LIFEPOINT HOSPITALS, INC. – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 We recommend that you read this discussion together with our consolidated financial statements and related notes included elsewhere in this report. Unless otherwise indicated, all relevant financial and statistical information included herein relates to our continuing operations.  We make forward-looking statements in this report, other reports and in statements we file with the SEC and/or release to the public. In addition, our senior management makes forward-looking statements orally to analysts, investors, the media and others. Broadly speaking, forward-looking statements include: projections of our revenues, net income, earnings per share, capital expenditures, cash flows, debt repayments, interest rates, operating statistics and data or other financial items; descriptions of plans or objectives of our management for future operations, services or growth plans including acquisitions, divestitures, business strategies and initiatives; interpretations of Medicare and Medicaid laws and regulations and their effect on our business; and descriptions of assumptions underlying or relating to any of the foregoing.  In this report, for example, we make forward-looking statements, including statements discussing our expectations about: future financial performance and condition; future liquidity and capital resources; future cash flows; existing and future debt and equity structure; our strategic goals; future acquisitions; our business strategy and operating philosophy, including an evaluation of growth strategies for existing markets and for potential acquisitions; effects of competition in a hospital's market; costs of providing care to our patients; increasing risk of collection of amounts due directly from patients; changes in interest rates; our compliance with new and existing laws and regulations and the increasing costs associated with compliance; the impact of national healthcare reform; effect of credit ratings; professional fees; increased costs of salaries and benefits; industry and general economic trends; reimbursement changes; patient volumes and related revenues; access to the HCA-IT information systems; future capital expenditures, including capital expenditures related to information systems, the aggregate capital commitment to Person Memorial and Maria Parham; claims and legal actions relating to professional liabilities, governmental investigations and other matters; accounting policies; and physician recruiting and retention, including trends in physician employment.  Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as "can," "could," "may," "should," "believe," "will," "would," "expect," "project," "estimate," "seek," "anticipate," "intend," "target," "continue" or similar expressions. You should not unduly rely on forward-looking statements, which give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statement. We do not undertake any obligation to update our forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.  There are several factors, some beyond our control that could cause results to differ significantly from our expectations. Some of these factors are described in Part I, Item 1A. Risk Factors. Other factors, such as market, operational, liquidity, interest rate and other risks, are described elsewhere in this section and Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Any factor described in this report could by itself, or together with one or more factors, adversely affect our business, results of operations and/or financial condition. There may be factors not described in this report that could also cause results to differ from our expectations.  

Overview

  We operate general acute care hospitals primarily in non-urban communities in the United States. At December 31, 2011, on a consolidated basis, we operated 54 hospital campuses in 18 states, having a total of 6,048 licensed beds. We generate revenues primarily through hospital services offered at our facilities. We generated $3,026.1 million, $2,818.6 million, and $2,587.3 million, respectively, in revenues from continuing operations, net of the provision for doubtful accounts, during 2011, 2010, and 2009. In 2011, we derived 49.3% of our revenues from continuing operations from the Medicare and Medicaid programs, collectively. Payments made to our hospitals pursuant to the Medicare and Medicaid programs for services rendered rarely                                         49  --------------------------------------------------------------------------------

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  exceed our costs for such services. As a result, we rely largely on payments made by private or commercial payors, together with certain limited services provided to Medicare recipients, to generate an operating profit. The hospital industry continues to endure a period where the costs of providing care are rising faster than reimbursement rates from government or private commercial payors. This places a premium on efficient operation, the ability to reduce or control costs and the need to leverage the benefits of our organization across all of our hospitals.  

Competitive and Structural Environment

  The environment in which our hospitals operate is extremely competitive. In addition to competitive concerns, many of our communities are experiencing slow growth, and in some cases, population losses. We believe this trend has occurred primarily as a result of poor economic conditions because the economies in the non-urban communities in which our hospitals primarily operate are often dependent on a small number of larger employers, especially manufacturing or other facilities. The economies of our communities are also more sensitive to economic downturns in the manufacturing sector than the United States, generally.  Our hospitals face competition from other acute care hospitals, including larger tertiary hospitals located in larger markets and/or affiliated with universities; specialty hospitals that focus on one or a small number of very lucrative service lines but that are not required to operate emergency departments; stand-alone centers at which surgeries or diagnostic tests can be performed; and physicians on the medical staffs of our hospitals. In many cases, our competitors focus on the service lines that offer the highest margins. By doing so, our competitors can potentially draw the best-paying business out of our hospitals. This, in turn, can reduce the overall operating profit of our hospitals as we are often obligated to offer service lines that operate at a loss or that have much lower profit margins. We continue to see the shift of increasingly complex procedures from the inpatient to the outpatient setting and have also seen growth in the general shift of lower acuity procedures to physician offices and other non-hospital outpatient settings. These trends have, to some extent, offset our efforts to improve equivalent admission rates at many of our hospitals.  Our hospitals also face extreme competition in their efforts to recruit and retain physicians on their medical staffs. It is widely recognized that the United States has a shortage of physicians in certain practice areas, including specialists such as cardiologists, oncologists, urologists and orthopedists, in various areas of the country. This fact, and our ability to overcome these shortages, is directly relevant to our growth strategies because cardiologists, oncologists, urologists and orthopedists are often the physicians in highest demand in communities where our hospitals are located. Larger tertiary medical centers are acquiring physician practices and employing physicians in some of our communities. While physicians in these practices may continue to be members of the medical staffs of our hospitals, they may be less likely to refer patients to our hospitals over time.  We believe other key factors in our competition for patients is the quality of our patient care and the perception of that quality in the communities where our hospitals are located, which may be influenced by, among other things, the technology, service lines and capital improvements made at our facilities. The quality of care, and our communities' perception of that quality, may also be influenced by the skills and experience of our non-physician employees involved in patient care.                                         50 

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     TABLE OF CONTENTS  Business Strategy  In order to achieve growth in patient volumes, revenues and profitability given the competitive and structural environment, we continue to focus our business strategy on the following:  

• Measurement and improvement of quality of patient care and perceptions of

such quality in communities where our hospitals are located;

• Targeted recruiting of primary care physicians and physicians in key

specialties;

• Retention of physicians and efforts to improve physician satisfaction;

• Retention and, where needed, recruitment of non-physician employees

involved in patient care and efforts to improve employee satisfaction;

• Targeted investments in new technologies, new service lines and capital

improvements at our facilities;

• Improvements in management of expenses and revenue cycle;

• Negotiation of improved reimbursement rates with non-governmental payors; and

• Strategic growth through acquisition and integration of hospitals and other

healthcare facilities where valuations are attractive and we can identify

opportunities for improved financial performance through our management or

        ownership.   Regulatory Environment  Our business and our hospitals are highly regulated, and the penalties for noncompliance are severe. We are required to comply with extensive, extremely complicated and overlapping government laws and regulations at the federal, state and local levels. These laws and regulations govern every aspect of how our hospitals conduct their operations, from what service lines must be offered in order to be licensed as an acute care hospital, to whether our hospitals may employ physicians, and to how (and whether) our hospitals may receive payments pursuant to the Medicare and Medicaid programs. The failure to comply with these laws and regulations can result in severe penalties including criminal penalties, civil sanctions, and the loss of our ability to receive reimbursements through the Medicare and Medicaid programs.  Not only are our hospitals heavily regulated, but the rules, regulations and laws to which they are subject often change, with little or no notice, and are often interpreted and applied differently by various regulatory agencies with authority to enforce such requirements. Each change or conflicting interpretation may require our hospitals to make changes in their facilities, equipment, personnel or services, and may also require that standard operating policies and procedures be re-written and re-implemented. The cost of complying with such laws and regulations is a significant component of our overall expenses. Further, this expense has grown in recent periods because of new regulatory requirements and the severity of the penalties associated with non-compliance. Management believes compliance expenses will continue to grow in the foreseeable future.  Health Care Reform  The Affordable Care Act dramatically alters the United States healthcare system and is intended to decrease the number of uninsured Americans and reduce the overall cost of healthcare. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare DSH and Medicaid payments to providers, expanding the Medicare program's use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, and instituting certain private health insurance reforms. Although a majority of the measures contained in the Affordable Care Act do not take effect until 2013, certain of the reductions in Medicare spending, such as negative adjustments to the Medicare hospital inpatient and outpatient prospective payment system market basket updates and the incorporation of productivity adjustments to the Medicare program's annual inflation updates, became effective in 2010 and 2011 or will be implemented in 2012. The Affordable Care Act will be heard by the United State Supreme Court in 2012. The Supreme Court will consider four issues: (1) whether the "individual mandate" - the requirement that all individuals purchase some form of health insurance - is                                         51  --------------------------------------------------------------------------------

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  constitutional; (2) if the individual mandate is found unconstitutional, whether it is severable from the remainder of the Affordable Care Act; (3) whether the Affordable Care Act's requirement that states expand Medicaid eligibility or risk losing federal funds is constitutional; and (4) whether the individual mandate is a tax for purposes of the Anti-Injunction Act, meaning that plaintiffs seeking to challenge the requirement must wait until it takes effect in 2014. Additionally, several bills have been and will likely continue to be introduced in Congress to repeal or amend all or significant provisions of the Affordable Care Act. It is difficult to predict the full impact of the Affordable Care Act due to pending Supreme Court review, its complexity, lack of implementing regulations and interpretive guidance, gradual and potentially delayed implementation, and possible repeal and/or amendment, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them by the Affordable Care Act. As a result, it is difficult to predict the full impact that the Affordable Care Act will have on our revenue and results of operations.  

Medicare and Medicaid Reimbursement

Medicare payment methodologies have been, and are expected to be, significantly revised based on cost containment and policy considerations. CMS has already begun to implement some of the Medicare reimbursement reductions required by the Affordable Care Act. These revisions will likely be more frequent and significant as more of the Affordable Care Act's changes and cost-saving measures become effective.  In addition, many states in which we operate are facing budgetary challenges and have adopted, or may be considering, legislation that is intended to control or reduce Medicaid expenditures, enroll Medicaid recipients in managed care programs, and/or impose additional taxes on hospitals to help finance or expand their Medicaid programs. Congress has made an effort to address the financial challenges Medicaid is facing by recently increasing the amount of Medicaid funding available to states through the ARRA and the Education, Jobs, and Medicaid Assistance Act, which increased FMAP payments through June 30, 2011. Budget cuts, federal or state legislation, or other changes in the administration or interpretation of government health programs by government agencies or contracted managed care organizations could have a material adverse effect on our financial position and results of operations.  

Adoption of Electronic Health Records

  The Health Information Technology for Economic and Clinical Health Act ("HITECH Act") was enacted into law on February 17, 2009 as part of ARRA. The HITECH Act includes provisions designed to increase the use of EHR by both physicians and hospitals. We intend to comply with the EHR meaningful use requirements of the HITECH Act in time to qualify for the maximum available incentive payments. Our compliance will result in significant costs including business process changes, professional services focused on successfully designing and implementing our EHR solutions along with costs associated with the hardware and software components of the project. We continue to refine our budgeted costs and the expected EHR incentive payments associated with our initiatives. We currently estimate that at a minimum total costs incurred to comply will be recovered through the total EHR incentive payments over the projected lifecycle of this initiative.  An important component of our effective implementation of our EHR initiatives involves our uninterrupted access to reliable information systems. We recently entered into an agreement with a third party technology provider to design and operate a hosted data center for our critical third party information systems. In addition to providing a hosted data center, the third party technology provider will offer help desk end-user support for certain clinical information systems, provide help desk and support functions for certain clinical information system applications, perform backups and recoveries of certain critical data, and monitor critical systems to facilitate the identifications of and rapid responses to certain system issues. We believe this arrangement will provide us with a single technology platform for the delivery of critical third party information systems and will improve the effectiveness and efficiency of key information support functions in a cost-effective and high quality manner.  

Privacy and Security Regulations

We are subject to the privacy and security requirements of HIPAA and the HITECH Act, which was enacted as part of ARRA. Among other things, the HITECH Act strengthened the requirements and significantly increased the penalties for violations of the HIPAA privacy and security regulations. The privacy

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  regulations of HIPAA apply to all health plans, all healthcare clearinghouses and healthcare providers that transmit health information in an electronic form in connection with HIPAA standard transactions. Our facilities are subject to the HIPAA privacy regulations. The privacy standards apply to individually identifiable information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally. These standards impose extensive administrative requirements on us, require our compliance with rules governing the use and disclosure of this health information, and require us to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on our behalf. They also create rights for patients in their health information, such as the right to amend their health information. In addition, our facilities will continue to remain subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA.  We also are subject to the HIPAA security regulations that are designed to protect the confidentiality, availability and integrity of health information. These security standards require us to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic health and related financial information. We believe that we are in material compliance with the privacy and security requirements of HIPAA.  The HITECH Act also creates a federal breach notification law that mirrors protections that many states have passed in recent years. This law requires us to notify patients of any unauthorized access, acquisition, or disclosure of their unsecured protected health information that poses significant risk of financial, reputational or other harm to a patient. In addition, a new breach notification requirement was established requiring reporting of certain unauthorized access, acquisition, or disclosure of unsecured protected health information that poses significant risk of financial, reputational or other harm to a patient to the Secretary of HHS and, in some cases, local media outlets. On August 24, 2009, HHS issued regulations implementing certain of the requirements of the HITECH Act, including the breach notification requirements providing obligations for compiling and reporting of certain information relating to breaches by providers and their business associates (the "Interim Final Breach Rule"), effective September 23, 2009. HHS subsequently promulgated and withdrew a final breach notification rule for review, but it intends to publish a final data breach rule in the coming months. Until such time as a new final breach rule is issued, the Interim Final Breach Rule remains in effect. In addition, our facilities remain subject to any state laws that relate to the reporting of data breaches that are more restrictive than the regulations issued under HIPAA and the requirements of the HITECH Act.  On July 14, 2010, HHS issued a notice of proposed rulemaking to modify the HIPAA privacy, security and enforcement regulations. These changes may require substantial operational changes for HIPAA covered entities and their business associates, including, in part, new requirements for business associate agreements and a transition period for compliance, new limits on the use and disclosure of health information for marketing and fundraising, enhanced individuals' rights to obtain electronic copies of their medical records and restricted disclosure of certain information, new requirements for notices of privacy practices, modified restrictions on authorizations for the use of health information for research, and new changes to the HIPAA enforcement regulations. HHS has not yet released the final version of these rules, and, as a result, we cannot quantify the financial impact of compliance with these new regulations. We could, however, incur expenses associated with such compliance.  Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties. The HITECH Act significantly increased the penalties for violations by introducing a tiered penalty system, with penalties of up to $50,000 per violation with a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement. The HITECH Act also extended the application of certain provisions of the security and privacy regulations to business associates and subjects business associates to civil and criminal penalties for violation of the regulations. Under the HITECH Act, HHS is required to conduct periodic compliance audits of covered entities and their business associates. The Secretary of HHS has issued an interim final rule conforming HIPAA's enforcement regulations to the HITECH Act's statutory revisions. This interim final rule also sets forth guidance on, among other things, how the tiered penalty structure will reflect increasing levels of culpability and provides a prohibition on the imposition of penalties for any violation that is corrected within a 30-day time period, as long as the violation was not due to willful neglect. This interim final rule became effective on November 30, 2009. The applicable state laws regulating the privacy of patient health information could impose additional penalties.                                         53  --------------------------------------------------------------------------------

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  The HITECH Act also authorizes State Attorneys General to bring civil actions seeking either an injunction or damages in response to violations of HIPAA privacy and security regulations or the new data breach law that affects the privacy of their state residents. We expect vigorous enforcement of the HITECH Act's requirements by HHS and State Attorneys General. Additional final rules relating to the HITECH Act, HIPAA enforcement and breach notification are expected to be published in the near future. Additionally, HHS announced a pilot audit program that will run until December 2012 in the first phase of HHS implementation of the HITECH Act's requirements of periodic audits of covered entities and business associates to ensure their compliance with the HIPAA privacy and security regulations. We cannot predict whether our hospitals will be able to comply with the final rules or the financial impact to our hospitals in implementing the requirements under the final rules if and when they take effect, or whether our hospitals will be selected for an audit and the results of such an audit.  Revenue Sources  Our hospitals generate revenues by providing healthcare services to our patients. Depending upon the patient's medical insurance coverage, we are paid for these services by governmental Medicare and Medicaid programs, commercial insurance, including managed care organizations, and directly by the patient. The amounts we are paid for providing healthcare services to our patients vary depending upon the payor. Governmental payors generally pay significantly less than the hospital's customary charges for the services provided. Insured patients are generally not responsible for any difference between customary hospital charges and the amounts received from commercial insurance payors. However, insured patients are responsible for payments not covered by insurance, such as exclusions, deductibles and co-payments.  Revenues from governmental payors, such as Medicare and Medicaid, are controlled by complex rules and regulations that stipulate the amount a hospital is paid for providing healthcare services. We must comply with these rules and regulations to continue to be eligible to participate in the Medicare and Medicaid programs. These rules and regulations are subject to frequent changes as a result of legislative and administrative action and annual payment adjustments on both the federal and the state levels. These changes will likely become more frequent and significant as the healthcare reform provisions of the Affordable Care Act are implemented.  Revenues from HMOs, PPOs and other private insurers are subject to contracts and other arrangements that require us to discount the amounts we customarily charge for healthcare services. These discounted arrangements often limit our ability to increase charges in response to increasing costs. We actively negotiate with these payors in an effort to maintain or increase the pricing of our healthcare services; however, we have no control over patients switching their healthcare coverage to a payor with which we have negotiated less favorable reimbursement rates.  Self-pay revenues are primarily generated through the treatment of uninsured patients. Our hospitals have experienced an increase in self-pay revenues during recent years as well as throughout 2011 as a result of a combination of broad economic factors, including rising unemployment in many of our markets, reductions in state Medicaid budgets and increasing numbers of individuals and employers who choose not to purchase insurance.  To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Our provision for doubtful accounts serves to reduce our reported revenues.  

For additional information about our revenue sources, please also refer to the discussion above under the subheading "Medicare and Medicaid Reimbursement."

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     TABLE OF CONTENTS  Results of Operations 

The following definitions apply throughout the remaining portion of Management's Discussion and Analysis of Financial Condition and Results of Operations:

  Admissions. Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to our hospitals and used by management and investors as a general measure of inpatient volume.  

bps. Basis point change.

  Continuing operations. Continuing operations information includes the results of our same-hospital operations but excludes the results of our hospitals that have previously been disposed.  

Effective tax rate. Provision for income taxes as a percentage of income from continuing operations before income taxes less net income attributable to noncontrolling interests.

Emergency room visits. Represents the total number of hospital-based emergency room visits.

  Equivalent admissions. Management and investors use equivalent admissions as a general measure of combined inpatient and outpatient volume. We compute equivalent admissions by multiplying admissions (inpatient volume) by the outpatient factor (the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue). The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume.  

Medicare case mix index. Refers to the acuity or severity of illness of an average Medicare patient at our hospitals.

N/A. Not applicable.

  Net revenue days outstanding. We compute net revenue days outstanding by dividing our accounts receivable net of allowance for doubtful accounts, by our revenue per day. Our revenue per day is calculated by dividing our quarterly revenues, including revenues for held for sale / disposed of hospitals, by the number of calendar days in the quarter.  

Outpatient surgeries. Outpatient surgeries are those surgeries that do not require admission to our hospitals.

Revenues. Revenues represent amounts recognized from all payors for the delivery of healthcare services, net of contractual discounts and the provision for doubtful accounts.

  Same-hospital. Same-hospital information includes the results of our hospital support center and the same 47 hospitals operated during the years ended December 31, 2011 and 2010. Same-hospital information excludes the results of Maria Parham which we acquired effective November 1, 2011 and Person Memorial which we acquired effective October 1, 2011 through our partnership arrangement with Duke; HighPoint Health System ("HighPoint") which we acquired effective September 1, 2010; Clark Regional Medical Center ("Clark"), which we acquired effective May 1, 2010; and our hospitals that have previously been disposed.                                         55  --------------------------------------------------------------------------------

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  As previously discussed, during the fourth quarter of 2011 we adopted the provisions of ASU 2011-7. ASU 2011-7 requires the presentation of revenues net of a provision for doubtful accounts. As a result of our adoption of ASU 2011-7, certain changes have been made to our historical summary results of operations. Specifically, revenues, sources by payor ratios and calculated metrics based on revenues have been updated to reflect our adoption of ASU 2011-7.  

Additionally and as previously discussed, during the fourth quarter of 2011, and retrospectively for the second and third quarters of 2011, we changed the classification of our Medicaid EHR incentive payments from other revenue to other income, separate from revenues, in accordance with ASC 450-30. Accordingly, our following discussion and analysis of revenues exclude all Medicaid EHR incentive payments.

For the Three Months Ended December 31, 2011 and 2010

The following table summarizes the results of operations for the three months ended December 31, 2011 and 2010 (dollars in millions):

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                                                   Three Months Ended December 31,                                         2011                                            2010                            Amount                   % of                   Amount                   % of                                                   Revenues                                        Revenues Revenues before provision for       $         916.4                   117.3 %       $         853.3                   116.4 % doubtful accounts Provision for                 135.1                    17.3                   120.4                    16.4 doubtful accounts Revenues                      781.3                   100.0                   732.9                   100.0 Salaries and                  353.5                    45.2                   335.2                    45.7 benefits Supplies                      122.8                    15.7                   112.5                    15.4 Other operating               186.6                    24.0                   161.0                    21.9 expenses Other income                  (11.5 )                  (1.5 )                     -                       - Depreciation and               44.8                     5.7                    39.3                     5.4 amortization Interest expense,              25.5                     3.3                    30.9                     4.2 net                               721.7                    92.4                   678.9                    92.6 Income from continuing                     59.6                     7.6                    54.0                     7.4 operations before income taxes Provision for                  21.3                     2.7                    16.9                     2.3 income taxes Income from continuing                     38.3                     4.9                    37.1                     5.1 operations Less: Net income attributable to                (0.6 )                  (0.1 )                  (0.8 )                  (0.1 ) noncontrolling interests Income from continuing operations          $          37.7                     4.8 %       $          36.3                     5.0 % attributable to LifePoint Hospitals, Inc.                                          56 

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     TABLE OF CONTENTS  Revenues 

The following table presents the components of revenues for the three months ended December 31, 2011 and 2010 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]     [[Image Removed]]      [[Image Removed]]                                Three Months Ended                                   December 31,                            2011                  2010                 Increase              % Increase Continuing operations: Revenues before provision for       $           916.4     $           853.3     $           63.1                  7.4 % doubtful accounts Provision for                   135.1                 120.4                 14.7                 12.2 doubtful accounts Revenues            $           781.3     $           732.9     $           48.4                  6.6 Same-hospital: Revenues before provision for       $           836.4     $           797.2     $           39.2                  4.9 % doubtful accounts Provision for                   121.5                 111.7                  9.8                  8.8 doubtful accounts Revenues            $           714.9     $           685.5     $           29.4                  4.3  

The following table shows the sources of our revenues by payor, including adjustments to estimated reimbursement amounts and provision for doubtful accounts, for the three months ended December 31, 2011 and 2010 (in millions):

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                                                        Continuing Operations                                                                             Same-Hospital                                         2011                                           2010                                           2011                                           2010 Medicare            $         272.8                   34.9 %       $         252.6                   34.5 %       $         249.9                   35.0 %       $         237.1                   34.6 % Medicaid                      107.6                   13.8                   101.2                   13.8                    98.7                   13.8                    93.0                   13.6 HMOs, PPOs and other private                 380.3                   48.7                   363.0                   49.5                   348.5                   48.7                   339.2                   49.5 insurers Self-Pay                      145.9                   18.7                   128.2                   17.5                   130.3                   18.2                   120.3                   17.5 Other                           9.8                    1.2                     8.3                    1.1                     9.0                    1.3                     7.6                    1.1 Revenues before provision for                 916.4                  117.3                   853.3                  116.4                   836.4                  117.0                   797.2                  116.3 doubtful accounts Provision for                (135.1 )                (17.3 )                (120.4 )                (16.4 )                (121.5 )                (17.0 )                (111.7 )                (16.3 ) doubtful accounts Revenues            $         781.3                  100.0 %       $         732.9                  100.0 %       $         714.9                  100.0 %       $         685.5                  100.0 %   Certain changes have been made to our historical sources of revenues table above. Specifically, we previously classified certain state managed Medicaid revenues as revenues from HMOs, PPOs and other private insurers. We have determined that these revenues are more appropriately classified as Medicaid revenues. This change had no impact on our historical results of operations. These reclassifications resulted in a reduction to revenue from HMOs, PPOs and other private insurers and an increase in our Medicaid revenues.                                         57  --------------------------------------------------------------------------------

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  Our revenues per equivalent admission from continuing operations and on a same-hospital basis were as follows for the three months ended December 31, 2011 and 2010:  [[Image Removed]]           [[Image Removed]]     [[Image Removed]]     [[Image Removed]]       [[Image Removed]]                                        Three Months Ended                                           December 31,                                    2011                  2010                 Increase               % Increase Revenues per equivalent admission - continuing      $           7,313     $           7,091     $            222                     3.1 

operations

 Revenues per equivalent     $           7,423     $           7,130     $            293                     4.1 

admission - same-hospital

Revenues Before Provision for Doubtful Accounts

The following table shows the key drivers of our revenues before provision for doubtful accounts for the three months ended December 31, 2011 and 2010:

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]     [[Image Removed]]      [[Image Removed]]                                Three Months Ended                     Increase              % Increase                                   December 31,                       (Decrease)             (Decrease)                            2011                  2010 Continuing operations: Admissions                     48,354                47,701                 653                   1.4 Equivalent                    106,850               103,361               3,489                   3.4 admissions Medicare case mix                1.30                  1.31               (0.01 )                (0.8 ) index Average length of                 4.4                   4.3                 0.1                   2.3 stay (days) Inpatient                      13,055                13,375                (320 )                (2.4 ) surgeries Outpatient                     39,830                39,893                 (63 )                (0.2 ) surgeries Emergency room                257,046               244,014              13,032                   5.3 visits Outpatient factor                2.21                  2.17                0.04                   1.8 Same-hospital: Admissions                     44,298                44,718                (420 )                (0.9 ) Equivalent                     96,319                96,154                 165                   0.2 admissions Medicare case mix                1.31                  1.32               (0.01 )                (0.8 ) index Average length of                 4.2                   4.3                (0.1 )                (2.3 ) stay (days) Inpatient                      11,981                12,696                (715 )                (5.6 ) surgeries Outpatient                     37,072                37,749                (677 )                (1.8 ) surgeries Emergency room                228,375               227,417                 958                   0.4 visits Outpatient factor                2.17                  2.15                0.02                   1.0   For the three months ended December 31, 2011, our same-hospital revenues before provision for doubtful accounts increased by $39.2 million or 4.9%, to $836.4 million as compared to $797.2 million for the same period last year. This increase in our same-hospital revenues before provision for doubtful accounts is largely a result of the following:  

• Increases in our same-hospital Medicare revenue of approximately $12.8

million or 5.4%;</p>

• Increases in our same-hospital HMOs, PPOs and other private insurers

revenue of approximately $9.3 million or 2.7%; and

• Increases in our same-hospital self-pay revenue of approximately $10.0

million or 8.3%.

   Increases in our same-hospital Medicare revenues were largely driven by higher Medicare equivalent admissions, benefits associated with improved Medicare reimbursement rates such as the market basket update and budget neutrality indices combined with an increase in anticipated cost report settlements. Our same-hospital HMOs, PPOs and other private insurers revenue increased primarily as a result of higher contracted rates partially offset by unfavorable equivalent admission volumes compared to the same period of the prior year. Finally, same-hospital self-pay revenue increased primarily as a result of higher emergency room visits from our self-pay population, overall high levels of unemployment in the majority of our                                         58  --------------------------------------------------------------------------------

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  communities and pricing increases. While our same-hospital self-pay revenue increased during the current period as compared to the same quarter of the prior year, it remains comparable to the increases experienced during prior quarters in 2011. Increases in our self-pay revenues attributed to an increase in our provision for doubtful accounts, as further discussed in our analysis of our provision for doubtful accounts.  

Provision for Doubtful Accounts

The following table summarizes the key drivers and key indicators of our provision for doubtful accounts for the three months ended December 31, 2011 and 2010 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                 Three Months Ended December 31,                            2011                   % of                  2010                   % of                 Increase              % Increase                                                 Revenues                                     Revenues Continuing operations: Related key indicators: Charity care        $            21.7                2.8 %       $            18.0                2.4 %       $            3.7                 20.9 % write-offs Self-pay revenues, net of charity care        $           145.9               18.7 %       $           128.2               17.5 %       $           17.7                 13.8 % write-offs and uninsured discounts Net revenue days outstanding                      50.7                N/A                      48.6                N/A                      2.1                  4.3 % (at end of period) Same-hospital: Related key indicators: Charity care        $            19.7                2.8 %       $            16.3                2.4 %       $            3.4                 20.9 % write-offs Self-pay revenues, net of charity care        $           130.3               18.2 %       $           120.3               17.5 %       $           10.0                  8.3 % write-offs and uninsured discounts Net revenue days outstanding                      50.2                N/A                      46.4                N/A                      3.8                  8.2 % (at end of period)   For the three months ended December 31, 2011, our provision for doubtful accounts increased by $14.7 million, or 12.2%, to $135.1 million on a continuing operations basis and by $9.8 million, or 8.8%, to $121.5 million on a same-hospital basis as compared to the same period last year. This increase was primarily the result of increases in self-pay revenues during the three months ended December 31, 2011. Same-hospital self-pay revenues increased by $10.0 million over the same period last year and represented 18.2% of revenues, as compared to 17.5% of revenues in the same period last year. Self- pay revenues continued to increase for both our inpatient and outpatient services, which were primarily driven by high levels of unemployment in the majority of our communities. Our increased provision for doubtful accounts was partially offset by an increase in both up-front cash collections and cash collections related to our insured receivables for the three months ended December 31, 2011, as compared to the same period last year. The provision for doubtful accounts relates principally to self-pay amounts due from patients. The provision and allowance for doubtful accounts are critical accounting estimates and are further discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Estimates."                                         59  --------------------------------------------------------------------------------

     TABLE OF CONTENTS  Expenses and Other Income Salaries and Benefits 

The following table summarizes our salaries and benefits, man-hours per equivalent admission and salaries and benefits per equivalent admission for the three months ended December 31, 2011 and 2010:

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                 Three Months Ended December 31,                            2011                   % of                  2010                   % of                 Increase              % Increase                                                 Revenues                                     Revenues Continuing operations: Salaries and benefits (dollars   $           353.5               45.2 %       $           335.2               45.7 %       $           18.3                 5.5 % in millions) Man-hours per equivalent                      101.5                N/A                     100.3                N/A                      1.2                 1.2 % admission Salaries and benefits per        $           3,286                N/A         $           3,233                N/A         $             53                 1.6 % equivalent admission Same-hospital: Salaries and benefits (dollars   $           320.4               44.8 %       $           310.0               45.2 %       $           10.4                 3.4 % in millions) Man-hours per equivalent                      100.9                N/A                      99.3                N/A                      1.6                 1.7 % admission Salaries and benefits per        $           3,299                N/A         $           3,214                N/A         $             85                 2.6 % equivalent admission   For the three months ended December 31, 2011, our salaries and benefits expense increased to $320.4 million, or 3.4%, on a same-hospital basis as compared to $310.0 million for the same period last year. This increase in our same-hospital salaries and benefits expense is primarily a result of the impact of compensation increases for our employees, an increase in our utilization of contract labor and an increase in man-hours per equivalent admission to 100.9, or 1.7% on a same-hospital basis as compared to 99.3 for the same period last year. These increases were partially offset by lower employee benefits cost, primarily medical benefits expense.  

Supplies

The following table summarizes our supplies and supplies per equivalent admission for the three months ended December 31, 2011 and 2010:

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                 Three Months Ended December 31,                            2011                   % of                  2010                   % of                 Increase              % Increase                                                 Revenues                                     Revenues Continuing operations: Supplies (dollars   $           122.8               15.7 %       $           112.5               15.4 %       $           10.3                 9.1 % in millions) Supplies per equivalent          $           1,151                N/A         $           1,089                N/A         $             62                 5.7 % admission Same-hospital: Supplies (dollars   $           112.4               15.7 %       $           105.5               15.4 %       $            6.9                 6.6 % in millions) Supplies per equivalent          $           1,169                N/A         $           1,097                N/A         $             72                 6.5 % admission   For the three months ended December 31, 2011, our supplies expense increased to $112.4 million, or 6.6% on a same-hospital basis as compared to $105.5 million for the same period last year. This increase in our same-hospital supplies expense for the three months ended December 31, 2011 was primarily a result of an increase in our supplies expense per equivalent admission to $1,169, or 6.5%, as compared to $1,097 for the same period last year. Supplies per equivalent admission increased as a result of a higher utilization of more expensive supplies, predominantly cancer related supplies, as well as an increase in our pharmacy supplies expense.                                         60 

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     TABLE OF CONTENTS  Other Operating Expenses 

The following table summarizes our other operating expenses for the three months ended December 31, 2011 and 2010 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                 Three Months Ended December 31,                            2011                   % of                  2010                   % of                 Increase              % Increase                                                 Revenues                                     Revenues Continuing operations: Professional fees   $            26.8                3.4 %       $            23.0                3.1 %       $            3.8                 15.9 % Utilities                        14.3                1.8                      13.7                1.9                      0.6                  5.1 Repairs and                      21.5                2.8                      19.5                2.7                      2.0                 10.2 maintenance Rents and leases                  7.8                1.0                       7.0                1.0                      0.8                 12.3 Insurance                        14.1                1.8                       9.5                1.3                      4.6                 48.0 Physician                         8.0                1.0                       6.5                0.9                      1.5                 22.5 recruiting Contract services                49.2                6.3                      41.4                5.7                      7.8                 18.7 Non-income taxes                 18.7                2.4                      17.7                2.4                      1.0                  5.7 Other                            26.2                3.5                      22.7                2.9                      3.5                 15.6                     $           186.6               24.0 %       $           161.0               21.9 %       $           25.6                 15.9 % Same-hospital: Professional fees   $            23.5                3.3 %       $            20.8                3.0 %       $            2.7                 13.0 % Utilities                        12.8                1.8                      12.6                1.8                      0.2                  1.4 Repairs and                      19.7                2.8                      17.7                2.6                      2.0                 11.1 maintenance Rents and leases                  6.9                1.0                       6.4                0.9                      0.5                  8.1 Insurance                        14.4                2.0                       9.2                1.3                      5.2                 55.7 Physician                         7.5                1.1                       6.4                0.9                      1.1                 16.9 recruiting Contract services                44.6                6.2                      39.4                5.7                      5.2                 13.0 Non-income taxes                 16.6                2.3                      16.1                2.3                      0.5                  3.2 Other                            24.6                3.4                      22.0                3.5                      2.6                 12.1                     $           170.6               23.9 %       $           150.6               22.0 %       $           20.0                 13.2 %   For the three months ended December 31, 2011, our other operating expenses increased to $170.6 million, or 13.2% on a same-hospital basis as compared to $150.6 million for the same period last year. This increase for the three months ended December 31, 2011 was primarily a result of increases in professional fees, insurance, contract services and other.  As a shortage of physicians continues to become more acute, we have experienced increasing professional fees in areas such as emergency room physician coverage and hospitalists. We expect this trend to continue and that professional fees as a percentage of revenues will increase in future periods.  For the three months ended December 31, 2011, our insurance expense increased compared to the same period last year primarily because of unfavorable claim development for our professional and general liability claims experienced during the current period as compared to the same period of the prior year.  On a same-hospital basis, our contract services expense increased primarily as a result of increased fees and expenses related to our conversion of the clinical and patient accounting information system applications at several of our hospitals. For the three months ended December 31, 2011, we estimate that we incurred approximately $3.3 million of additional operating expenses related to our implementation of our EHR initiatives. Finally, our other expenses increased primarily as a result of increases in our charitable program expenses as well as additional legal and consulting fees related to our recent acquisitions, including Maria Parham and Person Memorial.                                         61  --------------------------------------------------------------------------------

     TABLE OF CONTENTS  Other Income  We recognize EHR incentive payments received or anticipated to be received under the HITECH Act as other income in accordance with ASC 450-30 when our eligible hospitals and physician practices have demonstrated meaningful use of certified EHR technology for the applicable period and when the cost report information for the full cost report year that determines the final calculation of the EHR incentive payment is available. For the three months ended December 31, 2011, we recognized $11.5 million in Medicaid EHR incentive payments which was not available in the same period of the prior year.  During the second and third quarters of 2011, we first recognized EHR incentive payments of $4.2 million and $11.0 million, respectively, which we included in revenues. During the fourth quarter of 2011 and retrospectively for the second and third quarters of 2011, we changed the classification of our EHR incentive payments from revenues to other income. The quarterly impact of the change in our classification of EHR incentive payments recognized for the year ended December 31, 2011 is further described in Note 12 to our consolidated financial statements included elsewhere in this report.  

Depreciation and Amortization

  For the three months ended December 31, 2011, our depreciation and amortization expense increased by $5.5 million, or 14.2% to $44.8 million, or 5.7% of revenues, on a continuing operations basis as compared to $39.3 million, or 5.4% of revenues for the same period last year. Our depreciation and amortization expense increased primarily as a result of capital improvement projects completed during 2011, as well as our recent acquisitions, including Maria Parham and Person Memorial. Throughout 2011, we have experienced a significant increase in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. We estimate that we incurred approximately $1.7 million in additional depreciation expense during the three months ended December 31, 2011 related to our increased information systems spending. We anticipate increasing our spending related to information systems during 2012 as compared to 2011 and prior years. As a result, we anticipate that our depreciation and amortization expense as a percentage of revenues will increase in future periods.  

Interest Expense

  Our interest expense decreased by $5.4 million, or 17.5%, to $25.5 million, for the three months ended December 31, 2011, as compared to $30.9 million for the same period last year as a result of several factors. Effective September 23, 2010, we issued $400.0 million of 6.625% unsecured senior notes due October 1, 2020 (the "6.625% Senior Notes"). The net proceeds from this issuance were used to repay $249.2 million of our outstanding borrowings under the term B loans (the "Term B Loans") provided pursuant to our Credit Agreement and $6.0 million of our outstanding borrowings under our Province 7½% senior subordinated notes due 2013 (the "Province 7½% Notes"). Interest on the 6.625% Senior Notes is payable at an annual fixed rate of 6.625% as compared to a variable rate under our Term B Loans, which for the three months ended December 31, 2011, on a weighted average basis, was 3.22%. On November 30, 2010, the notional amount of our interest rate swap decreased from $450.0 million to $300.0 million and effective May 30, 2011 our interest rate swap agreement matured. As the notional amount of our interest rate swap declined and then matured, a larger portion of our total outstanding debt has become subject to floating interest rates that are lower than the previously fixed rate under the agreement of 5.585% for the three months ended December 31, 2011 as compared to the same period last year. For a further discussion of our debt and corresponding interest rates, see "Liquidity and Capital Resources - Debt."  

Provision for Income Taxes

  Our provision for income taxes was $21.3 million, or 2.7% of revenues, for the three months ended December 31, 2011, as compared to $16.9 million, or 2.3% of revenues, for the same period last year. The effective tax rate increased to 36.2% for the three months ended December 31, 2011, compared to 31.8% for the same period last year. Our effective tax rate was lower during the three months ended December 31, 2010 as compared to the three months ended December 31, 2011 primarily as a result of decreases in income tax liabilities due to a tax accounting method change and the expiration of statutes of limitations on various income tax returns.                                         62  --------------------------------------------------------------------------------

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For the Years Ended December 31, 2011 and 2010

The following table summarizes the results of operations for the years ended December 31, 2011 and 2010 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]      [[Image Removed]]       [[Image Removed]]      [[Image Removed]]                                                      Years Ended December 31,                                         2011                                           2010                            Amount                  % of                   Amount                  % of                                                  Revenues                                       Revenues Revenues before provision for       $       3,544.6                  117.1 %       $       3,262.4                  115.7 % doubtful accounts Provision for                 518.5                   17.1                   443.8                   15.7 doubtful accounts Revenues                    3,026.1                  100.0                 2,818.6                  100.0 Salaries and                1,364.7                   45.1                 1,270.3                   45.1 benefits Supplies                      469.5                   15.5                   443.0                   15.7 Other operating               682.4                   22.6                   605.2                   21.5 expenses Other income                  (26.7 )                 (0.9 )                     -                      - Depreciation and              165.8                    5.5                   148.5                    5.2 amortization Interest expense,             107.1                    3.5                   108.1                    3.8 net Debt extinguishment                    -                      -                     2.4                    0.1 costs                             2,762.8                   91.3                 2,577.5                   91.4 Income from continuing                    263.3                    8.7                   241.1                    8.6 operations before income taxes Provision for                  97.8                    3.2                    82.4                    3.0 income taxes Income from continuing                    165.5                    5.5                   158.7                    5.6 operations Less: Net income attributable to                (2.8 )                 (0.1 )                  (3.1 )                 (0.1 ) noncontrolling interests Income from continuing operations          $         162.7                    5.4 %       $         155.6                    5.5 % attributable to LifePoint Hospitals, Inc.   Revenues 

The following table presents the components of revenues for the years ended December 31, 2011 and 2010 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]     [[Image Removed]]     [[Image Removed]]                             Years Ended December 31,                            2011                  2010                Increase              % Increase Continuing operations: Revenues before provision for       $         3,544.6     $         3,262.4     $           282.2                8.6 % doubtful accounts Provision for                   518.5                 443.8                  74.7               16.8 doubtful accounts Revenues            $         3,026.1     $         2,818.6     $           207.5                7.4 Same-hospital: Revenues before provision for       $         3,300.5     $         3,168.1     $           132.4                4.2 % doubtful accounts Provision for                   479.5                 429.7                  49.8               11.6 doubtful accounts Revenues            $         2,821.0     $         2,738.4     $            82.6                3.0                                          63 

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The following table shows the sources of our revenues by payor, including adjustments to estimated reimbursement amounts and provision for doubtful accounts, for the years ended December 31, 2011 and 2010 (in millions):

[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]

                                                        Continuing Operations                                                                             Same-Hospital                                         2011                                           2010                                           2011                                           2010 Medicare            $       1,061.3                   35.0 %       $         983.7                   34.9 %       $         990.0                   35.1 %       $         958.7                   35.0 % Medicaid                      432.1                   14.3                   410.8                   14.6                   400.8                   14.2                   396.7                   14.5 HMOs, PPOs and other private               1,446.6                   47.8                 1,360.1                   48.2                 1,350.1                   47.9                 1,318.9                   48.2 insurers Self-Pay                      565.3                   18.7                   475.1                   16.9                   523.2                   18.5                   462.0                   16.9 Other                          39.3                    1.3                    32.7                    1.1                    36.4                    1.3                    31.8                    1.1 Revenues before provision for               3,544.6                  117.1                 3,262.4                  115.7                 3,300.5                  117.0                 3,168.1                  115.7 doubtful accounts Provision for                (518.5 )                (17.1 )                (443.8 )                (15.7 )                (479.5 )                (17.0 )                (429.7 )                (15.7 ) doubtful accounts Revenues            $       3,026.1                  100.0 %       $       2,818.6                  100.0 %       $       2,821.0                  100.0 %       $       2,738.4                  100.0 %   Certain changes have been made to our historical sources of revenues table above. Specifically, we previously classified certain state managed Medicaid revenues as revenues from HMOs, PPOs and other private insurers. We have determined that these revenues are more appropriately classified as Medicaid revenues. This change had no impact on our historical results of operations. These reclassifications resulted in a reduction to revenue from HMOs, PPOs and other private insurers and an increase in our Medicaid revenues.  Our revenues per equivalent admission from continuing operations and on a same-hospital basis were as follows for the years ended December 31, 2011 and 2010:  [[Image Removed]]           [[Image Removed]]     [[Image Removed]]     [[Image Removed]]       [[Image Removed]]                                     Years Ended December 31,                                    2011                  2010                 Increase               % Increase

Revenues per equivalent admission - continuing      $           7,126     $           6,925     $            201                     2.9 operations Revenues per equivalent     $           7,185     $           6,944     $            241                     3.5 admission - same-hospital                                          64 

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Revenues Before Provision for Doubtful Accounts

The following table shows the key drivers of our revenues before provision for doubtful accounts for the years ended December 31, 2011 and 2010:

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]     [[Image Removed]]      [[Image Removed]]                             Years Ended December 31,                  Increase              % Increase                            2011                  2010                (Decrease)             (Decrease) Continuing operations: Admissions                    195,974               188,875               7,099                   3.8 Equivalent                    424,676               407,026              17,650                   4.3 admissions Medicare case mix                1.29                  1.30               (0.01 )                (0.8 ) index Average length of                 4.3                   4.4                (0.1 )                (2.3 ) stay (days) Inpatient                      53,017                53,914                (897 )                (1.7 ) surgeries Outpatient                    156,140               155,691                 449                   0.3 surgeries Emergency room              1,024,273               952,449              71,824                   7.5 visits Outpatient factor                2.17                  2.16                0.01                   0.6 Same-hospital: Admissions                    183,213               183,942                (729 )                (0.4 ) Equivalent                    392,625               394,372              (1,747 )                (0.4 ) admissions Medicare case mix                1.30                  1.30                   -                     - index Average length of                 4.3                   4.3                   -                     - stay (days) Inpatient                      49,720                52,743              (3,023 )                (5.7 ) surgeries Outpatient                    147,257               151,411              (4,154 )                (2.7 ) surgeries Emergency room                940,923               921,074              19,849                   2.2 visits Outpatient factor                2.14                  2.14                   -                     -   For the year ended December 31, 2011, our revenues before provision for doubtful accounts increased by $132.4 million, or 4.2% to $3,300.5 million on a same-hospital basis as compared to $3,168.1 million for the same period last year. This increase in our same-hospital revenues before provision for doubtful accounts is largely a result of the following:  

• Increases in our same-hospital Medicare revenue of approximately $31.3

million or 3.3%;

• Increases in our same-hospital HMOs, PPOs and other private insurers

revenue of approximately $31.2 million or 2.4%; and

• Increases in our same-hospital self-pay revenue of approximately $61.2

million or 13.2%.

   Increases in our same-hospital Medicare revenues were largely driven by higher Medicare equivalent admissions, benefits associated with improved Medicare reimbursement rates such as the market basket update and budget neutrality indices combined with an increase in anticipated cost report settlements. Our same-hospital HMOs, PPOs and other private insurers revenue increased primarily as a result of higher contracted rates partially offset by unfavorable equivalent admission volumes compared to the same period of the prior year. Finally, same-hospital self-pay revenues increased primarily as a result of higher emergency room visits from our self-pay population, overall high levels of unemployment in the majority of our communities and pricing increases. Increases in our self-pay revenues attributed to an increase in our provision for doubtful accounts, as further discussed in our analysis of our provision for doubtful accounts.                                         65 

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Provision for Doubtful Accounts

The following table summarizes the key drivers and key indicators of our provision for doubtful accounts for the years ended December 31, 2011 and 2010 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                    Years Ended December 31,                            2011                   % of                  2010                   % of                 Increase              % Increase                                                 Revenues                                     Revenues Continuing operations: Related key indicators: Charity care        $            89.4                3.0 %       $            62.3                2.2 %       $           27.1                 43.5 % write-offs Self-pay revenues, net of charity care        $           565.3               18.7 %       $           475.1               16.9 %       $           90.2                 19.0 % write-offs and uninsured discounts Net revenue days outstanding                      50.7                N/A                      48.6                N/A                      2.1                  4.3 % (at end of period) Same-hospital: Related key indicators: Charity care        $            79.5                2.8 %       $            60.4                2.2 %       $           19.1                 31.7 % write-offs Self-pay revenues, net of charity care        $           523.2               18.5 %       $           462.0               16.9 %       $           61.2                 13.2 % write-offs and uninsured discounts Net revenue days outstanding                      50.2                N/A                      46.4                N/A                      3.8                  8.2 % (at end of period)   For the year ended December 31, 2011, our provision for doubtful accounts increased by $74.7 million, or 16.8%, to $518.5 million on a continuing operations basis and by $49.8 million, or 11.6%, to $479.5 million on a same-hospital basis as compared to the prior year. This increase was primarily the result of increases in self-pay revenues during the year ended December 31, 2011. Same-hospital self-pay revenues increased by $61.2 million over the prior year and represents 18.5% of revenues as compared to 16.9% of revenues in the prior year. Self-pay revenues continued to increase for both our inpatient and outpatient services which were primarily driven by high levels of unemployment in the majority of our communities. Our increased provision for doubtful accounts was partially offset by an increase in both up-front cash collections and cash collections related to our insured receivables for the year ended December 31, 2011, as compared to the prior year. The provision for doubtful accounts relates principally to self-pay amounts due from patients. The provision and allowance for doubtful accounts are critical accounting estimates and are further discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Estimates."  Expenses and Other Income Salaries and Benefits 

The following table summarizes our salaries and benefits, man-hours per equivalent admission and salaries and benefits per equivalent admission for the years ended December 31, 2011 and 2010:

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                    Years Ended December 31,                            2011              % of Revenues              2010              % of Revenues             Increase              % Increase Continuing operations: Salaries and benefits (dollars   $         1,364.7               45.1 %       $         1,270.3               45.1 %       $           94.4                 7.4 % in millions) Man-hours per equivalent                       98.7                N/A                      96.3                N/A                      2.4                 2.5 % admission Salaries and benefits per        $           3,201                N/A         $           3,112                N/A         $             89                 2.9 % equivalent admission Same-hospital: Salaries and benefits (dollars   $         1,262.3               44.7 %       $         1,227.7               44.8 %       $           34.6                 2.8 % in millions) Man-hours per equivalent                       98.0                N/A                      95.9                N/A                      2.1                 2.3 % admission Salaries and benefits per        $           3,201                N/A         $           3,104                N/A         $             97                 3.1 % equivalent admission                                          66 

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  For the year ended December 31, 2011, our salaries and benefits expense increased to $1,262.3 million, or 2.8%, on a same-hospital basis as compared to $1,227.7 million for the prior year. This increase in our same-hospital salaries and benefits expense is primarily a result of the impact of compensation increases for our employees and an increase in man-hours per equivalent admission to 98.0, or 2.3% on a same-hospital basis as compared to 95.9 for the same period last year. These increases were partially offset by lower employee benefits costs.  Supplies 

The following table summarizes our supplies and supplies per equivalent admission for the years ended December 31, 2011 and 2010:

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                    Years Ended December 31,                            2011                   % of                  2010                   % of                 Increase              % Increase                                                 Revenues                                     Revenues Continuing operations: Supplies (dollars   $           469.5               15.5 %       $           443.0               15.7 %       $           26.5                 6.0 % in millions) Supplies per equivalent          $           1,106                N/A         $           1,088                N/A         $             18                 1.6 % admission Same-hospital: Supplies (dollars   $           439.6               15.6 %       $           431.1               15.7 %       $            8.5                 2.0 % in millions) Supplies per equivalent          $           1,120                N/A         $           1,093                N/A         $             27                 2.4 % admission   For the year ended December 31, 2011, our supplies expense increased to $439.6 million, or 2.0% on a same-hospital basis, as compared to $431.1 million for the prior year. This increase in our same-hospital supplies expense for the year ended December 31, 2011 was primarily a result of an increase in our supplies expense per equivalent admission to $1,120, or 2.4%, as compared to $1,093 for the prior year. Supplies per equivalent admission increased as a result of a higher utilization of more expensive supplies, predominately cancer related supplies, as well as an increase in our pharmacy supplies expense.                                         67  --------------------------------------------------------------------------------

     TABLE OF CONTENTS  Other Operating Expenses 

The following table summarizes our other operating expenses for the years ended December 31, 2011 and 2010 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                    Years Ended December 31,                                         Increase              % Increase                            2011                   % of                  2010                   % of                (Decrease)             (Decrease)                                                 Revenues                                     Revenues Continuing operations: Professional fees   $            97.8                3.2 %       $            82.9                2.9 %       $         14.9                   17.9 % Utilities                        58.0                1.9                      53.8                1.9                    4.2                    7.9 Repairs and                      80.2                2.7                      71.8                2.5                    8.4                   11.7 maintenance Rents and leases                 30.0                1.0                      27.0                1.0                    3.0                   11.3 Insurance                        39.5                1.3                      42.8                1.5                   (3.3 )                 (7.7 ) Physician                        28.6                0.9                      24.1                0.9                    4.5                   18.6 recruiting Contract services               180.7                6.0                     156.5                5.6                   24.2                   15.4 Non-income taxes                 74.1                2.4                      65.9                2.3                    8.2                   12.5 Other                            93.5                3.2                      80.4                2.9                   13.1                   16.3                     $           682.4               22.6 %       $           605.2               21.5 %       $         77.2                   12.8 % Same-hospital: Professional fees   $            89.1                3.2 %       $            78.8                2.9 %       $         10.3                   13.1 % Utilities                        53.1                1.9                      52.1                1.9                    1.0                    1.8 Repairs and                      74.0                2.6                      69.1                2.5                    4.9                    7.1 maintenance Rents and leases                 26.9                1.0                      25.2                0.9                    1.7                    6.6 Insurance                        38.7                1.4                      42.2                1.5                   (3.5 )                 (8.4 ) Physician                        27.5                1.0                      23.9                0.9                    3.6                   14.7 recruiting Contract services               168.4                6.0                     153.2                5.6                   15.2                    9.9 Non-income taxes                 66.7                2.4                      62.5                2.3                    4.2                    6.7 Other                            89.3                3.0                      79.5                3.0                    9.8                   12.4                     $           633.7               22.5 %       $           586.5               21.5 %       $         47.2                    8.0 %   For the year ended December 31, 2011, our other operating expenses increased to $633.7 million, or 8.0% on a same-hospital basis, as compared to $586.5 million for the prior year. This increase in our same-hospital other operating expenses for the year ended December 31, 2011 was primarily a result of increases in professional fees, contract services and other expenses.  As a shortage of physicians continues to become more acute, we have experienced increasing professional fees in areas such as emergency room physician coverage and hospitalists. We expect this trend to continue and that professional fees as a percentage of revenues will increase in future periods.  On a same-hospital basis, our contract services expense increased primarily as a result of increased fees and expenses related to our conversion of the clinical and patient accounting information system applications at several of our hospitals. For the year ended December 31, 2011, we estimate that we incurred approximately $11.2 million of additional operating expenses related to our implementation of our EHR initiatives. Finally, our other expenses increased primarily as a result of increases in our charitable program expense as well as additional legal and consulting fees related to our recent acquisitions, including Maria Parham and Person Memorial.                                         68  --------------------------------------------------------------------------------

     TABLE OF CONTENTS  Other Income  We recognize EHR incentive payments received or anticipated to be received under the HITECH Act as other income in accordance with ASC 450-30 when our eligible hospitals and physician practices have demonstrated meaningful use of certified EHR technology for the applicable period and when the cost report information for the full cost report year that determines the final calculation of the EHR incentive payment is available. For the year ended December 31, 2011, we recognized $26.7 million in Medicaid EHR incentive payments which was not available in the same period of the prior year.  During the second and third quarters of 2011, we first recognized EHR incentive payments of $4.2 million and $11.0 million, respectively, which we included in revenues. During the fourth quarter of 2011 and retrospectively for the second and third quarters of 2011, we changed the classification of our EHR incentive payments from revenues to other income. The $26.7 million in EHR incentive payments recognized for the year ended December 31, 2011 include this reclassification. The quarterly impact of the change in our classification of EHR incentive payments recognized for the year ended December 31, 2011 is further described in Note 12 to our consolidated financial statements included elsewhere in this report.  Depreciation and Amortization  For the year ended December 31, 2011, our depreciation and amortization expense increased by $17.3 million, or 11.7% to $165.8 million, or 5.5% of revenues, on a continuing operations basis as compared to $148.5 million, or 5.2% of revenues for the prior year. Our depreciation and amortization expense increased primarily as a result of capital improvement projects completed during 2011, as well as our recent acquisitions, including Maria Parham and Person Memorial. Throughout 2011, we have experienced a significant increase in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. We estimate that we incurred approximately $4.5 million in additional depreciation expense during the year ended December 31, 2011 related to our increased information systems spending. We anticipate increasing our spending related to information systems during 2012 as compared to 2011 and prior years. As a result, we anticipate that our depreciation and amortization expense as a percentage of revenues will increase in future periods.  

Interest Expense

  Our interest expense decreased by $1.0 million, or 0.9%, to $107.1 for the year ended December 31, 2011, as compared to $108.1 million for the prior year as a result of several factors. Effective September 23, 2010, we issued $400.0 million of 6.625% Senior Notes. The net proceeds from this issuance were used to repay $249.2 million of our outstanding borrowings under the Term B Loans provided pursuant to our Credit Agreement and $6.0 million of our outstanding borrowings under our Province 7½% Notes. Interest on the 6.625% Senior Notes is payable at an annual fixed rate of 6.625% as compared to a variable rate under our Term B Loans, which for the year ended December 31, 2011, on a weighted average basis, was 3.11%. On November 30, 2010, the notional amount of our interest rate swap decreased from $450.0 million to $300.0 million and effective May 30, 2011 our interest rate swap agreement matured. As the notional amount of our interest rate swap declined and then matured, a larger portion of our total outstanding debt has become subject to floating interest rates that are lower than the previously fixed rate under the agreement of 5.585% for the year ended December 31, 2011 as compared to the same period last year. For a further discussion of our debt and corresponding interest rates, see "Liquidity and Capital Resources - Debt."  

Provision for Income Taxes

  Our provision for income taxes was $97.8 million, or 3.2% of revenues, for the year ended December 31, 2011, as compared to $82.4 million, or 3.0% of revenues, for the same period last year. The effective tax rate increased to 37.6% for the year ended December 31, 2011, compared to 34.6% for the same period last year. Our effective tax rate was lower during the year ended December 31, 2010 as compared to the year ended December 31, 2011 primarily as a result of decreases in income liabilities due to a tax accounting method change and the expiration of statutes of limitations on various income tax returns.                                         69  --------------------------------------------------------------------------------

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For the Years Ended December 31, 2010 and 2009

The following table summarizes the results of operations for the years ended December 31, 2010 and 2009 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]      [[Image Removed]]       [[Image Removed]]      [[Image Removed]]                                                      Years Ended December 31,                                         2010                                           2009                            Amount                  % of                   Amount                  % of                                                  Revenues                                       Revenues Revenues before provision for       $       3,262.4                  115.7 %       $       2,962.7                  114.5 % doubtful accounts Provision for                 443.8                   15.7                   375.4                   14.5 doubtful accounts Revenues                    2,818.6                  100.0                 2,587.3                  100.0 Salaries and                1,270.3                   45.1                 1,170.9                   45.3 benefits Supplies                      443.0                   15.7                   409.1                   15.8 Other operating               605.2                   21.5                   538.0                   20.8 expenses Depreciation and              148.5                    5.2                   143.0                    5.5 amortization Interest expense,             108.1                    3.8                   103.2                    4.0 net Debt extinguishment                  2.4                    0.1                       -                      - costs Impairment                        -                      -                     1.1                      - charges                             2,577.5                   91.4                 2,365.3                   91.4 Income from continuing                    241.1                    8.6                   222.0                    8.6 operations before income taxes Provision for                  82.4                    3.0                    80.3                    3.1 income taxes Income from continuing                    158.7                    5.6                   141.7                    5.5 operations Less: Net income attributable to                (3.1 )                 (0.1 )                  (2.5 )                 (0.1 ) noncontrolling interests Income from continuing operations          $         155.6                    5.5 %       $         139.2                    5.4 % attributable to LifePoint Hospitals, Inc.   Revenues 

The following table presents the components of revenues for the years ended December 31, 2010 and 2009 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]     [[Image Removed]]     [[Image Removed]]                             Years Ended December 31,                            2010                  2009                Increase              % Increase Continuing operations: Revenues before provision for       $         3,262.4     $         2,962.7     $           299.7               10.1 % doubtful accounts Provision for                   443.8                 375.4                  68.4               18.2 doubtful accounts Revenues            $         2,818.6     $         2,587.3     $           231.3                8.9 Same-hospital: Revenues before provision for       $         3,168.1     $         2,962.7     $           205.4                6.9 % doubtful accounts Provision for                   429.7                 375.4                  54.3               14.5 doubtful accounts Revenues            $         2,738.4     $         2,587.3     $           151.1                5.8                                          70 

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The following table shows the sources of our revenues by payor, including adjustments to estimated reimbursement amounts and provision for doubtful accounts, for the years ended December 31, 2010 and 2009 (dollars in millions):

[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]

                                                        Continuing Operations                                                                             Same-Hospital                                         2010                                           2009                                           2010                                           2009                            Amount              % of Revenues              Amount              % of Revenues              Amount              % of Revenues              Amount              % of Revenues Medicare            $         983.7                   34.9 %       $         891.4                   34.5 %       $         958.7                   35.0 %       $         891.4                   34.5 % Medicaid                      410.8                   14.6                   313.9                   12.1                   396.7                   14.5                   313.9                   12.1 HMOs, PPOs and other private               1,360.1                   48.2                 1,335.4                   51.6                 1,318.9                   48.2                 1,335.4                   51.6 insurers Self-Pay                      475.1                   16.9                   390.1                   15.1                   462.0                   16.9                   390.1                   15.1 Other                          32.7                    1.1                    31.9                    1.2                    31.8                    1.1                    31.9                    1.2 Revenues before provision for               3,262.4                  115.7                 2,962.7                  114.5                 3,168.1                  115.7                 2,962.7                  114.5 doubtful accounts Provision for                (443.8 )                (15.7 )                (375.4 )                (14.5 )                (429.7 )                (15.7 )                (375.4 )                (14.5 ) doubtful accounts Revenues            $       2,818.6                  100.0 %       $       2,587.3                  100.0 %       $       2,738.4                  100.0 %       $       2,587.3                  100.0 %   Certain changes have been made to our historical sources of revenues table above. Specifically, we previously classified certain state managed Medicaid revenues as revenues from HMOs, PPOs and other private insurers. We have determined that these revenues are more appropriately classified as Medicaid revenues. This change had no impact on our historical results of operations. These reclassifications resulted in a reduction to revenue from HMOs, PPOs and other private insurers and an increase in our Medicaid revenues.  Our revenues per equivalent admission from continuing operations and on a same-hospital basis were as follows for the years ended December 31, 2010 and 2009:  [[Image Removed]]           [[Image Removed]]     [[Image Removed]]     [[Image Removed]]       [[Image Removed]]                                     Years Ended December 31,                                    2010                  2009                 Increase               % Increase

Revenues per equivalent admission - continuing      $           6,925     $           6,586     $            339                     5.1 operations Revenues per equivalent     $           6,944     $           6,586     $            358                     5.4 admission - same-hospital                                          71 

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Revenues Before Provision for Doubtful Accounts

The following table shows the key drivers of our revenues before provision for doubtful accounts for the years ended December 31, 2010 and 2009:

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]     [[Image Removed]]      [[Image Removed]]                             Years Ended December 31,                  Increase              % Increase                            2010                  2009                (Decrease)             (Decrease) Continuing operations: Admissions                    188,875               188,147                 728                   0.4 Equivalent                    407,026               392,851              14,175                   3.6 admissions Medicare case mix                1.30                  1.30                   -                     - index Average length of                 4.4                   4.3                 0.1                   2.3 stay (days) Inpatient                      53,914                54,599                (685 )                (1.3 ) surgeries Outpatient                    155,691               151,496               4,195                   2.8 surgeries Emergency room                952,449               935,824              16,625                   1.8 visits Outpatient factor                2.16                  2.09                0.07                   3.3 Same-hospital: Admissions                    183,942               188,147              (4,205 )                (2.2 ) Equivalent                    394,372               392,851               1,521                   0.4 admissions Medicare case mix                1.30                  1.30                   -                     - index Average length of                 4.3                   4.3                   -                     - stay (days) Inpatient                      52,743                54,599              (1,856 )                (3.4 ) surgeries Outpatient                    151,411               151,496                 (85 )                (0.1 ) surgeries Emergency room                921,074               935,824             (14,750 )                (1.6 ) visits Outpatient factor                2.14                  2.09                0.05                   2.4   For the year ended December 31, 2010, our revenues before provision for doubtful accounts increased by $205.4 million, or 6.9% to $3,168.1 million on a same-hospital basis as compared to $2,962.7 million for the same period last year. Of the $205.4 million increase, $20.0 million relates to additional amounts we received from the state of Alabama in connection with settlements for DSH payments and access payments, slightly offset by inpatient and outpatient rate reductions as a part of Alabama's new state plan amendment for Alabama's fiscal year ended December 31, 2010. The additional $20.0 million we received from the state of Alabama corresponds with an $11.7 million increase in our non-income taxes as discussed for changes in our other operating expenses for the year ended December 31, 2010 as compared to 2009. The remaining increase was the result of the impact of favorable commercial pricing, inclusive of improvements in our third party payor contracting, and an increase in our self-pay revenues as further discussed in our analysis of our provision for doubtful accounts for the year ended December 31, 2010.                                         72  --------------------------------------------------------------------------------

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Provision for Doubtful Accounts

The following table summarizes the key drivers and key indicators of our provision for doubtful accounts for the years ended December 31, 2010 and 2009 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                    Years Ended December 31,                            2010                   % of                  2009                   % of                 Increase              % Increase                                                 Revenues                                     Revenues Continuing operations: Charity care        $            62.3                2.2 %       $            58.5                2.3 %       $            3.8                  6.4 % write-offs Self-pay revenues, net of charity care        $           475.1               16.9 %       $           390.1               15.1 %       $           85.0                 21.8 % write-offs and uninsured discounts Net revenue days outstanding                      48.6                N/A                      45.8                N/A                      2.8                  6.1 % (at end of period) Same-hospital: Charity care        $            60.4                2.2 %       $            58.5                2.3 %       $            1.9                  3.1 % write-offs Self-pay revenues, net of charity care        $           462.0               16.9 %       $           390.1               15.1 %       $           71.9                 18.4 % write-offs and uninsured discounts Net revenue days outstanding                      46.4                N/A                      45.9                N/A                      0.5                  1.1 % (at end of period)   For the year ended December 31, 2010, our provision for doubtful accounts increased by $68.4 million, or 18.2%, to $443.8 million on a continuing operations basis and by $54.3 million, or 14.5%, to $429.7 million on a same-hospital basis as compared to the prior year. This increase was primarily the result of increases in self-pay revenues during the year ended December 31, 2010. Self-pay revenues, on a continuing operations basis, increased by $85.0 million over the prior year and represents 16.9% of revenues as compared to 15.1% of revenues in the prior year. Self-pay revenues continued to increase for both our inpatient and outpatient services which were primarily driven by high levels of unemployment in the majority of our communities. Our increased provision for doubtful accounts was partially offset by an increase in both up-front cash collections and cash collections related to our insured receivables for the year ended December 31, 2010, as compared to the prior year. The provision for doubtful accounts relates principally to self-pay amounts due from patients. The provision and allowance for doubtful accounts are critical accounting estimates and are further discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Estimates."  

Expenses

Salaries and Benefits

The following table summarizes our salaries and benefits, man-hours per equivalent admission and salaries and benefits per equivalent admission for the years ended December 31, 2010 and 2009:

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                    Years Ended December 31,                            2010                   % of                  2009                   % of                 Increase              % Increase                                                 Revenues                                     Revenues Continuing operations: Salaries and benefits (dollars   $         1,270.3               45.1 %       $         1,170.9               45.3 %       $           99.4                 8.5 % in millions) Man-hours per equivalent                       96.3                N/A                      93.0                N/A                      3.3                 3.5 % admission Salaries and benefits per        $           3,112                N/A         $           2,972                N/A         $            140                 4.7 % equivalent admission Same-hospital: Salaries and benefits (dollars   $         1,227.7               44.8 %       $         1,170.9               45.3 %       $           56.8                 4.8 % in millions) Man-hours per equivalent                       95.9                N/A                      93.0                N/A                      2.9                 3.0 % admission Salaries and benefits per        $           3,104                N/A         $           2,972                N/A         $            132                 4.5 % equivalent admission                                          73 

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  For the year ended December 31, 2010, our salaries and benefits expense increased to $1,227.7 million, or 4.8%, on a same-hospital basis as compared to $1,170.9 million for the prior year. This increase in our same-hospital salaries and benefits expense is primarily a result of the impact of an increasing number of employed physicians and their related support staff, higher employee medical benefit expenses and the impact of compensation increases for our employees. The increase in our employed physicians and their related support staff resulted in an increase of $18.8 million in our salaries and benefits expense for the years ended December 31, 2010 as compared to the prior year.  

Supplies

The following table summarizes our supplies and supplies per equivalent admission for the years ended December 31, 2010 and 2009:

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                    Years Ended December 31,                            2010                   % of                  2009                   % of                 Increase              % Increase                                                 Revenues                                     Revenues Continuing operations: Supplies (dollars   $           443.0               15.7 %       $           409.1               15.8 %       $           33.9                 8.3 % in millions) Supplies per equivalent          $           1,088                N/A         $           1,038                N/A         $             50                 4.8 % admission Same-hospital: Supplies (dollars   $           431.1               15.7 %       $           409.1               15.8 %       $           22.0                 5.4 % in millions) Supplies per equivalent          $           1,093                N/A         $           1,038                N/A         $             55                 5.3 % admission   For the year ended December 31, 2010, our supplies expense increased to $431.1 million, or 5.4% on a same-hospital basis, as compared to $409.1 million for the prior year. This increase in our same-hospital supplies expense for the years ended December 31, 2010 was primarily a result of an increase in our supplies expense per equivalent admission to $1,093, or 5.3%, as compared to $1,038 for the prior year. Supplies per equivalent admission increased as a result of a higher utilization of more expensive supplies in areas such as orthopedics, cardiac devices and spine and bone as well as an increase in our pharmacy supplies expense.                                         74  --------------------------------------------------------------------------------

     TABLE OF CONTENTS  Other Operating Expenses 

The following table summarizes our other operating expenses for the years ended December 31, 2010 and 2009 (dollars in millions):

  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]      [[Image Removed]]     [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                                    Years Ended December 31,                                         Increase              % Increase                            2010                   % of                  2009                   % of                (Decrease)             (Decrease)                                                 Revenues                                     Revenues Continuing operations: Professional fees   $            82.9                2.9 %       $            72.9                2.8 %       $         10.0                   13.8 % Utilities                        53.8                1.9                      50.5                2.0                    3.3                    6.4 Repairs and                      71.8                2.5                      64.3                2.5                    7.5                   11.6 maintenance Rents and leases                 27.0                1.0                      26.4                1.0                    0.6                    2.3 Insurance                        42.8                1.5                      46.5                1.8                   (3.7 )                 (7.9 ) Physician                        24.1                0.9                      24.4                0.9                   (0.3 )                 (1.0 ) recruiting Contract services               156.5                5.6                     145.5                5.6                   11.0                    7.6 Non-income taxes                 65.9                2.3                      40.8                1.6                   25.1                   61.4 Other                            80.4                2.9                      66.7                2.6                   13.7                   20.3                     $           605.2               21.5 %       $           538.0               20.8 %       $         67.2                   12.5 % Same-hospital: Professional fees   $            78.8                2.9 %       $            72.9                2.8 %       $          5.9                    8.1 % Utilities                        52.1                1.9                      50.5                2.0                    1.6                    3.2 Repairs and                      69.1                2.5                      64.3                2.5                    4.8                    7.4 maintenance Rents and leases                 25.2                0.9                      26.4                1.0                   (1.2 )                 (4.3 ) Insurance                        42.2                1.5                      46.5                1.8                   (4.3 )                 (9.2 ) Physician                        23.9                0.9                      24.4                0.9                   (0.5 )                 (1.6 ) recruiting Contract services               153.2                5.6                     145.5                5.6                    7.7                    5.3 Non-income taxes                 62.5                2.3                      40.8                1.6                   21.7                   53.1 Other                            79.5                3.0                      66.7                2.6                   12.8                   19.0                     $           586.5               21.5 %       $           538.0               20.8 %       $         48.5                    9.0 %   For the year ended December 31, 2010, our other operating expenses increased to $586.5 million, or 9.0% on a same-hospital basis, as compared to $538.0 million for the prior year. This increase in our same-hospital other operating expenses for the year ended December 31, 2010 was primarily a result of increases in professional fees, contract services, non-income taxes and other expenses.  

As a shortage of physicians continues to become more acute, we have experienced increasing professional fees in areas such as radiology, anesthesiology, emergency room physician coverage and hospitalists.

  On a same-hospital basis, our contract services expense increased primarily as a result of increased accounts receivable collection fees and fees related to our conversion of the clinical and patient accounting information system applications at certain hospitals.  Our non-income taxes increased primarily as a result of $11.7 million in provider assessments paid to the state of Alabama under the new state plan amendment that is associated with the previously discussed Alabama DSH and access payments. Finally, our other expenses increased on a same-hospital basis as a result of additional training and implementation expenses from various information system initiatives in our efforts to comply with the HITECH Act as well as additional legal and consulting fees related to our recent acquisitions, including HighPoint, Clark and certain ancillary service-line acquisitions.                                         75  --------------------------------------------------------------------------------

     TABLE OF CONTENTS  Depreciation and Amortization  For the year ended December 31, 2010, our depreciation and amortization expense increased to $148.5 million, or 3.8%, as compared to $143.0 million for the prior year. Our depreciation and amortization expense increased primarily as a result of our 2010 acquisitions of HighPoint and Clark, capital improvement projects completed during 2010 as well as an increase in amortization expense for certain non-compete agreements as a result of ancillary service-line acquisitions completed during 2010. Throughout 2010, we experienced a significant increase in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act.  Interest Expense  Our interest expense increased by $4.9 million, or 4.7%, to $108.1 for the year ended December 31, 2010, as compared to $103.2 million for the prior year. The increase in interest expense for the year ended December 31, 2010, as compared to the prior year was a result of an increase in our outstanding debt balance, excluding unamortized discounts of convertible debt instruments, at December 31, 2010 to $1,651.7 million as compared to $1,502.2 million at December 31, 2009 and as a result of increases in our applicable annual interest rates. Effective September 23, 2010, we issued in a private placement $400.0 million of 6.625% Senior Notes. The net proceeds from this issuance were used to repay $249.2 million of our outstanding borrowings under our Term B Loans. Interest on the 6.625% Senior Notes is payable at an annual fixed rate of 6.625% as compared to a variable rate under our Term B Loans, which for the years ended December 31, 2010, on a weighted average basis, was 2.67%. These increases were offset by declines in interest expense attributable to our interest rate swap agreement. On November 30, 2010, the notional amount of our interest rate swap decreased from $450.0 million to $300.0 million. As the notional amount of our interest rate swap declined, a larger portion of our total outstanding debt was subject to floating interest rates that were lower than our fixed rate under the agreement of 5.585% for the years ended December 31, 2010 as compared to the same period last year. For a further discussion of our debt and corresponding interest rates, see "Liquidity and Capital Resources - Debt."  

Provision for Income Taxes

  Our provision for income taxes was $82.4 million, or 3.0% of revenues, for the year ended December 31, 2010, as compared to $80.3 million, or 3.1% of revenues, for the same period last year. The effective tax rate decreased to 34.6% for the years ended December 31, 2010, compared to 36.6% for the same period last year.  A reconciliation of the federal income tax and statutory federal income tax rate to our provision for income taxes and effective income tax rate, respectively, on income from continuing operations before income taxes and including net income from noncontrolling interests for the years ended December 31, 2010 and 2009, giving effect to the net (reversal) accrual of interest on the long-term income tax liability and the expiration of the statutes of limitations on various income tax returns is as follows (dollars in millions):  [[Image Removed]]   [[Image Removed]]      [[Image Removed]]      [[Image Removed]]      [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                     Years Ended                         Increase                         Years Ended                        Increase                                    December 31,                        (Decrease)                       December 31,                       (Decrease)                             2010                   2009                                          2010                   2009 Federal income      $         83.3         $         76.8         $          6.5                   35.0 %                 35.0 %                   -bps taxes State income taxes, net of                  3.8                    3.0                    0.8                    1.6                    1.4                       20 federal income tax benefits Increase in valuation allowances for                 3.9                    3.4                    0.5                    1.6                    1.5                       10 deferred tax assets Decrease in long-term income tax liabilities due to tax                    (6.1 )                 (4.2 )                 (1.9 )                 (2.5 )                 (1.9 )                    (60 ) accounting method changes, statute lapses and exam closures Decrease in deferred tax liabilities                   (2.6 )                    -                   (2.6 )                 (1.1 )                    -                     (110 ) primarily due to exam closures Other                          0.1                    1.3                   (1.2 )                    -                    0.6                      (60 )                     $         82.4         $         80.3         $          2.1                   34.6 %                 36.6 %               (200)bps                                          76 

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  Liquidity and Capital Resources Liquidity  Our primary sources of liquidity are cash flows provided by our operations and our debt borrowings. We believe that our internally generated cash flows and the amounts available under our debt agreements will be adequate to service existing debt, finance internal growth and fund capital expenditures and certain small to mid-size hospital acquisitions.  

The following table presents summarized cash flow information for the years ended December 31, 2011, 2010 and 2009 (in millions):

  [[Image Removed]]        [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                  2011                   2010                   2009 Net cash flows provided by continuing   $         401.2        $         375.7        $         350.3 operations Less: Purchases of                (219.9 )               (168.7 )               (166.6 ) property and equipment Free operating cash                181.3                  207.0                  183.7 flow Acquisitions, net of              (121.0 )               (184.9 )                (81.4 ) cash acquired Proceeds from                          -                  400.0                      - borrowings Payments on borrowings              (0.1 )               (255.2 )                (13.5 ) Repurchases of common             (174.6 )               (152.1 )                 (3.1 ) stock Payment of debt issue               (0.4 )                (13.7 )                    - costs Proceeds from exercise              39.0                   20.4                   10.8 of stock options Distributions to noncontrolling                      (1.8 )                 (2.4 )                 (4.2 ) interests, net of proceeds (Repurchases) sales of redeemable                          (2.3 )                  3.1                   (0.8 ) noncontrolling interests Other                               (1.6 )                 (0.4 )                  0.8 Cash flows from operations provided by               0.3                   (1.6 )                 (0.4 ) (used in) discontinued operations Cash flows provided by investing activities                   -                      -                   19.6 by discontinued operations Net (decrease) increase in cash and     $         (81.2 )      $          20.2        $         111.5 cash equivalents   The non-GAAP metric of free operating cash flow is an important liquidity measure for us. Our computation of free operating cash flow consists of net cash flows provided by continuing operations less cash flows used for the purchase of property and equipment.  Our net cash flows provided by continuing operations for the year ended December 31, 2011 were positively impacted by an increase in net income. This increase was partially offset by increases in the amount and timing of cash payments made for interest and income taxes. Our free operating cash flows for the year ended December 31, 2011 were lower as compared to 2010 and 2009 because of a significant increase in our purchases of property and equipment related to building and equipping a replacement hospital for one of our facilities and an increase in our purchases of information systems as the result of various initiatives and requirements, including compliance with the HITECH Act.  Our free operating cash flows for the year ended December 31, 2010 were positively impacted by lower tax payments as a result of the completion of our method change applications filed with the IRS during the third quarter. In addition, our free operating cash flows for the year ended December 31, 2010 were positively impacted by an increase in our income from continuing operations and the timing and amount of cash payments made for interest and salaries and benefits. These increases were partially offset by a decrease in our collection of accounts receivable, as a larger percentage of our revenues were incurred later in the third and fourth quarters as compared to the prior year.                                         77  --------------------------------------------------------------------------------

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  We believe that free operating cash flow is useful to investors and management as a measure of the ability of our business to generate cash and to repay and incur additional debt. Computations of free operating cash flow may differ from company to company. Therefore, free operating cash flow should be used as a complement to, and in conjunction with, our consolidated statements of cash flows presented in our consolidated financial statements included elsewhere in this report.  Capital Expenditures  We continued to make significant, targeted investments at our hospitals to add new technologies, modernize facilities and expand the services available. These investments should assist in our efforts to attract and retain physicians, to offset outmigration of patients and to make our hospitals more desirable to our employees and potential patients.  

The following table reflects our capital expenditures for the years ended December 31, 2011, 2010 and 2009 (dollars in millions):

  [[Image Removed]]     [[Image Removed]]       [[Image Removed]]       [[Image Removed]]                               2011                    2010                    2009 Capital projects      $          80.4         $          67.6         $         108.6 Routine                          57.0                    56.7                    49.3 Information systems              82.5                    44.4                     8.7                       $         219.9         $         168.7         $         166.6 Depreciation          $         162.2         $         145.9         $         141.7 expense Ratio of capital expenditures to                   136 %                   116 %                   118 % depreciation expense   We have a formal and intensive review procedure for the authorization of capital expenditures. The most important financial measure of acceptability for a discretionary capital project is whether its projected discounted cash flow return on investment exceeds our projected cost of capital for that project. We expect to continue to invest in information systems, modern technologies, emergency room and operating room expansions, the construction of medical office buildings for physician expansion and the reconfiguration of the flow of patient care. During 2011, we have experienced a significant increase in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. We anticipate that we will continue to spend more on information systems in 2012 and 2013. Additionally, in connection with our acquisition of Clark, we have committed to spend an additional approximate $60.0 million to build and equip a new hospital to replace the current hospital facility. As a result, during 2011, we spent significantly more in capital projects.  

Debt

An analysis and roll-forward of our long-term debt during 2011 is as follows (in millions):

  [[Image Removed]]   [[Image Removed]]      [[Image Removed]]      [[Image Removed]]       [[Image Removed]]      [[Image Removed]]                         December 31,           Payments of                                  Amortization of          December 31,                             2010                Borrowings              Other(a)              Convertible                2011                                                                                              Debt Discounts Senior Secured Credit Agreement: Term B Loans        $         443.7        $            -         $              -        $              -       $         443.7 Revolving Loans                   -                     -                        -                       -                     - Other                           0.1                  (0.1 )                      -                       -                     - 6.625% Senior                 400.0                     -                        -                       -                 400.0 Notes 3½% Notes                     575.0                     -                        -                       -                 575.0 3¼% Debentures                225.0                     -                        -                       -                 225.0 Unamortized discounts on 3¼%              (79.8 )                   -                        -                    24.3                 (55.5 ) Debentures and 3½% Notes Capital leases                  7.9                  (1.3 )                    2.5                       -                   9.1                     $       1,571.9        $         (1.4 )       $            2.5        $           24.3       $       1,597.3   [[Image Removed]] 

(a) Represents the assumption of capital leases obligations in connection with

certain acquisitions completed during the year ended December 31, 2011.

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  We use leverage, or our total debt to total capitalization ratio, to make financing decisions. The following table illustrates our financial statement leverage and the classification of our debt at December 31, 2011 and 2010 (dollars in millions):  [[Image Removed]]        [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                              December 31,           December 31,        Increase (Decrease)                                  2011                   2010 Current portion of       $           1.9        $           1.4        $            0.5 long-term debt Long-term debt                   1,595.4                1,570.5                    24.9 Unamortized discounts of convertible debt                 55.5                   79.8                   (24.3 ) instruments Total debt, excluding unamortized discounts            1,652.8                1,651.7                     1.1 of convertible debt instruments Total LifePoint Hospitals, Inc.                  1,945.2                1,887.5                    57.7 stockholders' equity Total capitalization     $       3,598.0        $       3,539.2        $           58.8 Total debt to total                 45.9 %                 46.7 %               (80)bps capitalization Percentage of: Fixed rate debt, excluding unamortized discounts of                        73.2 %                 73.1 % convertible debt instruments Variable rate debt(a)               26.8                   26.9                                    100.0 %                100.0 % Percentage of: Senior debt                         51.6 %                 51.6 % Subordinated debt, excluding unamortized discounts of                        48.4                   48.4 convertible debt instruments                                    100.0 %                100.0 %   [[Image Removed]] 

(a) The above calculations do not consider the effect of our interest rate swap.

Through May 30, 2011, we had an interest rate swap in effect which mitigated

a portion of our floating rate risk on our outstanding variable rate

borrowings under our Credit Agreement, by converting our variable rate debt

to an annual fixed rate of 5.585%. Effective May 30, 2011, our interest rate

      swap agreement matured. As of December 31, 2010, our interest rate swap       decreased our variable rate debt as a percentage of our outstanding debt

from 26.9% to 8.7%. Please refer to Note 7 to our consolidated financial

statements included elsewhere in this report for a discussion of our

interest rate swap agreement.

   Our Term A Loans and our Revolving Loans components mature on December 15, 2012. We are currently working on maturity date extensions, potential increases in available capacity and additional flexibility in terms for our Credit Agreement. Our Credit Agreement is guaranteed on a senior secured basis by our subsidiaries with certain limited exceptions. A more detailed discussion of our debt, including the terms of our individual debt instruments is included in Note 7 to our consolidated financial statements included elsewhere in this report.  

Liquidity and Capital Resources Outlook

  We expect to increase our level of spending for capital expenditures in 2012 as compared to 2011. We have large projects in process at a number of our facilities. We are reconfiguring some of our hospitals to more effectively accommodate patient services, restructuring existing surgical capacity in some of our hospitals to permit additional patient volume and a greater variety of services, and implementing various information system initiatives in our efforts to comply with the HITECH Act. For the year ended December 31, 2011, we spent $82.5 million on information systems. We anticipate spending in excess of $90.0 million on information systems in 2012. At December 31, 2011, we had uncompleted projects with an estimated additional cost to complete and equip of approximately $80.7 million. We anticipate funding these expenditures through cash provided by operating activities, available cash and borrowings available under our Credit Agreement.                                         79 

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  Our business strategy contemplates the selective acquisition of additional hospitals and other healthcare service providers, and we regularly review potential acquisitions. These acquisitions may, however, require additional financing. We regularly evaluate opportunities to sell additional equity or debt securities, obtain credit agreements from lenders or restructure our long-term debt or equity for strategic reasons or to further strengthen our financial position. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders.  In connection with our acquisitions of Maria Parham and Person Memorial, we have committed to invest an additional $60.0 million in capital expenditures and improvements over the next 10 years. Additionally, we have agreed to spend $8.0 million over the next 10 years and $3.0 million over the next five years for the continuation of existing or the initiation of new physician recruitment activities at Maria Parham and Person Memorial, respectively.  We believe that cash generated from our operations and borrowings available under our Credit Agreement will be sufficient to meet our working capital needs, the purchase prices for any potential facility acquisitions, planned capital expenditures and other expected operating needs over the next twelve months and into the foreseeable future prior to the maturity dates of our outstanding debt.  

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements Contractual Obligations

  We have various contractual obligations, which are recorded as liabilities in our consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. For example, we are required to make certain minimum lease payments for the use of property under certain of our operating lease agreements.  The following table summarizes our significant contractual obligations as of December 31, 2011 and the future periods in which such obligations are expected to be settled in cash (in millions):  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]     [[Image Removed]]     [[Image Removed]]     [[Image Removed]]                                                                Payment Due by Period Contractual                Total                 2012               2013 - 2014           2015 - 2016           After 2016 Obligations Long-term debt      $         2,070.6     $            71.8     $         1,134.4     $            67.6     $           796.8 obligations(a) Capital lease                    21.9                   3.7                   5.2                   4.0                   9.0 obligations Operating lease                  53.0                  17.3                  19.4                   7.0                   9.3 obligations(b) Other long-term                 148.7                  42.5                  56.1                  35.6                  14.5 liabilities(c) Purchase                      1,130.0                 196.9                 146.3                 128.9                 657.9 obligations(d) Total               $         3,424.2     $           332.2     $         1,361.4     $           243.1     $         1,487.5   [[Image Removed]]  

(a) Included in long-term debt obligations are principal and interest owed on

our outstanding debt obligations. These obligations are explained further in

Note 7 to our consolidated financial statements included elsewhere in this

report. We used the 3.28% effective interest rate at December 31, 2011 for

our $443.7 million outstanding Term B Loans to estimate interest payments on

this variable rate debt instrument. The maturity date of the $443.7 million

Term B Loans is contingent upon refinancing our outstanding 3½% Notes beyond

their current maturity date of May 15, 2014. In the event we do not

refinance our 3½% Notes, the extended portion of the Term B Loans mature on

February 13, 2014. For purposes of the above table, we assumed that we would

not refinance our 3½% Notes beyond their current maturity date and the

$443.7 million Term B Loans would mature on February 13, 2014. Holders of

our $225.0 million outstanding 3¼% Debentures may require us to purchase for

cash some or all of the 3¼% Debentures on February 15, 2013, February 15,

2015, and February 15, 2020. For purposes of the above table, we assumed

that our 3¼% Debentures would be outstanding during the entire term, which

ends on August 15, 2025. These amounts exclude our unamortized convertible

debt discounts and related non-cash amortization.

(b) This reflects our future minimum operating lease payments. We enter into

operating leases in the normal course of business. Substantially all of our

operating lease agreements have fixed payment terms based on the passage of

time. Some lease agreements provide us with the option to renew the lease.

Our future operating lease obligations would change if we exercised these

      renewal options and if we entered into                                          80 

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     TABLE OF CONTENTS       additional operating lease agreements. Please refer to Note 10 to our

consolidated financial statements included elsewhere in this report for more

information regarding our operating leases.

(c) Our reserves for self-insurance claims and other liabilities balance was

$139.1 million and our long-term income tax liability balance was $18.0

million in our consolidated balance sheet as of December 31, 2011. The

reserves for self-insurance claims and other liabilities balance included

the $105.3 million long-term portion of our reserves for self-insurance

claims and $33.8 million related to other long-term liabilities. In addition

to the long-term portion of our reserves for self-insurance claims of $105.3

million, the above table includes the current portion of our reserves for

self-insurance claims of $41.6 million. We have excluded the $18.0 million

long-term income tax liability because of the uncertainty of the dollar

amounts to be ultimately paid as well as the timing of such amounts.

Additionally, we have excluded a portion of the other liabilities as they

are non-cash liabilities. Please refer to "Critical Accounting

Estimates - Reserves for Self-Insurance Claims" in this report for more

information on our reserves for self-insurance claims.

(d) The following table summarizes our significant purchase obligations as of

December 31, 2011 and the future periods in which such obligations are       expected to be settled in cash (in millions):   [[Image Removed]]   [[Image Removed]]     [[Image Removed]]     [[Image Removed]]     [[Image Removed]]     [[Image Removed]]                                                                Payment Due by Period Purchase                   Total                 2012               2013 - 2014           2015 - 2016           After 2016 Obligations HCA-IT              $           129.4     $            21.8     $            40.9     $            43.7     $            23.0 services(e) Capital expenditure                     780.4                  52.6                  55.6                  51.0                 621.2 obligations(f) Physician                        13.6                  13.6                     -                     -                     - commitments(g) GEMS                             31.2                  31.2                     -                     -                     - obligations(h) Other purchase                  175.4                  77.7                  49.8                  34.2                  13.7 obligations(i) Total               $         1,130.0     $           196.9     $           146.3     $           128.9     $           657.9  

(e) HCA-IT provides various information systems services, including, but not

limited to, financial, clinical, patient accounting and network information

services to us under a contract that expires on December 31, 2017, including

a wind-down period. The amounts are based on estimated fees that will be

charged to our hospitals with an annual fee increase that is capped by the

consumer price index increase. We used a 3.5% annual rate increase as the

estimated consumer price index increase for the contract period. These fees

      will increase if we acquire additional hospitals and use HCA-IT for       information system conversion services at the acquired hospitals.  

(f) We had projects under construction with an estimated additional cost to

complete and equip of approximately $80.7 million as of December 31, 2011.

Because we can terminate substantially all of the related construction

contracts at any time without paying a termination fee, these costs are

excluded from the above table except for amounts contractually committed by

us. We are subject to annual capital expenditure commitments in connection

with several of our facilities including our recently acquired facilities

Maria Parham and Person Memorial. Additionally, in connection with our

acquisition of Clark, we have committed to spend an additional approximate

$60.0 million to build and equip a new hospital to replace the current

hospital facility.

(g) In consideration for a physician relocating to one of the communities in

which our hospitals are located and agreeing to engage in private practice

for the benefit of the respective community, we may advance certain amounts

of money to that physician, normally over a period of one year, to assist in

establishing the physician's practice. Our liability balance for

contract-based physician minimum revenue guarantees was $13.6 million at

December 31, 2011 and depends upon the cash collections of a physician's

private practice during the guarantee period.

(h) General Electric Medical Services ("GEMS") provides diagnostic imaging

equipment maintenance and bio-medical services to us pursuant to a contract

      that expires on December 31, 2012.     (i) Reflects our minimum commitments to purchase goods or services under

non-cancelable contracts as of December 31, 2011. In connection with the

on-going implementation of our initiatives to comply with EHR, we have made

substantial commitments to purchase goods and services to facilitate our

conversions of the clinical and patient accounting information system

applications at our hospitals. Additionally, in connection with our recently

acquired facilities Maria Parham and Person Memorial, we have committed to

spend an additional $8.0 million over the next 10 years and an additional

$3.0 million over the next five years, respectively, for the continuation of

      existing or initiation of new physician recruitment activities.                                          81 

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Off-Balance Sheet Arrangements

  We had standby letters of credit outstanding of approximately $29.8 million as of December 31, 2011, all of which relates to the self-insured retention levels of our professional and general liability insurance and workers' compensation programs as security for the payment of claims.  

Recently Issued Accounting Pronouncements

Please refer to Note 2 to our consolidated financial statements included elsewhere in this report for a discussion of the impact of recently issued accounting pronouncements.

Critical Accounting Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:

• it requires assumptions to be made that were uncertain at the time the

estimate was made; and

• changes in the estimate or different estimates that could have been made

could have a material impact on our consolidated results of operations or

financial condition.

   Our management has discussed the development and selection of these critical accounting estimates with the audit committee of our Board of Directors and with our independent registered public accounting firm, and they both have reviewed the disclosure presented below relating to our critical accounting estimates. Our critical accounting estimates include the following areas:  

• Revenue recognition and accounts receivable;

• Goodwill impairment analysis;

• Reserves for self-insurance claims;

• Accounting for stock-based compensation; and

• Accounting for income taxes.

   The following discussion of critical accounting estimates is not intended to be a comprehensive list of all of our accounting policies that require estimates. We believe that of our significant accounting policies, as discussed in Note 1 to our consolidated financial statements included elsewhere in this report, the estimates discussed below involve a higher degree of judgment and complexity. We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and our financial condition.  

The discussion that follows presents information about our critical accounting estimates, as well as the effects of hypothetical changes in the material assumptions used to develop each estimate.

Revenue Recognition and Accounts Receivable

  We recognize revenues in the period in which services are provided. Accounts receivable primarily consist of amounts due from third-party payors and patients. Our ability to collect outstanding receivables is critical to our results of operations and cash flows. Amounts we receive for treatment of patients covered by governmental programs, such as Medicare and Medicaid, and other third-party payors such as HMOs, PPOs and other private insurers, are generally less than our established billing rates. Additionally, to provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Accordingly, our revenues and accounts receivable are reduced to net realizable value through an allowance for contractual discounts and a provision for doubtful accounts.                                         82  --------------------------------------------------------------------------------

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  Approximately 97.1%, 97.7%, and 98.2% of our revenues during the years ended December 31, 2011, 2010, and 2009, respectively, relate to discounted charges, which were comprised of the following sources (as a percentage of revenues):  [[Image Removed]]        [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                  2011                   2010                   2009 Medicare                           35.0 %                 34.9 %                 34.5 % Medicaid                           14.3                   14.6                   12.1 HMOs, PPOs and other               47.8                   48.2                   51.6 private insurers   Revenues are recorded at estimated net amounts due from patients, third-party payors and others for healthcare services provided. For certain payors, such as Medicare, Medicaid, as well as some managed care payors with which we have contractual arrangements, the contractual allowances are calculated by computerized logging systems based on defined payment terms. For other payors, the contractual allowances are determined based on historical data by insurance plan. All contractual adjustments, regardless of type of payor or method of calculation, are reviewed and compared to actual experience.  

We monitor our processes for calculating contractual allowances through:

• review of payment discrepancy reports for logged payors;

• analysis of historical contractual allowance trends based on actual claims

paid by HMOs, PPOs and other private insurers;

• review of contractual allowance information reflecting current contract terms;

• consideration and analysis of changes in charge rates and payor mix

reimbursement levels; and

• other issues that may impact contractual allowances.

Medicare and Medicaid

  The majority of services performed on Medicare and Medicaid patients are reimbursed at predetermined reimbursement rates. The differences between the established billing rates (i.e., gross charges) and the predetermined reimbursement rates are recorded as contractual discounts and deducted from gross charges. Under the Medicaid program's prospective reimbursement systems, there is no adjustment or settlement of the difference between the actual cost to provide the service and the predetermined reimbursement rates.  Discounts for retrospectively cost-based revenues are estimated based on historical and current factors and are adjusted in future periods when settlements of filed cost reports are received. Final settlements under these programs are subject to adjustment based on administrative review and audit by third party intermediaries, which can take several years to resolve completely. Adjustments related to final settlements increased our revenues by $13.1 million, $4.9 million, and $5.4 million for the years ended December 31, 2011, 2010, and 2009, respectively.  Because the laws and regulations governing the Medicare and Medicaid programs are complex and subject to change, the estimates of contractual discounts we record could change by material amounts. A significant increase in our estimate of contractual discounts for Medicare and Medicaid would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and future access to capital.  

HMOs, PPOs and Other Private Insurers

  Amounts we receive for the treatment of patients covered by HMOs, PPOs and other private insurers (collectively "managed care plans") are generally less than our established billing rates. We include contractual allowances as a reduction to revenues in our consolidated financial statements based on payor specific identification and payor specific factors for rate increases and denials. For most managed care plans, estimated contractual allowances are adjusted to actual contractual allowances as cash is received and claims are reconciled.                                         83  --------------------------------------------------------------------------------

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  If our overall estimated contractual discount percentage on our managed care program revenues for the year ended December 31, 2011 were changed by 1%, our after-tax income from continuing operations would change by approximately $12.7 million, or diluted earnings per share of $0.25. This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate the amount expected to be received based on payor contract provisions, historical collection data as well as other factors and requires a high degree of judgment. It is impacted by changes in managed care contracts and other related factors. A significant increase in our estimate of contractual discounts for managed care plans would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and future access to capital.  

Provision and Allowance for Doubtful Accounts

  To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts. Our allowance for doubtful accounts, included in our consolidated balance sheets as of December 31, 2011 and 2010 was $537.4 million and $459.8 million, respectively. Our provision for doubtful accounts, included in our consolidated results of operations for the years ended December 31, 2011, 2010, and 2009, was $518.5 million, $443.8 million, and $375.4 million, respectively.  The largest component of our allowance for doubtful accounts relates to accounts for which patients are responsible, which we refer to as patient responsibility accounts or self-pay accounts. These accounts include both amounts payable by uninsured patients and co-payments and deductibles payable by insured patients. In general, we attempt to collect deductibles, co-payments and self-pay accounts prior to the time of service for non-emergency care. If we do not collect these patient responsibility accounts prior to the delivery of care, the accounts are handled through our billing and collections processes.  The approximate amounts and percentages of billed insured and uninsured (including self-pay, co-payments, deductibles and Medicaid pending) gross accounts receivable (prior to allowance for contractual discounts and allowance for doubtful accounts) in summarized aging categories are as follows for the periods presented (in millions):  [[Image Removed]]   [[Image Removed]]     [[Image Removed]]       [[Image Removed]]     [[Image Removed]]       [[Image Removed]]     [[Image Removed]]                                                                                December 31, 2011                                 Insured Receivables                          Uninsured Receivables                               Combined                           Amount               Percent of               Amount               Percent of               Amount               Percent of                                                Receivables                                   Receivables                                   Receivables 0 to 90 days        $           524.8                90.2 %       $           175.8                26.9 %       $           700.6                56.7 % 91 to 150 days                   31.7                 5.5                     105.8                16.2                     137.5                11.1 151 to 360 days                  20.4                 3.5                     238.6                36.5                     259.0                21.0 Over 361                          4.8                 0.8                     132.9                20.4                     137.7                11.2                     $           581.7               100.0 %       $           653.1               100.0 %       $         1,234.8               100.0 %   [[Image Removed]]   [[Image Removed]]     [[Image Removed]]       [[Image Removed]]     [[Image Removed]]       [[Image Removed]]     [[Image Removed]]                                                                                December 31, 2010                                 Insured Receivables                          Uninsured Receivables                               Combined                           Amount               Percent of               Amount               Percent of               Amount               Percent of                                                Receivables                                   Receivables                                   Receivables 0 to 90 days        $           434.1                85.1 %       $           147.8                27.1 %       $           581.9                55.1 % 91 to 150 days                   40.5                 7.9                      90.8                16.6                     131.3                12.4 151 to 360 days                  31.9                 6.3                     206.9                37.9                     238.8                22.6 Over 361                          3.8                 0.7                     100.5                18.4                     104.3                 9.9                     $           510.3               100.0 %       $           546.0               100.0 %       $         1,056.3               100.0 %   We verify each patient's insurance coverage as early as possible before a scheduled admission or procedure, including with respect to eligibility, benefits and authorization/pre-certification requirements, in order to notify patients of the amounts for which they will be responsible. We attempt to verify insurance coverage within a reasonable amount of time for all emergency room visits and urgent admissions in compliance with EMTALA.                                         84  --------------------------------------------------------------------------------

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In general, we perform the following steps in collecting accounts receivable:

• if possible, cash collection of deductibles, co-payments and self-pay

accounts prior to or at the time service is provided;

• billing and follow-up with third party payors;

• collection calls;

• utilization of collection agencies; and

• if collection efforts are unsuccessful, write-off of the accounts.

   Our policy is to write-off accounts after all collection efforts have failed, which is generally one year after the date of discharge of the patient. Patient responsibility accounts represent the majority of our write-offs. All of our hospitals retain third-party collection agencies for billing and collection of delinquent accounts. At most of our hospitals, more than one collection agency is used to promote competition and improve performance results. The selection of collection agencies and the timing of referral of an account to a collection agency vary among our hospitals.  We determine the adequacy of the allowance for doubtful accounts utilizing a number of analytical tools and benchmarks. No single statistic or measurement alone determines the adequacy of the allowance. Specifically, we monitor the revenue trends by payor classification on a month-by-month basis along with the composition of our accounts receivable agings. This review is focused primarily on trends in self-pay revenues, accounts receivable, co-payment receivables, historic payment patterns and other factors such as revenue days in accounts receivable.  The process of determining our allowance for doubtful accounts requires us to estimate uncollectible self-pay accounts. Our estimate of uncollectible self-pay accounts is primarily based on our collection history, adjusted for anticipated changes in collection trends, if significant. Our estimate may be impacted by changes in regional economic conditions, business office operations, payor mix and trends in federal or state governmental healthcare coverage or other third party payors. If the actual self-pay collection percentage would change by 1.5% from our estimated self-pay collection percentage for the year ended December 31, 2011, our after-tax income from continuing operations would change by approximately $5.3 million, or diluted earnings per share of $0.11, and our net accounts receivable would change by $2.2 million at December 31, 2011. The resulting change in this analytical tool is considered to be a reasonably likely change that would affect our overall assessment of this critical accounting estimate.  

Goodwill Impairment Analysis

  Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Our goodwill included in our consolidated balance sheets as of December 31, 2011 and 2010 was $1,568.7 million and $1,550.7 million, respectively. Please refer to Note 4 to our consolidated financial statements included elsewhere in this report for a detailed rollforward of our goodwill.  In accordance with ASC 350-10, "Intangibles - Goodwill and Other" ("ASC 350-10") goodwill and intangible assets with indefinite lives are reviewed by us at least annually for impairment. Our business comprises a single operating reporting unit for impairment test purposes. For the purposes of these analyses, our estimate of fair value are based on a combination of the income approach, which estimates the fair value of us based on our future discounted cash flows, and the market approach, which estimates the fair value of us based on comparable market prices. Our estimate of future discounted cash flows is based on assumptions and projections we believe to be currently reasonable and supportable. Our assumptions take into account revenue and expense growth rates, patient volumes, changes in payor mix, and changes in legislation and other payor payment patterns.  If we determine the carrying value of goodwill is impaired, or if the carrying value of a business that is to be sold or otherwise disposed of exceeds its fair value, then we reduce the carrying value, including any allocated goodwill, to fair value. During the years ended December 31, 2011, 2009 and 2010, we performed our annual impairment tests as of October 1, and did not incur an impairment charge.                                         85  --------------------------------------------------------------------------------

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Reserves for Self-Insurance Claims

  We are subject to potential professional liability claims, employee workers' compensation claims and other claims. To mitigate a portion of this risk, we maintain insurance for individual professional liability claims and employee workers' compensation claims exceeding a self-insured retention level. For all claims made after April 1, 2009, our self-insured retention level is $5.0 million per claim. For claims made before April 1, 2009, our self-insured retention level ranges from $10.0 million per claim to $25.0 million per claim. Our self-insured retention level is evaluated annually as a part of our insurance program's renewal process.  

Additionally, as of December 31, 2011, our self-insured retention level for workers' compensation claims is $2.0 million per claim in all states in which we operate except for Wyoming. We participate in a state specific program in Wyoming for our workers' compensation claims arising in this state.

  Each year, we obtain quotes from various insurers with respect to the cost of obtaining insurance coverage. We compare these quotes to our most recent actuarially determined estimates of losses at various self-insured retention levels. Accordingly, changes in insurance costs affect the self-insured retention level we choose each year. As insurance costs have decreased in recent years, we have reduced our self-insured retention levels.  Our reserves for self-insurance claims reflects the current estimate of all outstanding losses, including incurred but not reported losses, based upon actuarial calculations as of the balance sheet date. The loss estimates included in the actuarial calculations may change in the future based upon updated facts and circumstances. Our expense for self-insurance claims coverage each year includes: the actuarially determined estimate of losses for the current year, including claims incurred but not reported; the change in the estimate of losses for prior years based upon actual claims development experience as compared to prior actuarial projections; the insurance premiums for losses in excess of our self-insured retention levels; the administrative costs of the insurance program; and interest expense related to the discounted portion of the liability.  Our reserves for professional liability claims are based upon quarterly actuarial calculations. Our reserves for employee worker's compensation claims are based upon semiannual actuarial calculations. Our reserve calculations consider historical claims data, demographic considerations, severity factors and other actuarial assumptions, which are discounted to present value. We have discounted our reserves for self-insured claims to their present value using a discount rate of 2.50%, 3.15%, and 3.60% at December 31, 2011, 2010, and 2009, respectively. As a result of the decreases in our applied discount rate, our self-insurance claims expense increased by approximately $2.5 million, $1.6 million, and $1.2 million which decreased our net income by approximately $1.6 million, $1.0 million, $0.8 million and decreased our diluted earnings per share by $0.03, $0.02, and $0.01 during the years ended December 31, 2011, 2010 and 2009, respectively. We select a discount rate by considering a risk-free interest rate that corresponds to the period when the self-insured claims are incurred and projected to be paid.  

The following table provides information regarding our reserves for self-insured claims at December 31, 2011 and 2010 (in millions):

 [[Image Removed]]          [[Image Removed]]     [[Image Removed]]                               December 31,          December 31,                                   2011                  2010 Undiscounted               $           157.4     $           143.6 Discounted (as reported)   $           146.9     $           128.7                                          86 

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The following table presents the changes in our reserves for self-insured claims for the years ended December 31, 2011, 2010 and 2009 (in millions):

 [[Image Removed]]      [[Image Removed]]       [[Image Removed]]       [[Image Removed]]                                2011                    2010                    2009 Reserve at the beginning of the       $         128.7         $         119.3         $         103.2 period Increase for the provision of current year claims,                      45.7                    46.1                    43.5 including discontinued operations (Decrease) increase for the provision of prior year claims,                (6.2 )                  (3.7 )                   2.5 including discontinued operations Payments related to               (3.5 )                  (4.0 )                  (6.2 ) current year claims Payments related to              (20.3 )                 (30.6 )                 (24.9 ) prior year claims Provision for the change in discount                 2.5                     1.6                     1.2 rate Reserve at the end     $         146.9         $         128.7         $         119.3 of the period   As of December 31, 2011 and 2010, less than 1% of our reserves for self-insured claims represents reserves for settled and unpaid claims. Our average lag time between the settlement and payment of a self-insured claim ranges from 1 to 2 weeks.  Our estimated reserves for self-insured claims will be significantly affected if current and future claims differ from historical trends. While we monitor reported claims closely and consider potential outcomes when determining our reserves for self-insured claims, the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes complicates the estimation process. In addition, certain states have passed varying forms of tort reform which attempt to limit the amount of awards. If such laws are passed in the states where our hospitals are located, our loss estimates could decrease.  Our estimate of reserves for self-insured claims are based upon actuarial calculations and are significantly influenced by key assumptions and other factors. These factors include, but are not limited to: historical paid claims; trending of loss development factors; trends in the frequency and severity of claims, which can differ significantly by jurisdiction as a result of the legislative and judicial climate in such jurisdictions; coverage limits of third-party insurance and actuarial determined statistical confidence levels. Given the number of assumptions and characteristics of each assumption considered in establishing the reserves for self-insured claims, it is difficult to compute the individual financial impact of each assumption or groups of assumptions. Some of the assumptions are dependent upon the quantitative measurement of other assumptions, and therefore are not accurately evaluated in isolation. For example, a change in the frequency of claims assumption is also affected by the estimated severity of these claims resulting in an inability to properly isolate and quantify the impact of a change in this assumption.  Professional and general liability claims are typically resolved over an extended period of time, often as long as five years or more, while workers' compensation claims are typically resolved in one to two years. Our reserves for self-insured claims are comprised of estimated indemnity and expense payments related to reported events and incurred but not reported events as of the end of the period. We have the ability to reliably determine the amount and timing of payments based on sufficient history of our claims development, the use of external actuarial expertise and our rigorous review process. Actuarial payment patterns are based on our individual hospital historical data both prior to and after our inception in 1999. The processes, performed by both external actuaries and our management, enable us to reliably determine the amount of our ultimate losses as well as the timing of the loss settlements such that discounting of the reserves for self-insured claims is appropriate. Given the number of factors considered in establishing the reserves for self-insured claims, it is neither practical nor meaningful to isolate a particular assumption or parameter of the process and calculate the impact of changing that single item.  Ultimately, from an actuarial standpoint, the sensitivity in the estimates of reserves for self-insured claims is reflected in the various actuarial confidence levels. Our best estimate of our reserves for self-insured claims utilizes a statistical confidence level that is 50%. Higher statistical confidence levels, while not representative of our best estimate, reflect reasonably likely outcomes upon the ultimate resolution of related claims. Using a                                         87 

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higher statistical confidence level would increase the estimated reserves for self-insured claims. Changes in our estimates of reserves for self-insured claims are non-cash charges and accordingly, do not impact our liquidity or capital resources.

The assumptions included in the table below are presented for the sensitivity analysis (in millions):

  [[Image Removed]]            [[Image Removed]] December 31, 2011 reserve: As reported                  $           146.9 With 70% Confidence Level    $           155.9 With 80% Confidence Level    $           165.2 With 90% Confidence Level    $           191.3 December 31, 2010 reserve: As reported                  $           128.7 With 70% Confidence Level    $           139.8 With 80% Confidence Level    $           148.1 With 90% Confidence Level    $           171.4   The combination of changing conditions and the extended time required for claim resolution results in a loss estimation process that requires actuarial skill and the application of judgment, and such estimates require periodic revision. As a result of the variety of factors that must be considered, there is a risk that actual incurred losses may develop differently from estimates. The results of our quarterly and semi annually completed actuarial calculations decreased our self-insured claims expense by $6.2 million and $3.7 million, which increased our net income by approximately $3.9 million and $2.4 million, or $0.08 and $0.05 per diluted share, during the years ended December 31, 2011 and 2010, respectively. During the year ended December 31, 2009, the results of our quarterly and semi annually completed actuarial calculations increased our self-insured claims expense by $2.5 million, which decreased our net income by approximately $1.6 million, or $0.03 per diluted share.  

Accounting for Stock-Based Compensation

  We issue stock-based awards, including stock options and other stock-based awards (nonvested stock, restricted stock, restricted stock units, performance shares and deferred stock units) to certain officers, employees and non-employee directors in accordance with our various stockholder-approved stock-based compensation plans. We account for our stock-based awards in accordance with the provisions of ASC 718-10, "Compensation - Stock Compensation" ("ASC 718-10") and accordingly recognize compensation expense over each of the stock-based award's requisite service period based on the estimated grant date fair value. Our stock-based compensation from continuing operations, included in our consolidated results of operations, was $24.0 million, $22.4 million, and $22.3 million for the years ended December 31, 2011, 2010, and 2009, respectively.  The fair value of other stock-based awards is determined based on the closing price of our common stock on the day prior to the grant date. Stock-based compensation expense for our other stock-based awards is recorded equally over the vesting periods of such awards generally ranging from six months to three years.  We estimate the fair value of stock options granted using the Hull-White II Valuation Model ("HW-II") lattice option valuation model and a single option award approach. We use the HW-II because it considers characteristics of fair value option pricing, such as an option's contractual term and the probability of exercise before the end of the contractual term. In addition, the complications surrounding the expected term of an option are material, as indicated in ASC 718-10. Given our reasonably large pool of unexercised options, we believe a lattice model that specifically addresses this fact and models a full term of exercises is the most appropriate and reliable means of valuing our stock options. We are amortizing the fair value on a straight-line basis over the requisite service periods of the awards, which are the vesting periods of three years. The stock options vest 33.3% on each grant anniversary date over three years of continued employment.                                         88  --------------------------------------------------------------------------------

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  The following table shows the weighted average assumptions we used to develop the fair value estimates under our HW-II option valuation model and the resulting estimates of weighted-average fair value per share of stock options granted during the years ended December 31, 2011, 2010 and 2009:  [[Image Removed]]        [[Image Removed]]      [[Image Removed]]      [[Image Removed]]                                  2011                   2010                   2009 Expected volatility                   36.0 %                 39.9 %                 40.3 % Risk free interest           0.01% - 3.58  %        0.06% - 3.69  %        0.05% - 3.58  % rate (range) Expected dividends                       -                      -                      - Average expected term                  5.4                    5.4                    5.4 (years) Fair value per share of stock options         $           11.73      $           11.22      $            8.02 granted   Population Stratification  In accordance with ASC 718-10, a company should aggregate individual awards into relatively homogeneous groups with respect to exercise and post-vesting employment behaviors for the purpose of refining the expected term assumption, regardless of the valuation technique used to estimate the fair value. In addition, ASC 718-10 indicates that a company may generally make a reasonable fair value estimate with as few as one or two groupings. We have determined that a single employee population group is appropriate based on an analysis of our historical exercise patterns.  

Expected Volatility

  Volatility is a measure of the tendency of investment returns to vary around a long-term average rate. Historical volatility is an appropriate starting point for setting this assumption in accordance with ASC 718-10. According to ASC 718-10, companies should also consider how future experience may differ from the past. This may require using other factors to adjust historical volatility, such as implied volatility, peer-group volatility and the range and mean-reversion of volatility estimates over various historical periods. ASC 718-10 acknowledges that there is likely to be a range of reasonable estimates for volatility. In addition, ASC 718-10 requires that if a best estimate cannot be made, management should use the mid-point in the range of reasonable estimates for volatility. We estimate the volatility of our common stock at the date of grant based on both historical volatility and implied volatility from traded options of our common stock, consistent with ASC 718-10.  

Risk-Free Interest Rate

Lattice models require risk-free interest rates for all potential times of exercise obtained by using a grant-date yield curve. A lattice model would, therefore, require the yield curve for the entire time period during which employees might exercise their options. We base the risk-free rate on the implied yield in effect at the time of option grant on United States Treasury zero-coupon issues with equivalent remaining terms.

Expected Dividends

We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Accordingly, we use an expected dividend yield of zero.

Pre-Vesting Forfeitures

  Pre-vesting forfeitures do not affect the fair value calculation, but they affect the expense calculation. ASC 718-10 requires us to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record share-based compensation expense only for those awards that are expected to vest.  We apply a dynamic forfeiture rate methodology over the vesting period of the award. The dynamic forfeiture rate methodology incorporates the lapse of time into the resulting expense calculation and results in a forfeiture rate that diminishes as the granted awards approach its vest date. Accordingly, the dynamic forfeiture rate methodology results in a more consistent stock compensation expense calculation over the vesting period of the award.                                         89  --------------------------------------------------------------------------------

     TABLE OF CONTENTS  Post-Vesting Cancellations  Post-vesting cancellations include vested options that are cancelled, exercised or expire unexercised. Lattice models treat post-vesting cancellations and voluntary early exercise behavior as two separate assumptions. We use historical data to estimate post-vesting cancellations.  

Expected Term

  ASC 718-10 calls for an extinguishment calculation, dependent upon how long a granted option remains outstanding before it is fully extinguished. While extinguishment may result from exercise, it can also result from post-vesting cancellation or expiration at the contractual term. Expected term is an output in lattice models so we do not have to determine this amount.  

The fair value calculations of our stock option grants are affected by assumptions that are believed to be reasonable based upon the facts and circumstances at the time of grant. Changes in our volatility estimates can materially affect the fair values of our stock option grants. If our estimated weighted-average volatility for the year ended December 31, 2011 were 10% higher, our after-tax income from continuing operations would decrease by approximately $0.3 million, or less than $0.01 per diluted share.

Accounting for Income Taxes

  Deferred tax assets generally represent items that will result in a tax deduction in future years for which we have already recorded the tax benefit in our income statement. We assess the likelihood that deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not probable, a valuation allowance is established. To the extent we establish a valuation allowance or increase this allowance, we must include an expense as part of the income tax provision in our results of operations. Our deferred tax asset balances in our consolidated balance sheets were $255.3 million and $218.1 million as of December 31, 2011 and 2010, respectively. Our valuation allowances for deferred tax assets in our consolidated balance sheets were $59.8 million and $57.9 million as of December 31, 2011 and 2010, respectively.  In addition, significant judgment is required in determining and assessing the impact of certain tax-related contingencies. We establish accruals when, despite our belief that our tax return positions are fully supportable, it is probable that we have incurred a loss related to tax contingencies and the loss or range of loss can be reasonably estimated. We adjust the accruals related to tax contingencies as part of our provision for income taxes in our results of operations based upon changing facts and circumstances, such as progress of a tax audit, development of industry related examination issues, as well as legislative, regulatory or judicial developments. A number of years may elapse before a particular matter, for which we have established an accrual, is audited and resolved.  The first step in determining the deferred tax asset valuation allowance is identifying reporting jurisdictions where we have a history of tax and operating losses or are projected to have losses in future periods as a result of changes in operational performance. We then determine if a valuation allowance should be established against the deferred tax assets for that reporting jurisdiction.  The second step is to determine the amount of the valuation allowance. We will generally establish a valuation allowance equal to the net deferred tax asset (deferred tax assets less deferred tax liabilities) related to the jurisdiction identified in step one of the analysis. In certain cases, we may not reduce the valuation allowance by the amount of the deferred tax liabilities depending on the nature and timing of future taxable income attributable to deferred tax liabilities.  In assessing tax contingencies, we apply the provisions of ASC 740-10, "Income Taxes". We apply the recognition threshold and measurement of a tax position taken or expected to be taken in a tax return and follow the guidance on various matters such as derecognition, interest, penalties and disclosure. We classify interest and penalties as a component of income tax expense.  During each reporting period, we assess the facts and circumstances related to recorded tax contingencies. If tax contingencies are no longer deemed probable based upon new facts and circumstances, the contingency is reflected as a reduction of the provision for income taxes in the current period.                                         90  --------------------------------------------------------------------------------

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  Our deferred tax liabilities exceeded our deferred tax assets by $73.5 million as of December 31, 2011, excluding the impact of valuation allowances. Historically, we have produced federal taxable income. Therefore, we believe that the likelihood of not realizing the federal tax benefit of our deferred tax assets is remote. However, we do have subsidiaries with a history of tax losses in certain state jurisdictions and, based upon those historical tax losses, we assumed that the subsidiaries would not be profitable in the future for those states' tax purposes. If our assertion regarding the future profitability of those subsidiaries was incorrect, then our deferred tax assets would be understated by the amount of the valuation allowance of $59.8 million at December 31, 2011.  The IRS may propose adjustments for items we have failed to identify as tax contingencies. If the IRS were to propose and sustain assessments equal to 10% of our taxable income for 2011, we would incur approximately $9.2 million of additional tax payments for 2011 plus interest and penalties, if applicable.  

Segment Reporting

  We have five operating divisions as of December 31, 2011. We realign these operating divisions frequently based upon changing circumstances, including acquisition and divestiture activity. We consider these operating divisions as one operating segment, healthcare services, for segment reporting purposes and for goodwill impairment testing in accordance with ASC 280-10, "Segment Reporting" ("ASC 280-10"), and ASC 350-10.  In accordance with ASC 350-10, we determined that our five operating divisions and related acute care hospitals comprise one reporting unit because of their similar economic characteristics in each of the following areas:     •   the way we manage our operations and extent to which our acquired        facilities are integrated into our existing operations as a single        reporting unit;  

• our goodwill is recoverable from the collective operations of our five

operating divisions and related acute care hospitals and not individually

from one single operating division or hospital;

• our operating divisions are frequently realigned based upon changing

circumstances, including acquisition and divestiture activity; and

• because of the collective size of our five operating divisions, each

division and acute care hospital benefits from its participation in a group

purchasing organization.

Inflation

  The healthcare industry is labor-intensive. Wages and other expenses increase during periods of inflation and when labor shortages in marketplaces occur. In addition, suppliers pass along rising costs to us in the form of higher prices. Private insurers pass along their rising costs in the form of lower reimbursement to us. Our ability to pass on these increased costs in increased rates is limited because of increasing regulatory and competitive pressures and the fact that the majority of our revenues are fee-based. Accordingly, inflationary pressures could have a material adverse effect on our results of operations.                                         91 

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