IASIS HEALTHCARE LLC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 The following discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated financial statements, the notes to our audited consolidated financial statements, and the other financial information appearing elsewhere in this report. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes. It includes the following sections:      •   Forward Looking Statements;       •   Executive Overview;       •   Critical Accounting Policies and Estimates;       •   Results of Operations Summary; and                                            48 

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• Liquidity and Capital Resources.

Data for the fiscal years ended September 30, 2012, 2011 and 2010, has been derived from our audited consolidated financial statements. References herein to "we," "us," "our" and "our company" are to IASIS Healthcare LLC and its subsidiaries, unless indicated otherwise.

FORWARD LOOKING STATEMENTS

  Some of the statements we make in this Annual Report on Form 10-K are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy (including possible acquisitions and dispositions), financing needs, projections of revenue, income or loss, capital expenditures and future operations. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements.  Those risks and uncertainties include, among others, the risks and uncertainties discussed under Item 1A, "Risk Factors" in this Annual Report on Form 10-K. Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.  EXECUTIVE OVERVIEW  We are a leading provider of high quality, affordable healthcare services primarily in high-growth urban and suburban markets. As of September 30, 2012, we owned or leased 19 acute care hospital facilities and one behavioral health hospital facility with a total of 4,461 licensed beds, several outpatient service facilities and more than 160 physician clinics. We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. We operate in various regions, including:      •   Salt Lake City, Utah;       •   Phoenix, Arizona;       •   Tampa-St. Petersburg, Florida;       •   five cities in Texas, including Houston and San Antonio; and       •   West Monroe, Louisiana.   We also own and operate Health Choice, a Medicaid and Medicare managed health plan headquartered in Phoenix, Arizona, that serves more than 178,000 members in Arizona and Utah.  During August 2012, we entered into a wide-ranging partnership with Aurora, which includes the formation of a development joint venture, Aurora IASIS Health Partners, to pursue healthcare acquisitions, new construction and development of clinical services. The initial focus of the partnership will be on Aurora's existing markets in Wisconsin and northern Illinois. Headquartered in Milwaukee, Wisconsin, Aurora is one of the nation's largest integrated not-for-profit systems. We believe this joint venture creates new development and affiliation opportunities for us, supporting the strategic growth initiatives of both systems and allowing each to leverage the other's operational and clinical expertise.  

Aurora IASIS Health Partners is developing a cancer care center in Kenosha, Wisconsin, which is located in close proximity to Aurora Medical Center-Kenosha. The 11,000 square foot facility will expand patient access to outpatient radiological oncology services in southeastern Wisconsin and northern Illinois.

  In June 2012, we announced that $115.2 million in cash remains on the balance sheet of our sole owner and parent company, IAS, to be used by us to fund potential acquisitions and development projects, and for general corporate purposes. IAS had received $230.0 million in connection with the refinancing of our indebtedness in May 2011 and used $115.0 million of such cash in June 2012, to redeem all of its remaining issued and outstanding Series A Cumulative Convertible Preferred Stock and to pay a dividend to its common stockholders. The combination of our capital, along with that of IAS, and access to other sources of funding, continues to provide a platform for our future growth through acquisitions and other development projects.                                           49

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  On April 5, 2012, a settlement agreement ("Rural Floor Settlement") was signed between CMS and a large number of healthcare service providers, including our hospitals. The Rural Floor Settlement is intended to resolve all claims that have been brought or could have been brought relating to CMS' calculation of the rural floor budget neutrality adjustment that was created by the Balanced Budget Act of 1997 for federal fiscal year 1998 through and including federal fiscal year 2011. As a result of the Rural Floor Settlement, we recognized $15.4 million of additional acute care revenue and $4.1 million of related legal and consulting fees, which are included in other operating expenses, for the year ended September 30, 2012. Also included in acute care revenue for the year ended September 30, 2012, are unfavorable adjustments totaling $4.3 million related to the newly issued Supplemental Security Income ("SSI") ratios utilized for calculating Medicare DSH reimbursement for federal fiscal years 2006 through 2009.  Significant Industry Trends  The following sections discuss recent trends that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.  

The Impact of Health Reform

  The Health Reform Law changes how healthcare services are covered, delivered, and reimbursed. The law expands coverage of previously uninsured individuals, largely through expansion of Medicaid coverage and establishment of Exchanges where individuals may purchase coverage. The Health Reform Law also contains an "individual mandate" that imposes financial penalties on individuals who fail to carry insurance coverage and employers that do not provide health insurance coverage. In addition, the Health Reform Law reforms certain aspects of health insurance, reduces government reimbursement rates, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, places restrictions on physician-owned hospitals and contains provisions intended to strengthen fraud and abuse enforcement.  On June 28, 2012, the U.S. Supreme Court upheld the constitutionality of the individual mandate provisions of the Health Reform Law, but struck down provisions that would have allowed the Department to penalize states that do not implement the Medicaid expansion provisions of the law with the loss of existing federal Medicaid funding. As a result, states may choose not to implement the Medicaid expansion provisions of the Health Reform Law without losing existing funding. A number of U.S. governors, including those of states in which we operate, have stated that they will oppose their state's participation in the expanded Medicaid program. However, these statements are not legally binding and may be subject to change.  Because of the many variables involved, including the law's complexity, the lack of implementing regulations or interpretive guidance, gradual and potentially delayed implementation and possible amendment, the impact of the Health Reform Law, including how individuals and businesses will respond to the new choices and obligations under the law, is not yet fully known. We believe, however, that trends toward pay-for-performance reimbursement models focused on quality, cost control and clinically integrated healthcare delivery, which are encouraged by the Health Reform Law, are taking hold among private health insurers and will continue to do so.  Payor Mix Shift  Like others in the hospital industry, we have experienced a shift in our patient volumes and revenue from commercial and managed care payors to self-pay and Medicaid, including managed Medicaid. This has resulted in pressures on pricing and operating margins created from providing the same level of healthcare service, but for less reimbursement. This shift is reflective of continued high unemployment, the resulting increases in both states' Medicaid rolls and the uninsured population, and employers' cost shifting strategies, which has resulted in higher co-pays and deductibles. Relatedly, we have recently experienced growth in our self-pay revenue, resulting from an increase in the volume of uninsured patients, particularly in Arizona where the state has implemented measures to reduce Medicaid enrollment. We believe the decline in managed care volume and revenue mix is not only indicative of the impact of a depressed labor market, but also utilization behavior of the insured population resulting from higher deductible and co-insurance plans implemented by employers, which, in turn, has resulted in the deferral of elective and non-emergent procedures. Given the high rate of unemployment and its impact on the economy, particularly in the markets we serve, we expect the elevated levels in our self-pay and Medicaid payor mixes to continue until the U.S. economy experiences an economic recovery that includes significant sustained job growth and a meaningful decline in unemployment.                                           50

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State Medicaid Budgets

  The states in which we operate have experienced budget constraints as a result of increased costs and lower than expected tax collections. Many states have experienced or project near term shortfalls in their budgets, and economic conditions may increase these budget pressures. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. The states in which we operate, including Texas and Arizona, continue to respond to these budget concerns, by decreasing funding for Medicaid and other healthcare programs or making structural changes that have resulted in a reduction in hospital reimbursement. In addition, many states are seeking waivers from CMS in order to implement or expand managed Medicaid programs. For example, Florida legislation has established a goal of statewide implementation of Medicaid managed care. In December 2011, CMS approved, with certain stipulations, a two-year extension of Florida's five-county Medicaid managed care pilot program. In addition, another waiver request, which would have allowed Florida to expand its Medicaid managed care program statewide, was partially denied by CMS. A portion of that request that could lead to a statewide expansion is pending. The Texas legislature and the THHSC have recommended expanding Medicaid managed care enrollment in the state. In December 2011, CMS approved a five-year Medicaid waiver that allows Texas to expand its Medicaid managed care program while preserving hospital funding, provides incentive payments for healthcare improvements and directs more funding to hospitals that serve large numbers of uninsured patients.  Effective September 1, 2011, the THHSC implemented a statewide acute care hospital inpatient Standard Dollar Amount ("SDA") rate, along with an 8% reduction in Medicaid hospital outpatient reimbursement. The THHSC also rebased all MS-DRG relative weights concurrent with this SDA rate change. The new statewide SDA rate includes certain add-on adjustments for geographic wage-index, indirect medical education and trauma services. However, the new statewide SDA rate does not include add-on adjustments for higher acuity services, such as neonatal and other women's services, which are utilized by a majority of the Medicaid patients we serve at our Texas hospitals.  In April 2012, the THHSC released proposed rules to change the Texas Medicaid Disproportionate Share Hospital ("Texas Medicaid DSH") methodology. While changes to the Texas Medicaid DSH methodology have been proposed, details regarding its computation and funding for the state's upcoming fiscal year have not yet been identified. Because deliberations regarding the Texas Medicaid DSH program are ongoing, we are unable to estimate the financial impact, if any, of proposed program changes may have on our result of operations. During the fiscal year 2012, we recognized $24.7 million in Texas Medicaid DSH revenues.  In April 2011, the state of Arizona reduced funding for Medicaid through the elimination of Medicaid coverage for some services and a rate cut of up to 5% for all Medicaid providers. The state of Arizona then enacted an additional 5% cut to provider reimbursement effective October 1, 2011, and implemented a plan to reduce approximately 120,000 eligible Medicaid beneficiaries, which represents approximately 9.5% of the total Medicaid population in the state and includes approximately 105,000 childless adults, both of which were approved by CMS. Additionally, AHCCCS implemented a tiered profit sharing plan, which is administered through an annual reconciliation process with participating managed Medicaid health plans and has effectively limited Health Choice's net profit margins. If additional Medicaid spending cuts or other program changes are implemented in the future in Arizona or other states in which we operate, our revenue and earnings could be significantly impacted.  

Value-Based Reimbursement

  The trend in the healthcare industry continues towards value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting and financial incentives tied to the quality and efficiency of care provided by facilities. The Health Reform Law expands the use of value-based purchasing initiatives in federal healthcare programs. We expect programs of this type to become more common in the healthcare industry.  Medicare requires providers to report certain quality measures in order to receive full reimbursement increases for inpatient and outpatient procedures that previously were awarded automatically. CMS has expanded, through a series of rulemakings, the number of patient care indicators that hospitals must report. Additionally, we anticipate that CMS will continue to expand the number of inpatient and outpatient quality measures. We have invested significant capital and resources in the implementation of our advanced clinical system that assists us in monitoring and reporting these quality measures. CMS makes the data submitted by hospitals, including our hospitals, public on its website.  The Health Reform Law requires the Department to implement a value-based purchasing program for inpatient hospital services. Beginning in federal fiscal year 2013, the Department will reduce inpatient hospital payments for all discharges by a percentage specified by statute and pool the total amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by the Department. In addition, the Health Reform Law contains a number of other provisions that further tie reimbursement to quality and efficiency. For example, hospitals that have "excess readmissions" for specified conditions will receive reduced reimbursement. Medicare also no longer pays hospitals additional amounts for the treatment of certain hospital-acquired conditions, also known as HACs, unless the conditions were present at admission. Further, beginning in federal fiscal year 2015, hospitals that rank in the worst 25% of all hospitals nationally for HACs in the previous year will receive reduced Medicare reimbursements. The Health Reform Law also prohibits the use of federal funds under the Medicaid program to reimburse providers for treating certain provider-preventable conditions.                                           51 

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  In addition, managed care organizations are implementing programs that condition payment on performance against specified measures. The quality measurement criteria used by managed care and commercial payors may be similar to or even more stringent than Medicare requirements.  We expect these trends towards value-based purchasing of healthcare services by Medicare and other payors to continue. Because of these trends, if we are unable to meet or exceed quality of care standards in our facilities, our operating results could be significantly impacted in the future.  

Physician Alignment and Clinical Integration

  In an effort to meet community needs and address coverage issues, we continue to seek alignment with physicians through various recruitment and employment strategies, as well as alternative means of alignment such as our formation of provider networks in certain markets. Our ability to attract and retain skilled physicians to our hospitals is critical to our success and is affected by the quality of care at our hospitals. We believe intense efforts focusing on quality of care will enhance our ability to recruit and retain the skilled physicians necessary to make our hospitals successful. Furthermore, we believe that physician alignment promotes clinical integration, enhancing quality of care and making us more efficient and competitive in a healthcare environment trending toward value-based purchasing and pay-for-performance.  We experience certain risks associated with the integration of medical staffs at our hospitals. As we continue to focus on our physician employment strategy, we face significant competition for skilled physicians in certain of our markets as more hospital providers adopt a physician staffing model approach, coupled with a general shortage of physicians across most specialties. This increased competition has resulted in efforts by managed care organizations to align with certain provider networks in the markets in which we operate. While we expect that employing physicians should provide relief on cost pressures associated with on-call coverage and other professional fees, we anticipate incurring additional labor and other start-up related costs as we continue the integration of employed physicians and their related support staff. In certain markets, we have formed provider networks that include both employed and non-affiliated physicians, providing the infrastructure through which we are able to contract more efficiently with commercial payors, position ourselves for value based reimbursement and promote clinical integration.  We also face risk from competition for outpatient business. We expect to mitigate this risk through continued focus on our physician employment strategy, the development of new access points of care, our commitment to capital investment in our hospitals, including updated technology and equipment, and our commitment to our quality of care initiatives that some competitors, including individual physicians or physician groups, may not be equipped to implement.  

Uncompensated Care

  Like others in the hospital industry, we continue to experience high levels of uncompensated care, including discounts to the uninsured, bad debts and charity care. These elevated levels are driven by the number of uninsured and under-insured patients seeking care at our hospitals, particularly in Arizona where the state has taken measures to reduce its Medicaid enrollment. During the year ended September 30, 2012, our self-pay admissions represented 7.7% of our total admissions, compared to 6.7% in the prior year. The cost of our uncompensated care is also impacted by the higher acuity levels at which these patients are presenting for treatment, which is primarily resulting from economic pressures and their related decisions to defer care. In addition, as a result of high unemployment and its continued impact on the economy, we believe that our hospitals may continue to experience high levels of or possibly growth in the level of uncompensated care they provide. During the year ended September 30, 2012, our uncompensated care as a percentage of acute care revenue was 21.5%, compared to 18.8% in the prior year.  We continue to monitor our self-pay admissions on a daily basis and continue to focus on the efficiency of our emergency rooms, point-of-service cash collections, Medicaid eligibility automation and process-flow improvements. While we continue to be successful at qualifying many uninsured patients for Medicaid or other third-party coverage, which has helped to alleviate some of the pressure created from the growth in our uncompensated care, we continue to experience delays associated with the administrative functions of the Medicaid qualification process at the state levels. These delays are not indicative of eligibility issues, but rather staffing cut-backs as states continue working to address their budgetary issues.                                           52

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We anticipate that if we experience further growth in uninsured volume and revenue over the near-term, including increased acuity levels and continued increases in co-payments and deductibles for insured patients, our uncompensated care may increase and our results of operations could be adversely affected.

  The percentages of our insured and uninsured net hospital receivables are summarized as follows:                                         September 30,        September 30,                                          2012                 2011             Insured receivables                72.5 %               86.4 %             Uninsured receivables              27.5 %               13.6 %              Total                             100.0 %              100.0 %    The percentages of hospital receivables in summarized aging categories are as follows:                                      September 30,        September 30,                                       2012                 2011                 0 to 90 days                63.4 %               68.1 %                 91 to 180 days              19.2 %               19.3 %                 Over 180 days               17.4 %               12.6 %                  Total                      100.0 %              100.0 %   

We have experienced growth in our uninsured gross hospital receivables, including balances over 180 days. These increases are primarily attributable to the growth in our uninsured volumes and revenue, including the impact of a mandate by the state of Arizona to reduce its Medicaid enrollees, which has resulted in an increase in uninsured receivables.

Revenue and Volume Trends

  Net revenue for the year ended September 30, 2012, decreased $0.8 million compared to the prior year. Net revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts as required by newly adopted authoritative accounting guidance, and premium revenue. Acute care revenue, which includes the impact of the St. Joseph acquisition effective May 1, 2011, contributed $187.3 million to the increase in net revenue for the year ended September 30, 2012, compared to the prior year, while premium revenue at Health Choice declined $188.2 million compared to the prior year.  

Acute Care Revenue

  Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals' net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals' established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Due to adoption of new accounting guidance effective October 1, 2011, net patient revenue is now reported net of the provision for doubtful accounts. Other revenue includes medical office building rental income and other miscellaneous revenue.  Certain of our acute care hospitals receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Participation in indigent care affiliation agreements by our Texas hospitals has resulted in additional acute care revenue by virtue of the hospitals' entitlement to supplemental Medicaid inpatient reimbursement. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs for the year ended September 30, 2012, was $87.5 million, compared to $82.9 million in the prior year. The Texas private supplemental Medicaid reimbursement programs are currently being reviewed by the THHSC, which, on December 12, 2011, received CMS approval of a five-year waiver allowing Texas to continue receiving supplemental Medicaid reimbursement while expanding its Medicaid</org> managed care program. Under the Medicaid waiver, funds will be distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination will be controlled primarily by government-owned public hospitals that serve the surrounding geographic areas. Due to the complexities associated with implementation of the waiver's underlying rules and regulations and the nature of ongoing deliberations with advocacy groups and public hospitals, we are unable to estimate the impact, if any, this will have on our revenue and earnings.                                           53 

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  ARRA provides for Medicare and Medicaid incentives that began in calendar year 2011 for eligible hospitals and professionals that implement certified EHR technology and adopt the related meaningful use requirements. We recognize income related to the Medicare or Medicaid incentive payments as we are able to satisfy all appropriate contingencies, which includes completing attestations as to our eligible hospitals adopting, implementing or demonstrating meaningful use of certified EHR technology, and additionally for Medicare incentive payments, deferring income until the related Medicare fiscal year has passed and cost report information used to determine the final amount of reimbursement is known. Included in our audited consolidated statements of operations for the years ended September 30, 2012 and 2011, is $23.2 million and $9.0 million, respectively, of operating income related to Medicare and Medicaid EHR incentives. We have incurred and will continue to incur both capital costs and operating expenses in order to implement our certified EHR technology and meet meaningful use requirements. These costs and expenses are projected to continue during all stages of our certified EHR technology and meaningful use implementation. As a result, the timing of the expense recognition will not correlate with the receipt of the incentive payments or the recognition of operating income.  Admissions increased 9.3% for the year ended September 30, 2012, compared to the prior year. Adjusted admissions increased 9.9% for the year ended September 30, 2012, compared to the prior year. On a same-facility basis, admissions increased 1.3% for the year ended September 30, 2012, while adjusted admissions increased 2.9% for the year ended September 30, 2012, each compared to the prior year. On a same-facility basis, our volume has benefited from our physician alignment strategies, investment in outpatient access points of care and growth in sub-acute service lines, which includes an increase in psychiatric services of 8.0% for the year ended September 30, 2012, compared to the prior year. These improvements continue to be negatively impacted, in part, by an overall industry-wide decline in obstetric related services, a light influenza season, high unemployment and patient decisions to defer or cancel elective procedures, general primary care and other non-emergent healthcare procedures until their conditions become more acute. The deferral of non-emergent procedures has been facilitated by the current economic environment and an increase in the number of high deductible employer-sponsored health plans, which ultimately shifts more of the medical cost responsibility onto the patient.  We believe our volumes over the long-term will grow as a result of our business strategies, including the strategic deployment of capital, the continued investment in our physician alignment strategies, the development of increased access points of care, including physician clinics, urgent care centers, outpatient imaging centers and ambulatory surgery centers, our increased marketing efforts to promote our commitment to quality and patient satisfaction, and the general aging of the population.  

The following table provides the sources of our hospitals' net patient revenue before the provision for bad debts by payor:

                                                   Year Ended September 30,                                               2012         2011        2010             Medicare                             22.1 %      24.6 %      23.4 %             Managed Medicare                      9.1         7.9         8.5             Medicaid and managed Medicaid        14.7        14.7        15.7             Managed care                         37.3        40.2        40.2             Self-pay                             16.8        12.6        12.2              Total                               100.0 %     100.0 %     100.0 %    The increase in our self-pay revenue as a percentage of the total is the result of growth in our uninsured volumes and revenue, which have increased for the year ended September 30, 2012, compared to the prior years. This has been significantly impacted by the efforts of the state of Arizona to reduce its Medicaid enrollees.  Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 1.2% for the year ended September 30, 2012, compared to the prior year. On a same-facility basis, net patient revenue per adjusted admission increased 1.8% for the year ended September 30, 2012, compared to the prior year. Our pricing metrics for the year ended September 30, 2012, continue to benefit from rate increases from our managed care payors. However, our overall pricing has been negatively affected by the impact of high unemployment and other industry pressures, which has resulted in increased bad debts, reductions in Medicaid funding as states address their budgeting issues by implementing rate cuts on providers and reductions in Medicaid eligible beneficiaries. As states continue working through their budgetary issues, any additional cuts to Medicaid funding or structural changes to Medicaid programs that reduce eligibility would negatively impact our future pricing and earnings.                                           54 

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  See "Item 1 - Business - Sources of Acute Care Revenue" and "Item 1 - Business - Government Regulation and Other Factors" included elsewhere in this Annual Report on Form 10-K for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In those sections, we also discuss the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by CMS that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also addressed.  

Premium Revenue

  Premium revenue generated by Health Choice represented 22.4% of our consolidated net revenue for the year ended September 30, 2012, compared to 29.9% in the prior year. The decline in premium revenue as a percentage of consolidated net revenue is the result of our recent St. Joseph acquisition and a loss of covered lives in our Medicaid product line, which have declined approximately 9.8% since October 1, 2011. The loss in membership in our Medicaid product line is the result of efforts by the state of Arizona to balance its budget, which included the July 1, 2011, implementation of a plan to reduce its Medicaid enrollees, particularly related to childless adults.  Health Choice operates in what is currently a difficult state budgetary environment in Arizona. At the start of our 2012 fiscal year, AHCCCS implemented a tiered profit sharing plan, which followed two separate 5% cuts in hospital reimbursement rates for services provided to state Medicaid enrollees. AHCCCS could take further actions in the near term that could materially adversely impact our operating results and cash flows, including other reimbursement rate reductions, enrollment reductions, capitation payment deferrals, covered services reductions or limitations or other steps to reduce program expenditures.  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

  Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our financial statements, we make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.  We have determined an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and (2) changes in the estimate would have a material impact on our financial condition or results of operations. There are other items within our financial statements that require estimation but are not deemed critical as defined herein. Changes in estimates used in these and other items could have a material impact on our financial statements.  Allowance for Doubtful Accounts. Our ability to collect outstanding receivables from third-party payors and patients is critical to our operating performance and cash flows. The primary collection risk lies with uninsured patient accounts or patient accounts for which primary insurance has paid but a patient portion remains outstanding. The provision for bad debts and the allowance for doubtful accounts relate primarily to amounts due directly from patients. Our estimation of the allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of our collection efforts. Our policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. We monitor our accounts receivable balances and the effectiveness of our reserve policies on a monthly basis and review various analytics to support the basis for our estimates. These efforts primarily consist of reviewing the following:         •   Historical write-off and collection experience using a hindsight or          look-back approach;    

• Revenue and volume trends by payor, particularly the self-pay components;

         •   Changes in the aging and payor mix of accounts receivable, including

         increased focus on accounts due from the uninsured and accounts that          represent co-payments and deductibles due from patients;    

• Cash collections as a percentage of net patient revenue less bad debt

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  Table of Contents   •   Trending of days revenue in accounts receivable; and       •   Various allowance coverage statistics.   We regularly perform hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of our process for estimating the allowance for doubtful accounts. We do not pursue collection of amounts related to patients who qualify for charity care under our guidelines. Charity care accounts are deducted from gross revenue and do not affect the provision for bad debts.  At September 30, 2012, our self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $328.5 million and our allowance for doubtful accounts was $235.2 million. Excluding third-party settlement balances, same-facility days revenue in accounts receivable were 55 at September 30, 2012, compared to 48 days at September 30, 2011. For the year ended September 30, 2012, the provision for bad debts was 13.8% of acute care revenue before provision for bad debts, compared to 12.0% in the prior year. Significant changes in payor mix or business office operations could have a significant impact on the provision for bad debts, as well as our results of operations and cash flows.  Allowance for Contractual Discounts and Settlement Estimates. We derive a significant portion of our net patient revenue from Medicare, Medicaid and managed care payors that receive discounts from our standard charges. For the years ended September 30, 2012, 2011 and 2010, Medicare, Medicaid and managed care revenue together accounted for 83.2%, 87.4% and 87.8%, respectively, of our hospitals' net patient revenue.  We estimate contractual discounts and allowances based upon payment terms outlined in our managed care contracts, by federal and state regulations for the Medicare and various Medicaid programs, and in accordance with terms of our uninsured discount program. Contractual discounts for most of our patient revenue are determined by an automated process that establishes the discount on a patient-by-patient basis. The payment terms or fee schedules for most payors have been entered into our patient accounting systems. Automated (system-generated) contractual discounts are recorded, at the time a patient account is billed, based upon the system-loaded payment terms. In certain instances for payors that are not significant or who have not entered into a contract with us, we make manual estimates in determining contractual allowances based upon historical collection rates. At the end of each month, we estimate contractual allowances for all unbilled accounts based on payor-specific six-month average contractual discount rates.  For governmental payors such as Medicare and Medicaid, we determine contractual discounts or allowances based upon the program's reimbursement (payment) methodology (i.e. either prospectively determined or retrospectively determined based on costs as defined by the government payor). These contractual discounts are determined by an automated process in a manner similar to the process used for managed care revenue. Under prospective payment programs, we record contractual discounts based upon predetermined reimbursement rates. For retrospective cost-based revenues, which are less prevalent, we estimate contractual allowances based upon historical and current factors which are adjusted as necessary in future periods, when final settlements of filed cost reports are received. Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, excluding the $11.1 million net impact of the Rural Floor Settlement and the newly issued SSI ratios in fiscal year 2012, resulted in an increase in acute care revenue of $5.1 million, $2.4 million and $5.2 million for the years ended September 30, 2012, 2011 and 2010, respectively.  Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and renewals. All contractual adjustments, regardless of type of payor or method of calculation, are reviewed and compared to actual payment experience on an individual patient account basis. Discrepancies between expected and actual payments are reviewed, and as necessary, appropriate corrections to the patient accounts are made to reflect actual payments received. If a discrepancy exists between the payment terms loaded into the contract management system and the actual discount based on payments received, the system is updated accordingly to ensure appropriate discounting of future charges.  Additionally, we rely on other analytical tools to ensure our contractual discounts are reasonably estimated. These include, but are not limited to, monitoring of collection experience by payor, reviewing total patient collections as a percentage of net patient revenue (adjusted for the provision for bad debts) on a trailing twelve-month basis, gross to net patient revenue comparisons, contractual allowance metrics, etc. As well, patient accounts are continually reviewed to ensure all patient accounts reflect either system-generated discounts or estimated contractual allowances, as necessary.                                           56 

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Medicare and Medicaid regulations and various managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our healthcare facilities, requiring complex calculations and assumptions which are subject to interpretation. Additionally, the services authorized and provided and resulting reimbursement are often subject to interpretation. These interpretations sometimes result in payments that differ from our estimates. Additionally, updates to regulations and contract renegotiations occur frequently, necessitating continual review and assessment of the estimation process by management. We have made significant investments in our patient accounting information systems, human resources and internal controls, which we believe greatly reduces the likelihood of a significant variance occurring between the recorded and estimated contractual discounts. Given that most of our contractual discounts are pre-defined or contractually based, and as a result of continual internal monitoring processes and our use of analytical tools, we believe the aggregate differences between amounts recorded for initial contractual discounts and final contractual discounts resulting from payments received are not significant. Finally, we believe that having a wide variety and large number of managed care contracts that are subject to review and administration on a hospital-by-hospital basis minimizes the impact on the Company's net revenue of any imprecision in recorded contractual discounts caused by the system-load of payment terms of a particular payor. We believe that our systems and processes, as well as other items discussed, provide reasonable assurance that any change in estimate related to contractual discounts is immaterial to our financial position, results of operations and cash flows.  Insurance Reserves. Given the nature of our operating environment, we may become subject to medical malpractice or workers' compensation claims or lawsuits. We maintain third-party insurance coverage for individual malpractice and workers' compensation claims to mitigate a portion of this risk. In addition, we maintain excess coverage limiting our exposure to an aggregate annual amount for claims. We estimate our reserve for self-insured professional and general liability and workers' compensation risks using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At September 30, 2012 and 2011, our professional and general liability accrual for asserted and unasserted claims was $76.9 million and $60.1 million, respectively. For the year ended September 30, 2012, our total premiums and self-insured retention cost for professional and general liability insurance was $29.7 million, compared with $28.6 million in the prior year.  The estimated accrual for medical malpractice and workers' compensation claims could be significantly affected should current and future occurrences differ from historical claims trends. The estimation process is also complicated by the complexity and changing nature of tort reform in the states in which we operate. While we monitor current claims closely and consider outcomes when estimating our insurance accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in the estimates.  Valuations from our independent actuary for professional and general liability losses resulted in a change in related estimates for prior years which decreased professional and general liability expense by the following amounts (in millions):                          Year ended September 30, 2012   $ (0.9 )                       Year ended    $ (0.1 )                       Year ended September 30, 2010   $ (2.4 )   Our estimate of the reserve for professional and general liability claims is based upon actuarial calculations that are completed semi-annually. The changes in estimates noted above were recognized in the periods in which the independent actuarial calculations were received. The key assumptions underlying the development of our estimate (loss development, trends and increased limits factors) have not changed materially, as they are largely based upon professional liability insurance industry data published by the Insurance Services Office, a leading provider of data, underwriting, risk management and legal/regulatory services. The reductions in professional and general liability expense related to changes in prior year estimates reflected above for the years ended September 30, 2012, 2011 and 2010, are the result of better than expected claims experience as compared to the industry benchmarks for loss development included in the original actuarial estimate.  Sensitivity in the estimate of our professional and general liability claims reserve is reflected in various actuarial confidence levels. We utilize a statistical confidence level of 50% in developing our best estimate of the reserve for professional and general liability claims. Higher statistical confidence levels, while not representative of our best estimate, provide a range of reasonably likely outcomes upon resolution of the related claims. The following table outlines our reported reserve amounts compared to reserve levels established at the higher statistical confidence levels (in millions):                        As reported at September 30, 2012$ 76.9                     75% Confidence Level                $ 78.3                     90% Confidence Level                $ 86.6   Valuations from our independent actuary for workers' compensation losses resulted in a change in related estimates for prior years which increased (decreased) workers' compensation expense by the following amounts (in millions):                         Year ended September 30, 2012   $ (1.1 )                      Year ended September 30, 2011$  1.6                      Year ended September 30, 2010$  1.1                                            57 

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  Medical Claims Payable. Medical claims expense, including claims paid to our hospitals, was $473.2 million, $640.8 million and $690.5 million, or 83.1%, 84.6% and 87.2% of premium revenue, for the years ended September 30, 2012, 2011 and 2010, respectively. For the years ended September 30, 2012, 2011 and 2010, $7.1 million, $10.6 million and $11.8 million, respectively, of health plan payments made to hospitals and other healthcare entities owned by us for services provided to our enrollees were eliminated in consolidation.  The following table shows the components of the change in medical claims payable (in thousands):                                                 Year Ended            Year Ended            Year Ended                                             September 30,         September 30,         September 30,                                                 2012                  2011                  2010 Medical claims payable as of October 1     $        85,723       $       111,373       $       113,519 Medical claims expense incurred during the year Related to current year                            489,387               648,739               697,052 Related to prior years                             (16,170 )              (7,985 )              (6,596 )  Total expenses                                     473,217               640,754               690,456  Medical claims payments during the year Related to current year                           (430,788 )            (564,920 )            (587,292 ) Related to prior years                             (67,010 )            (101,484 )            (105,310 )  Total payments                                    (497,798 )            (666,404 )            (692,602 )  Medical claims payable as of September 30                               $        61,142       $        85,723       $       111,373    As reflected in the table above, medical claims expense for the year ended September 30, 2012, includes an $16.2 million reduction of medical costs related to prior years resulting from favorable development in the Medicaid product line of $16.5 million, offset by unfavorable development in the Medicare product line of $364,000. The favorable development in the Medicaid product line is attributable to lower than anticipated medical costs resulting from a general decline in medical utilization, the loss of member lives due to changes in Arizona'sMedicaid eligibility structure, AHCCCS provider payment reductions and improvements in care management and other operational initiatives. This favorable development is offset, in part, by $4.9 million in reductions to premium revenue associated with the settlement of prior year profit reconciliations.  As reflected in the table above, medical claims expense for the year ended September 30, 2011, includes an $8.0 million reduction of medical costs related to prior years resulting from favorable development in the Medicaid and Medicare product lines of $8.1 million, offset by unfavorable development in the Medicare product line of $62,000. The favorable development in the Medicaid product line is attributable to lower than anticipated medical costs resulting from a general decline in medical utilization, the loss of member lives due to changes in Arizona'sMedicaid eligibility structure, AHCCCS provider payment reductions and improvements in care management and other operational initiatives. This favorable development is offset, in part, by $3.3 million in reductions to premium revenue associated with the settlement of prior year profit reconciliations.  As reflected in the table above, medical claims expense for the year ended September 30, 2010, includes a $6.6 million reduction of medical costs related to prior years resulting from favorable development in the Medicaid and Medicare product line of $6.4 million and $209,000, respectively. The favorable development is attributable to lower than anticipated medical costs.                                           58

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  We estimate our medical claims payable using historical claims experience (including severity and payment lag time) and other actuarial analysis including number of enrollees, age of enrollees and certain enrollee health indicators to predict the cost of healthcare services provided to enrollees during any given period. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from our estimates given changes in healthcare costs or adverse experience. For example, our medical claims payable is primarily composed of estimates related to the most recent three months and periods prior to the most recent three months. The claims trend factor, which is developed through a comprehensive analysis of claims incurred in prior months, is the most significant component used in developing the claims liability estimates for the most recent three months. The completion factor is an actuarial estimate, based upon historical experience, of the percentage of incurred claims during a given period that have been adjudicated as of the date of estimation. The completion factor is the most significant component used in developing the claims liability estimates for the periods prior to the most recent three months. The following table illustrates the sensitivity of our medical claims payable at September 30, 2012, and the estimated potential impact on our results of operations, to changes in these factors that management believes are reasonably likely based upon our historical experience and currently available information (dollars in thousands):                 Claims Trend Factor                                 

Completion Factor

                        Increase (Decrease) in                              Increase (Decrease) in Increase (Decrease)        Medical Claims           Increase (Decrease)        Medical Claims      in Factor                Payable                    in Factor                Payable       (3.0%)          $                 (2,923 )           1.0%           $                 (2,628 )        (2.0)                            (1,948 )            0.5                             (1,556 )        (1.0)                              (974 )           (0.5)                             2,239        1.0                                 974             (1.0)                             4,517   Goodwill and Other Intangibles. The accounting policies and estimates related to goodwill and other intangibles are considered critical because of the significant impact that impairment could have on our operating results. We record all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair value as required by Financial Accounting Standards Board ("FASB") authoritative guidance regarding business combinations. The initial recording of goodwill and other intangibles requires subjective judgments concerning estimates of the fair value of the acquired assets. Goodwill, which was $818.4 million at September 30, 2012, is not amortized but is subject to tests for impairment annually or more often if events or circumstances indicate it may be impaired. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. We did not record an impairment loss during the years ended September 30, 2012, 2011 or 2010. Other identifiable intangible assets, net of accumulated amortization, were $29.2 million at September 30, 2012, compared to $32.8 million at September 30, 2011. These are amortized over their estimated useful lives and are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow projections. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions. Other key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles which require amortization. See "Goodwill and Other Intangible Assets" in the Notes to Consolidated Financial Statements for additional information regarding intangible assets. To assist in assessing the impact of a goodwill or intangible asset impairment charge at September 30, 2012, we have $847.6 million of goodwill and intangible assets. The impact of a 5% impairment charge would result in a reduction in pre-tax income of $42.4 million.                                           59

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  Income Taxes. We estimate and record a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized in future periods based on all relevant information. We believe that future income as well as the reversal of deferred tax liabilities will enable us to realize the deferred tax assets we have recorded, net of the valuation allowance we have established.  Certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. Significant judgment is required in determining and assessing the impact of such tax-related contingencies. We apply the provisions of FASB authoritative guidance regarding accounting for uncertainty in income taxes, which prescribe a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Only tax positions that meet the more-likely-than-not recognition threshold have been recognized in connection with these provisions.  

The provisions regarding accounting for uncertainty in income taxes permit interest and penalties on underpayments of income taxes to be classified as interest expense, income tax expense, or another appropriate expense classification based on the accounting election of the company. Our policy is to classify interest and penalties as a component of income tax expense.

  The estimates, judgments and assumptions used by us under "Allowance for Doubtful Accounts," "Allowance for Contractual Discounts and Settlement Estimates," "Insurance Reserves," "Medical Claims Payable," "Goodwill and Other Intangibles" and "Income Taxes" are, we believe, reasonable, but involve inherent uncertainties as described above, which may or may not be controllable by management. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods.                                           60

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  Table of Contents  RESULTS OF OPERATIONS SUMMARY  Consolidated  The following table sets forth, for the periods indicated, results of consolidated operations expressed in dollar terms and as a percentage of net revenue. Such information has been derived from our audited consolidated statements of operations.                                                   Year Ended                          Year Ended                          Year Ended                                            September 30, 2012                  September 30, 2011                  September 30, 2010 ($ in thousands)                        Amount          Percentage          Amount          Percentage          Amount         Percentage Net revenue Acute care revenue before provision for bad debts                         $ 2,283,126                         $ 2,023,387                         $ 1,730,990 Less: Provision for bad debts            (316,653 )                          (244,263 )                          (197,680 )  Acute care revenue                      1,966,473              77.6 %       1,779,124              70.1 %       1,533,310             65.9 % Premium revenue                           569,142              22.4 %         757,309              29.9 %         792,062             34.1 %  Total net revenue                       2,535,615             100.0 %       2,536,433             100.0 %       2,325,372            100.0 %  Costs and expenses Salaries and benefits                     938,471              37.0 %         818,742              32.3 %         686,303             29.5 % Supplies                                  342,039              13.5 %         316,277              12.5 %         266,545             11.5 % Medical claims                            466,125              18.4 %         630,203              24.8 %         678,651             29.2 % Other operating expenses                  470,733              18.6 %         431,070              17.0 %         363,916             15.6 % Medicare and Medicaid EHR incentives                                (23,213 )            (0.9 )%         (9,042 )            (0.4 )%             -                - Rentals and leases                         49,370               1.9 %          46,211               1.9 %          39,955              1.7 % Interest expense, net                     138,054               5.4 %          96,084               3.8 %          66,810              2.9 % Depreciation and amortization             114,358               4.5 %         104,241               4.1 %          96,106              4.1 % Management fees                             5,000               0.2 %           5,000               0.2 %           5,000              0.2 % Loss on extinguishment of debt                 -                 -             23,075               0.9 %              -                -  Total costs and expenses                2,500,937              98.6 %       2,461,861              97.1 %       2,203,286             94.7 % Earnings from continuing operations before gain on disposal of assets and income taxes                           34,678               1.4 %          74,572               2.9 %         122,086              5.3 %  Gain on disposal of assets, net             2,406               0.1 %             102               0.0 %             108              0.0 %  Earnings from continuing operations before income taxes                        37,084               1.5 %          74,674               2.9 %         122,194              5.3 %  Income tax expense                          5,833               0.2 %          27,374               1.1 %          44,715              1.9 %  Net earnings from continuing operations                                 31,251               1.3 %          47,300               1.8 %          77,479              3.4 %  Gain (loss) from discontinued operations, net of income taxes               337               0.0 %          (5,601 )            (0.2 )%         (1,087 )           (0.1 )%  Net earnings                               31,588               1.3 %          41,699               1.6 %          76,392              3.3 %  Net earnings attributable to non-controlling interests                  (8,712 )            (0.4 )%        (10,338 )            (0.4 )%         (9,925 )           (0.4 )%  Net earnings attributable to IASIS Healthcare LLC                        $    22,876               0.9 %     $    31,361               1.2 %     $    66,467              2.9 %                                             61 

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Acute Care

  The following table sets forth, for the periods indicated, results of our acute care operations expressed in dollar terms and as a percentage of acute care revenue. Such information has been derived from our audited consolidated statements of operations.                                                  Year Ended                          Year Ended                          Year Ended                                           September 30, 2012                  September 30, 2011                  September 30, 2010 ($ in thousands)                       Amount          Percentage          Amount          Percentage          Amount          Percentage Net revenue Acute care revenue before provision for bad debts              $ 2,283,126                         $ 2,023,387                         $ 1,730,990 Less: Provision for bad debts           (316,653 )                          (244,263 )                          (197,680 )  Acute care revenue                     1,966,473              99.6 %       1,779,124              99.4 %       1,533,310              99.2 % Revenue between segments                   7,092               0.4 %          10,551               0.6 %          11,805               0.8 %  Total acute care revenue (1)           1,973,565             100.0 %       1,789,675             100.0 %       1,545,115             100.0 %  Costs and expenses Salaries and benefits                    916,944              46.5 %         798,348              44.6 %         667,154              43.2 % Supplies                                 341,811              17.3 %         316,076              17.7 %         266,347              17.2 % Other operating expenses                 448,255              22.7 %         405,282              22.6 %         339,304              22.0 % Medicare and Medicaid EHR incentives                               (23,213 )            (1.2 %)         (9,042 )            (0.5 %)             -                 - Rentals and leases                        47,837               2.4 %          44,586               2.5 %          38,409               2.5 % Interest expense, net                    138,054               7.0 %          96,084               5.4 %          66,810               4.3 % Depreciation and amortization            110,474               5.6 %         100,685               5.6 %          92,544               6.0 % Management fees                            5,000               0.3 %           5,000               0.3 %           5,000               0.3 % Loss on extinguishment of debt                -                 -             23,075               1.3 %              -                 -  Total costs and expenses               1,985,162             100.6 %       1,780,094              99.5 %       1,475,568              95.5 % Earnings (loss) from continuing operations before gain on disposal of assets and income taxes               (11,597 )            (0.6 %)          9,581               0.5 %          69,547               4.5 %  Gain on disposal of assets, net            2,406               0.1 %             102               0.0 %             108               0.0 %  Earnings (loss) from continuing operations before income taxes       $    (9,191 )            (0.5 %)    $     9,683               0.5 %     $    69,655               4.5 %     

(1) Revenue between segments is eliminated in our consolidated results.

Years Ended September 30, 2012 and 2011

  Acute care revenue - Acute care revenue for the year ended September 30, 2012 was $2.0 billion, an increase of $183.9 million or 10.3%, compared to $1.8 billion in the prior year. The increase in acute care revenue, which includes the impact of the St. Joseph acquisition, is comprised primarily of an increase in adjusted admissions of 9.9%. The provision for bad debts for the year ended September 30, 2012, was $316.7 million, an increase of $72.4 million or 29.6%, compared to $244.3 million in the prior year. The increase in the provision for bad debt is the result in increased self-pay volume and revenue, which was particularly impacted by the state of Arizona's efforts to reduce its Medicaid enrollment. Our self-pay admissions as a percentage of total admissions increased to 7.7% for the year ended September 30, 2012, compared to 6.7% in the prior year. Our net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 1.2% compared to the prior year.  Salaries and benefits - Salaries and benefits expense for the year ended September 30, 2012, was $916.9 million, or 46.5% of acute care revenue, compared to $798.3 million, or 44.6% of acute care revenue in the prior year. Excluding the impact of stock-based compensation, salaries and benefits as a percentage of acute care revenue was 46.0% for the year ended September 30, 2012, compared to 44.5% in the prior year. Salaries and benefits expense as a percentage of acute care revenue, excluding the impact of stock-based compensation, increased primarily as a result of the expansion of our employed physician base, which requires additional investments in labor and other practice-related costs, including infrastructure and physician support staff.  Supplies - Supplies expense for the year ended September 30, 2012, was $341.8 million, or 17.3% of acute care revenue, compared to $316.1 million, or 17.7% of acute care revenue in the prior year. The decrease in supplies as a percentage of acute care revenue is the result of lower supplies utilization driven by a 17.5% increase in sub-acute services and the impact of supply cost initiatives that have included improved pricing and more effective utilization.                                           62

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Other operating expenses - Other operating expenses for the year ended September 30, 2012, were $448.3 million, or 22.7% of acute care revenue, compared to $405.3 million, or 22.6% of acute care revenue in the prior year.

Medicare and Medicaid EHR incentives - Medicare and Medicaid EHR incentives for the year ended September 30, 2012, totaled $23.2 million, compared to $9.0 million in the prior year. The increase in our Medicare and Medicaid EHR incentives is due to the timing of EHR implementation and meeting meaningful use requirements at our facilities.  Interest expense - Interest expense for the year ended September 30, 2012, was $138.1 million, or 7.0% of acute care revenue, compared to $96.1 million, or 5.4% of acute care revenue in the prior year. The increase in our interest expense is due to our refinancing transaction completed during the third quarter of fiscal year 2011.  Loss on extinguishment of debt - We incurred a loss on extinguishment of debt totaling $23.1 million during the year ended September 30, 2011, as a result of our refinancing transaction. The loss on extinguishment of debt included the write-off of $8.3 million in existing deferred financing costs, $4.9 million in creditor fees and $9.9 million in redemption premiums associated with the repurchase of the 8 3/4% senior subordinated notes due 2014.  Earnings from continuing operations before income taxes - Earnings from continuing operations before income taxes decreased $18.9 million to a loss of $9.2 million for the year ended September 30, 2012, compared to $9.7 million in the prior year. Earnings from continuing operations in the current year included the impact of additional interest expense of $42.0 million resulting from our prior year refinancing transaction, offset by the additional Medicare and Medicaid EHR incentives of $14.2 million recognized in our fiscal year 2012.  

Years Ended September 30, 2011 and 2010

  Acute care revenue - Acute care revenue for the year ended September 30, 2011, was $1.8 billion, an increase of $244.6 million or 15.8%, compared to $1.5 billion in the prior year. The increase in acute care revenue, which includes the impact of the Brim and St. Joseph acquisitions, is comprised primarily of an increase in adjusted admissions of 15.8%. The provision for bad debts for the year ended September 30, 2011, was $244.3 million, an increase of $46.6 million or 23.6%, compared to $197.7 million in the prior year. The increase in the provision for bad debts is a result of increased self-pay volume and revenue. Our self-pay admissions as a percentage of total admissions increased to 6.7% for the year end September 30, 2011, compared to 6.1% in the prior year. Our net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 1.0% compared to the prior year.  Salaries and benefits - Salaries and benefits expense for the year ended September 30, 2011, was $798.3 million, or 44.6% of acute care revenue, compared to $667.2 million, or 43.2% of acute care revenue in the prior year. Included in the prior year was $2.0 million of stock-based compensation incurred in connection with the repurchase of certain equity by our parent company. Included in fiscal year 2011, was $1.3 million in severance related costs associated with the transition of our executive management. The remaining increase in our salaries and benefits expense as a percentage of acute care revenue is due to our recent acquisitions, which contributed an increase of 0.3% of acute care revenue, and the expansion of our employed physician base, which requires additional investments in labor and other practice-related costs, including infrastructure and physician support staff.  Supplies - Supplies expense for the year ended September 30, 2011, was $316.1 million, or 17.7% of acute care revenue, compared to $266.3 million, or 17.2% of acute care revenue in the prior year. The increase in supplies as a percentage of acute care revenue is primarily the result of a shift in the mix of our surgical volume to cases with more costly implant utilization, particularly in the area of orthopedics.  Other operating expenses - Other operating expenses for the year ended September 30, 2011, were $405.3 million, or 22.6% of acute care revenue, compared to $339.3 million, or 22.0% of acute care revenue in the prior year. Included in the current year was $3.1 million in settlement costs related to a terminated vendor contract for services provided from fiscal years 2006 to 2008 and $859,000 in costs related to the start-up of our physician professional liability captive insurance program. Other operating expenses in fiscal year 2011 also included $2.0 million in qui tam related legal costs, compared to $439,000 in the prior year.  Interest expense- Interest expense for the year ended September 30, 2011, was $96.1 million, or 5.4% of acute care revenue, compared to $66.8 million, or 4.3% of acute care revenue in the prior year. The increase in our interest expense is due to our refinancing transaction during our fiscal year 2011.  Loss on extinguishment of debt - We incurred a loss on extinguishment of debt totaling $23.1 million during the year ended September 30, 2011, as a result of our refinancing transaction. The loss on extinguishment of debt included the write-off of $8.3 million in existing deferred financing costs, $4.9 million in creditor fees and $9.9 million in redemption premiums associated with the repurchase of the 8 3/4% senior subordinated notes due 2014.                                           63

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  Earnings from continuing operations before income taxes - Earnings from continuing operations before income taxes decreased $60.0 million to $9.7 million for the year ended September 30, 2011, compared to $69.7 million in the prior year. Earnings from continuing operations before income taxes for the year ended September 30, 2011, included the impact of additional interest expense of $29.3 million resulting from our refinancing transaction, as well as the related loss on extinguishment of debt totaling $23.1 million.  

Health Choice

  The following table sets forth, for the periods indicated, results of our Health Choice operations expressed in dollar terms and as a percentage of premium revenue. Such information has been derived from our audited consolidated statements of operations.                                                  Year Ended                       Year Ended                       Year Ended                                           September 30, 2012               September 30, 2011               September 30, 2010 ($ in thousands)                       Amount         Percentage        Amount         Percentage        Amount         Percentage Premium revenue Premium revenue                      $   569,142            100.0 %   $   757,309            100.0 %   $   792,062            100.0 %  Costs and expenses Salaries and benefits                     21,527              3.8 %        20,394              2.7 %        19,149              2.4 % Supplies                                     228              0.0 %           201              0.0 %           198              0.0 % Medical claims (1)                       473,217             83.1 %       640,754             84.6 %       690,456             87.2 % Other operating expenses                  22,478              4.0 %        25,788              3.4 %        24,612              3.1 % Rentals and leases                         1,533              0.3 %         1,625              0.2 %         1,546              0.2 % Depreciation and amortization              3,884              0.7 %         3,556              0.5 %         3,562              0.5 %  Total costs and expenses                 522,867             91.9 %       692,318             91.4 %       739,523             93.4 %  Earnings before income taxes         $    46,275              8.1 %   $    64,991              8.6 %   $    52,539              6.6 %     

(1) Medical claims paid to our hospitals of $7.1 million, $10.6 million and $11.8

million for the years ended September 30, 2012, 2011 and 2010, respectively,

are eliminated in our consolidated results.

Years Ended September 30, 2012 and 2011

  Premium revenue - Premium revenue was $569.1 million for the year ended September 30, 2012, a decrease of $188.2 million or 24.8%, compared to $757.3 million in the prior year. The decline in premium revenue is primarily impacted by the efforts of the state of Arizona to reduce its Medicaid enrollment, particularly related to childless adults, which has resulted in a 9.8% decline in member months. This resulted in lower capitation rates on a per member per month basis, as the mix of enrollees has changed to include fewer childless adults, which typically receive a higher capitation rate on a monthly basis. Additionally, premium revenue has been impacted by two separate 5% provider rate reductions that were implemented effective April 1 and October 1, 2011.  Medical claims - Medical claims expense was $473.2 million for the year ended September 30, 2012, compared to $640.8 million in the prior year. Medical claims expense as a percentage of premium revenue was 83.1% for the year ended September 30, 2012, compared to 84.6% in the prior year. The decrease in medical claims as a percentage of premium revenue is primarily impacted by the loss of childless adult lives from its membership rolls, which typically incur higher medical claims costs per member.  

Years Ended September 30, 2011 and 2010

  Premium revenue - Premium revenue was $757.3 million for the year ended September 30, 2011, a decrease of $34.8 or 4.4%, compared to $792.1 million in the prior year. The decline in premium revenue is primarily due to a reduction in capitation rates in our Medicaid product line, as a result of the provider cuts implemented by AHCCCS on April 1, 2011, and a 0.9% decline in member months, compared to the prior year.  Medical claims - Medical claims expense was $640.8 million for the year ended September 30, 2011, compared to $690.5 million in the prior year. Medical claims expense as a percentage of premium revenue was 84.6% for the year ended September 30, 2011, compared to 87.2% in the prior year. The decrease in medical claims as a percentage of premium revenue is primarily the result of a general decline in medical utilization, the loss of member lives due to changes in the state's Medicaid eligibility structure, AHCCCS provider payment reductions and improvements in care management and other operational initiatives.                                           64

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Income Taxes

  The following discussion sets forth, for the periods indicated, the impact of income taxes on our consolidated results. Such information has been derived from our audited consolidated statements of operations.  

Years Ended September 30, 2012 and 2011

  Income tax expense - We recorded a provision for income taxes from continuing operations of $5.8 million, resulting in an effective tax rate of 15.7% for the year ended September 30, 2012, compared to $27.4 million, for an effective tax rate of 36.7% in the prior year. The decrease in our effective tax rate is primarily the result of a change in certain of our state tax filing positions, which resulted in a tax benefit totaling $4.0 million, and the elimination of a reserve for an uncertain tax position totaling $5.0 million.  

Years Ended September 30, 2011 and 2010

  Income tax expense - We recorded a provision for income taxes from continuing operations of $27.4 million, resulting in an effective tax rate of 36.7% for the year ended September 30, 2011, compared to $44.7 million, for an effective tax rate of 36.6% in the prior year. The increase in our effective tax rate was primarily due to an increase in non-deductible expenses and unrecognized tax benefits.  

Summary of Operations by Quarter

  The following table presents unaudited quarterly operating results for the years ended September 30, 2012 and 2011. We believe that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the consolidated financial statements. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.                                                                       Quarter Ended                                               Sept. 30,       June 30,       March 31,       Dec. 31,                                                2012 (1)         2012          2012 (2)        2011(3)                                                                    (in thousands) Net revenue                                   $  632,984      $ 631,322      $  647,636      $ 623,673 Earnings from continuing operations before income taxes                                       3,519          4,318          22,009          7,238 Net earnings from continuing operations            2,979         11,835          12,804          3,633                                                                        Quarter Ended                                               Sept. 30,       June 30,       March 31,       Dec. 31,                                                2011(4)         2011(5)        2011(6)         2010(7)                                                                    (in thousands) Net revenue                                   $  647,455      $ 650,526      $  624,186      $ 614,266 Earnings from continuing operations before income taxes                                       8,163          3,681          36,367         26,463 Net earnings from continuing operations            4,867          2,292          22,867         17,274    

(1) Results for the quarter ended September 30, 2012, include $14.5 million in

Medicare and Medicaid EHR incentives, an increase of $13.6 million, compared

to $917,000 in the prior year quarter, and a $1.2 million increase and a

$682,000 reduction in prior year estimates for professional and general

liability losses and workers' compensation claims, respectively, as a result

of our semi-annual actuarial studies.

(2) Results for the quarter ended March 31, 2012, include two separate

adjustments related to Medicare revenue. One of these adjustments related to

the Rural Floor Settlement, which resulted in an increase in acute care

revenue of $15.4 million, as well as an increase in operating expenses of

$4.1 million for related legal and consulting fees. In addition, new SSI

ratios were published by CMS for federal fiscal years ending September 30,

2006 through 2009, which resulted in a reduction in acute care revenue of

$4.3 million. Results for the quarter ended March 31, 2012, also included a

$2.1 million and a $267,000 reduction in prior year estimates for

professional and general liability losses and workers' compensation claims,

respectively, as a result of our semi-annual actuarial studies. Additionally,

results for the quarter ended March 31, 2012, include $2.0 in Medicare and

Medicaid EHR incentives.

(3) Results for the quarter ended December 31, 2011, include Medicare and

    Medicaid EHR incentives of $6.7 million.                                            65 

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Table of Contents (4) Results for the quarter ended September 30, 2011, include a $1.1 million

reduction and a $328,000 increase in prior year estimates for professional

and general liability losses and workers' compensation claims, respectively,

as a result of our semi-annual actuarial studies.

(5) Results for the quarter ended June 30, 2011, include a loss on extinguishment

of debt of $23.1 million as a result of our refinancing transaction and

Medicare and Medicaid EHR incentives of $8.1 million.

(6) Results for the quarter ended March 31, 2011, include $1.4 million is

settlement costs related to a terminated vendor contract for services

provided from fiscal years 2006 to 2008 and a $948,000 and $1.2 million

increase in prior year estimates for professional and general liability

losses and workers' compensation claims, respectively, as a result of our

semi-annual actuarial studies.

(7) Results for the quarter ended December 31, 2010, include $1.6 million in

settlement costs related to a terminated vendor contract for services

provided from fiscal years 2006 to 2008 and $859,000 in costs related to the

start-up of our physician professional liability captive insurance program.

LIQUIDITY AND CAPITAL RESOURCES

Overview of Cash Flow Activities for the Years Ended September 30, 2012 and 2011

Our cash flows are summarized as follows (in thousands):

                                                     Year Ended September 30,                                                     2012              2011

Cash flows from operating activities $ 41,857 $ 137,101

Cash flows from investing activities $ (115,881 ) $ (249,760 )

Cash flows from financing activities $ (24,421 ) $ 115,475

   Operating Activities  Operating cash flows decreased $95.2 million for the year ended September 30, 2012, compared to the prior year. Our operating cash flows have been impacted by increased interest costs, payments related to Health Choice medical claims and settlements, delays in Medicaid supplemental reimbursement payments and delays in payments from Medicaid as more states implement managed Medicaid programs, coupled with delays in qualifying patients for Medicaid coverage.  At September 30, 2012, we had $241.0 million in net working capital, compared to $225.1 million at September 30, 2011. Net accounts receivable increased $61.8 million to $339.7 million at September 30, 2012, from $277.9 million at September 30, 2011. The increase in net accounts receivable includes the impact of the St. Joseph acquisition. Excluding the impact of the St. Joseph acquisition, our days revenue in accounts receivable at September 30, 2012, were 55, compared to 48 at September 30, 2011.  

Investing Activities

Capital expenditures for the year ended September 30, 2012, were $112.4 million, compared to $98.3 million in the prior year.

During the year ended September 30, 2011, we paid $151.7 million for acquisitions, which included the acquisition of St. Joseph.

Financing Activities

  During the year ended September 30, 2011, we completed a refinancing transaction which resulted in proceeds totaling $1.811 billion, net of creditors' fees, original issue discounts and other transaction costs totaling $63.5 million. The refinancing proceeds were used to repay $567.3 million in our then existing senior secured credit facilities and repurchase our $475.0 million aggregate principal amount of 8 3/4% senior subordinated notes due 2014, including $9.9 million in redemption premiums.  Also, as part of the debt refinancing, we distributed $632.9 million to IAS, which is comprised of $402.9 million to fund the repayment of the IAS senior paid-in-kind loans and $230.0 million to be held for future acquisitions and strategic growth initiatives, as well as potential distributions to the equity holders of IAS. On June 6, 2012, IAS distributed $115.0 million to its equity holders to redeem all of its remaining outstanding preferred stock and to pay a dividend to its common stockholders.                                           66

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Capital Resources

As of September 30, 2012, we had the following debt arrangements:

     •   $1.325 billion in senior secured credit facilities; and       •   $850.0 million in 8.375% senior notes due 2019.   At September 30, 2012, amounts outstanding under our senior secured credit facilities consisted of $1,009.6 million in term loans. In addition, we had $79.3 million in letters of credit outstanding under the revolving credit facility. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 5.0% for the year ended September 30, 2012, compared to 4.4% in the prior year.  

$1.325 Billion Senior Secured Credit Facilities

  As part of our 2011 refinancing transaction, we entered into a new senior credit agreement (the "Restated Credit Agreement"). The Restated Credit Agreement provides for $1.325 billion in Senior Secured Credit Facilities consisting of (1) a $1.025 billion senior secured term loan facility with a seven-year maturity and (2) a $300.0 million senior secured revolving credit facility with a five-year maturity, of which up to $150.0 million may be utilized for the issuance of letters of credit. Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount outstanding at the closing of the refinancing, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require installment payments.  Borrowings under the senior secured term loan facility bear interest at a rate per annum equal to, at our option, either (1) a base rate (the "base rate") determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.75% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.75% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at our option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, we will be required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.  The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain of our subsidiaries (collectively, the "Credit Facility Guarantors") and are required to be guaranteed by all of our future material wholly owned subsidiaries, subject to certain exceptions. All obligations under the Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of our equity interests and that of the Credit Facility Guarantors, (2) mortgage liens on all of our material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.  The Restated Credit Agreement requires us to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances, and from a percentage of annual excess cash flow.  The Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.  

8.375% Senior Notes due 2019

  In our refinancing transaction, we and IASIS Capital (together, the "Issuers") issued our Senior Notes, which consisted of $850.0 million aggregate principal amount of 8.375% senior notes due 2019, which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers' wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the "Notes Guarantors") (the "Indenture"). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis.                                           67 

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  The Senior Notes bear interest at a rate of 8.375% per annum, beginning May 3, 2011. Interest on the Senior Notes is payable semi-annually, in cash in arrears, on May 15 and November 15 of each year, and commenced on November 15, 2011.  We may redeem the Senior Notes, in whole or in part, at any time prior to May 15, 2014, at a price equal to 100% of the aggregate principal amount of the Senior Notes plus a "make-whole" premium and accrued and unpaid interest and special interest, if any, to but excluding the redemption date. In addition, we may redeem up to 35% of the Senior Notes before May 15, 2014, with the net cash proceeds from certain equity offerings at a redemption price equal to 108.375% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions.  The Indenture contains covenants that limit our (and our restricted subsidiaries') ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase our capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to us and our restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important limitations and exceptions.  The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If we experience certain kinds of changes of control, we must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, we will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.  

Credit Ratings

  The table below summarizes our corporate rating, as well as our credit ratings for the Senior Secured Credit Facilities and Senior Notes as of the date of this filing:                                                      Moody's   Standard & Poor's        Corporate credit                             B2              B        Senior secured term loan facility            Ba3             B        Senior secured revolving credit facility     Ba3            BB-        8.375% senior notes due 2019                Caa1           CCC+        Outlook                                    Stable         Stable   Other  In August 2011, we executed forward starting interest rate swaps with Citibank, N.A. ("Citibank") and Barclays Bank PLC ("Barclays"), as counterparties, with notional amounts totaling $350.0 million, each effective March 31, 2013 and expiring between September 30, 2014 and September 30, 2016. Under these agreements, we are required to make quarterly fixed rate payments to the counterparties at annual rates ranging from 1.6% to 2.2%. The counterparties are obligated to make quarterly floating rate payments to us based on the three-month LIBOR rate, each subject to a floor of 1.25%. Additionally, in August 2011, we executed an interest rate cap with Citibank, as counterparty, with a notional amount of $350.0 million and a cap rate of 1.75%, effective March 1, 2012 and expiring March 31, 2013.  

Capital Expenditures

  We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our Senior Secured Credit Facilities and other capital sources that may become available. We expect our capital expenditures for fiscal 2013 to be $140.0 million to $150.0 million, including the following significant expenditures:      •   $50.0 million to $55.0 million for growth and new business projects;          •   $55.0 million to $60.0 million in replacement or maintenance related

         projects at our hospitals; and                                            68 

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• $35.0 million in hardware and software costs related to information

systems projects, including healthcare IT stimulus initiatives.

Liquidity

  We rely on cash generated from our operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, federal and state budget initiatives, weather-related catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, leverage capacity and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see Item 1A., "Risk Factors".  

Including available cash at September 30, 2012, we have available liquidity as follows (in millions):

     Cash and cash equivalents                                               $  

48.9

Available capacity under our senior secured revolving credit facility 220.7

   Net available liquidity at September 30, 2012                           $ 

269.6

    Net available liquidity assumes 100% participation from all lenders currently participating in our senior secured revolving credit facility. In addition to our available liquidity, we expect to generate significant operating cash flows in fiscal 2012. We will also utilize proceeds from our financing activities as needed.  Based upon our current level of operations and anticipated growth, we believe we have sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over the next three years. In evaluating the sufficiency of our liquidity for both the short-term and long-term, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our Senior Secured Credit Facilities, compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities.  We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you, however, that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our Senior Secured Credit Facilities, or otherwise, to enable us to grow our business, service our indebtedness, or make anticipated capital expenditures and tax payments. For more information, see Item 1A., "Risk Factors".  One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence of, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For more information, see Item 1A., "Risk Factors".  

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

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Tabular Disclosure of Contractual Obligations

The following table reflects a summary of obligations and commitments outstanding including both the principal and interest portions of long-term debt and capital lease obligations at September 30, 2012.

                                                                       Payments Due By Period                                             Less than                                      More than                                              1 Year         1-3 Years       3-5 Years       5 Years         Total                                                                         (in millions) Contractual Cash Obligations Long-term debt, with interest (1)          $     131.7     $     261.9     $     259.9     $  1,989.4     $ 2,642.9 Capital lease obligations, with interest           2.9             4.1             1.5            3.6          12.1 Medical claims                                    61.1              -               -              -           61.1 Operating leases                                  30.5            50.9            39.2           16.6         137.2 Estimated self-insurance liabilities              17.7            31.0            20.8           20.7          90.2 Purchase obligations                              39.1            25.2            15.4           18.3          98.0  Subtotal                                   $     283.0     $     373.1     $     336.8     $  2,048.6     $ 3,041.5                                                               Amount of

Commitment Expiration Per Period

                                           Less than                                      More than                                             1 Year         1-3 Years       3-5 Years       5 Years         Total                                                                        (in millions) Other Commitments (2) Guarantees of surety bonds                $      12.2     $        -      $        -      $       -      $    12.2 Letters of credit                                  -             79.3              -              -           79.3 Other commitments                                 5.4             0.6             0.4             -            6.4  Subtotal                                         17.6            79.9             0.4             -           97.9 

Total obligations and commitments $ 300.6$ 453.0 $

    337.2     $  2,048.6     $ 3,139.4     

(1) We applied an interest rate of 5.0%, to our Senior Secured Credit Facilities

and 8.375% to our Senior Notes.

(2) Excludes $15.5 million of unrecognized tax benefits and related interest that

could result in a cash settlement, of which $13.5 million relates to timing

differences between book and taxable income that may be offset by a reduction

of cash tax obligations in future periods. We have not included these amounts

    in the above table as we cannot reliably estimate the amount and timing of     payments related to these liabilities.  

Seasonality

  The patient volumes and net revenue at our healthcare operations are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures. 

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