HCA Healthcare (HCA) 10-Q 2009 Q1 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 March 31, 2009
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 of the latest practicable date.

Class of Common Stock	Outstanding at April 30, 2009
Voting common stock, $.01 par value	94,383,900 shares

HCA INC.

Form 10-Q
March 31, 2009

			Page of
			Form 10-Q
	Part I.	Financial Information
	Item 1.	Financial Statements (Unaudited):
		Condensed Consolidated Income Statements — for the quarters ended March 31, 2009 and 2008		3
		Condensed Consolidated Balance Sheets — March 31, 2009 and December 31, 2008		4
		Condensed Consolidated Statements of Cash Flows — for the quarters ended March 31, 2009 and 2008		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
	Item 4.	Controls and Procedures		35
	Part II.	Other Information
	Item 1.	Legal Proceedings		35
	Item 1A.	Risk Factors		36
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
	Item 6.	Exhibits		38
	Signatures			39
EX-31.1
EX-31.2
EX-32

2

HCA INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 2009 AND 2008

Unaudited

(Dollars in millions)

	2009			2008
Revenues	$	7,431		$	7,127
Salaries and benefits		2,923			2,839
Supplies		1,210			1,173
Other operating expenses		1,102			1,114
Provision for doubtful accounts		807			888
Equity in earnings of affiliates		(68	)		(67	)
Depreciation and amortization		353			357
Interest expense		471			530
Losses (gains) on sales of facilities		5			(51	)
Impairment on long-lived assets		9			—
		6,812			6,783
Income before income taxes		619			344
Provision for income taxes		187			119
Net income		432			225
Net income attributable to noncontrolling interests		72			55
Net income attributable to HCA Inc.	$	360		$	170

See accompanying notes.

3

HCA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(Dollars in millions)

	March 31,			December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	356		$	465
Accounts receivable, less allowance for doubtful accounts of $5,594 and $5,435		3,870			3,780
Inventories		717			737
Deferred income taxes		988			914
Other		558			405
		6,489			6,301
Property and equipment, at cost		23,913			23,714
Accumulated depreciation		(12,458	)		(12,185	)
		11,455			11,529
Investments of insurance subsidiary		1,302			1,422
Investments in and advances to affiliates		860			842
Goodwill		2,579			2,580
Deferred loan costs		452			458
Other		1,147			1,148
	$	24,284		$	24,280
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,200		$	1,370
Accrued salaries		823			854
Other accrued expenses		1,458			1,282
Long-term debt due within one year		416			404
		3,897			3,910
Long-term debt		26,151			26,585
Professional liability risks		1,098			1,108
Income taxes and other liabilities		1,853			1,782
Equity securities with contingent redemption rights		154			155
Stockholders’ deficit:
Common stock $.01 par; authorized 125,000,000 shares; outstanding 94,378,600 shares in 2009 and 94,367,500 shares in 2008		1			1
Capital in excess of par value		176			165
Accumulated other comprehensive loss		(608	)		(604	)
Retained deficit		(9,457	)		(9,817	)
Stockholders’ deficit attributable to HCA Inc.		(9,888	)		(10,255	)
Noncontrolling interests		1,019			995
		(8,869	)		(9,260	)
	$	24,284		$	24,280

See accompanying notes.

4

HCA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2009 AND 2008

Unaudited

(Dollars in millions)

	2009			2008
Cash flows from operating activities:
Net income	$	432		$	225
Adjustments to reconcile net income to net cash provided by operating activities:
Changes in operating assets and liabilities		(1,111	)		(1,183	)
Provision for doubtful accounts		807			888
Depreciation and amortization		353			357
Income taxes		41			(9	)
Losses (gains) on sales of facilities		5			(51	)
Impairment of long-lived assets		9			—
Change in noncontrolling interests		(48	)		(49	)
Amortization of deferred loan costs		21			23
Pay-in-kind interest		39			—
Share-based compensation		7			7
Other		12			19
Net cash provided by operating activities		567			227
Cash flows from investing activities:
Purchase of property and equipment		(337	)		(308	)
Acquisition of hospitals and health care entities		(38	)		(24	)
Disposition of hospitals and health care entities		5			107
Change in investments		76			(11	)
Other		6			9
Net cash used in investing activities		(288	)		(227	)
Cash flows from financing activities:
Issuance of long-term debt		300			4
Net change in revolving bank credit facility		(335	)		650
Repayment of long-term debt		(339	)		(575	)
Other		(14	)		(1	)
Net cash (used in) provided by financing activities		(388	)		78
Change in cash and cash equivalents		(109	)		78
Cash and cash equivalents at beginning of period		465			393
Cash and cash equivalents at end of period	$	356		$	471
Interest payments	$	344		$	411
Income tax payments, net	$	146		$	127

See accompanying notes.

5

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

NOTE 1 — INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Merger, Recapitalization and Reporting Entity

On November 17, 2006, HCA Inc. completed its merger (the “Merger”) with Hercules Acquisition Corporation, pursuant to which the Company was acquired by Hercules Holding II, LLC (“Hercules Holding”), a Delaware limited liability company owned by a private investor group comprised of affiliates of Bain Capital Partners (“Bain”), Kohlberg Kravis Roberts & Co. (“KKR”), Merrill Lynch Global Private Equity (“MLGPE”) (each a “Sponsor”) and of Citigroup Inc. and Bank of America Corporation (the “Sponsor Assignees”), by affiliates of HCA founder, Dr. Thomas F. Frist Jr., (the “Frist Entities,” and together with the Sponsors and the Sponsor Assignees, the “Investors”), and by members of management and certain other investors. The Merger, the financing transactions related to the Merger and other related transactions are collectively referred to in this quarterly report as the “Recapitalization.” The Merger was accounted for as a recapitalization in our financial statements, with no adjustments to the historical basis of our assets and liabilities. As a result of the Recapitalization, our outstanding capital stock is owned by the Investors, certain members of management and key employees 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, thus subjecting us to the reporting requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended. Our common stock is not traded on a national securities exchange.

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 March 31, 2009, these affiliates owned and operated 155 hospitals, 97 freestanding surgery centers and facilities which provided extensive outpatient and ancillary services. Affiliates of HCA are also partners in joint ventures that own and operate eight hospitals and eight freestanding surgery centers which are accounted for using the equity method. The Company’s facilities are located in 20 states and England. The terms “HCA,” “Company,” “we,” “our” or “us,” as used in this quarterly report 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 the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. In accordance with Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated FinancialStatements-an Amendment of ARB No. 51,” references in this report to our net income attributable to HCA Inc. and stockholders’ deficit attributable to HCA Inc. do not include noncontrolling interests (previously known as minority interests), which we now report separately. 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 $37 million and $40 million for the quarters ended March 31, 2009 and 2008, respectively. Operating results for the quarter ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. 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, 2008.

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

NOTE 2 — INCOME TAXES

We are currently contesting before the Appeals Division of the Internal Revenue Service (“IRS”), certain claimed deficiencies and adjustments proposed by the IRS in connection with its examination of the 2003 and 2004

6

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 2 — INCOME TAXES (continued)

federal income tax returns for HCA and 14 affiliates that are treated as partnerships for federal income tax purposes (“affiliated partnerships”). The disputed items include the timing of recognition of certain patient service revenues and our method for calculating the tax allowance for doubtful accounts.

Eight taxable periods of HCA and its predecessors ended in 1995 through 2002 and the 2002 taxable year for 10 affiliated partnerships, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, are pending before the IRS Examination Division or the United States Tax Court as of March 31, 2009. The IRS began an audit of the 2005 and 2006 federal income tax returns for HCA and seven affiliated partnerships during 2008.

Our liability for unrecognized tax benefits was $614 million, including accrued interest of $166 million, as of March 31, 2009 ($625 million and $156 million, respectively, as of December 31, 2008). Unrecognized tax benefits of $263 million ($264 million as of December 31, 2008) 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 balance of a refundable deposit we made in 2006, which is recorded in noncurrent assets. The provision for income taxes reflects a $20 million reduction in interest expense and interest expense of $12 million related to taxing authority examinations for the quarters ended March 31, 2009 and March 31, 2008, respectively.

Depending on the resolution of the IRS disputes, the completion of examinations by federal, state or international taxing authorities, or the expiration of statutes of limitation for specific taxing jurisdictions, we believe it is reasonably possible our liability for unrecognized tax benefits may significantly increase or decrease within the next 12 months. However, we are currently unable to estimate the range of any possible change.

NOTE 3 — INVESTMENTS OF INSURANCE SUBSIDIARY

A summary of our insurance subsidiary’s investments at March 31, 2009 and December 31, 2008 follows (dollars in millions):

	March 31, 2009
			Unrealized
	Amortized		Amounts					Fair
	Cost		Gains		Losses			Value
Debt securities:
States and municipalities	$	789	$	24	$	(16	)	$	797
Auction rate securities		574		—		(42	)		532
Asset-backed securities		49		—		(4	)		45
Money market funds		122		—		—			122
		1,534		24		(62	)		1,496
Equity securities:
Preferred stocks		6		—		(3	)		3
Common stocks		3		—		—			3
		9		—		(3	)		6
	$	1,543	$	24	$	(65	)		1,502
Amount classified as current assets									(200	)
Investment carrying value								$	1,302

7

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — INVESTMENTS OF INSURANCE SUBSIDIARY (continued)

	December 31, 2008
			Unrealized
	Amortized		Amounts					Fair
	Cost		Gains		Losses			Value
Debt securities:
States and municipalities	$	808	$	20	$	(23	)	$	805
Auction rate securities		576		—		(40	)		536
Asset-backed securities		51		1		(5	)		47
Money market funds		226		—		—			226
		1,661		21		(68	)		1,614
Equity securities:
Preferred stocks		6		—		(1	)		5
Common stocks		3		—		—			3
		9		—		(1	)		8
	$	1,670	$	21	$	(69	)		1,622
Amount classified as current assets									(200	)
Investment carrying value								$	1,422

At March 31, 2009 and December 31, 2008, the investments of our insurance subsidiary were classified as “available-for-sale.” Changes in temporary unrealized gains and losses are recorded as adjustments to other comprehensive income. At March 31, 2009 and December 31, 2008, $106 million and $119 million, respectively, of our investments were subject to restrictions included in insurance bond collateralization and assumed reinsurance contracts.

8

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 4 — LONG-TERM DEBT

A summary of long-term debt at March 31, 2009 and December 31, 2008, including related interest rates at March 31, 2009, follows (dollars in millions):

	March 31,		December 31,
	2009		2008
Senior secured asset-based revolving credit facility (effective interest rate of 2.0%)	$	1,715	$	2,000
Senior secured revolving credit facility		—		50
Senior secured term loan facilities (effective interest rate of 6.0%)		11,641		12,002
Other senior secured debt (effective interest rate of 6.9%)		385		406
First lien debt		13,741		14,458
Senior secured cash-pay notes (effective interest rate of 9.7%)		4,500		4,200
Senior secured toggle notes (effective interest rate of 10.0%)		1,500		1,500
Second lien debt		6,000		5,700
Senior unsecured notes payable through 2095 (effective interest rate of 7.2%)		6,826		6,831
Total debt (average life of six years, rates averaging 6.9%)		26,567		26,989
Less amounts due within one year		416		404
	$	26,151	$	26,585

During February 2009, we issued $310 million aggregate principal amount of 97/8% senior secured notes due 2017 at a price of 96.673% of their face value, resulting in approximately $300 million of gross proceeds. We used the proceeds to repay outstanding indebtedness under our senior secured term loan facilities.

During April 2009, we issued $1.500 billion aggregate principal amount of 81/2% senior secured notes due 2019 at a price of 96.755% of their face value, resulting in approximately $1.451 billion of gross proceeds. We used the proceeds to repay outstanding indebtedness under our senior secured term loan facilities.

NOTE 5 — FINANCIAL INSTRUMENTS

Interest Rate Swap Agreements

We have entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates. These swap agreements involve the exchange of fixed and variable rate interest payments between two parties based on common notional principal amounts and maturity dates. Pay-fixed interest rate swaps effectively convert LIBOR indexed variable rate instruments to fixed interest rate obligations. The net interest payments, based on the notional amounts in these agreements, generally match the timing of the related liabilities. The notional amounts of the swap agreements represent amounts used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis.

9

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 5 — FINANCIAL INSTRUMENTS (continued)

Interest Rate Swap Agreements (continued)

The following table sets forth our interest rate swap agreements, which have been designated as cash flow hedges, at March 31, 2009 (dollars in millions):

	Notional				Fair
	Amount		Termination Date		Value
Pay-fixed interest rate swap	$	4,000		November 2011	$	(328	)
Pay-fixed interest rate swap		4,000		November 2011		(309	)
Pay-fixed interest rate swap		500		March 2011		(15	)
Pay-fixed interest rate swap		500		March 2011		(15	)

During the next 12 months, we estimate that $318 million will be reclassified from other comprehensive income (“OCI”) to interest expense.

Cross Currency Swaps

The Company and certain subsidiaries have incurred obligations and entered into various intercompany transactions where such obligations are denominated in currencies (Great Britain Pound and Euro), other than the functional currencies (United States Dollar and Great Britain Pound) of the parties executing the trade. In order to mitigate the currency exposure risks and better match the cash flows of our obligations and intercompany transactions with cash flows from operations, we entered into various cross currency swaps. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.

Certain of our cross currency swaps were not designated as hedges, and changes in fair value are recognized in results of operations. The following table sets forth these cross currency swap agreements at March 31, 2009 (amounts in millions):

	Notional				Fair
	Amount		Termination Date		Value
Euro — United States Dollar currency swap		541 Euro		December 2011	$	40
Euro — Great Britain Pound (GBP) currency swap		30 Euro		December 2011		14

The following table sets forth our cross currency swap agreements, which have been designated as cash flow hedges, at March 31, 2009 (amounts in millions):

	Notional				Fair
	Amount		Termination Date		Value
GBP — United States Dollar currency swap		50 GBP		November 2010	$	(16	)
GBP — United States Dollar currency swap		50 GBP		November 2010		(15	)

10

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 5 — FINANCIAL INSTRUMENTS (continued)

Cross Currency Swaps (continued)

Derivatives — Results of Operations

The following tables present the effect on our results of operations for our interest rate and cross currency swaps for the quarter ended March 31, 2009 (amounts in millions):

			Location of Loss		Amount of Loss
	Amount of Loss		Reclassified from		Reclassified from
	Recognized in OCI on		Accumulated OCI		Accumulated OCI
Derivatives in Cash Flow Hedging Relationships	Derivatives, Net of Tax		into Operations		into Operations
Interest rate swaps	$	51		Interest expense	$	72
Cross currency swaps		3		Interest expense		—
	$	54			$	72

	Location of Loss		Amount of Loss
	Recognized in		Recognized in
	Operations on		Operations on
Derivatives Not Designated as Hedging Instruments	Derivatives		Derivatives
Cross currency swaps		Other operating expense	$	43

Credit-risk-related Contingent Features

We have agreements with each of our derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of March 31, 2009, we have not been required to post any collateral related to these agreements. If we had breached any of these provisions at March 31, 2009, we would have been required to settle our obligations under the agreements at their aggregate, estimated termination value of $725 million.

NOTE 6 — 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 that 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

11

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 6 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)

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 considers factors specific to the asset or liability.

Cash Traded Investments

Our cash traded investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Certain types of cash traded instruments are classified within Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include auction rate securities (“ARS”) and limited partnership investments. The transaction price is initially used as the best estimate of fair value.

Our wholly-owned insurance subsidiary had investments in municipal, tax-exempt ARS, that are backed by student loans substantially guaranteed by the federal government, of $532 million ($572 million par value) at March 31, 2009. We do not currently intend to attempt to sell the ARS as the liquidity needs of our insurance subsidiary are expected to be met by other investments in its investment portfolio. These securities continue to accrue and pay interest semi-annually based on the failed auction maximum rate formulas stated in their respective Official Statements. During 2008 and the first quarter of 2009, certain issuers of our ARS redeemed $94 million of our securities at par value. The valuation of these securities involved management’s judgment, after consideration of market factors and the absence of market transparency, market liquidity and observable inputs. Our valuation models derived a fair market value compared to tax-equivalent yields of other student loan backed variable rate securities of similar credit worthiness.

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. 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 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 3 of the fair value hierarchy at March 31, 2009.

12

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 6 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)

The following table summarizes our assets and liabilities measured at fair value on a recurring basis as of March 31, 2009, 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	$	1,502		$	123		$	845		$	534
Less amounts classified as current assets		(200	)		(122	)		(78	)		—
		1,302			1			767			534
Cross currency swaps (Other assets)		54			—			—			54
Liabilities:
Interest rate swaps (Income taxes and other liabilities)		667			—			—			667
Cross currency swaps (Income taxes and other liabilities)		31			—			—			31

The following table summarizes the activity related to the investments of our insurance subsidiary and our cross currency and interest rate swaps which have fair value measurements based on significant unobservable inputs (Level 3) during the quarter ended March 31, 2009 (dollars in millions):

	Investments			Cross			Interest
	of Insurance			Currency			Rate
	Subsidiary			Swaps (net)			Swaps
Asset (liability) balances at December 31, 2008	$	538		$	71		$	(657	)
Realized gains and losses included in earnings		—			(43	)		72
Unrealized gains and losses included in other comprehensive income		(2	)		(5	)		(82	)
Purchases, issuances and settlements		(2	)		—			—
Asset (liability) balances at March 31, 2009	$	534		$	23		$	(667	)

NOTE 7 — CONTINGENCIES

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

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

13

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 8 — COMPREHENSIVE INCOME AND CAPITAL STRUCTURE

The components of comprehensive income, net of related taxes, for the quarters ended March 31, 2009 and 2008 are only attributable to HCA Inc. and are as follows (dollars in millions):

	Quarter
	2009			2008
Net income attributable to HCA Inc.	$	360		$	170
Change in fair value of derivative instruments		(8	)		(167	)
Change in fair value of available-for-sale securities		4			(3	)
Foreign currency translation adjustments		(2	)		—
Defined benefit plans		2			1
Comprehensive income	$	356		$	1

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

	March 31,			December 31,
	2009			2008
Change in fair value of derivative instruments	$	(448	)	$	(440	)
Change in fair value of available-for-sale securities		(26	)		(30	)
Foreign currency translation adjustments		(30	)		(28	)
Defined benefit plans		(104	)		(106	)
Accumulated other comprehensive loss	$	(608	)	$	(604	)

The changes in stockholders’ deficit, including changes in stockholders’ deficit attributable to HCA Inc. and changes in equity attributable to noncontrolling interests are as follows (dollars in millions):

	Equity Attributable to HCA Inc.
					Capital in		Accumulated						Equity
	Common Stock				Excess of		Other						Attributable to
	Shares		Par		Par		Comprehensive			Retained			Noncontrolling
	(000)		Value		Value		Loss			Deficit			Interests			Total
Balances, December 31, 2008		94,367	$	1	$	165	$	(604	)	$	(9,817	)	$	995		$	(9,260	)
Net income											360			72			432
Other comprehensive loss								(4	)								(4	)
Distributions														(48	)		(48	)
Share-based benefit plans		12				7											7
Other						4											4
Balances, March 31, 2009		94,379	$	1	$	176	$	(608	)	$	(9,457	)	$	1,019		$	(8,869	)

NOTE 9 — SEGMENT AND GEOGRAPHIC INFORMATION

We operate in one line of business, which is operating hospitals and related health care entities. During the quarters ended March 31, 2009 and 2008, approximately 24% of our patient revenues related to patients participating in the fee-for-service Medicare program.

Our operations are structured into three geographically organized groups: the Eastern Group includes 48 consolidating hospitals located in the Eastern United States, the Central Group includes 47 consolidating hospitals located in the Central United States and the Western Group includes 54 consolidating hospitals located in the

14

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 9 — SEGMENT AND GEOGRAPHIC INFORMATION (continued)

Western United States. We also operate six consolidating hospitals in England, and these facilities are included in the Corporate and other group.

Adjusted segment EBITDA is defined as income before depreciation and amortization, interest expense, losses (gains) on sales of facilities, impairment of long-lived assets, income taxes and noncontrolling interests. We use adjusted segment EBITDA as an analytical indicator for purposes of allocating resources to geographic areas and assessing their performance. Adjusted segment EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. Adjusted segment EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from adjusted segment EBITDA are significant components in understanding and assessing financial performance. Because adjusted segment EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, adjusted segment EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. The geographic distributions of our revenues, equity in earnings of affiliates, adjusted segment EBITDA and depreciation and amortization are summarized in the following table (dollars in millions):

	Quarter
	2009			2008
Revenues:
Central Group	$	1,803		$	1,692
Eastern Group		2,275			2,220
Western Group		3,151			2,975
Corporate and other		202			240
	$	7,431		$	7,127
Equity in earnings of affiliates:
Central Group	$	(1	)	$	(1	)
Eastern Group		—			(1	)
Western Group		(67	)		(66	)
Corporate and other		—			1
	$	(68	)	$	(67	)
Adjusted segment EBITDA:
Central Group	$	351		$	296
Eastern Group		433			354
Western Group		733			570
Corporate and other		(60	)		(40	)
	$	1,457		$	1,180
Depreciation and amortization:
Central Group	$	88		$	91
Eastern Group		90			90
Western Group		144			138
Corporate and other		31			38
	$	353		$	357

15

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 9 — SEGMENT AND GEOGRAPHIC INFORMATION (continued)

	Quarter
	2009		2008
Adjusted segment EBITDA	$	1,457	$	1,180
Depreciation and amortization		353		357
Interest expense		471		530
Losses (gains) on sales of facilities		5		(51	)
Impairment of long-lived assets		9		—
Income before income taxes	$	619	$	344

NOTE 10 — ACQUISITIONS, DISPOSITIONS AND IMPAIRMENT OF LONG-LIVED ASSETS

During the quarter ended March 31, 2009, we paid $38 million to acquire other health care entities. During the quarter ended March 31, 2008, we paid $18 million to acquire one hospital and $6 million to acquire other health care entities.

During the quarter ended March 31, 2009, we received proceeds of $5 million and recognized a net pretax loss of $5 million related to the sales of hospital facilities and other investments. During the quarter ended March 31, 2008, we received proceeds of $107 million and recognized a net pretax gain of $51 related primarily to the sale of a hospital facility.

During the quarter ended March 31, 2009, we recorded a charge of $9 million to adjust the value of certain real estate investments in our Central Group to estimated fair value. There were no impairments of long-lived assets in the quarter ended March 31, 2008.

16

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

Our summarized condensed consolidating balance sheets at March 31, 2009 and December 31, 2008 and condensed consolidating statements of income and cash flows for the quarters ended March 31, 2009 and 2008, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, follow.

HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 2009
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	4,393		$	3,038		$	—		$	7,431
Salaries and benefits		—			1,755			1,168			—			2,923
Supplies		—			721			489			—			1,210
Other operating expenses		5			617			480			—			1,102
Provision for doubtful accounts		—			508			299			—			807
Equity in earnings of affiliates		(705	)		(24	)		(44	)		705			(68	)
Depreciation and amortization		—			196			157			—			353
Interest expense		542			(66	)		(5	)		—			471
Losses (gains) on sales of facilities		—			7			(2	)		—			5
Impairment of long-lived assets		—			9			—			—			9
Management fees		—			(116	)		116			—			—
		(158	)		3,607			2,658			705			6,812
Income (loss) before income taxes		158			786			380			(705	)		619
Provision for income taxes		(202	)		270			119			—			187
Net income (loss)		360			516			261			(705	)		432
Net income attributable to noncontrolling interests		—			14			58			—			72
Net income (loss) attributable to HCA Inc.	$	360		$	502		$	203		$	(705	)	$	360

17

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HCA INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 2008
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	4,159		$	2,968		$	—		$	7,127
Salaries and benefits		—			1,709			1,130			—			2,839
Supplies		—			679			494			—			1,173
Other operating expenses		6			589			519			—			1,114
Provision for doubtful accounts		—			556			332			—			888
Equity in earnings of affiliates		(525	)		(26	)		(41	)		525			(67	)
Depreciation and amortization		—			196			161			—			357
Interest expense		558			(7	)		(21	)		—			530
Gains on sales of facilities		—			(2	)		(49	)		—			(51	)
Management fees		—			(113	)		113			—			—
		39			3,581			2,638			525			6,783
Income (loss) before income taxes		(39	)		578			330			(525	)		344
Provision for income taxes		(209	)		220			108			—			119
Net income (loss)		170			358			222			(525	)		225
Net income attributable to noncontrolling interests		—			12			43			—			55
Net income (loss) attributable to HCA Inc.	$	170		$	346		$	179		$	(525	)	$	170

18

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HCA INC.
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2009
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-					Condensed
	Issuer			Guarantors			Guarantors		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	126		$	230	$	—		$	356
Accounts receivable, net		—			2,282			1,588		—			3,870
Inventories		—			436			281		—			717
Deferred income taxes		988			—			—		—			988
Other		—			174			384		—			558
		988			3,018			2,483		—			6,489
Property and equipment, net		—			7,079			4,376		—			11,455
Investments of insurance subsidiary		—			—			1,302		—			1,302
Investments in and advances to affiliates		—			246			614		—			860
Goodwill		—			1,642			937		—			2,579
Deferred loan costs		452			—			—		—			452
Investments in and advances to subsidiaries		19,995			—			—		(19,995	)		—
Other		1,014			28			105		—			1,147
	$	22,449		$	12,013		$	9,817	$	(19,995	)	$	24,284
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable	$	—		$	741		$	459	$	—		$	1,200
Accrued salaries		—			522			301		—			823
Other accrued expenses		623			269			566		—			1,458
Long-term debt due within one year		386			—			30		—			416
		1,009			1,532			1,356		—			3,897
Long-term debt		25,677			101			373		—			26,151
Intercompany balances		4,173			(8,439	)		4,266		—			—
Professional liability risks		—			—			1,098		—			1,098
Income taxes and other liabilities		1,324			398			131		—			1,853
		32,183			(6,408	)		7,224		—			32,999
Equity securities with contingent redemption rights		154			—			—		—			154
Stockholders’ (deficit) equity attributable to HCA Inc.		(9,888	)		18,290			1,705		(19,995	)		(9,888	)
Noncontrolling interests		—			131			888		—			1,019
		(9,888	)		18,421			2,593		(19,995	)		(8,869	)
	$	22,449		$	12,013		$	9,817	$	(19,995	)	$	24,284

19

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HCA INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2008
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-					Condensed
	Issuer			Guarantors			Guarantors		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	134		$	331	$	—		$	465
Accounts receivable, net		—			2,214			1,566		—			3,780
Inventories		—			455			282		—			737
Deferred income taxes		914			—			—		—			914
Other		—			140			265		—			405
		914			2,943			2,444		—			6,301
Property and equipment, net		—			7,122			4,407		—			11,529
Investments of insurance subsidiary		—			—			1,422		—			1,422
Investments in and advances to affiliates		—			243			599		—			842
Goodwill		—			1,643			937		—			2,580
Deferred loan costs		458			—			—		—			458
Investments in and advances to subsidiaries		19,290			—			—		(19,290	)		—
Other		1,050			31			67		—			1,148
	$	21,712		$	11,982		$	9,876	$	(19,290	)	$	24,280
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable	$	—		$	881		$	489	$	—		$	1,370
Accrued salaries		—			549			305		—			854
Other accrued expenses		435			284			563		—			1,282
Long-term debt due within one year		355			—			49		—			404
		790			1,714			1,406		—			3,910
Long-term debt		26,089			99			397		—			26,585
Intercompany balances		3,663			(8,136	)		4,473		—			—
Professional liability risks		—			—			1,108		—			1,108
Income taxes and other liabilities		1,270			379			133		—			1,782
		31,812			(5,944	)		7,517		—			33,385
Equity securities with contingent redemption rights		155			—			—		—			155
Stockholders’ (deficit) equity attributable to HCA Inc.		(10,255	)		17,788			1,502		(19,290	)		(10,255	)
Noncontrolling interests		—			138			857		—			995
		(10,255	)		17,926			2,359		(19,290	)		(9,260	)
	$	21,712		$	11,982		$	9,876	$	(19,290	)	$	24,280

20

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HCA INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2009
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	360		$	516		$	261		$	(705	)	$	432
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Increase (decrease) in cash from operating assets and liabilities		75			(706	)		(480	)		—			(1,111	)
Provision for doubtful accounts		—			508			299			—			807
Depreciation and amortization		—			196			157			—			353
Income taxes		41			—			—			—			41
Losses on sales of facilities		—			1			4			—			5
Impairments of long-lived assets		—			9			—			—			9
Change in noncontrolling interests		—			(21	)		(27	)		—			(48	)
Amortization of deferred loan costs		21			—			—			—			21
Pay-in-kind interest		39			—			—			—			39
Share-based compensation		7			—			—			—			7
Equity in earnings of affiliates		(705	)		—			—			705			—
Other		4			12			(4	)		—			12
Net cash provided by (used in) operating activities		(158	)		515			210			—			567
Cash flows from investing activities:
Purchase of property and equipment		—			(177	)		(160	)		—			(337	)
Acquisition of hospitals and health care entities		—			(38	)		—			—			(38	)
Disposition of hospitals and health care entities		—			1			4			—			5
Change in investments		—			(4	)		80			—			76
Other		—			—			6			—			6
Net cash used in investing activities		—			(218	)		(70	)		—			(288	)
Cash flows from financing activities:
Issuance of long-term debt		300			—			—			—			300
Net change in revolving bank credit facility		(335	)		—			—			—			(335	)
Repayment of long-term debt		(285	)		(1	)		(53	)		—			(339	)
Changes in intercompany balances with affiliates, net		492			(304	)		(188	)		—			—
Other		(14	)		—			—			—			(14	)
Net cash provided by (used in) financing activities		158			(305	)		(241	)		—			(388	)
Change in cash and cash equivalents		—			(8	)		(101	)		—			(109	)
Cash and cash equivalents at beginning of period		—			134			331			—			465
Cash and cash equivalents at end of period	$	—		$	126		$	230		$	—		$	356

21

HCA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HCA INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2008
(Dollars in millions)

							Subsidiary
	Parent			Subsidiary			Non-						Condensed
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	170		$	358		$	222		$	(525	)	$	225
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Increase (decrease) in cash from operating assets and liabilities		102			(984	)		(301	)		—			(1,183	)
Provision for doubtful accounts		—			556			332			—			888
Depreciation and amortization		—			196			161			—			357
Income taxes		(9	)		—			—			—			(9	)
Gains on sales of facilities		—			(5	)		(46	)		—			(51	)
Change in noncontrolling interests		—			(13	)		(36	)		—			(49	)
Amortization of deferred loan costs		23			—			—			—			23
Share-based compensation		7			—			—			—			7
Equity in earnings of affiliates		(525	)		—			—			525			—
Other		9			6			4			—			19
Net cash provided by (used in) operating activities		(223	)		114			336			—			227
Cash flows from investing activities:
Purchase of property and equipment		—			(127	)		(181	)		—			(308	)
Acquisition of hospitals and health care entities		—			(18	)		(6	)		—			(24	)
Disposition of hospitals and health care entities		—			17			90			—			107
Change in investments		—			(18	)		7			—			(11	)
Other		—			—			9			—			9
Net cash used in investing activities		—			(146	)		(81	)		—			(227	)
Cash flows from financing activities:
Issuance of long-term debt		—			—			4			—			4
Net change in revolving bank credit facility		650			—			—			—			650
Repayment of long-term debt		(560	)		(1	)		(14	)		—			(575	)
Changes in intercompany balances with affiliates, net		134			38			(172	)		—			—
Other		(1	)		—			—			—			(1	)
Net cash provided by (used in) financing activities		223			37			(182	)		—			78
Change in cash and cash equivalents		—			5			73			—			78
Cash and cash equivalents at beginning of period		—			165			228			—			393
Cash and cash equivalents at end of period	$	—		$	170		$	301		$	—		$	471

22

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.” 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 and the ability to refinance such indebtedness on acceptable terms, (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, including potential declines in the population covered under managed care agreements due to the current economic downturn and the ability to enter into and renew managed care provider agreements on acceptable terms, (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, (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, which forward-looking statements reflect management’s views only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

First Quarter 2009 Operations Summary

Net income attributable to HCA Inc. totaled $360 million for the quarter ended March 31, 2009, compared to $170 million for the quarter ended March 31, 2008. Revenues increased to $7.431 billion in the first quarter of 2009 from $7.127 billion in the first quarter of 2008. First quarter 2009 results include losses on sales of facilities of $5 million, compared to gains on sales of facilities of $51 million for the first quarter of 2008. First quarter 2009 results also include an impairment of long-lived assets of $9 million.

Revenues increased 4.3% on a consolidated basis and 4.6% on a same facility basis for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. The increase in consolidated revenues can be attributed to the combined impact of a 2.8% increase in revenue per equivalent admission and a 1.5% increase in equivalent admissions. The same facility revenues increase resulted from the combined impact of a 2.7% increase in same facility revenue per equivalent admission and a 1.9% increase in same facility equivalent admissions.

During the quarter ended March 31, 2009, consolidated admissions declined 1.4% and same facility admissions declined 0.9% compared to the quarter ended March 31, 2008. Inpatient surgeries declined 2.2% on a consolidated basis and declined 0.5% on a same facility basis during the quarter ended March 31, 2009, compared to the quarter ended March 31, 2008. Outpatient surgeries declined 1.3% on a consolidated basis and declined 0.7% on a same facility basis during the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008.

23

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

First Quarter 2009 Operations Summary (continued)

For the quarter ended March 31, 2009, the provision for doubtful accounts decreased to 10.9% of revenues from 12.5% of revenues for the quarter ended March 31, 2008. The provision for doubtful accounts decreased $81 million, but the combined self-pay revenue deductions for charity care and uninsured discounts increased $305 million for the first quarter of 2009, compared to the first quarter of 2008. Same facility uninsured admissions declined 0.1% and same facility uninsured emergency room visits increased 0.7% for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008.

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 that are similar to the discounts provided to many local managed care plans.

Revenues increased 4.3% from $7.127 billion in the first quarter of 2008 to $7.431 billion in the first quarter of 2009. The increase in consolidated revenues can be attributed to the combined impact of a 2.8% increase in revenue per equivalent admission and a 1.5% increase in equivalent admissions. Same facility revenues increased 4.6% from $6.975 billion in the first quarter of 2008 to $7.299 billion in the first quarter of 2009. The increase in same facility revenues can be attributed to the combined impact of a 2.7% increase in same facility revenue per equivalent admission and a 1.9% increase in same facility equivalent admissions.

Consolidated admissions declined 1.4% and same facility admissions declined 0.9% compared to the first quarter of 2008. Consolidated outpatient surgeries declined 1.3% and same facility outpatient surgeries declined 0.7% in the first quarter of 2009 compared to the first quarter of 2008. Consolidated inpatient surgeries declined 2.2% and same facility inpatient surgeries declined 0.5% in the first quarter of 2009 compared to the first quarter of 2008.

Same facility uninsured admissions decreased by 0.1% in the first quarter of 2009 compared to the first quarter of 2008. The quarterly trend of same facility uninsured admissions growth during 2008, compared to 2007, was 5.3% during the first quarter, 1.0% during the second quarter, 0.9% during the third quarter and a decline of 0.4% during the fourth quarter.

Admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters ended March 31, 2009 and 2008 are set forth in the following table.

	Quarter
	2009			2008
Medicare		35	%		36	%
Managed Medicare		10			9
Medicaid		9			8
Managed Medicaid		7			7
Managed care and other insurers		33			34
Uninsured		6			6
		100	%		100	%

24

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

Results of Operations (continued)

Revenue/Volume Trends (continued)

The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters ended March 31, 2009 and 2008 are set forth in the following table.

	Quarter
	2009			2008
Medicare		33	%		33	%
Managed Medicare		8			8
Medicaid		7			6
Managed Medicaid		4			3
Managed care and other insurers		44			43
Uninsured		4			7
		100	%		100	%

We have implemented an approach for determining emergency department (“ED”) evaluation and management (“E/M”) assignments based on the American College of Emergency Physicians model. This model uses interventions, such as cardiac monitoring, to indicate the acuity of the patient and the resources involved in the evaluation and management of the patient. These E/M assignments are utilized in preparing the patient bill. We converted to this system, which is used by a significant number of hospitals, because it provides for more consistent emergency department E/M assignments than the “point” system previously used. As a result of the ED evaluation and management change, we estimate an increase in net revenue, less the related provision for doubtful accounts, of approximately $75 million to $100 million in the first quarter of 2009. While we believe there will be continued future benefits from this change, the impact in future quarters may vary.

At March 31, 2009, we had 73 hospitals in the states of Texas and Florida. During the first quarter of 2009, 57% of our admissions and 52% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 64% of our uninsured admissions during the first quarter of 2009.

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. Our Texas Medicaid revenues included $63 million and $38 million during the first quarters of 2009 and 2008, respectively, of Medicaid supplemental payments pursuant to UPL programs. 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.

25

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

Results of Operations (continued)

Operating Results Summary

The following are comparative summaries of results from operations for the quarters ended March 31, 2009 and 2008 (dollars in millions):

	Quarter
	2009						2008
	Amount			Ratio			Amount			Ratio
Revenues	$	7,431			100.0		$	7,127			100.0
Salaries and benefits		2,923			39.3			2,839			39.8
Supplies		1,210			16.3			1,173			16.5
Other operating expenses		1,102			14.8			1,114			15.5
Provision for doubtful accounts		807			10.9			888			12.5
Equity in earnings of affiliates		(68	)		(0.9	)		(67	)		(0.9	)
Depreciation and amortization		353			4.8			357			5.1
Interest expense		471			6.3			530			7.4
Losses (gains) on sales of facilities		5			0.1			(51	)		(0.7	)
Impairment of long-lived assets		9			0.1			—			—
		6,812			91.7			6,783			95.2
Income before income taxes		619			8.3			344			4.8
Provision for income taxes		187			2.5			119			1.6
Net income		432			5.8			225			3.2
Net income attributable to noncontrolling interests		72			1.0			55			0.8
Net income attributable to HCA Inc.	$	360			4.8		$	170			2.4
% changes from prior year:
Revenues		4.3	%					6.7	%
Income before income taxes		80.1						(6.9	)
Net income attributable to HCA Inc.		111.6						(5.8	)
Admissions(a)		(1.4	)					(0.5	)
Equivalent admissions(b)		1.5						—
Revenue per equivalent admission		2.8						6.7
Same facility% changes from prior year(c):
Revenues		4.6						8.1
Admissions(a)		(0.9	)					0.8
Equivalent admissions(b)		1.9						1.1
Revenue per equivalent admission		2.7						6.9

(a)	Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.
(b)	Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and then dividing the resulting amount by gross inpatient revenues. The equivalent admissions computation “equates” outpatient revenues to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume.
(c)	Same facility information excludes the operations of hospitals and their related facilities which were either acquired or divested during the current and prior period.

26

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

Results of Operations (continued)

Quarters Ended March 31, 2009 and 2008

Net income attributable to HCA Inc. totaled $360 million in 2009 compared to $170 million in 2008. Revenues increased 4.3% due to the combined impact of revenue per equivalent admission growth of 2.8% and an increase of 1.5% in equivalent admissions for the first quarter of 2009 compared to the first quarter of 2008.

For the first quarter of 2009, consolidated admissions declined 1.4% and same facility admissions declined 0.9% compared to the first quarter of 2008. Outpatient surgical volumes declined 1.3% on a consolidated basis and declined 0.7% on a same facility basis during the first quarter of 2009 compared to the first quarter of 2008. Consolidated inpatient surgeries declined 2.2% and same facility inpatient surgeries declined 0.5% in the first quarter of 2009 compared to the first quarter of 2008.

Salaries and benefits, as a percentage of revenues, were 39.3% in the first quarter of 2009 and 39.8% in the same quarter of 2008. Salaries and benefits per equivalent admission increased 1.5% in the first quarter of 2009 compared to the first quarter of 2008. Same facility labor rate increases averaged 4.1% for the first quarter of 2009 compared to the first quarter of 2008.

Supplies, as a percentage of revenues, were 16.3% in the first quarter of 2009 and 16.5% in the same quarter of 2008. Supply cost per equivalent admission increased 1.6% in the first quarter of 2009 compared to the first quarter of 2008. Same facility supply costs increased 3.1% for medical devices, 6.6% for blood products and 2.9% for general medical and surgical items.

Other operating expenses, as a percentage of revenues, decreased to 14.8% in the first quarter of 2009 compared to 15.5% in the first quarter of 2008. Other operating expenses is primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Other operating expenses include $39 million and $38 million of indigent care costs in certain Texas markets during the first quarters of 2009 and 2008, respectively. Provisions for losses related to professional liability risks were $45 million and $56 million for the first quarters of 2009 and 2008, respectively.

Provision for doubtful accounts, as a percentage of revenues, decreased to 10.9% in the first quarter of 2009 compared to 12.5% in the first quarter of 2008. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients. The provision for doubtful accounts decreased $81 million, but the combined self-pay revenue deductions for charity care and uninsured discounts increased $305 million for the first quarter of 2009 compared to the first quarter of 2008. At March 31, 2009, our allowance for doubtful accounts represented approximately 93% of the $5.989 billion total patient due accounts receivable balance, including accounts, net of estimated contractual discounts, related to patients for which eligibility for Medicaid coverage was being evaluated.

Equity in earnings of affiliates increased from $67 million in the first quarter of 2008 to $68 million in the first quarter of 2009. Equity in earnings of affiliates relates primarily to our Denver, Colorado market joint venture.

Depreciation and amortization decreased by $4 million, from $357 million in the first quarter of 2008 to $353 million in the first quarter of 2009.

Interest expense decreased from $530 million in the first quarter of 2008 to $471 million in the first quarter of 2009 due primarily to a reduction in the average interest rate on our outstanding debt. Our average debt balance was $26.794 billion for the first quarter of 2009 compared to $27.293 billion for the first quarter of 2008. The average interest rate for our long term debt decreased from 7.2% at March 31, 2008 to 6.9% at March 31, 2009.

During the first quarter of 2009, we recorded a net loss on sales of facilities and other investments of $5 million. During the first quarter of 2008, we recognized gains on sales of facilities of $51 million related primarily to the sale of a hospital.

27

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

Results of Operations (continued)

Quarters Ended March 31, 2009 and 2008 (continued)

During the first quarter of 2009, we recorded an asset impairment charge of $9 million to adjust the value of certain real estate investments to estimated fair value. There were no asset impairments during the first quarter of 2008.

The effective tax rate was 34.1% and 41.0% for the first quarters of 2009 and 2008, respectively. Our provision for income taxes for the first quarter of 2009 was reduced by $30 million due to the completion of certain state tax examinations, the reporting of certain federal tax adjustments to state taxing authorities and reductions to related interest accruals. Excluding the effect of these adjustments, the effective tax rate for the first quarter of 2009 would have been 39.7%.

Net income attributable to noncontrolling interests increased from $55 million for the first quarter of 2008 to $72 million for the first quarter of 2009. The increase in noncontrolling interests related primarily to growth in operating results of hospital joint ventures in two Texas markets.

Liquidity and Capital Resources

Cash provided by operating activities totaled $567 million in the first quarter of 2009 compared to $227 million in the first quarter of 2008. The $340 million increase in cash provided by operating activities in the first quarter of 2009 compared to the first quarter of 2008 related primarily to the $207 million increase in net income, the $65 million increase related to asset sales and impairments and a decrease of $48 million in interest and income tax payments. We made $490 million and $538 million in interest and net tax payments in the first quarters of 2009 and 2008, respectively. Working capital totaled $2.592 billion at March 31, 2009 and $2.391 billion at December 31, 2008.

Cash used in investing activities was $288 million in the first quarter of 2009 compared to $227 million in the first quarter of 2008. Excluding acquisitions, capital expenditures were $337 million in the first quarter of 2009 and $308 million in the first quarter of 2008. Capital expenditures are expected to approximate $1.5 billion in 2009. At March 31, 2009, there were projects under construction which had estimated additional costs to complete and equip over the next five years of approximately $1.410 billion. We expect to finance capital expenditures with internally generated and borrowed funds. We received cash flows from our investments of $76 million in the first quarter of 2009 and expended $11 million to increase investments in the first quarter of 2008. We received $5 million and $107 million from sales of hospitals and health care entities during the first quarters of 2009 and 2008, respectively.

Cash used in financing activities totaled $388 million during the first quarter of 2009, compared to cash provided by financing activities of $78 million during the first quarter of 2008. During the first quarter of 2009, cash flows from financing activities include a decrease in net borrowings of $374 million. During the first quarter of 2008, cash flows from financing activities include an increase in net borrowings of $79 million.

Due to the Recapitalization, we are a highly leveraged company with significant debt service requirements. Our debt totaled $26.567 billion at March 31, 2009. Our interest expense decreased from $530 million for the first quarter of 2008 to $471 million for the first quarter of 2009 due primarily to a reduction in the average interest rate on our outstanding debt.

In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($2.198 billion and $2.422 billion available as of March 31, 2009 and April 30, 2009, respectively) and anticipated access to public and private debt markets.

Investments of our professional liability insurance subsidiary, to maintain statutory equity and pay claims incurred prior to 2007, totaled $1.502 billion and $1.622 billion at March 31, 2009 and December 31, 2008, respectively. The insurance subsidiary maintained net reserves for professional liability risks of $772 million and $782 million at March 31, 2009 and December 31, 2008, respectively. Our facilities are insured by our wholly-

28

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

Liquidity and Capital Resources (continued)

owned insurance subsidiary for losses up to $50 million per occurrence; however, since January 2007, this coverage is subject to a $5 million per occurrence self-insured retention. Net reserves for the self-insured professional liability risks retained were $549 million and $548 million at March 31, 2009 and December 31, 2008, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $250 million. We estimate that approximately $50 million of the expected net claim payments during the next 12 months will relate to claims incurred subsequent to 2006.

During February 2009, we issued $310 million aggregate principal amount of 97/8% senior secured notes due 2017 at a price of 96.673% of their face value, resulting in approximately $300 million of gross proceeds. We used the proceeds to repay outstanding indebtedness under our senior secured term loan facilities.

During April 2009, we issued $1.500 billion aggregate principal amount of 81/2% senior secured notes due 2019 at a price of 96.755% of their face value, resulting in approximately $1.451 billion of gross proceeds. We used the proceeds to repay outstanding indebtedness under our senior secured term loan facilities.

On March 2, 2009, we amended our cash flow credit facility to allow for future issuances of additional secured notes, and we amended our $2.000 billion senior secured asset-based revolving credit facility, dated as of November 17, 2006, as amended and restated as of June 20, 2007, to allow for future issuances of additional secured notes or loans, which may include, in each case, indebtedness secured on apari passubasis or on a junior basis with the obligations under the senior secured credit facilities, so long as, in each case, the proceeds from any such issuance are used to prepay term loans under the senior secured credit facilities and certain other conditions are met.

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.

Market Risk

We are exposed to market risk related to changes in market values of securities. The investments in debt and equity securities of our wholly-owned insurance subsidiary were $1.496 billion and $6 million, respectively, at March 31, 2009. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. At March 31, 2009, we had a net unrealized loss of $41 million on the insurance subsidiary’s investment securities.

We are exposed to market risk related to market illiquidity. Liquidity of the investments in debt and equity securities of our wholly-owned insurance subsidiary could be impaired by the inability to access the capital markets. Should the wholly-owned insurance subsidiary require significant amounts of cash in excess of normal cash requirements to pay claims and other expenses on short notice, we may have difficulty selling these investments in a timely manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. At March 31, 2009, our wholly-owned insurance subsidiary had invested $532 million ($572 million par value) 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 reset through a Dutch auction every seven to 35 days. 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. These securities continue to accrue and pay interest semi-annually based on the failed auction maximum rate formulas stated in their respective Official Statements. 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.

29

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

Liquidity and Capital Resources (continued)

Market Risk (continued)

We are also exposed to market risk related to changes in interest rates, and we periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives are included in other comprehensive income.

With respect to our interest-bearing liabilities, approximately $4.359 billion of long-term debt at March 31, 2009 is subject to variable rates of interest, while the remaining balance in long-term debt of $22.208 billion at March 31, 2009 is subject to fixed rates of interest. Both the general level of interest rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities 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 7.2% at March 31, 2008 to 6.9% at March 31, 2009.

The estimated fair value of our total long-term debt was $21.816 billion at March 31, 2009. 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 $44 million. To mitigate the impact of fluctuations in interest rates, we generally target a portion of our debt portfolio to be maintained at fixed rates.

Our international operations and foreign currency denominated loans expose us to market risks associated with foreign currencies. In order to mitigate the currency exposure related to foreign currency denominated debt service obligations, we have entered into cross currency swap agreements. A cross currency swap is an agreement between two parties to exchange a stream of principal and interest payments in one currency for a stream of principal and interest payments in another currency over a specified period. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.

Pending IRS Disputes

We are currently contesting before the IRS Appeals Division, certain claimed deficiencies and adjustments proposed by the IRS in connection with its examinations of the 2003 and 2004 federal income returns for HCA and 14 affiliates that are treated as partnerships for federal income tax purposes. The disputed items include the timing of recognition of certain patient service revenues and our method for calculating the tax allowance for doubtful accounts.

Eight taxable periods of HCA and its predecessors ended in 1995 through 2002 and the 2002 taxable year of 10 affiliated partnerships, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, are pending before the IRS Examination Division or the United States Tax Court as of March 31, 2009. The IRS began an audit of the 2005 and 2006 federal income tax returns for HCA and seven affiliated partnerships during 2008.

Management believes that adequate provisions have been recorded to satisfy final resolution of the disputed issues. 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.

30

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

Operating Data

	2009		2008
CONSOLIDATING
Number of hospitals in operation at:
March 31		155		161
June 30				161
September 30				158
December 31				158
Number of freestanding outpatient surgical centers in operation at:
March 31		97		101
June 30				99
September 30				99
December 31				97
Licensed hospital beds at(a):
March 31		38,763		38,375
June 30				38,448
September 30				38,386
December 31				38,504
Weighted average licensed beds(b):
Quarter:
First		38,811		38,406
Second				38,419
Third				38,390
Fourth				38,474
Year				38,422
Average daily census(c):
Quarter:
First		21,701		22,248
Second				20,743
Third				19,932
Fourth				20,273
Year				20,795
Admissions(d):
Quarter:
First		396,200		401,700
Second				382,600
Third				377,400
Fourth				380,100
Year				1,541,800

31

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

Operating Data — (Continued)

	2009		2008
Equivalent admissions(e):
Quarter:
First		610,200		601,300
Second				587,600
Third				587,400
Fourth				587,300
Year				2,363,600
Average length of stay (days)(f):
Quarter:
First		4.9		5.0
Second				4.9
Third				4.9
Fourth				4.9
Year				4.9
Emergency room visits(g):
Quarter:
First		1,359,700		1,368,800
Second				1,297,600
Third				1,303,100
Fourth				1,276,900
Year				5,246,400
Outpatient surgeries(h):
Quarter:
First		194,400		196,900
Second				202,100
Third				196,500
Fourth				201,900
Year				797,400
Inpatient surgeries(i):
Quarter:
First		122,600		125,400
Second				125,000
Third				121,400
Fourth				121,300
Year				493,100

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

Operating Data — (Continued)

	2009			2008
Days in accounts receivable(j):
Quarter:
First		47			53
Second					51
Third					49
Fourth					48
Year					49
Gross patient revenues(k) (dollars in millions):
Quarter:
First	$	28,742		$	25,804
Second					25,065
Third					24,783
Fourth					27,191
Year					102,843
Outpatient revenues as a% of patient revenues(l):
Quarter:
First		38	%		36	%
Second					38	%
Third					39	%
Fourth					38	%
Year					37	%
NONCONSOLIDATING(m)
Number of hospitals in operation at:
March 31		8			8
June 30					8
September 30					8
December 31					8
Number of freestanding outpatient surgical centers in operation at:
March 31		8			8
June 30					8
September 30					8
December 31					8
Licensed hospital beds at:
March 31		2,367			2,337
June 30					2,337
September 30					2,367
December 31					2,367

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

Operating Data — (Continued)

BALANCE SHEET DATA

	% of Accounts Receivable
	Under 91 Days			91 — 180 Days			Over 180 Days
Accounts receivable aging at March 31, 2009:
Medicare and Medicaid		10	%		1	%		2	%
Managed care and other discounted		18			3			3
Uninsured		18			10			35
Total		46	%		14	%		40	%

(a)	Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(b)	Weighted average licensed beds represents the average number of licensed beds, weighted based on periods owned.
(c)	Represents the average number of patients in our hospital beds each day.
(d)	Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.
(e)	Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and then dividing the resulting amount by gross inpatient revenues. The equivalent admissions computation “equates” outpatient revenues to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume.
(f)	Represents the average number of days admitted patients stay in our hospitals.
(g)	Represents the number of patients treated in our emergency rooms.
(h)	Represents the number of surgeries performed on patients who were not admitted to our hospitals. Pain management and endoscopy procedures are not included in outpatient surgeries.
(i)	Represents the number of surgeries performed on patients who have been admitted to our hospitals. Pain management and endoscopy procedures are not included in inpatient surgeries.
(j)	Days in accounts receivable are calculated by dividing the revenues for the period by the days in the period (revenues per day). Accounts receivable, net of allowance for doubtful accounts, at the end of the period is then divided by the revenues per day.
(k)	Gross patient revenues are based upon our standard charge listing. Gross charges/revenues typically do not reflect what our hospital facilities are paid. Gross charges/revenues are reduced by contractual adjustments, discounts and charity care to determine reported revenues.
(l)	Represents the percentage of patient revenues related to patients who are not admitted to our hospitals.
(m)	The nonconsolidating facilities include facilities operated through 50/50 joint ventures which we do not control and are accounted for using the equity method of accounting.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

HCA’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of HCA’s disclosure controls and procedures (as defined 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 our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Part II: Other Information

Item 1:   Legal Proceedings

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

Corporate Integrity Agreement

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. Our CIA expired on January 24, 2009. 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 tam actions. Sanctions imposed against us as a result of such actions could have a material, adverse effect on our results of operations or financial position.

ERISA Litigation

On November 22, 2005, Brenda Thurman, a former employee of an HCA affiliate, filed a complaint in the United States District Court for the Middle District of Tennessee on behalf of herself, the HCA Savings and Retirement Program (the “Plan”), and a class of participants in the Plan who held an interest in our common stock, against our Chairman and Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer, and other unnamed individuals. The lawsuit, filed under sections 502(a)(2) and 502(a)(3) of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §§ 1132(a)(2) and (3), alleges that defendants breached their fiduciary duties owed to the Plan and to plan participants and seeks monetary damages and injunctions and other relief.

On January 13, 2006, the court signed an order staying all proceedings and discovery in this matter, pending resolution of a motion to dismiss the consolidated amended complaint in the related federal securities class action against HCA. On January 18, 2006, the magistrate judge signed an order (1) consolidating Thurman’s cause of

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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. The court approved a final settlement of this lawsuit in March 2009.

Merger Litigation in State Court

On October 23, 2006, the Foundation for Seacoast Health (the “Foundation”) 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 for the year ended December 31, 2008, 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, except as set forth below.

Changes in governmental programs may reduce our revenues.

A significant portion of our patient volumes is derived from government health care programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. We derived approximately 59% of our admissions from the Medicare and Medicaid programs in 2008. In recent years, legislative and regulatory changes have resulted in limitations on and, in some cases, reductions in levels of payments to health care providers for certain services under these government programs. National health care

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reform is a focus at the federal level, and we anticipate that it will remain a focus in the near term. Several states are also considering health care reform measures. This focus on health care reform may increase the likelihood of significant changes affecting government health care programs. Possible future changes in the Medicare, Medicaid, and other state programs, may reduce reimbursements to health care providers and insurers and may also increase our operating costs, which could reduce our profitability.

CMS issued final regulations effective January 1, 2008 that increased ASC payment groups from nine clinically disparate payment groups to an extensive list of covered surgical procedures among the APCs used under the outpatient PPS for these surgical services. CMS estimates that the payment rates for procedures performed in an ASC setting equal 65% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. The final regulation establishes a four-year transition period for implementing the revised payment rates. This regulation significantly expands the number of procedures that Medicare reimburses if performed in an ASC and limits ASC reimbursement for procedures commonly performed in physicians’ offices. More Medicare procedures that are now performed in hospitals, such as ours, may be moved to ASCs, reducing surgical volume in our hospitals. Also, more Medicare procedures that are now performed in ASCs, such as ours, may be moved to physicians’ offices. Commercial third-party payers may adopt similar policies.

On August 22, 2007, CMS issued a final rule for federal fiscal year 2008 for hospital inpatient PPS. This rule adopts a two-year implementation of MS-DRGs, a Medicare severity-adjusted diagnosis related group system. This change represents a refinement to the existing Medicare DRG system. Realignments in the DRG system could impact the margins we receive for certain services. For federal fiscal year 2009, CMS has provided a 3.6% market basket update for hospitals that submit certain quality patient care indicators and a 1.6% update for hospitals that do not submit this data. While we will endeavor to comply with all quality data submission requirements, our submissions may not be deemed timely or sufficient to entitle us to the full market basket adjustment for all of our hospitals. Medicare payments to hospitals in fiscal years 2009 and 2008 have been reduced to eliminate what CMS estimates will be the effect of coding or classifications changes as a result of hospitals implementing the MS-DRG system. CMS may retrospectively determine if the adjustment levels for federal fiscal years 2009 and 2008 were adequate and may impose an adjustment in future years if CMS finds that the adjustment was inadequate. Additionally, Medicare payments to hospitals are subject to a number of other adjustments, and the actual impact on payments to specific hospitals may vary. In some cases, commercial third-party payers and other payers such as some state Medicaid programs rely on all or portions of the Medicare DRG system to determine payment rates, and adjustments that negatively impact Medicare payments may also negatively impact payments from Medicaid programs or commercial third-party payers and other payers. CMS announced proposed rates and payment adjustments for the hospital inpatient PPS for federal fiscal year 2010 that, if finalized, may reduce payments to hospitals. If implemented, these payment adjustments may adversely affect the results of our operations.

Since most states must operate with balanced budgets and since the Medicaid program is often the state’s largest program, states can be expected to adopt or consider adopting legislation designed to reduce their Medicaid expenditures. The current economic downturn has increased the budgetary pressures on most states, and these budgetary pressures have resulted and likely will continue to result in decreased spending for Medicaid programs in many states. Further, many states have also adopted, or are considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programsand/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems.

On May 1, 2009, the Department of Defense implemented a prospective payment system for hospital outpatient services furnished to TRICARE beneficiaries similar to that utilized for services furnished to Medicare beneficiaries. Because the Medicare outpatient prospective payment system APC rates have historically been below TRICARE rates, the adoption of this payment methodology for TRICARE beneficiaries will reduce our reimbursement. This change in TRICARE will have a material impact on our revenues from this program; however, TRICARE outpatient services do not represent a significant portion of our patient volumes. The TRICARE outpatient payment rule was reopened for comment during the first quarter of 2009, but only minor modifications to the new outpatient payment system were made.

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Changes in laws or regulations regarding government health programs or other changes in the administration of government health programs could have a material, adverse effect on our financial position and results of operations.

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

During the quarter ended March 31, 2009, HCA issued 7,026 shares of common stock in connection with the cashless exercise of stock options for aggregate consideration of $89,582 resulting in 3,867 net settled shares. HCA also issued 13,092 shares of common stock in connection with the exercise of stock options for aggregate consideration of $166,923. 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 January 1, 2009 through March 31, 2009.

							Approximate
					Total Number		Dollar Value of
					of Shares		Shares That
					Purchased as		May Yet Be
					Part of		Purchased
					Publicly		Under Publicly
	Total Number				Announced		Announced
	of Shares		Average Price		Plans or		Plans or
Period	Purchased		Paid per Share		Programs		Programs
January 1, 2009 through January 31, 2009		700	$	55.86		—	$	—
February 1, 2009 through February 28, 2009		534	$	51.17		—		—
March 1, 2009 through March 31, 2009		5,327	$	51.17		—		—
Total for First Quarter 2009		6,561	$	51.67		—	$	—

During the first quarter of 2009, we purchased 6,561 shares pursuant to the terms of the Management Stockholders Agreementand/or separation agreements and stock purchase agreements between former employees and the Company.

Item 6:   Exhibits

(a) List of Exhibits:

Exhibit 31.1	—	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	—	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

HCA INC.

By:  /s/  R. Milton Johnson

R. Milton Johnson

Executive Vice President and

Chief Financial Officer

Date: May 14, 2009

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