630			841
Provision for income taxes		77			39			233			245
Net income	$	86		$	300		$	397		$	596

See accompanying notes.

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HCA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(Dollars in millions)

	September 30,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	444		$	393
Accounts receivable, less allowance for doubtful accounts of $5,147 and $4,289		3,699			3,895
Inventories		716			710
Deferred income taxes		722			592
Other		517			615
		6,098			6,205
Property and equipment, at cost		23,406			22,579
Accumulated depreciation		(11,968	)		(11,137	)
		11,438			11,442
Investments of insurance subsidiary		1,483			1,669
Investments in and advances to affiliates		824			688
Goodwill		2,601			2,629
Deferred loan costs		478			539
Other		871			853
	$	23,793		$	24,025
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,191		$	1,370
Accrued salaries		849			780
Other accrued expenses		1,235			1,391
Long-term debt due within one year		368			308
		3,643			3,849
Long-term debt		26,673			27,000
Professional liability risks		1,114			1,233
Income taxes and other liabilities		1,375			1,379
Minority interests in equity of consolidated entities		969			938
Equity securities with contingent redemption rights		163			164
Stockholders’ deficit:
Common stock $.01 par; authorized 125,000,000 shares; outstanding 94,181,700 shares in 2008 and 94,182,400 shares in 2007		1			1
Capital in excess of par value		148			112
Accumulated other comprehensive loss		(211	)		(172	)
Retained deficit		(10,082	)		(10,479	)
		(10,144	)		(10,538	)
	$	23,793		$	24,025

See accompanying notes.

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HCA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Unaudited

(Dollars in millions)

	2008			2007
Cash flows from operating activities:
Net income	$	397		$	596
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		2,520			2,218
Depreciation and amortization		1,062			1,072
Income taxes		(379	)		(103	)
Gains on sales of facilities		(90	)		(332	)
Impairment of long-lived assets		53			24
Changes in operating assets and liabilities		(2,420	)		(2,598	)
Share-based compensation		25			17
Change in minority interests		10			33
Other		86			58
Net cash provided by operating activities		1,264			985
Cash flows from investing activities:
Purchase of property and equipment		(1,115	)		(997	)
Acquisition of hospitals and health care entities		(76	)		(21	)
Disposition of hospitals and health care entities		185			484
Change in investments		30			156
Other		4			13
Net cash used in investing activities		(972	)		(365	)
Cash flows from financing activities:
Net change in revolving bank credit facility		530			(370	)
Repayment of long-term debt		(775	)		(623	)
Issuance of common stock		—			100
Other		4			(14	)
Net cash used in financing activities		(241	)		(907	)
Change in cash and cash equivalents		51			(287	)
Cash and cash equivalents at beginning of period		393			634
Cash and cash equivalents at end of period	$	444		$	347
Interest payments	$	1,380		$	1,522
Income tax payments, net of refunds	$	612		$	348

See accompanying notes.

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HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

NOTE 1 — INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Merger, Recapitalization and Reporting Entity

On November 17, 2006, HCA Inc. completed its merger (the “Merger”) with Hercules Acquisition Corporation, pursuant to which the Company was acquired by Hercules Holding II, LLC (“Hercules Holding”), a Delaware limited liability company owned by a private investor group comprised of affiliates of Bain Capital, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity (each a “Sponsor”) 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 other investors. The Merger, the financing transactions related to the Merger and other related transactions are collectively referred to in this quarterly report as the “Recapitalization.” The Merger was accounted for as a recapitalization in our financial statements, with no adjustments to the historical basis of our assets and liabilities. As a result of the Recapitalization, our outstanding capital stock is owned by the Investors, certain members of management and key employees and certain other investors. On April 29, 2008, we registered our common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended. Our common stock is not traded on a national securities exchange.

Basis of Presentation

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 September 30, 2008, these affiliates owned and operated 158 hospitals, 99 freestanding surgery centers and facilities which provide extensive outpatient and ancillary services. Affiliates of HCA Inc. are also partners in joint ventures that own and operate eight hospitals and eight freestanding surgery centers which are accounted for using the equity method. The Company’s facilities are located in 20 states and England. The terms “HCA,” “Company,” “we,” “our” or “us,” as used in this Quarterly Report onForm 10-Q, refer to HCA Inc. and its affiliates unless otherwise stated or indicated by context.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions toForm 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. The majority of our expenses are “cost of revenue” items. Costs that could be classified as general and administrative would include our corporate office costs, which were $41 million and $42 million for the quarters ended September 30, 2008 and 2007, respectively, and $124 million and $122 million for the nine months ended September 30, 2008 and 2007, respectively. Operating results for the quarter and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report onForm 10-K for the year ended December 31, 2007.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent Pronouncements

In December 2007, the Financial Accounting Standards Board (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

6

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 1 — INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Recent Pronouncements (continued)

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 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 No. 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 fiscal years and interim periods 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 do not expect the adoption of SFAS 160 to have a material effect on our financial position or results of operations.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). This new standard will require entities to provide enhanced disclosures about (a) how and why an entity uses derivatives instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have a material effect on our financial position or results of operations.

NOTE 2 — INCOME TAXES

Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 created a single model to address uncertainty in income tax positions and clarified 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. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, “Accounting for Income Taxes.” Interest expense related to taxing authority examinations of $14 million ($9 million net of tax) is included in the provision for income taxes for the quarter ended September 30, 2008, and a $9 million ($6 million net of tax) reduction to interest expense is included in the provision for income taxes for the quarter ended September 30, 2007. Interest expense of $20 million and $13 million ($13 million and $8 million, respectively, net of tax) is included in the provision for income taxes for the nine months ended September 30, 2008 and 2007, respectively.

Our liability for unrecognized tax benefits was $739 million, including accrued interest of $206 million, as of September 30, 2008 ($828 million and $218 million, respectively, as of December 31, 2007). Of the $739 million, $369 million ($489 million as of December 31, 2007) would affect the effective rate, if recognized. The liability for unrecognized tax benefits does not reflect deferred tax assets related to deductible interest and state income taxes or the remaining $104 million balance of a refundable deposit we made in 2006, which is recorded in noncurrent assets.

7

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 2 — INCOME TAXES (continued)

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 examinations of the 2001 through 2004 federal income returns for HCA and 17 affiliates that are treated as partnerships for federal income tax purposes (“affiliated partnerships”). The disputed items include the deductibility of a portion of the 2003 government settlement payment, the timing of recognition of certain patient service revenues for 2003 and 2004, and our method for calculating the tax allowance for doubtful accounts for 2001 through 2004.

Six taxable periods of HCA, its predecessors, subsidiaries and affiliated partnerships ended in 1995 through 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 September 30, 2008. The IRS began an audit of the 2005 and 2006 federal income tax returns for HCA and seven affiliated partnerships during 2008.

Depending on the resolution of the IRS disputes, the completion of examinations by federal, state or international taxing authorities, or the expiration of statutes of limitation for specific taxing jurisdictions, we believe it is reasonably possible our liability for unrecognized tax benefits may significantly increase or decrease within the next twelve months. However, we are currently unable to estimate the range of any possible change.

8

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — INVESTMENTS OF INSURANCE SUBSIDIARY

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A summary of the insurance subsidiary’s investments at September 30, 2008 and December 31, 2007 follows (dollars in millions):

	September 30, 2008
			Unrealized
	Amortized		Amounts					Fair
	Cost		Gains		Losses			Value
Debt securities:
States and municipalities	$	1,468	$	12	$	(16	)	$	1,464
Money market funds		159		—		—			159
Asset-backed securities		54		—		(3	)		51
		1,681		12		(19	)		1,674
Equity securities:
Preferred stocks		6		—		(1	)		5
Common stocks and other equities		4		—		—			4
		10		—		(1	)		9
	$	1,691	$	12	$	(20	)		1,683
Amount classified as current assets									(200	)
Investment carrying value								$	1,483

	December 31, 2007
			Unrealized
	Amortized		Amounts					Fair
	Cost		Gains		Losses			Value
Debt securities:
States and municipalities	$	1,675	$	23	$	(2	)	$	1,696
Money market funds		109		—		—			109
Asset-backed securities		59		1		—			60
Corporate and other		5		—		—			5
		1,848		24		(2	)		1,870
Equity securities:
Preferred stocks		26		—		(1	)		25
Common stocks and other equities		4		—		—			4
		30		—		(1	)		29
	$	1,878	$	24	$	(3	)		1,899
Amount classified as current assets									(230	)
Investment carrying value								$	1,669

At September 30, 2008 and December 31, 2007, the investments of our insurance subsidiary were classified as “available-for-sale.” Changes in temporary unrealized gains and losses are recorded as adjustments to other comprehensive income. At September 30, 2008 and December 31, 2007, $116 million and $106 million, respectively, of our investments were subject to the restrictions included in insurance bond collateralizations and assumed reinsurance contracts.

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HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 4 — LONG-TERM DEBT

A summary of long-term debt at September 30, 2008 and December 31, 2007, including related interest rates at September 30, 2008, follows (dollars in millions):

	September 30,		December 31,
	2008		2007
Senior secured asset-based revolving credit facility (effective interest rate of 4.4%)	$	1,880	$	1,350
Senior secured term loan facilities (effective interest rate of 6.6%)		12,086		12,317
Other senior secured debt (effective interest rate of 6.8%)		406		427
First lien debt		14,372		14,094
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 7.2%)		6,969		7,514
Total debt (average life of seven years, rates averaging 7.3%)		27,041		27,308
Less amounts due within one year		368		308
	$	26,673	$	27,000

NOTE 5 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

On January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements.

SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

10

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 5 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)

Cash Traded Investments

Our cash traded investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

Certain types of cash traded instruments are classified within Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include auction rate securities (“ARS”) and limited partnership investments. The transaction price is initially used as the best estimate of fair value.

Our wholly-owned insurance subsidiary had investments in municipal, tax-exempt ARS, that are backed by student loans substantially guaranteed by the federal government, of $623 million at September 30, 2008. The valuation of these securities involved management’s judgment, after consideration of market factors and the absence of market transparency, market liquidity and observable inputs. Our market observations failed to identify an illiquidity discount that was verifiable without the strong presumption of forced liquidation or distress sales. Valuations resulting from forced liquidations or distress sales are inconsistent with the SFAS 157 definition of fair value, which assumes an orderly market. Our valuation models did not indicate a valuation discount below par value for these securities when compared to yields of variable rate demand notes of similar credit worthy securities, without consideration of their mandatory put features. Management observed other ARS with similar characteristics that were called, partially called or repurchased at par by their issuers at or near the measurement date. After considering these factors, management’s best estimate of fair value for our ARS is par value.

Derivative Financial Instruments

We have entered into interest rate and cross currency swap agreements to manage our exposure to fluctuations in interest rates and foreign currency risks. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates and implied volatilities. To comply with the provisions of SFAS 157, we incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties. However, as of September 30, 2008, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

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HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 5 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)

Derivative Financial Instruments (continued)

The following table summarizes our assets and liabilities measured at fair value on a recurring basis as of September 30, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in millions):

				Fair Value Measurements Using
				Quoted Prices in
				Active Markets for
				Identical Assets			Significant Other			Significant
				and Liabilities			Observable Inputs			Unobservable Inputs
	Fair Value			(Level 1)			(Level 2)			(Level 3)
Assets:
Investments of insurance subsidiary	$	1,683		$	160		$	897		$	626
Less amounts classified as current assets		(200	)		(159	)		(41	)		—
		1,483			1			856			626
Cross currency swaps (Other assets)		94			—			94			—
Liabilities:
Interest rate swaps (Income taxes and other liabilities)		259			—			259			—

The following table summarizes the activity related to investments of our insurance subsidiary having fair value measurements based on significant unobservable inputs (Level 3) during the nine months ended September 30, 2008 (dollars in millions):

Balance at December 31, 2007	$	4
Realized gains and losses included in earnings		1
Purchases, issuances and settlements		(47	)
Transfers into Level 3		668
Balance at September 30, 2008	$	626

NOTE 6 — CONTINGENCIES

We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims or legal and regulatory proceedings could have a material, adverse effect on our results of operations and financial position in a given period.

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.

12

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 6 — CONTINGENCIES (continued)

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.

NOTE 7 — COMPREHENSIVE INCOME

The components of comprehensive income, net of related taxes, for the quarters and nine months ended September 30, 2008 and 2007 are as follows (dollars in millions):

	Quarter						Nine Months
	2008			2007			2008			2007
Net income	$	86		$	300		$	397		$	596
Change in fair value of derivative instruments		(23	)		(126	)		5			(58	)
Change in unrealized net gains and losses on available-for-sale securities		(8	)		8			(19	)		(5	)
Currency translation adjustments		(24	)		(10	)		(24	)		(10	)
Defined benefit plans		—			2			(1	)		5
Comprehensive income	$	31		$	174		$	358		$	528

The components of accumulated other comprehensive loss, net of related taxes, are as follows (dollars in millions):

	September 30,			December 31,
	2008			2007
Change in fair value of derivative instruments	$	(171	)	$	(176	)
Net unrealized (losses) gains on available-for-sale securities		(5	)		14
Currency translation adjustments		10			34
Defined benefit plans		(45	)		(44	)
Accumulated other comprehensive loss	$	(211	)	$	(172	)

NOTE 8 — SEGMENT AND GEOGRAPHIC INFORMATION

We operate in one line of business, which is operating hospitals and related health care entities. During the quarters ended September 30, 2008 and 2007, approximately 22% and 24%, respectively, of our patient revenues related to patients participating in the Medicare program. During the nine months ended September 30, 2008 and 2007, approximately 24% of our patient revenues related to patients participating in the Medicare program.

Our operations are structured into three geographically organized groups: the Eastern Group includes 48 consolidating hospitals located in the Eastern United States, the Central Group includes 51 consolidating hospitals located in the Central United States and the Western Group includes 53 consolidating hospitals located in the Western United States. We also operate six consolidating hospitals in England, and these facilities are included in the Corporate and other group.

13

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 8 — SEGMENT AND GEOGRAPHIC INFORMATION (continued)

Adjusted segment EBITDA is defined as income before depreciation and amortization, interest expense, gains on sales of facilities, impairment of long-lived assets, 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 and depreciation and amortization for the quarters and nine months ended September 30, 2008 and 2007 are summarized in the following table (dollars in millions):

	Quarter						Nine Months
	2008			2007			2008			2007
Revenues:
Central Group	$	1,663		$	1,567		$	5,007		$	4,691
Eastern Group		2,059			1,990			6,382			6,071
Western Group		3,037			2,782			8,976			8,473
Corporate and other		243			230			744			740
	$	7,002		$	6,569		$	21,109		$	19,975
Equity in earnings of affiliates:
Central Group	$	—		$	1		$	(1	)	$	6
Eastern Group		(1	)		(1	)		(2	)		(2	)
Western Group		(42	)		(52	)		(168	)		(161	)
Corporate and other		2			1			1			1
	$	(41	)	$	(51	)	$	(170	)	$	(156	)
Adjusted segment EBITDA:
Central Group	$	240		$	254		$	791		$	813
Eastern Group		277			256			931			939
Western Group		541			484			1,661			1,641
Corporate and other		(5	)		(11	)		(46	)		46
	$	1,053		$	983		$	3,337		$	3,439
Depreciation and amortization:
Central Group	$	88		$	90		$	270		$	275
Eastern Group		87			92			267			277
Western Group		137			135			413			396
Corporate and other		38			39			112			124
	$	350		$	356		$	1,062		$	1,072

14

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 8 — SEGMENT AND GEOGRAPHIC INFORMATION (continued)

	Quarter						Nine Months
	2008			2007			2008			2007
Adjusted segment EBITDA	$	1,053		$	983		$	3,337		$	3,439
Depreciation and amortization		350			356			1,062			1,072
Interest expense		497			560			1,521			1,674
Gains on sales of facilities		(50	)		(316	)		(90	)		(332	)
Impairment of long-lived assets		44			—			53			24
Income before minority interests and income taxes	$	212		$	383		$	791		$	1,001

NOTE 9 — ACQUISITIONS, DIVESTITURES AND IMPAIRMENT OF LONG-LIVED ASSETS

During the nine months ended September 30, 2008, we paid $18 million to acquire one hospital and $58 million to acquire other health care entities. During the nine months ended September 30, 2007, we paid $21 million for health care entity acquisitions.

During the quarter and nine months ended September 30, 2008, we received proceeds of $75 million and $185 million, respectively, and recognized net gains on sales of facilities of $50 million and $90 million, respectively. For the quarter ended September 30, 2008, the $50 million gain is comprised of a $39 million gain on the sale of a hospital facility and an $11 million gain on the sale of other health care entity investments. For the nine months ended September 30, 2008, the $90 million gain includes $86 million of net gains on sales of hospital facilities and $4 million of net gains on sales of real estate and other health care entity investments. During the quarter and nine months ended September 30, 2007, we received proceeds of $419 million and $484 million, respectively, and recognized net gains of $316 million and $332 million, respectively, related to sales of our two Switzerland hospitals and certain real estate investments. The results of operations of the sold facilities were not significant to our consolidated results of operations.

During the quarter and nine months ended September 30, 2008, we recorded impairment charges of $44 million and $53 million, respectively. The $44 million impairment charge for the quarter ended September 30, 2008 related to adjusting the value of goodwill for other health care entity investments in our Eastern Group to estimated fair value. The additional $9 million impairment charge included in our operating results for the nine months ended September 30, 2008 related to adjusting the value of certain hospital facilities in our Central Group to estimated fair value. During the quarter ended September 30, 2007, no impairment charges were recognized, and during the nine months ended September 30, 2007, we recorded a charge of $24 million to adjust the value of a building in our Central Group to estimated fair value.

NOTE 10 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Our senior secured credit facilities and senior secured notes are fully and unconditionally guaranteed by substantially all existing and future, direct and indirect, wholly-owned material domestic subsidiaries that are “Unrestricted Subsidiaries” under our Indenture dated as of December 16, 1993 (except for certain special purpose subsidiaries that only guarantee and pledge their assets under our senior secured asset-based revolving credit facility).

15

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)

Our condensed consolidating balance sheets at September 30, 2008 and December 31, 2007, condensed consolidating statements of income for the quarters and nine months ended September 30, 2008 and 2007 and condensed consolidating statements of cash flows for the nine months ended September 30, 2008 and 2007, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, follow:

HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	4,032		$	2,970		$	—		$	7,002
Salaries and benefits		—			1,722			1,161			—			2,883
Supplies		—			657			484			—			1,141
Other operating expenses		(3	)		635			514			—			1,146
Provision for doubtful accounts		—			471			348			—			819
Losses on investments		—			—			1			—			1
Equity in earnings of affiliates		(432	)		(14	)		(27	)		432			(41	)
Depreciation and amortization		—			190			160			—			350
Interest expense		541			(23	)		(21	)		—			497
Gains on sales of facilities		—			(8	)		(42	)		—			(50	)
Impairment of long-lived assets		—			—			44			—			44
Management fees		—			(109	)		109			—			—
		106			3,521			2,731			432			6,790
Income (loss) before minority interests and income taxes		(106	)		511			239			(432	)		212
Minority interests in earnings of consolidated entities		—			12			37			—			49
Income (loss) before income taxes		(106	)		499			202			(432	)		163
Provision for income taxes		(192	)		197			72			—			77
Net income (loss)	$	86		$	302		$	130		$	(432	)	$	86

16

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)

HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	3,826		$	2,743		$	—		$	6,569
Salaries and benefits		—			1,640			1,061			—			2,701
Supplies		—			628			457			—			1,085
Other operating expenses		—			592			484			—			1,076
Provision for doubtful accounts		—			469			305			—			774
Losses on investments		—			—			1			—			1
Equity in earnings of affiliates		(809	)		(23	)		(28	)		809			(51	)
Depreciation and amortization		—			195			161			—			356
Interest expense		540			16			4			—			560
Gains on sales of facilities		—			(2	)		(314	)		—			(316	)
Management fees		—			(103	)		103			—			—
		(269	)		3,412			2,234			809			6,186
Income (loss) before minority interests and income taxes		269			414			509			(809	)		383
Minority interests in earnings of consolidated entities		—			5			39			—			44
Income (loss) before income taxes		269			409			470			(809	)		339
Provision for income taxes		(31	)		(5	)		75			—			39
Net income (loss)	$	300		$	414		$	395		$	(809	)	$	300

17

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)

HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	12,229		$	8,880		$	—		$	21,109
Salaries and benefits		—			5,128			3,435			—			8,563
Supplies		—			1,999			1,464			—			3,463
Other operating expenses		(1	)		1,846			1,551			—			3,396
Provision for doubtful accounts		—			1,527			993			—			2,520
Equity in earnings of affiliates		(1,420	)		(63	)		(107	)		1,420			(170	)
Depreciation and amortization		—			579			483			—			1,062
Interest expense		1,624			(42	)		(61	)		—			1,521
Gains on sales of facilities		—			—			(90	)		—			(90	)
Impairment of long-lived assets		—			—			53			—			53
Management fees		—			(329	)		329			—			—
		203			10,645			8,050			1,420			20,318
Income (loss) before minority interests and income taxes		(203	)		1,584			830			(1,420	)		791
Minority interests in earnings of consolidated entities		—			39			122			—			161
Income (loss) before income taxes		(203	)		1,545			708			(1,420	)		630
Provision for income taxes		(600	)		571			262			—			233
Net income (loss)	$	397		$	974		$	446		$	(1,420	)	$	397

18

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)

HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	11,574		$	8,401		$	—		$	19,975
Salaries and benefits		—			4,835			3,167			—			8,002
Supplies		—			1,903			1,381			—			3,284
Other operating expenses		—			1,719			1,475			—			3,194
Provision for doubtful accounts		—			1,376			842			—			2,218
Gains on investments		—			—			(6	)		—			(6	)
Equity in earnings of affiliates		(1,736	)		(69	)		(87	)		1,736			(156	)
Depreciation and amortization		—			589			483			—			1,072
Interest expense		1,609			50			15			—			1,674
Gains on sales of facilities		—			(2	)		(330	)		—			(332	)
Impairment of long-lived assets		—			—			24			—			24
Management fees		—			(304	)		304			—			—
		(127	)		10,097			7,268			1,736			18,974
Income (loss) before minority interests and income taxes		127			1,477			1,133			(1,736	)		1,001
Minority interests in earnings of consolidated entities		—			17			143			—			160
Income (loss) before income taxes		127			1,460			990			(1,736	)		841
Provision for income taxes		(469	)		426			288			—			245
Net income (loss)	$	596		$	1,034		$	702		$	(1,736	)	$	596

19

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)

HCA INC.
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2008
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-					Condensed
	Issuer			Guarantors			Guarantors		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	119		$	325	$	—		$	444
Accounts receivable, net		—			2,167			1,532		—			3,699
Inventories		—			442			274		—			716
Deferred income taxes		722			—			—		—			722
Other		—			152			365		—			517
		722			2,880			2,496		—			6,098
Property and equipment, net		—			6,968			4,470		—			11,438
Investments of insurance subsidiary		—			—			1,483		—			1,483
Investments in and advances to affiliates		—			240			584		—			824
Goodwill		—			1,643			958		—			2,601
Deferred loan costs		478			—			—		—			478
Investments in and advances to subsidiaries		18,610			—			—		(18,610	)		—
Other		819			18			34		—			871
	$	20,629		$	11,749		$	10,025	$	(18,610	)	$	23,793
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable	$	—		$	741		$	450	$	—		$	1,191
Accrued salaries		—			542			307		—			849
Other accrued expenses		343			295			597		—			1,235
Long-term debt due within one year		329			—			39		—			368
		672			1,578			1,393		—			3,643
Long-term debt		26,153			103			417		—			26,673
Intercompany balances		2,851			(7,454	)		4,603		—			—
Professional liability risks		—			—			1,114		—			1,114
Income taxes and other liabilities		934			305			136		—			1,375
Minority interests in equity of consolidated entities		—			136			833		—			969
		30,610			(5,332	)		8,496		—			33,774
Equity securities with contingent redemption rights		163			—			—		—			163
Stockholders’ (deficit) equity		(10,144	)		17,081			1,529		(18,610	)		(10,144	)
	$	20,629		$	11,749		$	10,025	$	(18,610	)	$	23,793

20

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL 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

21

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)

HCA INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	397		$	974		$	446		$	(1,420	)	$	397
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for doubtful accounts		—			1,527			993			—			2,520
Depreciation and amortization		—			579			483			—			1,062
Income taxes		(379	)		—			—			—			(379	)
Gains on sales of facilities		—			—			(90	)		—			(90	)
Impairment of long-lived assets		—			—			53			—			53
Equity in earnings of affiliates		(1,420	)		—			—			1,420			—
Changes in operating assets and liabilities		100			(1,627	)		(893	)		—			(2,420	)
Share-based compensation		25			—			—			—			25
Change in minority interests		—			19			(9	)		—			10
Other		65			18			3			—			86
Net cash provided by (used in) operating activities		(1,212	)		1,490			986			—			1,264
Cash flows from investing activities:
Purchase of property and equipment		—			(579	)		(536	)		—			(1,115	)
Acquisition of hospitals and health care entities		—			(25	)		(51	)		—			(76	)
Disposition of hospitals and health care entities		—			20			165			—			185
Change in investments		—			(13	)		43			—			30
Other		—			(2	)		6			—			4
Net cash used in investing activities		—			(599	)		(373	)		—			(972	)
Cash flows from financing activities:
Net change in revolving bank credit facility		530			—			—			—			530
Repayment of long-term debt		(699	)		(3	)		(73	)		—			(775	)
Changes in intercompany balances with affiliates, net		1,382			(934	)		(448	)		—			—
Other		(1	)		—			5			—			4
Net cash provided by (used in) financing activities		1,212			(937	)		(516	)		—			(241	)
Change in cash and cash equivalents		—			(46	)		97			—			51
Cash and cash equivalents at beginning of period		—			165			228			—			393
Cash and cash equivalents at end of period	$	—		$	119		$	325		$	—		$	444

22

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)

HCA INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	596		$	1,034		$	702		$	(1,736	)	$	596
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for doubtful accounts		—			1,376			842			—			2,218
Depreciation and amortization		—			589			483			—			1,072
Income taxes		(103	)		—			—			—			(103	)
Gains on sales of facilities		—			(2	)		(330	)		—			(332	)
Impairment of long-lived assets		—			—			24			—			24
Equity in earnings of affiliates		(1,736	)		—			—			1,736			—
Changes in operating assets and liabilities		107			(1,588	)		(1,117	)		—			(2,598	)
Share-based compensation		17			—			—			—			17
Change in minority interests		—			4			29			—			33
Other		66			13			(21	)		—			58
Net cash provided by (used in) operating activities		(1,053	)		1,426			612			—			985
Cash flows from investing activities:
Purchase of property and equipment		—			(363	)		(634	)		—			(997	)
Acquisition of hospitals and health care entities		—			—			(21	)		—			(21	)
Disposal of hospitals and health care entities		—			13			471			—			484
Change in investments		—			3			153			—			156
Other		—			(3	)		16			—			13
Net cash used in investing activities		—			(350	)		(15	)		—			(365	)
Cash flows from financing activities:
Net change in revolving bank credit facility		(370	)		—			—			—			(370	)
Repayment of long-term debt		(193	)		(3	)		(427	)		—			(623	)
Issuance of common stock		100			—			—			—			100
Changes in intercompany balances with affiliates, net		1,526			(1,223	)		(303	)		—			—
Other		(10	)		—			(4	)		—			(14	)
Net cash provided by (used in) financing activities		1,053			(1,226	)		(734	)		—			(907	)
Change in cash and cash equivalents		—			(150	)		(137	)		—			(287	)
Cash and cash equivalents at beginning of period		—			282			352			—			634
Cash and cash equivalents at end of period	$	—		$	132		$	215		$	—		$	347

23

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This quarterly report onForm 10-Q includes certain disclosures which contain “forward-looking statements” intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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, (2) the impact of the substantial indebtedness incurred to finance the Recapitalization, (3) increases, particularly in the current economic downturn, in the amount and risk of collectibility of uninsured accounts and deductibles and copayment amounts for insured accounts, (4) the ability to achieve operating and financial targets, and attain 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 the 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 possible enactment of federal or state health care reform, (13) the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities, (14) changes in accounting practices, (15) changes in general economic conditions nationally and regionally in our markets, (16) future divestitures which may result in charges, (17) changes in business strategy or development plans, (18) delays in receiving payments for services provided, (19) the outcome of pending and any future tax audits, appeals and litigation associated with our tax positions, (20) potential liabilities and other claims that may be asserted against us, and (21) other risk factors described in our annual report onForm 10-K and other filings with the Securities and Exchange Commission. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.

Third Quarter 2008 Operations Summary

Net income totaled $86 million for the quarter ended September 30, 2008, compared to $300 million for the quarter ended September 30, 2007. Revenues increased to $7.002 billion in the third quarter of 2008 from $6.569 billion in the third quarter of 2007. Third quarter 2008 results include gains on sales of facilities of $50 million, compared to gains on sales of facilities of $316 million for the third quarter of 2007. Results for the third quarter of 2008 include an asset impairment charge of $44 million. Third quarter 2008 results also include interest expense of $497 million, compared to interest expense of $560 million for the third quarter of 2007, and results for the third quarter of 2007 include a reduction of our provision for income taxes of $85 million.

Revenues increased 6.6% on a consolidated basis and 7.7% on a same facility basis for the quarter ended September 30, 2008 compared to the third quarter of 2007. The increase in consolidated revenues can be attributed to a 5.9% increase in revenue per equivalent admission and a 0.7% increase in equivalent admissions. The same facility revenues increase resulted from a 5.7% increase in same facility revenue per equivalent admission and a 1.9% increase in same facility equivalent admissions.

During the third quarter of 2008, same facility admissions increased 0.4% compared to the third quarter of 2007. Same facility inpatient surgeries decreased 1.2% and same facility outpatient surgeries increased 0.8% during the third quarter of 2008 compared to the third quarter of 2007.

24

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Results of Operations

Revenue/Volume Trends

Our revenues depend upon inpatient occupancy levels, the ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charge and negotiated payment rates for such services. Gross charges typically do not reflect what our facilities are actually paid. Our facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon the cost of providing services, predetermined rates per diagnosis, 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. These discounts are similar to those provided to many local managed care plans.

Revenues increased 6.6% from $6.569 billion in the third quarter of 2007 to $7.002 billion for the third quarter of 2008. The increase in revenues can be attributed to the combined impact of a 5.9% increase in revenue per equivalent admission and a 0.7% increase in equivalent admissions for the third quarter of 2008 compared to the third quarter of 2007. Same facility revenues increased 7.7% for the third quarter of 2008 due to the combined impact of a 5.7% increase in same facility revenue per equivalent admission and a 1.9% increase in the same facility equivalent admissions.

In the third quarter of 2008, consolidated admissions decreased 1.1% and same facility admissions increased 0.4% compared to the third quarter of 2007. Consolidated inpatient surgeries decreased 5.4% and same facility inpatient surgeries decreased 1.2% in the third quarter of 2008 compared to the third quarter of 2007. Consolidated outpatient surgeries increased 0.1% and same facility outpatient surgeries increased 0.8% in the third quarter of 2008 compared to the third quarter of 2007.

Same facility uninsured admissions increased by 233 admissions, or 0.9%, in the third quarter of 2008 compared to the third quarter of 2007. Same facility uninsured admissions increased, compared to 2007, 1.0% in the second quarter of 2008 and 5.3% in the first quarter of 2008. The quarterly trend of same facility uninsured admissions growth during 2007, compared to 2006, was 12.4% during the first quarter, 9.9% during the second quarter, 5.2% during the third quarter and 10.0% during the fourth quarter.

Admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters and nine months ended September 30, 2008 and 2007 are set forth in the following table.

	Quarter						Nine Months
	2008			2007			2008			2007
Medicare		33	%		34	%		35	%		35	%
Managed Medicare		9			7			9			7
Medicaid		8			9			8			9
Managed Medicaid		7			7			7			7
Managed care and other insurers		36			36			35			36
Uninsured		7			7			6			6
		100	%		100	%		100	%		100	%

25

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Results of Operations (continued)

Revenue/Volume Trends (continued)

The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters and nine months ended September 30, 2008 and 2007 are set forth in the following table.

	Quarter						Nine Months
	2008			2007			2008			2007
Medicare		30	%		31	%		31	%		32	%
Managed Medicare		8			7			8			7
Medicaid		8			7			7			7
Managed Medicaid		4			4			3			4
Managed care and other insurers		45			45			45			44
Uninsured		5			6			6			6
		100	%		100	%		100	%		100	%

At September 30, 2008, we had 72 hospitals in the states of Texas and Florida. During the third quarter of 2008, 55% of our admissions and 51% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 64% of our uninsured admissions during the third quarter of 2008.

We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. We have increased the indigent care services we provide in several communities in the state of Texas, in affiliation with other hospitals. 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 transfer some portion of these newly available funds to the state’s Medicaid program. Such action is at the sole discretion of the public hospital districts or counties. It is anticipated that these contributions to the state will be matched with federal Medicaid funds. The state then may make supplemental payments to hospitals in the state for Medicaid services rendered. Hospitals receiving Medicaid supplemental payments may include those that are providing additional indigent care services. Such payments must be within the federal UPL established by federal regulation.

During 2007, based upon a review of certain expenditures claimed for federal Medicaid matching funds by the state of Texas, the Centers for Medicare and Medicaid Services (“CMS”) deferred a portion of claimed amounts. CMS completed its review of the claimed expenditures and released the previously deferred amounts during the second and third quarters of 2008. Our Texas Medicaid revenues increased by $100 million and $32 million during the third quarters of 2008 and 2007, respectively, and $194 million and $210 million during the first nine months of 2008 and 2007, respectively, due to increases in Medicaid supplemental payments pursuant to UPL programs. Approximately $60 million of the Medicaid revenues recorded during the third quarter of 2008 were recognized based upon the completion of CMS’s review of expenditure claims for previous periods and the release of the previously deferred matching funds. We expect to continue to recognize net benefits related to the Texas Medicaid supplemental payment program based upon the routine incurrence of indigent care expenditures and expected processing of Medicaid supplemental payments.

26

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Results of Operations (continued)

Operating Results Summary

The following are comparative summaries of results of operations for the quarters and nine months ended September 30, 2008 and 2007 (dollars in millions):

	Quarter
	2008						2007
	Amount			Ratio			Amount			Ratio
Revenues	$	7,002			100.0		$	6,569			100.0
Salaries and benefits		2,883			41.2			2,701			41.1
Supplies		1,141			16.3			1,085			16.5
Other operating expenses		1,146			16.4			1,076			16.4
Provision for doubtful accounts		819			11.7			774			11.8
Losses on investments		1			—			1			—
Equity in earnings of affiliates		(41	)		(0.6	)		(51	)		(0.8	)
Depreciation and amortization		350			5.0			356			5.5
Interest expense		497			7.1			560			8.5
Gains on sales of facilities		(50	)		(0.7	)		(316	)		(4.8	)
Impairment of long-lived assets		44			0.6			—			—
		6,790			97.0			6,186			94.2
Income before minority interests and income taxes		212			3.0			383			5.8
Minority interests in earnings of consolidated entities		49			0.7			44			0.6
Income before income taxes		163			2.3			339			5.2
Provision for income taxes		77			1.1			39			0.6
Net income	$	86			1.2		$	300			4.6
% changes from prior year:
Revenues		6.6	%					5.7	%
Income before income taxes		(52.1	)					(5.6	)
Net income		(71.1	)					24.9
Admissions(a)		(1.1	)					(3.3	)
Equivalent admissions(b)		0.7						(1.9	)
Revenue per equivalent admission		5.9						7.7
Same facility % changes from prior year(c):
Revenues		7.7						7.0
Admissions(a)		0.4						(1.6	)
Equivalent admissions(b)		1.9						(0.5	)
Revenue per equivalent admission		5.7						7.5

27

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Results of Operations (continued)

Operating Results Summary (continued)

	Nine Months
	2008						2007
	Amount			Ratio			Amount			Ratio
Revenues	$	21,109			100.0		$	19,975			100.0
Salaries and benefits		8,563			40.6			8,002			40.1
Supplies		3,463			16.4			3,284			16.4
Other operating expenses		3,396			16.1			3,194			16.0
Provision for doubtful accounts		2,520			11.9			2,218			11.1
Gains on investments		—			—			(6	)		—
Equity in earnings of affiliates		(170	)		(0.8	)		(156	)		(0.8	)
Depreciation and amortization		1,062			5.0			1,072			5.4
Interest expense		1,521			7.2			1,674			8.4
Gains on sales of facilities		(90	)		(0.4	)		(332	)		(1.7	)
Impairment of long-lived assets		53			0.3			24			0.1
		20,318			96.3			18,974			95.0
Income before minority interests and income taxes		791			3.7			1,001			5.0
Minority interests in earnings of consolidated entities		161			0.7			160			0.8
Income before income taxes		630			3.0			841			4.2
Provision for income taxes		233			1.1			245			1.2
Net income	$	397			1.9		$	596			3.0
% changes from prior year:
Revenues		5.7	%					5.2	%
Income before income taxes		(25.1	)					(42.5	)
Net income		(33.3	)					(34.8	)
Admissions(a)		(0.6	)					(4.1	)
Equivalent admissions(b)		0.5						(3.5	)
Revenue per equivalent admission		5.1						9.0
Same facility % changes from prior year(c):
Revenues		7.0						7.3
Admissions(a)		0.9						(1.6	)
Equivalent admissions(b)		1.7						(1.0	)
Revenue per equivalent admission		5.2						8.5

(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 which were either acquired or divested during the current and prior period.

28

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Results of Operations (continued)

Quarters Ended September 30, 2008 and 2007

Net income totaled $86 million for the third quarter of 2008 compared to $300 million for the third quarter of 2007. Revenues increased 6.6% due to favorable pricing trends, evidenced by net revenue per equivalent admission growth of 5.9%, and a 0.7% increase in equivalent admissions. The $214 million decrease in net income was primarily due to the net impact of the $266 million ($164 million, net of taxes) decrease in gains on sales of facilities, the $44 million ($28 million, net of taxes) increase in impairment of long-lived assets, the $134 million increase in income before income taxes (excluding gains on sales of facilities and impairment of long-lived assets) and the third quarter 2007 reduction in the provision for income taxes of $85 million related to the favorable resolution of tax positions taken in prior taxable periods.

For the third quarter of 2008, consolidated admissions decreased 1.1% and same facility admissions increased 0.4% compared to the third quarter of 2007. Inpatient surgical volumes decreased 5.4% on a consolidated basis and decreased 1.2% on a same facility basis during the third quarter of 2008, compared to the third quarter of 2007. Outpatient surgical volumes increased 0.1% on a consolidated basis and increased 0.8% on a same facility basis during the third quarter of 2008, compared to the third quarter of 2007.

Salaries and benefits, as a percentage of revenues, were 41.2% in the third quarter of 2008 and 41.1% in the third quarter of 2007. Salaries and benefits per equivalent admission increased 6.0% in the third quarter of 2008 compared to the third quarter of 2007. Same facility labor rate increases averaged 5.1% for the third quarter of 2008 compared to the third quarter of 2007.

Supplies, as a percentage of revenues, were 16.3% in the third quarter of 2008 and 16.5% in the third quarter of 2007. Supply costs per equivalent admission increased 4.5% in the third quarter of 2008 compared to the third quarter of 2007. Same facility supply costs increased 7.1% for medical devices, 2.4% for pharmacy supplies, 16.7% for blood products and 7.4% for general medical and surgical items in the third quarter of 2008 compared to the third quarter of 2007.

Other operating expenses, as a percentage of revenues, were 16.4% in the third quarters of 2008 and 2007. Other operating expenses is primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Provisions for losses related to professional liability risks were $32 million and $44 million for the third quarters of 2008 and 2007, respectively, and reflect reductions in our estimated professional liability reserves of $25 million and $7 million for the third quarters of 2008 and 2007, respectively. We recorded $15 million of expense related to the hurricanes that occurred during the third quarter of 2008. Other operating expenses includes $22 million and $33 million of indigent care costs in certain Texas markets during the third quarters of 2008 and 2007, respectively.

Provision for doubtful accounts, as a percentage of revenues, decreased to 11.7% in the third quarter of 2008 compared to 11.8% in the third quarter of 2007. The decrease in the provision for doubtful accounts, as a percentage of revenues, can be partially attributed to an increase in charity and uninsured discounts from $805 million in the third quarter of 2007 to $920 million in the third quarter of 2008. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients. At September 30, 2008, our allowance for doubtful accounts represented approximately 93% of the $5.534 billion total patient due accounts receivable balance.

Losses on investments of $1 million in each of the third quarters of 2008 and 2007 relate to sales of investment securities by our wholly-owned insurance subsidiary.

Equity in earnings of affiliates was $41 million and $51 million in the third quarters of 2008 and 2007, respectively. These amounts related primarily to the operations of our Denver market joint venture, which is accounted for under the equity method of accounting.

29

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Results of Operations (continued)

Quarters Ended September 30, 2008 and 2007 (continued)

Depreciation and amortization decreased by $6 million, from $356 million in the third quarter of 2007 to $350 million in the third quarter of 2008.

Interest expense decreased from $560 million in the third quarter of 2007 to $497 million in the third quarter of 2008. Our average debt balance was $27.263 billion for the third quarter of 2008 compared to $27.625 billion for the third quarter of 2007. The average interest rate for our long term debt decreased from 7.7% at September 30, 2007 to 7.3% at September 30, 2008.

During the third quarter of 2008, we recorded gains on sales of facilities of $50 million, which included a $39 million gain on the sale of a hospital. During the third quarter of 2007, we recognized gains on sales of facilities of $316 million, which included a gain of $311 million on the sale of our two Switzerland hospitals.

During the third quarter of 2008, we recorded an asset impairment charge of $44 million to adjust the value of goodwill of health care entity investments to estimated fair value. There were no asset impairments during the third quarter of 2007.

Minority interests in earnings of consolidated entities were $49 million and $44 million for the third quarters of 2008 and 2007, respectively.

Our effective tax rate was 46.8% in the third quarter of 2008. During the third quarter of 2008, we increased our tax provision by $16 million for interest expense related to taxing authority examinations and certain state taxes. Excluding the effect of these adjustments, the effective tax rate for the third quarter of 2008 would have been 36.9%. Our effective tax rate was 11.7% in the third quarter of 2007. Based on information received during the third quarter of 2007, related primarily to tax positions taken in prior taxable periods, we reduced our provision for income taxes by $85 million. Excluding the effect of this adjustment, the effective rate for the third quarter of 2007 would have been 36.9%.

Nine Months Ended September 30, 2008 and 2007

Net income totaled $397 million for the nine months ended September 30, 2008 compared to $596 million for the nine months ended September 30, 2007. Revenues increased 5.7% due to favorable pricing trends, evidenced by net revenue per equivalent admission growth of 5.1%, and a 0.5% increase in equivalent admissions. Results for the first nine months of 2008 include gains on sales of facilities of $90 million compared to $332 million of gains on sales of facilities for the first nine months of 2007, and impairments on long-lived assets of $53 million for the first nine months of 2008 compared to a $24 million impairment of long-lived assets in the first nine months of 2007.

For the nine months ended September 30, 2008, consolidated admissions decreased 0.6% and same facility admissions increased 0.9% compared to the nine months ended September 30, 2007. Inpatient surgical volumes decreased 4.7% on a consolidated basis and decreased 0.7% on a same facility basis during the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. Outpatient surgical volumes decreased 1.5% on a consolidated basis and decreased 0.7% on a same facility basis during the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007.

Salaries and benefits, as a percentage of revenues, were 40.6% in the first nine months of 2008 and 40.1% in the first nine months of 2007. Salaries and benefits per equivalent admission increased 6.5% for the first nine months of 2008 compared to the first nine months of 2007. Same facility labor rate increases averaged 4.9% for the first nine months of 2008 compared to the first nine months of 2007.

Supplies, as a percentage of revenues, were 16.4% in the first nine months of each 2008 and 2007. Supply costs per equivalent admission increased 5.0% for the first nine months of 2008 compared to the first nine months of 2007. Same facility supply costs increased 7.8% for medical devices, 2.8% for pharmacy supplies, 20.0% for blood

30

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Results of Operations (continued)

Nine Months Ended September 30, 2008 and 2007 (continued)

products and 7.1% for general medical and surgical items in the first nine months of 2008 compared to the first nine months of 2007.

Other operating expenses, as a percentage of revenues, were 16.1% in the first nine months of 2008, compared to 16.0% in the first nine months of 2007. Other operating expenses is primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Provisions for losses related to professional liability risks were $144 million and $141 million for the nine months ended September 30, 2008 and 2007, respectively. Other operating expenses includes $99 million and $164 million of indigent care costs in certain Texas markets during the first nine months of 2008 and 2007, respectively.

Provision for doubtful accounts, as a percentage of revenues, was 11.9% in the first nine months of 2008 compared to 11.1% in the first nine months of 2007. 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 4.5% and uninsured admissions of 2.3% in the first nine months of 2008 compared to the first nine months of 2007. At September 30, 2008, our allowance for doubtful accounts represented approximately 93% of the $5.534 billion total patient due accounts receivable balance.

Gains on investments of $6 million in the first nine months of 2007 relate to sales of investment securities by our wholly-owned insurance subsidiary. There were no net gains on investments in the first nine months of 2008.

Equity in earnings of affiliates was $170 million and $156 million in the first nine months of 2008 and 2007, respectively. These amounts related primarily to the operations of our Denver market joint venture, which is accounted for under the equity method of accounting.

Depreciation and amortization decreased by $10 million, from $1.072 billion in the first nine months of 2007 to $1.062 billion in the first nine months of 2008.

Interest expense decreased from $1.674 billion in the first nine months of 2007 to $1.521 billion in the first nine months of 2008. Our average debt balance was $27.313 billion for the first nine months of 2008 compared to $27.843 billion for the first nine months of 2007. The average interest rate for our long term debt decreased from 7.7% at September 30, 2007 to 7.3% at September 30, 2008.

During the first nine months of 2008, we recognized net gains on sales of facilities of $90 million, which includes $86 million of net gains on the sales of hospital facilities and $4 million of net gains on sales of real estate and other health care entity investments. During the first nine months of 2007, we recognized gains on sales of facilities of $332 million, which included a gain of $311 million on the sale of our two Switzerland hospitals.

During the first nine months of 2008, we recorded asset impairment charges of $53 million, including a $44 million impairment charge related to adjusting the value of goodwill for other health care entity investments to estimated fair value. The additional $9 million asset impairment charge included in our operating results for the first nine months of 2008 related to adjusting the value of certain hospital facilities to estimated fair value. We recorded an asset impairment charge of $24 million to adjust the value of a building to estimated fair value during the first nine months of 2007.

Minority interest in earnings of consolidated entities increased from $160 million in the first nine months of 2007 to $161 million for the first nine months of 2008.

Our effective tax rate was 36.9% in the first nine months of 2008 and 29.2% in the first nine months of 2007. Based on information received during the first nine months of 2007 related primarily to tax positions taken in prior

31

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Results of Operations (continued)

Nine Months Ended September 30, 2008 and 2007 (continued)

taxable periods, we reduced our provision for income taxes by $85 million. Excluding the effect of this adjustment, the effective rate for the first nine months of 2007 would have been 39.3%.

Liquidity and Capital Resources

Cash provided by operating activities totaled $1.264 billion in the first nine months of 2008 compared to $985 million in the first nine months of 2007. The increased cash provided by operating activities in the first nine months of 2008 compared to the first nine months of 2007 related, primarily, to the net impact of a $480 million increase in cash provided by the net change in the provision for doubtful accounts and changes in operating assets and liabilities and a $264 million increase in cash used to pay taxes. We made $612 million in net tax payments in the first nine months of 2008 compared to $348 million in the first nine months of 2007. We made $1.380 billion in interest payments in the first nine months of 2008 compared to $1.522 billion in the first nine months of 2007. Working capital totaled $2.455 billion at September 30, 2008 and $2.356 billion at December 31, 2007.

Cash used in investing activities was $972 million in the first nine months of 2008 compared to $365 million in the first nine months of 2007. Excluding acquisitions, capital expenditures were $1.115 billion and $997 million in the first nine months of 2008 and 2007, respectively. Capital expenditures are expected to approximate $1.650 billion in 2008. At September 30, 2008, there were projects under construction which had estimated additional costs to complete and equip over the next five years of approximately $1.7 billion. We expect to finance capital expenditures with internally generated and borrowed funds. During the first nine months of 2008 and 2007, we received cash proceeds of $185 million and $484 million, respectively, from dispositions of hospitals and health care entities. We received $30 million and $156 million from the liquidation of investments during the first nine months of 2008 and 2007, respectively.

Cash used in financing activities totaled $241 million during the first nine months of 2008 compared to $907 million used in financing activities during the first nine months of 2007. During the first nine months of 2008, we decreased net borrowings by $241 million. During the first nine months of 2007, we decreased net borrowings by $991 million and received proceeds of $100 million from issuances of 1,972,100 shares of common stock.

In addition to cash flows from operations, available sources of capital include amounts available under the senior secured credit facilities ($2.021 billion and $2.102 billion as of September 30, 2008 and October 31, 2008, respectively) and anticipated access to public and private debt markets.

Investments of our professional liability insurance subsidiary, to maintain statutory equity and pay claims (primarily claims that occurred prior to 2007), totaled $1.683 billion at September 30, 2008 and $1.899 billion at December 31, 2007. Claims payments, net of reinsurance recoveries, during the next twelve months are expected to approximate $200 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 routinely monitor the financial condition of our reinsurers. The amounts receivable related to the reinsurance contracts were $58 million and $44 million at September 30, 2008 and December 31, 2007, respectively. Effective January 1, 2007, our facilities are generally self-insured for the first $5 million of per occurrence losses, and we are not required to maintain investments to fund the liabilities for claims that occurred after 2006.

Management believes that cash flows from operations, amounts available under our senior secured credit facilities and our anticipated access to public and private debt markets will be sufficient to meet expected liquidity needs during the next twelve months.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Liquidity and Capital Resources (continued)

Market Risk

HCA is 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 $1.674 billion and $9 million, respectively, at September 30, 2008. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. At September 30, 2008, we had a net unrealized loss of $8 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 in excess of normal cash requirements on short notice, we may have difficulty selling these investments in a timely manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. At September 30, 2008, our wholly-owned insurance subsidiary had invested $623 million in municipal, tax-exempt student loan 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 usually reset through a Dutch auction every seven to 35 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 to 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. 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 $4.970 billion of long-term debt at September 30, 2008 is subject to variable rates of interest, while the remaining balance in long-term debt of $22.071 billion at September 30, 2008 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 rate debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the federal funds rate plus1/2 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 may fluctuate according to a leverage ratio, with the exception of term loan B where the margin is static. The average rate for our long-term debt decreased from 7.7% at September 30, 2007 to 7.3% at September 30, 2008.

The estimated fair value of our total long-term debt was $24.101 billion at September 30, 2008. 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 $50 million. To mitigate the impact of fluctuations in interest rates, we generally target a portion of our debt portfolio to be maintained at fixed rates.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Liquidity and Capital Resources (continued)

Market Risk (continued)

Our international operations and 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 European term loan, we have entered into cross currency swap agreements. A cross currency swap is an agreement between two parties to exchange a stream of principal and interest payments in one currency for a stream of principal and interest payments in another currency over a specified period. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. Changes in the fair value of these derivatives are recognized in results of operations.

Pending IRS Disputes

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 examinations of the 2001 through 2004 federal income returns for HCA and 17 affiliates that are treated as partnerships for federal income tax purposes (“affiliated partnerships”). The disputed items include the deductibility of a portion of the 2003 government settlement payment, the timing of recognition of certain patient service revenues for 2003 and 2004, and our method for calculating the tax allowance for doubtful accounts for 2001 through 2004.

Six taxable periods of HCA, its predecessors, subsidiaries and affiliated partnerships ended in 1995 through 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 September 30, 2008.

Management believes that HCA, its predecessors, subsidiaries and affiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS and that final resolution of these disputes will not have a material, adverse effect on our results of operations or financial position. However, if payments due upon final resolution of these issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Operating Data

	2008		2007
CONSOLIDATING
Number of hospitals in operation at:
March 31		161		165
June 30		161		164
September 30		158		162
December 31				161
Number of freestanding outpatient surgical centers in operation at:
March 31		101		99
June 30		99		98
September 30		99		98
December 31				99
Licensed hospital beds at(a):
March 31		38,375		39,269
June 30		38,448		39,175
September 30		38,386		38,939
December 31				38,405
Weighted average licensed beds(b):
Quarter:
First		38,406		39,269
Second		38,419		39,222
Third		38,390		38,990
Fourth				38,784
Year				39,065
Average daily census(c):
Quarter:
First		22,248		22,461
Second		20,743		20,874
Third		19,932		20,444
Fourth				20,448
Year				21,049
Admissions(d):
Quarter:
First		401,700		403,800
Second		382,600		383,200
Third		377,400		381,700
Fourth				384,000
Year				1,552,700

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Operating Data — (Continued)

	2008		2007
Equivalent admissions(e):
Quarter:
First		601,300		601,200
Second		587,600		582,500
Third		587,400		583,400
Fourth				585,300
Year				2,352,400
Average length of stay (days)(f):
Quarter:
First		5.0		5.0
Second		4.9		5.0
Third		4.9		4.9
Fourth				4.9
Year				4.9
Emergency room visits(g):
Quarter:
First		1,368,800		1,295,200
Second		1,297,600		1,258,700
Third		1,303,100		1,273,900
Fourth				1,288,300
Year				5,116,100
Outpatient surgeries(h):
Quarter:
First		196,900		204,200
Second		202,100		204,200
Third		196,500		196,400
Fourth				200,100
Year				804,900
Inpatient surgeries(i):
Quarter:
First		125,400		130,500
Second		125,000		131,200
Third		121,400		128,300
Fourth				126,500
Year				516,500

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Operating Data — (Continued)

	2008			2007
Days in accounts receivable(j):
Quarter:
First		53			52
Second		51			51
Third		49			54
Fourth					52
Year					53
Gross patient revenues(k) (dollars in millions):
Quarter:
First	$	25,804		$	23,161
Second		25,065			22,503
Third		24,783			22,381
Fourth					24,384
Year					92,429
Outpatient revenues as a % of patient revenues(l)
Quarter:
First		36	%		36	%
Second		38	%		37	%
Third		39	%		38	%
Fourth					37	%
Year					37	%
NONCONSOLIDATING(m)
Number of hospitals in operation at:
March 31		8			8
June 30		8			8
September 30		8			8
December 31					8
Number of freestanding outpatient surgical centers in operation at:
March 31		8			9
June 30		8			9
September 30		8			9
December 31					9
Licensed hospital beds at:
March 31		2,337			2,356
June 30		2,337			2,334
September 30		2,367			2,337
December 31					2,337

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Operating Data — (Continued)

BALANCE SHEET DATA

	% of Accounts Receivable
	Under 91 Days			91 — 180 Days			Over 180 Days
Accounts receivable aging at September 30, 2008:
Medicare and Medicaid		10	%		1	%		2	%
Managed care and other discounted		17			3			4
Uninsured		20			10			33
Total		47	%		14	%		39	%

(a)	Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(b)	Weighted average licensed beds represents the average number of licensed beds, weighted based on periods owned.
(c)	Represents the average number of patients in our hospital beds each day.
(d)	Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.
(e)	Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient 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.
(f)	Represents the average number of days admitted patients stay in our hospitals.
(g)	Represents the number of patients treated in our emergency rooms.
(h)	Represents the number of surgeries performed on patients who were not admitted to our hospitals. Pain management and endoscopy procedures are not included in outpatient surgeries.
(i)	Represents the number of surgeries performed on patients who have been admitted to our hospitals. Pain management and endoscopy procedures are not included in inpatient surgeries.
(j)	Days in accounts receivable are calculated by dividing the revenues for the period by the days in the period (revenues per day). Accounts receivable, net of allowance for doubtful accounts, at the end of the period is then divided by the revenues per day.
(k)	Gross patient revenues are based upon our standard charge listing. Gross charges/revenues typically do not reflect what our hospital facilities are paid. Gross charges/revenues are reduced by contractual adjustments, discounts and charity care to determine reported revenues.
(l)	Represents the percentage of patient revenues related to patients who are not admitted to our hospitals.
(m)	The nonconsolidating facilities are facilities operated through joint ventures which we do not control and are accounted for using the equity method of accounting.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by this item is provided under the caption “Market Risk” under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

HCA’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of HCA’s disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and chief financial officer have concluded that HCA’s disclosure controls and procedures effectively and timely provide them with material information relating to HCA and its consolidated subsidiaries required to be disclosed in the reports HCA files or submits under the Exchange Act.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Part II: Other Information

Item 1:   Legal Proceedings

General Liability

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 and financial position in a given period.

Government Investigations, Claims and Litigation

In January 2001, we entered into an eight-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General 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.

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 related federal securities class action against HCA. On January 18, 2006, the magistrate judge signed an order (1) consolidating Thurman’s cause of

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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. We have reached an agreement in principle to settle this suit, subject to court approval.

Merger Litigation in State Court

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 filed an appeal from the final judgment. On July 15, 2008, the New Hampshire Supreme Court held that the Merger did not trigger the right of first refusal. The Court remanded to the lower court the claim that the right of first refusal had been triggered by certain intra-corporate transactions in 1999. The Court did not determine the merits of that claim, and we will continue to defend the claim vigorously.

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 appealed this dismissal. While the appeal was pending, the Kansas Supreme Court for the first time construed the Kansas Consumer Protection Act to apply to the provision of medical services. Based on that new ruling, the 10th Circuit reversed the district court’s dismissal and remanded the action for further consideration by the trial court. We will continue to defend this claim vigorously.

We are a party to certain proceedings relating to claims for income taxes and related interest in the United States Tax Court. For a description of those proceedings, see Part I. Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — IRS Disputes” and Note 2 to our condensed consolidated financial statements.

We are also subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or for wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants have asked for punitive damages against us, which may not be covered by insurance. In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material, adverse effect on our results of operations or financial position.

Item 1A:   Risk Factors

Reference is made to the factors set forth under the caption “Forward-Looking Statements” in Part I, Item 2 of thisForm 10-Q and other risk factors described in our annual report onForm 10-K, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our annual report onForm 10-K.

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Item 2:   Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended September 30, 2008, HCA issued 6,766 shares of common stock in connection with the exercise of stock options for aggregate consideration of $86,267. The shares were issued without registration in reliance on the exemptions afforded by Section 4(2) of the Securities Act of 1933, as amended and Rule 701 promulgated thereunder.

On April 29, 2008, we registered our common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended. The following table provides certain information with respect to our repurchase of common stock from July 1, 2008 through September 30, 2008.

							Approximate
					Total Number		Dollar Value of
					of Shares		Shares That
					Purchased as		May Yet Be
					Part of		Purchased
					Publicly		Under Publicly
	Total Number				Announced		Announced
	of Shares		Average Price		Plans or		Plans or
Period	Repurchased		Paid per Share		Programs		Programs
July 1, 2008 through July 31, 2008		—	$	—		—	$	—
August 1, 2008 through August 31, 2008		164		56.71		—		—
September 1, 2008 through September 30, 2008		—		—		—		—
Total for Third Quarter 2008		164	$	56.71		—	$	—

In August 2008, we purchased 164 shares pursuant to the terms of the Management Stockholder’s Agreement between former employees and the Company.

Item 6:   Exhibits

(a) List of Exhibits:

Exhibit 31	.1	—	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31	.2	—	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32		—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HCA INC.

By:  /s/  R. Milton Johnson

R. Milton Johnson

Executive Vice President and

Chief Financial Officer

Date: November 13, 2008

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