IASIS HEALTHCARE LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this report. Data for the quarter ended December 31, 2012 and 2011, has been derived from our unaudited condensed consolidated financial statements.

References herein to "we," "our" and "us" are to IASIS Healthcare LLC and its subsidiaries. References herein to "IAS" are to IASIS Healthcare Corporation, our parent company.

FORWARD LOOKING STATEMENTS Some of the statements we make in this report are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy (including possible acquisitions and dispositions), financing needs, projections of revenue, income or loss, capital expenditures and future operations. Those risks and uncertainties include, among others, changes in governmental healthcare programs that could reduce our revenues; the uncertain impact of federal health reform; the possibility of Health Choice Arizona, Inc.'s ("Health Choice" or the "Plan") contract with the Arizona Health Care Cost Containment System ("AHCCCS") being discontinued and changes in the payment structure under that contract, as well as an inability to control costs at Health Choice; shifts in payor mix from commercial and managed care payors to Medicaid and managed Medicaid; our ability to retain and negotiate reasonable contracts with managed care plans; a growth in the level of uncompensated care at our hospitals; our ability to recruit and retain quality physicians and medical professionals; competition from other hospitals and healthcare providers impacting our patient volume; our failure to continually enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment; the federal health reform law's significant restrictions on hospitals that have physician owners; a failure of our information systems that would adversely affect our ability to properly manage our operations; failure to effectively and timely implement electronic health record systems; claims brought against our facilities for malpractice, product liability and other legal grounds; difficulties with the integration of acquisitions that may disrupt our ongoing operations; our dependence on key management personnel; potential responsibilities and costs under environmental laws; the possibility of a decline in the fair value of our reporting units that could result in a material non-cash charge to earnings; the risks and uncertainties related to our ability to generate sufficient cash to service our existing indebtedness; our substantial level of indebtedness; the possibility of an increase in interest rates, which would increase the cost of servicing our debt; and the risks associated with us being owned by equity sponsors who have the ability to control our financial decisions. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements.

Those risks and uncertainties, among others discussed in this report, are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, filed with the Securities and Exchange Commission (the "SEC").

Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

25 -------------------------------------------------------------------------------- Table of Contents EXECUTIVE OVERVIEW We are a leading provider of high quality, affordable healthcare services primarily in high-growth urban and suburban markets. As of December 31, 2012, we owned or leased 19 acute care hospital facilities and one behavioral health hospital, with a total of 4,485 licensed beds, several outpatient service facilities, and more than 160 physician clinics. We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. We operate in various regions, including: • Salt Lake City, Utah; • Phoenix, Arizona; • Tampa-St. Petersburg, Florida; • five cities in Texas, including Houston and San Antonio; and • West Monroe, Louisiana.

We also own and operate Health Choice, a Medicaid and Medicare managed health plan head quartered in Phoenix that serves over 174,000 members in Arizona and Utah.

In November 2012, we opened a new campus of St. Joseph Medical Center in the Heights area of Houston, located approximately six miles from the main campus in a community currently undergoing a revitalization. The new campus, licensed for 48 beds, includes an emergency department, four operating rooms, a procedure room and a fully equipped imaging department.

Significant Industry Trends The following sections discuss recent trends that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.

The Impact of Health Reform The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health Reform Law") changes how healthcare services are covered, delivered, and reimbursed. The law expands coverage of previously uninsured individuals, largely through expansion of Medicaid coverage and establishment of state insurance exchanges ("Exchanges") where individuals may purchase coverage. The Health Reform Law also contains an "individual mandate" that imposes financial penalties on individuals who fail to carry insurance coverage and employers that do not provide health insurance coverage. In addition, the Health Reform Law reforms certain aspects of health insurance, reduces government reimbursement rates, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, places restrictions on physician-owned hospitals and contains provisions intended to strengthen fraud and abuse enforcement.

On June 28, 2012, the U.S. Supreme Court upheld the constitutionality of the individual mandate provisions of the Health Reform Law, but struck down provisions that would have allowed the U.S. Department of Health & Human Services (the "Department") to penalize states that do not implement the Medicaid expansion provisions of the law with the loss of existing federal Medicaid funding. As a result, states may choose not to implement the Medicaid expansion provisions of the Health Reform Law without losing existing funding. A number of U.S. governors, including the governor of Texas, have stated that they will oppose their state's participation in the expanded Medicaid program.

However, these statements are not legally binding and may be subject to change.

Because of the many variables involved, including the law's complexity, the lack of implementing regulations or interpretive guidance, gradual and potentially delayed implementation and possible amendment, the impact of the Health Reform Law, including how individuals and businesses will respond to the new choices and obligations under the law, is not yet fully known. We believe, however, that trends toward pay-for-performance reimbursement models focused on quality, cost control and clinically integrated healthcare delivery, which are encouraged by the Health Reform Law, are taking hold among private health insurers and will continue to do so.

26 -------------------------------------------------------------------------------- Table of Contents Budget Control Act and American Taxpayer Relief Act On August 2, 2011, the U.S. Congress enacted the Budget Control Act of 2011.

This law increased the nation's borrowing authority and takes steps to reduce federal spending and the deficit. The deficit reduction portion of the Budget Control Act of 2011 is being implemented in two phases. In the first phase, the law imposes caps that reduce discretionary spending by more than $900 billion over ten years, beginning in federal fiscal year 2012. Under the second phase, if spending and deficit amounts reach certain thresholds, an enforcement mechanism called "sequestration" will be triggered under which a total of $1.2 trillion in automatic, across-the board spending reductions must be implemented over ten years beginning in 2013. The spending reductions are to be split evenly between defense and non-defense discretionary spending, although certain programs (including the Medicaid and Children's Health Insurance Programs ("CHIP")), are exempt from these automatic spending reductions, and Medicare expenditures cannot be reduced by more than two percent. The start of the sequestration was delayed until March 1, 2013, by the American Taxpayer Relief Act of 2012. The President and U.S. Congress continue to negotiate federal government spending reductions, but if action is not taken by March 1, 2013, sequestration will go into effect, and Medicare payments to hospitals and payments for other services could be reduced. It is possible that these negotiations will result in another temporary compromise or will result in greater spending reductions than required by the Budget Control Act of 2011.

State Medicaid Budgets Over recent years, the states in which we operate have experienced budget constraints as a result of increased costs and lower than expected tax collections. Many states have experienced or project near term shortfalls in their budgets, and economic conditions may increase these budget pressures.

Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. The states in which we operate have responded to these budget concerns, by decreasing funding for Medicaid and other healthcare programs or by making structural changes that have resulted in a reduction in hospital reimbursement. In addition, many states are seeking waivers from the Centers for Medicare and Medicaid Services ("CMS") in order to implement or expand managed Medicaid programs.

The Texas legislature and the Texas Health and Human Services Commission ("THHSC") recommended expanding Medicaid managed care enrollment in the state, and in December 2011, CMS approved a five-year Medicaid waiver that: (1) allows Texas to expand its Medicaid managed care program while preserving hospital funding; (2) provides incentive payments for healthcare improvements; and (3) directs more funding to hospitals that serve large numbers of uninsured patients. Certain of our acute care hospitals currently receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Participation in indigent care affiliation agreements by our Texas hospitals has resulted in additional acute care revenue by virtue of the hospitals' entitlement to supplemental Medicaid inpatient reimbursement. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs for the quarter ended December 31, 2012, was $15.1 million, compared to $19.2 million in the prior year quarter. Under the Medicaid waiver, which will change the funding structure of Texas' current supplemental Medicaid reimbursement programs, funds will be distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities' care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination will be controlled primarily by government-owned public hospitals that serve the surrounding geographic areas.

Due to the complexities associated with implementation of the waiver's underlying rules and regulations and the nature of ongoing deliberations with advocacy groups and public hospitals, we are unable to estimate the impact, if any, this will have on our revenue and earnings.

The THHSC has released proposed rules to change the Texas Medicaid Disproportionate Share Hospital ("Texas Medicaid DSH") methodology. While changes to the Texas Medicaid DSH methodology have been proposed, details regarding its computation and funding for the state's upcoming fiscal year have not yet been identified. Because deliberations regarding the Texas Medicaid DSH program are ongoing, we are unable to estimate the financial impact, if any, that proposed program changes may have on our result of operations. During the quarter ended December 31, 2012, we recognized $7.1 million in Texas Medicaid DSH revenues, compared to $6.2 million in the prior year quarter.

Beginning in July 2011, in an effort to control its budgeted expenditures and balance its budget, the state of Arizona implemented a plan to reduce its eligible Medicaid beneficiaries. This plan has resulted in a reduction of approximately 7.4% of the total Medicaid population in the state and includes approximately 143,000 childless adults. Since implementation of this plan by the state of Arizona, Health Choice has experienced a significant decline in its enrollees, premium revenue and earnings. While Health Choice's enrollment has continued to decline during the quarter ended December 31, 2012, and is expected to continue to decline throughout our fiscal year 2013, the rate of decline is beginning to moderate. Additionally, on January 14, 2013, the governor of Arizona announced a recommendation that the state should fully participate in the expansion of its Medicaid program under the Health Reform Law, which would include increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults that was previously eliminated.

The expansion of the state's Medicaid program under the Health Reform Law could potentially result in the addition of approximately 370,000 people to its Medicaid rolls.

If additional Medicaid program changes are implemented in the future in Arizona or other states in which we operate, our revenue and earnings could be significantly impacted.

27 -------------------------------------------------------------------------------- Table of Contents Physician Alignment and Clinical Integration In an effort to meet community needs and address coverage issues, we have made significant investments in order to align with physicians through various recruitment and employment strategies, as well as alternative means of alignment such as our formation of provider networks in certain markets. We believe that physician alignment promotes clinical integration, enhances quality of care and makes us more efficient and competitive in a healthcare environment trending toward value-based purchasing and pay-for-performance.

As we continue to focus on our physician alignment and integration strategies, we face significant competition for skilled physicians in certain of our markets as more hospital providers adopt a physician staffing model approach, coupled with a general shortage of physicians across most specialties. This increased competition has resulted in efforts by managed care organizations to align with certain provider networks in the markets in which we operate. In response, we have formed our own provider networks in certain markets that include both employed and non-affiliated physicians, providing the infrastructure through which we are able to contract more efficiently with commercial payors, position ourselves for value based reimbursement and promote clinical integration. While we expect that employing physicians should provide relief on cost pressures associated with on-call coverage and other professional fees, we anticipate incurring additional labor and other start-up related costs as we continue the integration of employed physicians and their related support staff.

We also face risk from competition for outpatient business. We expect to mitigate this risk through continued focus on our physician employment strategy, the development of new access points of care, our commitment to capital investment in our hospitals, including updated technology and equipment, and our commitment to our quality of care initiatives that some competitors, including individual physicians or physician groups, may not be equipped to implement.

Uncompensated Care Like others in the hospital industry, we continue to experience high levels of uncompensated care, including discounts to the uninsured, bad debts and charity care. These elevated levels are driven by the number of uninsured and under-insured patients seeking care at our hospitals, which has been significantly impacted by the efforts of the state of Arizona to reduce its Medicaid enrollees, as well as a general increase in uninsured volume in our Texas market where the state exercises stringent Medicaid eligibility requirements. Given the high rate of unemployment and its impact on the economy, particularly in the markets we serve, we believe our hospitals may continue to experience these elevated levels of uncompensated care until the U.S. economy experiences an economic recovery that includes significant sustained job growth and a meaningful decline in unemployment. During the quarter ended December 31, 2012, our self-pay admissions represented 7.8% of our total admissions, compared to 7.2% in the prior year quarter. This has resulted in pressures on pricing and operating margins created from providing the same level of healthcare service, but for less reimbursement. The cost of our uncompensated care is also impacted by the higher acuity levels at which these patients are presenting for treatment, which is primarily resulting from economic pressures and their related decisions to defer care. During the quarter ended December 31, 2012, our uncompensated care, which includes bad debts, charity care and uninsured discounts, as a percentage of acute care revenue was 23.8%, compared to 19.8% in the prior year quarter.

We continue to monitor our self-pay admissions on a daily basis and continue to focus on the efficiency of our emergency rooms, point-of-service cash collections, Medicaid eligibility automation and process-flow improvements.

While we continue to be successful at qualifying many uninsured patients for Medicaid or other third-party coverage, which has helped to alleviate some of the pressure created from the growth in our uncompensated care, we continue to experience delays associated with the administrative functions of the Medicaid qualification process at the state levels. These delays are not indicative of eligibility issues, but rather staffing cut-backs as states continue working to address their budgetary issues.

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

The percentages of our insured and uninsured net hospital receivables are summarized as follows: December 31, September 30, 2012 2012 Insured receivables 76.1 % 72.5 % Uninsured receivables 23.9 % 27.5 % Total 100.0 % 100.0 % 28 -------------------------------------------------------------------------------- Table of Contents The percentages of hospital receivables in summarized aging categories are as follows: December 31, September 30, 2012 2012 0 to 90 days 63.0 % 63.4 % 91 to 180 days 19.8 % 19.2 % Over 180 days 17.2 % 17.4 % Total 100.0 % 100.0 % Adoption of Electronic Health Records ("EHR") The American Recovery and Reinvestment Act of 2009 ("ARRA") included approximately $26.0 billion in funding for various healthcare information technology ("IT") initiatives, including Medicare and Medicaid incentives for eligible hospitals and professionals to adopt and meaningfully use certified EHR technology ("EHR Incentive Programs"). In addition, eligible providers that fail to demonstrate meaningful use of certified EHR technology will be subject to reduced payments from Medicare, beginning in federal fiscal year 2015 for eligible hospitals and calendar year 2015 for eligible professionals.

Implementation of the EHR Incentive Programs has been divided into three stages with increasing requirements for participation. Stage 1 requires providers to meet meaningful use objectives specified by CMS, which include electronically capturing health information in structured format, tracking key clinical conditions for coordination of care purposes, implementing clinical decision support tools to facilitate disease and medication management, using EHRs to engage patients and families, and reporting clinical quality measures and public health information. Our hospitals, as well as a number of our physician clinics, substantially met the Stage 1 requirements in our fiscal year 2012. Stage 2 introduces several new meaningful use measures, as well as imposes stricter requirements on certain existing Stage 1 measures. Providers must achieve meaningful use under the Stage 1 criteria before advancing to Stage 2 and are required to meet the criteria for the applicable stage based on their first year of attesting to meaningful use. Our hospitals and physician clinics whose first payment year is 2011 or 2012 are required to meet Stage 2 criteria beginning in 2014. Though we expect to continue to incur certain non-productive and other operating costs, as well as additional investments in hardware and software, we believe our historical investments in advanced clinical and other information systems, as well as quality of care programs, provides a solid platform to build upon for timely compliance with the healthcare IT initiatives and requirements of ARRA.

Revenue and Volume Trends Total net revenue for the quarter ended December 31, 2012, increased 2.8% to $641.3 million, compared to $623.7 million in the prior year quarter. Total net revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts, and premium revenue. Acute care revenue contributed $29.5 million to the increase in total net revenue for the quarter ended December 31, 2012, compared to the prior year quarter, while premium revenue at Health Choice declined $11.9 million for the same period.

Acute Care Revenue Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals' net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals' established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Acute care revenue is reported net of the provision for doubtful accounts. Other revenue includes medical office building rental income and other miscellaneous revenue.

Admissions decreased 0.4% for the quarter ended December 31, 2012, compared to the prior year quarter. An increase in observation cases, primarily resulting from the adoption of new InterQual criteria changes that focus on certain diagnoses presenting for emergency services, has impacted our admissions.

Observation cases represent the number of patients classified as outpatient, during which time medical necessity is being evaluated prior to the patient being transferred to an inpatient status or being released from care. Adjusted admissions increased 3.1% for the quarter ended December 31, 2012, compared to the prior year quarter. Our volume for the quarter ended December 31, 2012, has benefited from an 18.8% increase in outpatient surgeries, resulting from our investment in the expansion of access points of care and the continued expansion of our physician alignment strategies to meet the growing need for outpatient services in the communities we serve. In addition, we experienced a 14.2% increase in emergency room visits for the quarter ended December 31, 2012, resulting from the current nationwide influenza epidemic.

We believe our volumes over the long-term will grow as a result of our business strategies, including the strategic deployment of capital, the continued investment in our physician alignment strategies, the development of increased access points of care, including physician clinics, urgent care centers, outpatient imaging centers and ambulatory surgery centers, our increased marketing efforts to promote our commitment to quality and patient satisfaction, and the general aging of the population.

29-------------------------------------------------------------------------------- Table of Contents The following table provides the sources of our hospitals' net patient revenue before the provision for bad debts by payor: Quarter Ended December 31, 2012 2011 Medicare 22.1 % 23.8 % Managed Medicare 9.4 % 7.3 % Medicaid and managed Medicaid 12.7 % 15.5 % Managed care and other 37.2 % 39.6 % Self-pay 18.6 % 13.8 % Total 100.0 % 100.0 % The increase in our self-pay revenue as a percentage of the total is the result of growth in our uninsured volumes and revenue, which have increased for the quarter ended December 31, 2012, compared to the prior year quarter. This is significantly impacted by the efforts of the state of Arizona to reduce its Medicaid enrollees.

Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 2.4% for the quarter ended December 31, 2012, compared to the prior year quarter. Our pricing metrics for the quarter ended December 31, 2012, continue to benefit from rate increases from our managed care payors. However, our overall pricing has been negatively affected by the impact of high unemployment and other industry pressures, which has resulted in increased bad debts, reductions in Medicaid funding as states address their budgeting issues by implementing rate cuts on providers and reductions in Medicaid eligible beneficiaries. As states continue working through their budgetary issues, any additional cuts to Medicaid funding or structural changes to Medicaid programs that reduce eligibility would negatively impact our future pricing and earnings.

See "Item 1 - Business - Sources of Acute Care Revenue" and "Item 1 - Business - Government Regulation and Other Factors" included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, filed with the SEC on December 21, 2012, for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans.

In those sections, we also discussed the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by CMS that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also addressed in such Annual Report on Form 10-K.

Premium Revenue Health Choice contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted providers. Most of its premium revenue is derived through a contract with AHCCCS, the state agency that administers Arizona's Medicaid program. The contract requires Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Health Choice also contracts with CMS to provide coverage as a Medicare Advantage Prescription Drug ("MAPD") Special Needs Plan ("SNP"). This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid).

Effective for the 2012 plan year, SNPs are required to meet additional CMS requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

Health Choice's current contract with AHCCCS, which covers Medicaid members in Apache, Coconino, Maricopa, Mohave, Navajo, Pima, Yuma, La Paz and Santa Cruz counties, expires on September 30, 2013. On January 28, 2013, Health Choice submitted its bid for a new three year contract with AHCCCS, which if accepted would become effective October 1, 2013. We anticipate contracts will be awarded by AHCCCS in March 2013. While we cannot be assured we will be awarded a new contract, we have successfully secured new contracts in the last four bidding cycles.

Premium revenue generated by Health Choice represented 21.7% of our consolidated net revenue for the quarter ended December 31, 2012, compared to 24.2% in the prior year quarter. The decline in premium revenue as a percentage of consolidated net revenue is the result of a loss of covered lives in our Medicaid product line, which have declined approximately 6.7% since December 31, 2011. The loss in membership in our Medicaid product line is the result of efforts by the state of Arizona to balance its budget, which included the July 1, 2011, implementation of a plan to reduce its Medicaid enrollees, particularly related to childless adults.

If AHCCCS were to take further actions in the near term, including reimbursement rate reductions, enrollment reductions, capitation payment deferrals, covered services reductions or limitations or other steps to reduce program expenditures, it could materially adversely impact our operating results and cash flows.

30 -------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. Our critical accounting policies are further described under the caption "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2012.

SELECTED OPERATING DATA The following table sets forth certain unaudited operating data for each of the periods presented.

Quarter Ended December 31, 2012 2011 Acute Care Number of acute care hospital facilities at end of period 19 18 Licensed beds at end of period (1) 4,485 4,365 Average length of stay (days) (2) 5.0 4.9 Occupancy rates (average beds in service) 48.4 % 48.9 % Admissions (3) 31,512 31,634 Adjusted admissions (4) 54,975 53,315 Patient days (5) 158,136 154,810 Adjusted patient days (4) 275,882 252,163 Net patient revenue per adjusted admission (6) $ 8,965 $ 8,756 Health Choice Medicaid covered lives 170,420 182,647 Dual-eligible lives (7) 4,081 4,213 Medical loss ratio (8) 82.8 % 83.5 % (1) Includes St. Luke's Behavioral Hospital.

(2) Represents the average number of days that a patient stayed in our hospitals.

(3) Represents the total number of patients admitted to our hospitals for stays in excess of 23 hours. Management and investors use this number as a general measure of inpatient volume.

(4) Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions/patient days by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.

(5) Represents the number of days our beds were occupied by inpatients over the period.

(6) Includes the impact of the provision for bad debts as a component of revenue.

(7) Represents members eligible for Medicare and Medicaid benefits under Health Choice's contract with CMS to provide coverage as a MAPD SNP.

(8) Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

31 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS SUMMARY Consolidated The following table sets forth, for the periods presented, our results of consolidated operations expressed in dollar terms and as a percentage of net revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

Quarter Ended Quarter Ended December 31, 2012 December 31, 2011 ($ in thousands): Amount Percentage Amount Percentage Net revenue Acute care revenue before provision for bad debts $ 597,101 $ 543,214 Less: Provision for bad debts (94,656 ) (70,279 ) Acute care revenue 502,445 78.3 % 472,935 75.8 % Premium revenue 138,854 21.7 % 150,738 24.2 % Total net revenue 641,299 100.0 % 623,673 100.0 % Costs and expenses Salaries and benefits 246,288 38.4 % 223,964 35.9 % Supplies 89,899 14.0 % 84,170 13.5 % Medical claims 113,343 17.7 % 124,245 19.9 % Rentals and leases 13,965 2.2 % 12,266 2.0 % Other operating expenses 115,093 17.9 % 113,983 18.3 % Medicare and Medicaid EHR incentives (5,536 ) (0.9 %) (6,677 ) (1.1 %) Interest expense, net 33,845 5.3 % 34,940 5.6 % Depreciation and amortization 26,852 4.2 % 28,534 4.6 % Management fees 1,250 0.2 % 1,250 0.2 % Total costs and expenses 634,999 99.0 % 616,675 98.9 % Earnings from continuing operations before gain on disposal of assets and income taxes 6,300 1.0 % 6,998 1.1 % Gain on disposal of assets, net 88 0.0 % 240 0.0 % Earnings from continuing operations before income taxes 6,388 1.0 % 7,238 1.1 % Income tax expense 2,735 0.4 % 3,605 0.5 % Net earnings from continuing operations 3,653 0.6 % 3,633 0.6 % Earnings (loss) from discontinued operations, net of income taxes 415 0.0 % (48 ) 0.0 % Net earnings 4,068 0.6 % 3,585 0.6 % Net earnings attributable to non-controlling interests (1,599 ) (0.2 %) (2,232 ) (0.4 %) Net earnings attributable to IASIS Healthcare LLC $ 2,469 0.4 % $ 1,353 0.2 % 32 -------------------------------------------------------------------------------- Table of Contents Acute Care The following table and discussion sets forth, for the periods presented, the results of our acute care operations expressed in dollar terms and as a percentage of acute care revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

Quarter Ended Quarter Ended December 31, 2012 December 31, 2011 ($ in thousands): Amount Percentage Amount Percentage Acute care revenue Acute care revenue before provision for bad debts $ 597,101 $ 543,214 Less: Provision for bad debts (94,656 ) (70,279 ) Acute care revenue 502,445 99.7 % 472,935 99.7 % Revenue between segments (1) 1,567 0.3 % 1,629 0.3 % Total acute care revenue 504,012 100.0 % 474,564 100.0 % Costs and expenses Salaries and benefits 240,522 47.7 % 218,837 46.1 % Supplies 89,845 17.8 % 84,119 17.7 % Rentals and leases 13,572 2.7 % 11,886 2.5 % Other operating expenses 109,336 21.7 % 108,297 22.8 % Medicare and Medicaid EHR incentives (5,536 ) (1.1 %) (6,677 ) (1.4 %) Interest expense, net 33,845 6.7 % 34,940 7.4 % Depreciation and amortization 25,817 5.1 % 27,656 5.8 % Management fees 1,250 0.3 % 1,250 0.3 % Total costs and expenses 508,651 100.9 % 480,308 101.2 % Loss from continuing operations before gain on disposal of assets and income taxes (4,639 ) (0.9 %) (5,744 ) (1.2 %) Gain on disposal of assets, net 88 0.0 % 240 0.0 % Loss from continuing operations before income taxes $ (4,551 ) (0.9 %) $ (5,504 ) (1.2 %) (1) Revenue between segments is eliminated in our consolidated results.

Quarters Ended December 31, 2012 and 2011 Acute care revenue -Acute care revenue for the quarter ended December 31, 2012, was $504.0 million, an increase of $29.4 million or 6.2% compared to $474.6 million in the prior year quarter. The increase in acute care revenue is comprised primarily of an increase in adjusted admissions of 3.1% and an increase in our net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, of 2.4%, both compared to the prior year quarter. The provision for bad debts for the quarter ended December 31, 2012, was $94.7 million, an increase of $24.4 million or 34.7% compared to $70.3 million in the prior year quarter. The increase in the provision for bad debts is the result of increased self-pay volume and revenue. Our self-pay admissions as a percentage of total admissions increased to 7.8% for the quarter ended December 31, 2012, compared to 7.2% in the prior year quarter.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in acute care revenue of $1.6 million and $78,000 for the quarters ended December 31, 2012 and 2011, respectively.

Salaries and benefits - Salaries and benefits expense for the quarter ended December 31, 2012, was $240.5 million, or 47.7% of acute care revenue, compared to $218.8 million, or 46.1% of acute care revenue in the prior year quarter.

Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of acute care revenue was 47.5% for the quarter ended December 31, 2012, compared to 46.0% in the prior year quarter. Salaries and benefits expense as a percentage of acute care revenue, excluding the impact of stock-based compensation, increased primarily as a result of the recent expansion of our employed physician base, which requires additional investments in labor and practice related costs, including infrastructure and physician support staff.

Other operating expenses - Other operating expenses for the quarter ended December 31, 2012, were $109.3 million, or 21.7% of acute care revenue, compared to $108.3 million, or 22.8% of acute care revenue in the prior year quarter.

Other operating expenses as a percentage of acute care revenue decreased primarily due to a decline in professional fees associated with our supplemental Medicaid reimbursement programs in Texas.

33-------------------------------------------------------------------------------- Table of Contents Health Choice The following table and discussion sets forth, for the periods presented, the results of our Health Choice operations expressed in dollar terms and as a percentage of premium revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

Quarter Ended Quarter Ended December 31, 2012 December 31, 2011 ($ in thousands): Amount Percentage Amount Percentage Premium revenue Premium revenue $ 138,854 100.0 % $ 150,738 100.0 % Costs and expenses Salaries and benefits 5,766 4.2 % 5,127 3.4 % Supplies 54 0.0 % 51 0.0 % Medical claims (1) 114,910 82.8 % 125,874 83.5 % Other operating expenses 5,757 4.1 % 5,686 3.8 % Rentals and leases 393 0.3 % 380 0.3 % Depreciation and amortization 1,035 0.7 % 878 0.6 % Total costs and expenses 127,915 92.1 % 137,996 91.5 % Earnings before income taxes $ 10,939 7.9 % $ 12,742 8.5 % (1) Medical claims paid to our hospitals of $1.6 million for each of the quarters ended December 31, 2012 and 2011, are eliminated in our consolidated results.

Quarters Ended December 31, 2012 and 2011 Premium revenue - Premium revenue from Health Choice was $138.9 million for the quarter ended December 31, 2012, a decrease of $11.9 million or 7.9% compared to $150.7 million in the prior year quarter. The decline in premium revenue is primarily impacted by the efforts of the state of Arizona to reduce its Medicaid enrollment, particularly related to childless adults, which has resulted in a 7.4% decline in member months, and lower capitation rates on a per member per month basis, as the mix of enrollees has changed to include fewer childless adults, which typically receive a higher capitation rate on a monthly basis.

Medical claims - Prior to eliminations, medical claims expense was $114.9 million for the quarter ended December 31, 2012, compared to $125.9 million in the prior year quarter. Medical claims expense as a percentage of premium revenue was 82.8% for the quarter ended December 31, 2012, compared to 83.5% in the prior year quarter. The decrease in medical claims as a percentage of premium revenue is impacted primarily by an overall decline in inpatient hospitalization.

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