UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2013

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            .

Commission File Number: 333-117362

IASIS HEALTHCARE LLC

(Exact name of registrant as specified in its charter)

DELAWARE	20-1150104
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
DOVER CENTRE 117 SEABOARD LANE, BUILDING E FRANKLIN, TENNESSEE	37067
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (615) 844-2747

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  x    NO  ¨

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

(Note: As a voluntary filer not subject to the filing requirements of Sections 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months as if it were subject to such filing requirements.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x

As of December 20, 2013, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.

DOCUMENTS INCORPORATED BY REFERENCE

None.

CERTAIN TERMS

In this Annual Report on Form 10-K (this “Report”), unless indicated or the context requires otherwise, the terms “we,” “us,” “our,” the “Company” or “our company” refers to IASIS Healthcare LLC and its consolidated subsidiaries (“IASIS”). Our parent company, IASIS Healthcare Corporation (“IAS”), is our sole member.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this Report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and funds from operations, our strategic plans and objectives, cost management, liquidity and ability to repay or refinance our indebtedness as it matures, anticipated capital expenditures (and access to capital) required to complete projects, and other matters. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and/or could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. You are cautioned to not place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:

• the impact of our indebtedness and the ability to repay or to refinance such indebtedness on acceptable terms;

• the effects related to the enactment and implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, the possible enactment of additional federal or state healthcare reforms and possible changes to such laws and other federal, state or local laws or regulations affecting the healthcare industry;

• the effects related to the enactment and implementation of the Budget Control Act of 2011 and the outcome of negotiations and legislation related to the Act’s mandated spending reductions, which include cuts to Medicare payments;

• increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts;

• the ability to achieve operating and financial targets, and attain expected levels of patient volumes and control the costs of providing services;

• possible changes in the Medicare, Medicaid and other state programs, including Medicaid upper payment limit programs or waiver programs, that may impact reimbursements to healthcare providers and insurers;

• the highly competitive nature of the health care business;

• changes in service mix, revenue mix and surgical volumes, including potential declines in the population covered under managed care agreements, the ability to enter into and renew managed care provider agreements on acceptable terms and the impact of consumer driven health plans and physician utilization trends and practices;

• the efforts of insurers, healthcare providers and others to contain healthcare costs;

• the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures;

• increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel;

• the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities;

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• changes in accounting practices;

• changes in general economic conditions nationally and regionally in our markets;

• future divestitures which may result in charges and possible impairments of long-lived assets;

• changes in business strategy or development plans;

• delays in receiving payments for services provided;

• potential adverse impact of known and unknown government investigations, litigation and other claims that may be made against us;

• our ongoing ability to demonstrate meaningful use of certified electronic health record technology and recognize income for the related Medicare or Medicaid incentive payments; and

• other risk factors described in this Report.

This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended to be exhaustive. You should carefully review the risks described under “Item 1A. — Risk Factors” in this Report. New factors may also emerge from time to time that could materially and adversely affect us.

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TABLE OF CONTENTS

PART I
Item 1. Business	1
Item 1A. Risk Factors	35
Item 1B. Unresolved Staff Comments	49
Item 2. Properties	49
Item 3. Legal Proceedings	49
Item 4. Mine Safety Disclosures	50
PART II
Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	51
Item 6. Selected Financial Data	51
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	68
Item 8. Financial Statements and Supplementary Data	70
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	110
Item 9A. Controls and Procedures	110
Item 9B. Other Information	110
PART III
Item 10. Directors, Executive Officers and Corporate Governance	111
Item 11. Executive Compensation	114
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	132
Item 13. Certain Relationships and Related Transactions, and Director Independence	134
Item 14. Principal Accountant Fees and Services	135
PART IV
Item 15. Exhibit and Financial Statement Schedules	135
Signatures	136

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IASIS HEALTHCARE LLC

PART I

Item 1. Business.

Company Overview

We are a leading provider of high quality, affordable healthcare services primarily in high-growth urban and suburban markets. As of September 30, 2013, we owned or leased 19 acute care hospital facilities and one behavioral health hospital facility with a total of 4,494 licensed beds, several outpatient service facilities and more than 160 physician clinics. On October 1, 2013, we sold our Florida operations, which primarily included three hospitals in the Tampa-St. Petersburg area and all related physician operations. With respect to this disposition, any discussion in this Report regarding our current or future operations or strategies does not include, and will not reflect the impact of our former Florida operations. Accordingly, as of the date of this Report, we own or lease 16 acute care hospital facilities and one behavioral health hospital facility with a total of 3,803 licensed beds, several outpatient service facilities and more than 145 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 currently operate in various regions, including:

• Salt Lake City, Utah;

• Phoenix, Arizona;

• five cities in Texas, including Houston and San Antonio; and

• West Monroe, Louisiana.

Our business consists of two operating segments: (1) our acute care segment comprised of our hospitals, outpatient service facilities and physician clinics and (2) our Health Choice segment. The financial information for our reportable operating segments is presented in both Footnote 17 (Segment and Geographic Information) to our audited, consolidated financial statements included under “Item 8. – Financial Statements and Supplementary Data” and in the Results of Operations Summary section included under “Item 7. – Management Discussion and Analysis of Financial Condition and Results of Operations” of this Report.

Our general acute care hospital facilities offer a variety of medical and surgical services commonly available in hospitals, including emergency services, general surgery, internal medicine, cardiology, obstetrics, orthopedics, psychiatry and physical rehabilitation. In addition, our facilities provide outpatient and ancillary services including outpatient surgery, physical therapy, radiation therapy, diagnostic imaging and respiratory therapy.

We also own and operate Health Choice Arizona, Inc. (“Health Choice” or the “Plan”), a provider-owned, managed care organization and insurer, headquartered in Phoenix that served more than 179,000 members in Arizona and Utah as of September 30, 2013.

For the year ended September 30, 2013, we generated net revenue of approximately $2.4 billion, of which 76.3%, or approximately $1.8 billion, was derived from our acute care segment and 23.7%, or approximately $564 million, was derived from our Health Choice segment.

Our principal executive offices are located at Dover Centre, 117 Seaboard Lane, Building E, Franklin, Tennessee, 37067, and our telephone number at that address is (615) 844-2747. Our Internet website address is www.iasishealthcare.com. Information contained on our website is not part of this Annual Report on Form 10-K.

Industry Overview and Trends

Growth of Healthcare Spending

According to the Centers for Medicare & Medicaid Services (“CMS”), United States (“U.S.”) healthcare expenditures were $2.7 trillion in 2011. CMS projects that total U.S. healthcare expenditures are expected to grow by 4.2% in 2012, 3.8% in 2013, 7.4% in 2014 and by an average of 6.2% annually from 2015 to 2021. As a result of this growth, total U.S. healthcare expenditures are estimated to be $4.8 trillion, or 19.6% of the total U.S. gross domestic product by 2021. The hospital services sector represents the single largest category of healthcare spending at $848.9 billion in 2011. CMS expects continued increases in hospital services based on the aging of the U.S. population, advances in medical procedures, expansion of health coverage, increasing consumer demand for expanded medical services and increased prevalence of chronic conditions such as diabetes, heart disease and obesity. CMS estimates that hospital care expenditures will increase to approximately $1.5 trillion by 2021.

According to the U.S Census Bureau, the U.S. population includes 41.4 million Americans age 65 or older, which represents 13.3% of the total population. By 2030, the number of Americans age 65 or older is expected to increase to 88.5 million, or 19.0% of the total population.

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Changes in the Delivery and Reimbursement of Healthcare Services

We believe the U.S. healthcare system and the demand for healthcare services are evolving in ways that favor larger-scale, cost-effective and more integrated healthcare delivery systems in certain markets, with a greater focus on population health management. Specifically, we believe that as governmental and private insurers seek to control healthcare costs and increase quality of care, a number of payment methodologies and reimbursement trends, such as bundled payments and shared savings, will continue to gain in importance. These will include, we believe, the continued growth of value-based payment methodologies tied to both quality and coordination of care, with incentives paid for the implementation of integrated electronic health records (“EHR”) technology and other programs that promote clinical integration and coordination of care, as well as movement toward risk-based arrangements, including the use of capitated rates. We also believe that patient-centered medical home reimbursement models, in which a primary care or specialty physician serves as care coordinator, will grow in prominence in certain markets. With our investment in information technology, capital resources, focus on physician alignment strategies and managed care expertise, including both provider based expertise and expertise associated with our managed care business at Health Choice, we believe our company is well-positioned to capitalize on these trends.

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 seeks to expand coverage of previously uninsured individuals, largely through expansion of Medicaid coverage and establishment of 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.

The most significant provisions of the Health Reform Law that seek to decrease the number of uninsured individuals mostly will become effective January 1, 2014. However, the employer mandate which requires companies with 50 or more employees to provide health insurance or pay fines, as well as insurer reporting requirements, has been delayed until January 1, 2015. In addition, the federal online Exchange has experienced significant technical issues that have negatively impacted the ability of individuals to enroll in Medicaid and to purchase health insurance. These technical issues, especially if not corrected in a timely manner, could lead to the federal government delaying the individual mandate tax penalties past the current March 31, 2014 deadline, further delays in uninsured individuals obtaining health insurance and an increase in the number of individuals who choose to pay the tax mandates rather than to purchase health insurance. Furthermore, states may choose, without losing existing federal Medicaid funding, not to implement the Medicaid expansion provisions of the Health Reform Law and in those states the penalty for not carrying insurance will be waived for low-income residents. A number of state governors and legislatures, including Texas and Louisiana, have chosen not to participate in the expanded Medicaid program at this time; however, these states could choose to implement the expansion at a later date. While some states have currently chosen not to participate, some states such as Arizona have approved the expansion of its Medicaid program effective January 1, 2014, which is anticipated to increase its Medicaid enrollment by approximately 370,000 people over the coming years. Additionally, other states, such as Arkansas, have chosen to participate or are considering participating through “private option” programs that would provide funds to low-income individuals to purchase private insurance. These “private option” programs are subject to federal approval.

Because of the many variables involved, including the law’s complexity, the lack of implementing regulations or interpretive guidance, gradual and partially delayed implementation, possible amendment, repeal or further implementation delays, uncertainty regarding the success of Exchanges in enrolling uninsured individuals, possible reductions in funding by the U.S. Congress (“Congress”) and future reductions in Medicare and Medicaid reimbursement, 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 and cost control, which are encouraged by the Health Reform Law, are taking hold among private health insurers and will continue to do so.

Budget Control Act and Sequestration

The Budget Control Act of 2011 (the “BCA”) increased the nation’s borrowing authority and takes steps to reduce federal spending and the deficit. The deficit reduction portion of the BCA imposes caps, which began in federal fiscal year 2012, that reduce discretionary spending by more than $900 billion over ten years. The BCA also requires automatic spending reductions of $1.2 trillion for federal fiscal years 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. These automatic spending reductions are commonly referred to as “sequestration.” The spending reductions are split evenly between defense and non-defense discretionary spending, although certain programs (including 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. Sequestration began on March 1, 2013, with CMS imposing a two percent reduction on Medicare claims on April 1, 2013. We are unable to predict what other deficit reduction initiatives may be proposed by the President or the Congress or whether the President and the Congress will restructure or suspend sequestration. It is possible that changes in the law to end or restructure sequestration will result in greater spending reductions than currently required by the BCA.

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Value-Based Reimbursement

The trend in the healthcare industry continues towards value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting and financial incentives tied to the quality and efficiency of care provided by facilities. The Health Reform Law expands the use of value-based purchasing initiatives in federal healthcare programs. We expect programs of this type to become more common in the healthcare industry.

Medicare requires providers to report certain quality measures in order to receive full reimbursement increases for inpatient and outpatient procedures that previously were awarded automatically. CMS has expanded, through a series of rulemakings, the number of patient care indicators that hospitals must report. Additionally, we anticipate that CMS will continue to expand the number of inpatient and outpatient quality measures. We have invested significant capital and resources in the implementation of our advanced clinical system that assists us in monitoring and reporting these quality measures. CMS makes the data submitted by hospitals, including our hospitals, public on its website.

Beginning in federal fiscal year 2013, the Department of Health and Human Services (the “Department”) reduced inpatient hospital payments for all discharges by a percentage specified by statute and pools the total amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by the Department. Under the value-based purchasing program, CMS will distribute an estimated $963 million to hospitals based on their overall performance on a set of certain quality measures. For payments in federal fiscal year 2013, hospitals were scored based on a weighted average of patient experience scores using the Hospital Consumer Assessment of Healthcare Providers and Systems survey and 12 clinical process-of-care measures. CMS adopted 17 clinical process-of-care measures by which hospitals will be scored for payments in federal fiscal year 2014 and has also announced the 19 measures for federal fiscal year 2015. CMS scores each hospital based on achievement (relative to other hospitals) and improvement ranges (relative to the hospital’s own past performance) for each applicable measure. Because the Health Reform Law provides that the pool will be fully distributed, hospitals that meet or exceed the quality performance standards set by the Department will receive greater reimbursement under the value-based purchasing program than they would have otherwise. On the other hand, hospitals that do not achieve the necessary quality performance will receive reduced Medicare inpatient hospital payments.

In addition, the Health Reform Law contains a number of other provisions that further tie reimbursement to quality and efficiency. For example, hospitals that have “excess readmissions” for specified conditions will receive reduced reimbursement. Medicare also no longer pays hospitals additional amounts for the treatment of certain hospital-acquired conditions, also known as hospital-acquired conditions (“HACs”), unless the conditions were present at admission. Further, beginning in federal fiscal year 2015, hospitals that rank in the worst 25% of all hospitals nationally for HACs in the previous year will receive a 1% reduction in their total Medicare payments. The Health Reform Law also prohibits the use of federal funds under the Medicaid program to reimburse providers for treating certain provider-preventable conditions. CMS implemented this prohibition for services with dates beginning July 1, 2012. Each state Medicaid program must deny payments to providers for the treatment of healthcare-acquired conditions and provider-preventable conditions designated by CMS as well as any other provider-preventable conditions designated by the state.

In addition, managed care organizations are implementing programs that condition payment on performance against specified measures. The quality measurement criteria used by managed care and commercial payors may be similar to or even more stringent than Medicare requirements.

As we expect these trends towards value-based purchasing of healthcare services by Medicare and other payors to continue, we believe that our position as a high-quality, low cost provider in certain of our markets will prove beneficial as we continue to move towards a quality and value-based reimbursement system. Because of these trends, if we are unable to meet or exceed quality of care standards in our facilities, our operating results could be significantly impacted in the future.

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 have increased 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 have received waivers from CMS in order to implement or expand managed Medicaid programs.

Texas

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 improvements in healthcare delivery; 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. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs for the year ended September 30, 2013, was $68.7 million compared to $87.5 million in the prior year. 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

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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. Along with delays in funding for the state’s Medicaid supplemental reimbursement programs, the expansion of the managed Medicaid program has also resulted in delays in processing and payment of related patient accounts receivable by many of the managed care payors. As of September 30, 2013, we had $66.8 million in receivables due to our Texas hospitals in connection with the supplemental reimbursement programs, including amounts due under the Texas Medicaid Disproportionate Share Hospital program (“Texas Medicaid DSH”).

The THHSC has released proposed rules to change the Texas Medicaid DSH methodology for the state’s fiscal year 2014 and 2015. While changes to the Texas Medicaid DSH methodology have been proposed, details regarding its computation for the state’s upcoming fiscal year have not yet been finalized. 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 results of operations. Texas has appropriated $160.0 million for fiscal year 2014 and $140.0 million for fiscal year 2015 to stabilize and improve the Texas Medicaid DSH program, including providing rate adjustments to recognize improvements in quality of patient care, the most appropriate use of care, and patient outcomes. These appropriations provide that the funding is contingent on “measurable progress” by THHSC toward a long-term plan. Funds appropriated for in 2015 may not be spent before the plan is finalized.

During the year ended September 30, 2013, we recognized $30.1 million in Texas Medicaid DSH revenues compared to $24.7 million in the prior year.

Arizona

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 7.0% of the total Medicaid enrollment in the state, which included approximately 141,000 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, the rate of decline has moderated compared to the prior year. Additionally, on June 17, 2013, the governor of Arizona signed into law the expansion of its Medicaid program under the Health Reform Law, which includes 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. The law is scheduled to go into effect January 1, 2014.

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.

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 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. The increased levels of uncompensated care 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 in our emergency rooms, which is primarily resulting from economic pressures and their related decisions to defer care.

We continue to monitor our uninsured 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.

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 will increase and our results of operations could be adversely affected.

Starting January 1, 2014, we expect uninsured volumes to begin decreasing due to the impact of the Health Reform Law, which includes the implementation of Exchanges and the expansion of Medicaid programs in certain of the states in which we operate. However, states may opt not to implement the expansion. A number of state governors and legislatures, including in Texas and Louisiana, have chosen not to participate in the expanded Medicaid program at this time; however, these states could choose to implement the expansion at a later date.

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The percentages of our insured and uninsured net hospital receivables are summarized as follows:

	September 30, 2013			September 30, 2012
Insured receivables		77.2	%		72.5	%
Uninsured receivables		22.8	%		27.5	%
Total		100.0	%		100.0	%

The percentages of hospital receivables in summarized aging categories are as follows:

	September 30, 2013			September 30, 2012
0 to 90 days		61.0	%		63.4	%
91 to 180 days		20.7	%		19.2	%
Over 180 days		18.3	%		17.4	%
Total		100.0	%		100.0	%

Business Strategy

We seek to provide high-quality, cost-effective healthcare services to the communities we serve, while positioning our company for long-term growth and re-investment opportunities in a very dynamic healthcare environment. In order to achieve these objectives, we are focusing on the following key components of our business strategy:

Focus on Operational Excellence. We believe that a continuous focus on operational excellence is the key to growth, quality of care and operating results. Our management team, which has extensive multi-facility operating experience, continually emphasizes operational excellence. We believe that in order to excel from an operations perspective, we must focus on the following:

• growing our presence in our existing markets, including increasing our geographical footprint by way of clinics, outpatient facilities and other access points of care;

• providing high-quality healthcare services to the communities we serve;

• achieving operational efficiencies and effective cost management in all aspects of patient care delivery;

• improving all aspects of the revenue cycle, including our processes for patient registration, such as patient qualification for financial assistance and point-of-service collections, billing, collections and managed care contract compliance; and

• deploying capital resources in a disciplined manner, including initiatives related to business development, information technology and plant maintenance.

Provide High-Quality Services. High-quality services, including patient safety, patient satisfaction and clinical quality, drive our facilities’ success. With the evolution of the U.S. healthcare system emphasizing population health management, we believe the achievement of high-quality care results in patient loyalty and long-term revenue growth and profitability. Our quality-of-care strategies include enhancing the patient care experience by:

• attracting and retaining high-quality, compassionate healthcare professionals;

• monitoring and tracking clinical performance and patient safety for numerous purposes, including the establishment of best practices;

• utilizing our advanced clinical information system, which provides timely key clinical care data, to enable our hospitals to enhance patient safety, reduce medical errors through bar coding and increase staff time available for direct patient care;

• reducing readmission rates;

• investing in our emergency rooms to improve patient flow, as well as quality and timeliness of care; and

• utilizing our hospital medical management quality program to drive improvements in core clinical management and allocation of resources, as well as quality and safety of care.

Leverage Our Managed Care Expertise and Enhance Our Provider Networks to Improve Care and Payor Contracting Opportunities. We believe that the managed care expertise within Health Choice and our provider network development efforts have provided us with unique opportunities to improve care quality and participate competitively in the emerging value-based payment landscape. In recent years, we have

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increasingly sought to leverage in our acute care operations Health Choice’s deep medical management and provider networking experience. In particular, we have used Health Choice’s expertise to build provider networks in certain of our markets. These networks include our hospitals, our employed physicians and independent physicians and physician practice groups who are recruited into the networks by Health Choice. Health Choice and our acute care managed care contracting personnel help these networks monitor, coordinate and improve patient outcomes and the cost efficiency with which we deliver care.

This strategy, we believe, has improved our competitive position in an environment shifting toward value based payments and population health management. The Medicare and Medicaid programs, as well as commercial health insurers, are increasingly seeking to compensate healthcare providers based on quality outcomes and efficiency of care, rather than fixed fee schedules. These models include gain-sharing arrangements, various capitation models and other forms of risk-based compensation.

We believe that with increased patient care coordination, many physicians, hospitals and other providers can better manage a patient’s health in a cost efficient manner. This increased effort toward integrated care, bolstered by Health Choice’s patient care coordination experience, has enabled us to work with governmental and commercial payors on innovative reimbursement models, under which we can be rewarded financially for delivering high quality care in a cost-conscious manner in the future.

Recruit and Employ Physicians to Meet Community Needs and Emerging Reimbursement Trends. We believe that in order to provide high quality healthcare and achieve long-term profitability, we must execute on our comprehensive physician alignment strategy. This includes investing in the employment and retention of highly competent physicians and other healthcare professionals, as well as efforts to make our facilities attractive and easy to use by physicians. To accomplish this, we have focused on:

• recruiting both specialist and primary care physicians to join us under employment arrangements;

• expanding the geographic reach of our outpatient and other specialty services, through opening or acquiring physician clinics, outpatient surgery facilities and other ambulatory care centers that increase our patients’ points of access;

• equipping our hospitals with advanced medical technology and computer systems and platforms;

• enhancing physician convenience and access, including the development of medical office space on or near our hospital campuses;

• enabling physicians to remotely access clinical data through our advanced information systems, facilitating more convenient and timely patient care; and

• sponsoring training programs to educate physicians on advanced medical procedures.

Invest in Technology to Improve Patient Care and Achieve Clinical Integration. We believe that investment in technology drives improvement in clinical outcomes and quality of patient care. Since our company’s inception, we have spent more than $345 million to equip our hospitals with cutting-edge clinical and health information technology. Our strategy of investing in technology includes:

• providing state of the art medical equipment and technology in our hospitals, including significant investment in robotics surgery, hybrid operating rooms, tomotherapy and sophisticated diagnostic equipment such as computed axial tomography (“CT”) scanners, magnetic resonance imaging (“MRIs”), positron emission tomography (“PET”) scanners and automated laboratories;

• utilizing our system-wide EHR information platform to connect all our hospitals and to provide comprehensive real-time access to patient records and other information;

• providing a business intelligence system to enable real-time and effective decision making;

• investing in stronger physician relationships and clinical integration by, where possible, connecting affiliated physicians with our advanced technology and platforms; and

• using our information systems to track quality and patient outcomes.

We believe that deploying our information technology where possible throughout our physician network will position us to better track quality and to achieve clinical outcomes and costs savings, enhancing our competitiveness in a healthcare reimbursement landscape that is moving toward payment for performance.

Pursue a Comprehensive Development Strategy. We continuously assess opportunities to expand our national and regional presence through hospital acquisitions and strategic partnerships in existing and new markets. In existing markets, we explore acquisitions of physician clinics, outpatient care centers and other ancillary points of access in order to expand the geographical reach of our established hospitals. We believe the many factors currently affecting the healthcare industry are increasing consolidation and business development opportunities across the industry. We intend to continue actively pursuing these opportunities on a national, regional and local level. We seek to apply a disciplined approach to expanding our national and regional presence and enhancing our competitive position within our existing markets by pursuing only those development opportunities that we project to have a meaningful long-term return on investment.

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We recently raised significant capital through both the sale of our Florida operations and a sale leaseback transaction associated with the real estate at three of our existing hospitals. We currently have this capital available to fund in-market and new-market development opportunities.

Focus on Managed Care Relationships. We are focused on maintaining market-based relationships with managed care payors. We believe that our managed care relationships benefit from the geographic coverage of our hospitals in certain of our markets, our commitment to providing high-quality services and our expanding physician networks. As discussed above, we believe that the managed care and networking expertise of our Health Choice personnel represents a key strategic asset. We have leveraged this expertise in certain of our markets to organize physician networks and to structure managed care relationships between our hospitals and commercial payors. We believe that our expertise on both the hospital and payor side of the healthcare industry enables us to negotiate reasonable terms with existing managed care plans and to enter into new contracts, as well as to provide a platform to develop patient-centered medical homes. Our relationships with managed care payors and demonstrated ability to be a low cost and high quality provider in our markets has allowed us to negotiate and execute new Exchange contracts at rates which are consistent with our existing reimbursement rates with such payors. We believe that patient-centered care and reimbursement models will continue to grow in importance throughout the healthcare industry.

Implement Operational Initiatives in Response to Healthcare Reform. The Health Reform Law requires focus on quality of care. We believe that our consistent focus on quality and patient satisfaction programs, our significant investments in information systems and clinical operations, and our focus on developing clinically integrated provider networks, positions us to respond promptly and effectively to the changes resulting from the Health Reform Law, as well as any additional reform initiatives at both the federal and state levels.

We continue our physician alignment strategies and have leveraged Health Choice’s managed care expertise and physician relationships to establish provider networks that include employed and independent physicians and our local facilities. We believe the formation of these provider networks and similar initiatives position our hospitals for value based and risk sharing reimbursement arrangements.

Health Choice has positioned itself to increase the number of covered lives under its managed Medicaid plans and related products in Arizona and Utah. In Arizona, Health Choice won a new managed Medicaid contract effective October 1, 2013 and has begun offering policies on the state of Arizona’s health insurance exchange, following the launch of its Utah managed Medicaid plan in 2012. These initiatives, along with the prospects of Medicaid expansion in Arizona, are expected to result in increased enrollment and premium revenue at Health Choice. Further, Health Choice’s growth is expected to provide opportunities for further engagement with physicians in Arizona and Utah, as Health Choice expands its provider networks and builds commercial managed care networks with its providers.

Although we expect our business strategy may increase our patient volumes and reimbursement and allow us to control costs, certain risk factors could offset those increases to our net revenue and profitability. Please see Item 1A., “Risk Factors” for a discussion of risk factors affecting our business.

Our Hospital Markets

The following includes a discussion of the acute care operations for certain of our markets. It does not include a discussion of the Tampa-St. Petersburg, Florida market, which we sold on October 1, 2013.

Salt Lake City, Utah

We operate four acute care hospital facilities with a total of 705 licensed beds in the Salt Lake City area, which has consistently been a very competitive environment. We believe that our hospitals in this market benefit from attractive locations, participate in a more favorable reimbursement environment relative to other markets and possess significant opportunity to capture additional market share. For the year ended September 30, 2013, exclusive of Health Choice, we generated 24.1% of our total acute care revenue in this market.

Our Salt Lake market strategy focuses on high-quality patient care, disciplined capital deployment and the expansion of our footprint by developing a more extensive network of services, including a comprehensive physician employment strategy and development of outpatient services and other patient access points around our hospitals. In recent years, we completed various capital investments, including the acquisition of a surgery center and a number of emergency room and bed capacity expansions, at Jordan Valley Medical Center, Davis Hospital and Medical Center (“Davis”) and Salt Lake Regional Medical Center. In June 2013, we opened a free-standing emergency department and medical office building in Roy, Utah, which has increased the emergency, primary care and specialty capacity of Davis. Additionally, we continue to focus on recruiting highly qualified specialist and primary care physicians to the Physician Group of Utah, our Salt Lake area physician association, as well as improving the clinical integration among our facilities and employed physicians using our company’s information technology. We are also pursuing physician alignment through professional services arrangements, network development and other avenues. We believe these physician alignment and integration efforts are laying the foundation for a high-quality, integrated Salt Lake area healthcare delivery network.

We have also deployed our Health Choice business in Utah. During recent years, Health Choice has launched a managed Medicaid plan in Utah. In conjunction with this, Health Choice handled the development of a provider network that enhances our abilities to coordinate care and contract with payors.

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Texas

We operate five acute care hospital facilities with a total of 1,943 licensed beds that serve the areas of Houston, San Antonio, Odessa, Texarkana and Port Arthur, Texas. For the year ended September 30, 2013, we generated 41.5% of our total acute care revenue in this market.

Our strategic focus, throughout our Texas market, centers on integration of our hospitals and physician operations developing a more extensive network of primary care physicians, including the expansion of our physician employment strategy, extending the reach of our outpatient business, including both surgical and imaging services, and continuing to expand profitable product lines within our higher acuity service lines, including neurosurgery, cardiology and cardio-thoracic services and neonatology.

In recent years, our presence in Texas has increased through the acquisition of St. Joseph Medical Center (“St. Joseph”) in downtown Houston, Texas and Wadley Regional Medical Center (“Wadley”) in Texarkana, Texas. Since the acquisition of these hospitals, we have made strategic investments in various physician alignment and integration opportunities focused on expanding profitable service lines such as cardiology. Also, in the most recent two fiscal years, we have expanded the geographic footprints of St. Joseph and Wadley through additional access point strategies. In November 2012, we opened a St. Joseph campus in the growing Heights area of Houston. A few months prior to that, we acquired Medical Park Hospital in Hope, Arkansas, about 30 miles from Wadley, which now operates as Wadley Regional Medical Center – Hope.

Phoenix, Arizona

We operate three acute care hospital facilities and one behavioral health hospital facility with a total of 615 licensed beds in the Phoenix area. We have made strategic investments in this market, which have focused on capturing market share through expansion of various service lines and bed capacity. For the year ended September 30, 2013, exclusive of Health Choice, we generated 19.8% of our total acute care revenue in this market.

We are pursuing a physician alignment and access point strategy in our Arizona market that focuses on enhancing our physician specialty and emergency room coverage to allow our hospitals to more effectively meet community needs. We continue to grow our employed physician base in the Phoenix area and have leveraged Health Choice’s expertise to establish a provider network that includes employed and independent physicians and our local facilities. We believe that by developing a strong, high performance provider network, increasing our patient access points and deploying our information technology to provider participants, we can position our hospitals for value based contracting for Medicare and managed care lives.

In 2013, we expanded our geropsychiatry services in the Phoenix market by adding beds for these services at both our St. Luke’s Medical Center and our Mountain Vista Medical Center.

In connection with the Health Reform Law, Arizona is expanding Medicaid coverage beginning January 1, 2014, which will include, among other things, the restoration of eligibility to childless adults who have been without coverage since 2011. This expanded coverage is expected to eventually provide relief for the uncompensated care costs our Arizona hospitals have incurred in recent years in connection with the continued provision of healthcare to these individuals.

West Monroe, Louisiana

We operate Glenwood Regional Medical Center (“Glenwood”) with a total of 277 licensed beds, in West Monroe, Louisiana, which we believe benefits from a strong market position, and opportunities for strategic growth of profitable product lines. For the year ended September 30, 2013, we generated 7.8% of our total acute care revenue in this market.

Since acquiring Glenwood in 2007, our focus on capital spending at this facility has included renovations and capacity expansion, with an emphasis on creating additional inpatient capacity with a recent 25 bed-expansion, growing the hospital’s cardiovascular program, expanding and renovating operating rooms and purchasing new diagnostic imaging equipment, automated laboratory systems and other equipment. We have also improved the facility’s hospitalist program, expanded emergency room coverage, re-opened the inpatient psychiatric program and acquired an imaging center. Glenwood also owns a majority ownership interest in Ouachita Community Hospital (“Ouachita”), a ten-bed surgical hospital located in West Monroe, which we believe this strategic acquisition has provided additional surgical capacity and allowed us to expand our market presence.

To build on our capital investments in Glenwood and to serve our growing patient volume, we continue to seek opportunities to expand the hospital’s patient access points, including acquisitions, or new development, of other ancillary facilities around Glenwood. We believe our focus on providing high-quality patient care, and our efforts to expand the reach of our physician network in this market, will result in our capturing additional market share and improving our relationships with managed care payors.

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Our Properties

We operate 16 acute care hospital facilities and one behavioral health hospital facility. Each of our hospitals is included in the acute care segment of our business, as discussed in Footnote 17 (Segment and Geographic Information) to our audited, consolidated financial statements included under “Item 8. Financial Statements and Supplementary Data” of this Report. On October 1, 2013, we sold our Florida operations which included Memorial Hospital of Tampa, Palms of Pasadena Hospital and Town & Country Hospital. Thus, we own ten and lease six of our hospital facilities. Nine of our acute care hospitals have third-party investors. The following table contains information concerning our hospitals.

Hospitals	City	Licensed Beds
Utah
Davis Hospital and Medical Center (1)	Layton		225
Jordan Valley Medical Center (2)	West Jordan		183
Pioneer Valley Hospital (3)	West Valley City		139
Salt Lake Regional Medical Center (4)	Salt Lake City		158
Arizona
Mountain Vista Medical Center (5)	Mesa		178
St. Luke’s Medical Center (6)	Phoenix		226
St. Luke’s Behavioral Health Hospital	Phoenix		124
Tempe St. Luke’s Hospital (7)	Tempe		87
Texas
Odessa Regional Medical Center (8)	Odessa		230
Southwest General Hospital (9)	San Antonio		327
St. Joseph Medical Center (10)	Houston		792
The Medical Center of Southeast Texas (11)	Port Arthur		224
Wadley Regional Medical Center (12)	Texarkana		370
Louisiana
Glenwood Regional Medical Center (13)	West Monroe		277
Nevada
North Vista Hospital	Las Vegas		177
Arkansas
Wadley Regional Medical Center at Hope (14)	Hope		71
Colorado
Pikes Peak Regional Hospital (15)	Woodland Park		15
Total			3,803

(1) Owned by a limited partnership in which we own a 96.2% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(2) On July 1, 2007, Jordan Valley Medical Center acquired Pioneer Valley Hospital, a wholly-owned subsidiary of IASIS. The combined entity is owned by a limited partnership in which we own a 95.7% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(3) A separate campus of Jordan Valley Medical Center, which is leased under an agreement that expires on September 30, 2028. We have options to extend the term of the lease, which includes two renewal options of five years each.

(4) Owned by a limited partnership in which we own a 98.4% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(5) Mountain Vista Medical Center is leased under an agreement that expires on September 30, 2028, and includes two renewal options of five years each. The operations are owned by a limited partnership in which we own a 93.4% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(6) On September 28, 2007, St. Luke’s Medical Center acquired Tempe St. Luke’s Hospital, a wholly-owned subsidiary of IASIS.

(7) A separate campus of St. Luke’s Medical Center.

(8) Owned by a limited partnership in which we own an 88.4% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(9) Owned by a limited partnership in which we own a 94.0% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(10) Owned by a limited liability corporation in which we own a 79.6% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(11) The Medical Center of Southeast Texas is leased under an agreement that expires on September 30, 2028, and includes two renewal options of five years each. The operations are owned by a limited partnership in which we own an 88.2% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(12) Wadley is leased under an agreement that expires on March 31, 2017, with up to 51 automatic two year renewals periods. The operations are owned by a limited liability company in which we own a 72.7% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(13) Glenwood is leased under an agreement that expires on September 30, 2028, and includes two renewal options for a total of seven years. Includes Ouachita, a surgical hospital with 10 licensed beds.

(14) Owned by Brim Healthcare of Texas, LLC, the same wholly-owned subsidiary of IASIS that owns Wadley.

(15) Pikes Peak Regional Hospital is leased under an agreement that expires on September 11, 2017 and is subject to three five year renewal periods at our option.

We also operate and lease medical office buildings in conjunction with our hospitals. These office buildings are occupied primarily by physicians who practice at our hospitals.

Hospital Operations

At each of our hospitals, we have implemented policies and procedures to enhance patient safety and quality of care, and to improve the hospital’s operating and financial performance. A hospital’s local management team is generally comprised of a chief executive officer, chief financial officer and chief nursing officer. Local management teams, in consultation with our corporate staff, develop annual operating plans setting forth quality and patient satisfaction goals, revenue growth and operating profit strategies. These strategies can include the expansion of services offered by the hospital, market development to improve community access to care, the recruitment and employment of physicians, plans to enhance quality of care and improvements in operating efficiencies to

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reduce costs. We believe that the competence, skills and experience of the management team at each hospital is critical to the hospital’s successful execution of its operating plan. Our performance-based compensation program for each local management team is based upon the achievement of qualitative and quantitative goals set forth in the annual operating plan. Our hospital management teams are advised by boards of trustees that include members of hospital medical staffs, as well as community leaders. Each board of trustees establishes policies concerning medical, professional and ethical practices, monitors such practices and is responsible for ensuring that these practices conform to established standards.

Factors that affect demand for our services include:

• local economic conditions;

• the geographic location of our hospital facilities and their convenience for patients and physicians;

• our participation in managed care programs, including new managed care contracts on the Exchange;

• utilization management practices of managed care plans;

• consolidation of managed care payors;

• strategic investment and improvements in healthcare access points;

• capital investment at our facilities;

• the quality of our medical staff;

• competition from other healthcare providers;

• the size of and growth in the local population; and

• improved treatment protocols as a result of advances in medical technology and pharmacology.

We believe that the ability of our hospitals to meet the healthcare needs of their communities is determined by the:

• level of physician support;

• availability of nurses and other healthcare professionals;

• quality, skills and compassion of our employees;

• scope, breadth and quality of our services; and

• physical capacity and level of technological advancement at our facilities.

We continually evaluate our services with the intention of improving quality of care, expanding our profitable lines of business and improving our business mix. We use our advanced information systems to perform detailed clinical process and care quality reviews, as well as product line margin analyses, and to monitor the profitability of the services provided at our facilities. We employ these analyses to capitalize on price and volume trends through the expansion and improvement of certain services.

Competition

Our facilities and related businesses operate in competitive environments. A number of factors affect our competitive position, including:

• the local economies in which we operate;

• the level of tourism in our service areas;

• our managed care contracting relationships;

• the number, availability, quality and specialties of physicians, nurses and other healthcare professionals;

• the scope, breadth and quality of services;

• the reputation of our facilities and physicians;

• growth in hospital capacity and healthcare access points in the markets we serve;

• the physical condition of our facilities and medical equipment;

• the location of our facilities and availability of physician office space;

• federal and state restrictions on expansion, such as certificate of need restrictions in the Nevada market;

• the availability of parking or proximity to public transportation;

• accumulation, access and interpretation of publicly reported quality indicators;

• growth in outpatient service providers;

• the charges we can set for our services; and

• the geographic coverage of our hospitals in the regions in which we operate.

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We currently face competition from established, not-for-profit healthcare companies and systems, investor-owned hospital companies, large tertiary care centers, specialty hospitals and outpatient service providers, such as surgery centers and imaging centers. In addition, some of our hospitals operate in regions with vertically integrated healthcare providers that include health plans, physician groups and facilities, which could affect our ability to obtain managed care contracts. We continue to encounter increased competition from specialty hospitals, outpatient service providers, not-for-profit healthcare providers and companies, like ours, that consolidate hospitals and healthcare companies in specific geographic markets.

Our competitiveness depends heavily on obtaining and maintaining contracts with managed care organizations, which seek to control healthcare costs through utilization policies and procedures. Most of our markets have experienced significant managed care penetration, along with consolidation of major managed care plans. The revenue and operating results of our hospitals are significantly affected by our hospitals’ ability to negotiate reasonable contracts with managed care plans. Health maintenance organizations and preferred provider organizations use managed care contracts to encourage patients to use certain hospitals in exchange for discounts from the hospitals’ established charges. Traditional health insurers also contain costs through similar contracts with hospitals.

Our managed care relationships also depend upon whether one of our hospitals is part of a local hospital network, as well as the scope and quality of services offered by the network compared to competing networks. A hospital that is part of a network offering a broad range of services in a wide geographic area is more likely to obtain more favorable managed care contracts. On an ongoing basis, we evaluate circumstances in each geographic area in which we operate. We may position ourselves to compete in these managed care markets by forming our own, or joining with others to form, local hospital networks. Furthermore, where strategically advantageous, we seek to participate in or form integrated delivery networks consisting of hospitals and physicians that can deliver clinically integrated, coordinated care.

As we continue to focus on our physician employment strategy, we face significant competition for skilled physicians in certain of our markets, as more providers are adopting a physician staffing model approach, coupled with a general shortage of physicians across most specialties, particularly primary care. This increased competition has resulted in efforts by managed care organizations to align with certain provider networks in the markets in which we operate. While we anticipate that our physician employment strategy and network development efforts will help us compete more effectively in our markets, we are unable to provide any assurance regarding the success of our strategy.

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 recently 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.

Health Choice

Health Choice is a provider-owned, managed care organization and insurer headquartered in Phoenix, Arizona. Health Choice primarily contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted providers. Premium revenue is generated through capitated contracts whereby the Plan provides healthcare services to enrollees in exchange for fixed periodic payments, based upon negotiated per capita member rates, and certain supplemental payments from the state of Arizona’s Medicaid agency, the Arizona Health Care Cost Containment System (“AHCCCS”), the state of Utah’s Medicaid agency and CMS. All capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services.

On March 25, 2013, Health Choice was awarded a new contract by AHCCCS , which commenced on October 1, 2013. The new contract has an initial term of three years, and includes two one-year renewal options at the discretion of AHCCCS.

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In 2013, Health Choice continued to lead our provider network development in Arizona, Utah and other markets. Effective October 1, 2013, Health Choice is offering insurance plans on the Arizona state insurance exchange through Health Choice Insurance Company, a wholly-owned subsidiary of Health Choice. This will enable us to enroll members that move between the Arizona state insurance exchange and Medicaid eligibility under AHCCCS.

In recent years, Health Choice has faced an increasingly challenging environment in Arizona due to state government budget pressures exacerbated by the sluggish economy. This environment has resulted in downward pressure on capitation rates paid by AHCCCS, implementation of profit caps and the tightening of Medicaid eligibility standards by the state of Arizona, resulting in less premium revenue and fewer covered lives at Health Choice.

While Health Choice’s enrollment continued to decline during the year ended September 30. 2013, the rate of decline has moderated and, with the award of a new contract covering certain new service areas and an altered competitive landscape following the state’s contract awards, we anticipate enrollment growth in our fiscal year 2014. Additionally, on June 17, 2013, the governor of Arizona signed into law the expansion of its Medicaid program under the Health Reform Law, which includes 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 may result in the addition of approximately 370,000 people to its Medicaid rolls over the next few years. The law may face opposition from groups that are considering lawsuits to challenge the passage of the law. The law is scheduled to go into effect January 1, 2014. If additional changes to the Arizona Medicaid program are implemented in the future, our revenue and earnings could be significantly impacted.

AHCCCS has implemented a tiered profit sharing plan on managed Medicaid plans. These changes implemented by AHCCCS followed a movement in recent years by the agency to a risk-based or severity-adjusted payment methodology for all health plans, under which capitation rates for each health plan and geographic service area are adjusted annually based on the severity of treatment episodes experienced by each plan’s membership compared to the average over a specified 12-month period. These changes by AHCCCS place limits on Health Choice’s profitability.

We believe Health Choice represents one of our company’s key strategic assets. Its leadership team has considerable experience in population health management, physician relations and network development. Health Choice also deploys state of the art disease management and claims processing technology. In light of the current healthcare industry trends toward integrated delivery and clinical integration, we are bringing Health Choice’s expertise and technology to bear as part of the integrated delivery networks that we offer to health plans.

Health Choice is subject to state and federal laws and regulations, and CMS, AHCCCS and the state Medicaid agency in Utah have the right to audit Health Choice to determine the Plan’s compliance with such standards. Health Choice is required to file periodic reports demonstrating satisfaction of certain financial viability standards with CMS, the Utah Department of Insurance, the National Association of Insurance Commissioners, the state Medicaid agency in Utah and AHCCCS. Health Choice must provide its enrollees with certain mandated benefits and must meet certain quality assurance and improvement requirements. Health Choice must also comply with the electronic transactions regulations and privacy and security standards of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”).

The federal anti-kickback statute prohibits the payment, solicitation, offering or receipt of any form of remuneration in return for the referral of federal healthcare program patients or any item or service that is reimbursed, in whole or in part, by any federal healthcare program. Similar anti-kickback statutes have been adopted in Arizona and Utah, which apply regardless of the source of reimbursement. The Department has adopted safe harbor regulations specifying the following relationships and activities that are deemed not to violate the federal anti-kickback statute that specifically relate to managed care:

• waivers by health maintenance organizations of Medicare and Medicaid beneficiaries’ obligation to pay cost-sharing amounts or to provide other incentives in order to attract Medicare and Medicaid enrollees;

• certain discounts offered to prepaid health plans by contracting providers;

• certain price reductions offered to eligible managed care organizations; and

• certain price reductions offered by contractors with substantial financial risk to managed care organizations.

We believe that the incentives offered by Health Choice to its Medicaid and Medicare enrollees and the discounts it receives from contracting healthcare providers satisfy the requirements of the safe harbor regulations. However, failure to satisfy each criterion of the applicable safe harbor does not mean that the arrangement constitutes a violation of the law; rather the safe harbor regulations provide that the arrangement must be analyzed on the basis of its specific facts and circumstances. We believe that Health Choice’s arrangements comply in all material respects with the federal anti-kickback statute and similar Arizona and Utah statutes.

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Sources of Acute Care Revenue

Acute care revenue is comprised of net patient revenue, which represents gross charges for our inpatient and outpatient services less contractual adjustments and discounts that are based upon negotiated rates. 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 also includes other revenue, which consists of medical office building rental income and other miscellaneous revenue.

The following table provides the sources of our hospitals’ gross patient revenue by payor before discounts, contractual adjustments and the provision for bad debts:

	Year Ended September 30,
	2013			2012			2011
Medicare		28.3	%		30.8	%		29.2	%
Managed Medicare		14.4			13.0			12.0
Medicaid and managed Medicaid		20.9			19.9			23.2
Managed care		29.3			30.2			30.1
Self-pay		7.1			6.1			5.5
Total		100.0	%		100.0	%		100.0	%

A large percentage of our hospitals’ net patient revenue consists of fixed payments from 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, various managed care companies with which we contract reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided.

We receive payment for patient services primarily from:

• the federal government, primarily under the Medicare program;

• state Medicaid programs, including managed Medicaid plans;

• managed care payors, including health maintenance organizations, preferred provider organizations and managed Medicare plans; and

• individual patients and private insurers.

Medicare is a federal program that provides hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with Lou Gehrig’s Disease and end-stage renal disease. All of our hospitals are certified as providers of Medicare services. Under the Medicare program, acute care hospitals receive reimbursement under a prospective payment system that generally pays fixed rates for inpatient and outpatient hospital services. Certain types of facilities are exempt or partially exempt from the prospective payment system methodology, including children’s hospitals, cancer hospitals and critical access hospitals. Hospitals and units exempt from the prospective payment system are reimbursed on a reasonable cost-based system, subject to cost limits.

Our hospitals offer discounts from established charges to managed care plans if they are large group purchasers of healthcare services. Additionally, we offer discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity care. These discount programs generally limit our ability to increase net patient revenue in response to increasing costs. Patients generally are not responsible for any difference between established hospital charges and amounts reimbursed for such services under Medicare, Medicaid, health maintenance organizations, preferred provider organizations or private insurance plans. Patients generally are responsible for services not covered by these plans, along with exclusions, deductibles or co-insurance features of their coverage. Collecting amounts due from patients is more difficult than collecting from governmental programs, managed care plans or private insurers. Increases in the population of uninsured individuals, and the acuity levels of such seeking care in our emergency rooms, changes in the states’ indigent and Medicaid eligibility requirements, continued efforts by employers to pass more out-of-pocket healthcare costs to employees in the form of increased co-payments and deductibles and the effects of an uncertain, low-growth economic environment have resulted in increased levels of uncompensated care.

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

	Year Ended September 30,
	2013			2012			2011
Medicare		20.9	%		23.5	%		21.8	%
Managed Medicare		10.1			9.0			8.7
Medicaid and managed Medicaid		12.2			13.7			16.1
Managed care		37.9			38.1			41.1
Self-pay		18.9			15.7			12.3
Total(1)		100.0	%		100.0	%		100.0	%

(1) For the years ended September 30, 2013, 2012 and 2011, net patient revenue comprised 76.3%, 75.5% and 67.6%, respectively, of our consolidated net revenue.

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Medicare

Inpatient Acute Care

Under the inpatient prospective payment system, a hospital receives a fixed payment based on the patient’s assigned Medicare severity diagnosis-related group (“MS-DRG”). The MS-DRG system classifies categories of illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. The MS-DRG rates for acute care hospitals are based upon a statistically normal distribution of severity. The MS-DRG payments do not consider a specific hospital’s actual costs but are adjusted for geographic area wage differentials. Inpatient capital costs for acute care hospitals are reimbursed on a prospective system based on diagnosis related group weights multiplied by geographically adjusted federal weights. When treatments for patients fall well outside the normal distribution, providers may receive additional payments known as outlier payments. For federal fiscal year 2014, CMS has established an outlier threshold of $21,748 per case.

The MS-DRG rates are adjusted each federal fiscal year and have been affected by federal legislation. The index used to adjust the MS-DRG rates, known as the “market basket index,” gives consideration to the inflation experienced by hospitals and entities outside of the healthcare industry in purchasing goods and services. In past years, the percentage increases to the MS-DRG rates have been lower than the percentage increases in the costs of goods and services purchased by hospitals. For federal fiscal year 2013, CMS issued a final rule that resulted in a net increase in operating payment rates of 2.8%. This increase reflected a 2.6% market basket increase, a prospective documentation and coding adjustment of negative 1.9%, a multi-factor productivity adjustment of negative 0.7%, a retrospective documentation and coding adjustment of 2.9% and a 0.1% reduction as required by the Health Reform Law. For federal fiscal year 2014, CMS issued a final rule that results in a net increase in operating payment rates of 0.7%. This increase reflects a 2.5% market basket increase, a prospective documentation and coding adjustment of negative 0.8%, a multi-factor productivity adjustment of negative 0.5%, a 0.3% reduction as required by the Health Reform Law and a 0.2% reduction to offset projected spending increases associated with proposed new admission and medical review criteria for inpatient services. The Health Reform Law provides for additional reductions to the inpatient prospective payment system market basket update, as well as other payment adjustments, in future years as discussed below and in the section entitled “Government Regulation and Other Factors—Healthcare Reform.”

Quality of care provided is becoming an increasingly important factor in Medicare reimbursement. Hospitals must submit data for certain patient care indicators to the Secretary of the Department in order to receive MS-DRG increases at the full market basket. Those hospitals not submitting the required data will receive an increase in payment equal to the market basket minus two percentage points in federal fiscal year 2014. Beginning in federal fiscal year 2015, hospitals that do not participate will lose one-quarter of the percentage increase in their payment updates. In federal fiscal year 2014, CMS requires hospitals to report 59 quality measures in order to qualify for the full market basket update in federal fiscal year 2015. We currently have the ability to monitor our compliance with the quality indicators and intend to submit the quality data required to receive the full market basket pricing update when appropriate.

Medicare does not pay hospitals additional amounts for the treatment of certain preventable adverse events, also known as HACs unless the conditions were present at admission. Currently, there are 11 categories of conditions on the list of HACs. The Deficit Reduction Act of 2005 (“DEFRA”) provides that CMS may revise the list of conditions from time to time. In 2009, CMS announced three National Coverage Determinations (“NCDs”) that prohibit Medicare reimbursement for erroneous surgical procedures performed on an inpatient or outpatient basis. These three erroneous surgical procedures are in addition to the HACs designated by regulation. The Health Reform Law contains additional measures to further tie Medicare payments to performance and quality as discussed below in the section entitled “Government Regulation and Other Factors—Healthcare Reform.”

On August 2, 2013, CMS issued Final Rule CMS-1599-F, which modified and clarified CMS’s policy on how Medicare Administrative Contractors (“MACs”) review inpatient hospital admissions for payment purposes. The 2-midnight presumption outlined in CMS-1599-F specifies that hospital stays spanning 2 or more midnights after the beneficiary is formally admitted as an inpatient pursuant to a physician order are presumed to be reasonable and necessary for inpatient status as long as the stay at the hospital is medically necessary. CMS has directed MACs to not focus their medical review efforts on stays spanning at least 2 midnights after admission absent evidence of systematic gaming, abuse, or delays in the provision of care in an attempt to qualify for the 2-midnight presumption. However, MACs may review these claims as part of routine monitoring activity or as part of other targeted reviews. Inpatient stays spanning 0-1 midnights after the beneficiary is formally admitted as an inpatient are not subject to the presumption and may be selected for review. When a patient enters a hospital for a procedure not specified by Medicare as inpatient only, a diagnostic test, or any other treatment, and the physician expects to keep the patient in the hospital for 0-1 midnights, the services are generally inappropriate for inpatient admission and inpatient payment under Medicare Part A. CMS will direct MACs to deny these inappropriate admissions unless unforeseen circumstances shortened the stay or there are other rare or unusual circumstances that necessitate an inpatient admission. Effective for admissions on or after October 1, 2013, CMS will direct the MACs to conduct probe reviews and deny claims found to be out of compliance with CMS-1599-F. Based on the results of these

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initial reviews, MACs will conduct educational outreach efforts during the next 3 months. CMS will instruct MACs to deny each non-compliant claim and to outline the reasons for denial in their communication to providers. In addition to educational outreach efforts, for those providers that are identified as having moderate, significant or major concerns, the MACs will conduct additional probe reviews on claims with dates of admission between January and March 2014.

Outpatient

CMS reimburses hospital outpatient services and certain Medicare Part B services furnished to hospital inpatients that have no Part A coverage on a prospective payment system basis. CMS uses fee schedules to pay for physical, occupational and speech therapies, durable medical equipment, clinical diagnostic laboratory services and nonimplantable orthotics and prosthetics.

All services paid under the prospective payment system for hospital outpatient services are classified into groups called ambulatory payment classifications (“APCs”). Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. CMS increased the market basket for calendar year 2013 by 1.8%, which includes the full market basket of 2.6%, a negative 0.7% multifactor productivity adjustment and a negative 0.1% adjustment required by the Health Reform Law. For federal fiscal year 2014, CMS has issued a proposed rule to increase the market basket for calendar year 2014 by 1.8%, which includes the full market basket of 2.5%, a negative 0.4% multifactor productivity adjustment and a negative 0.3% adjustment required by the Health Reform Law. The Health Reform Law provides for additional reductions to the outpatient prospective payment system market basket update, as well as other payment adjustments, in future years as discussed below in the section entitled “Government Regulation and Other Factors—Healthcare Reform.”

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CMS has issued a proposed rule that would require hospitals to submit quality data regarding 22 measures relating to outpatient care in calendar year 2014 in order to receive the full market basket increase under the outpatient prospective payment system in calendar year 2015. For calendar year 2015, CMS has proposed requiring hospitals to submit quality data regarding 27 measures relating to outpatient care in order to receive the full market basket increase for outpatient payments in calendar year 2016. Hospitals that fail to submit such data will receive the market basket update minus two percentage points for the outpatient prospective payment system.

Rehabilitation

Inpatient rehabilitation hospitals and designated units are reimbursed under a prospective payment system. Under this prospective payment system, patients are classified into case mix groups based upon impairment, age, co-morbidities and functional capability. Inpatient rehabilitation facilities are paid a predetermined amount per discharge that reflects the patient’s case mix group and is adjusted for area wage levels, low-income patients, rural areas and high-cost outliers. For federal fiscal year 2013, CMS updated inpatient rehabilitation payment rates by 1.9%, which reflected a 2.7% market basket increase, a negative 0.7% productivity adjustment and a 0.1% reduction required by the Health Reform Law. For federal fiscal year 2014, CMS has issued a final rule updating inpatient rehabilitation rates by 1.8%, which reflects a 2.6% market basket increase, a negative 0.5% productivity adjustment and a 0.3% reduction required by the Health Reform Law. The Health Reform Law provides for additional reductions to the inpatient rehabilitation facility prospective payment system market basket update, as well as other payment adjustments, in future years as discussed below in the section entitled “Government Regulation and Other Factors—Healthcare Reform.”

In order to qualify for classification as an inpatient rehabilitation facility, at least 60% of the facility’s inpatient population during the most recent 12-month cost reporting period must have required intensive rehabilitation services for one or more of 13 specified conditions. Inpatient rehabilitation facilities must meet additional coverage criteria, including patient selection and care requirements relating to pre-admission screenings, post-admission evaluations, ongoing coordination of care and involvement of rehabilitation physicians. As of October 1, 2013, we operate nine inpatient rehabilitation units within our hospitals.

Psychiatric

Inpatient psychiatric facilities are paid based on a prospective payment system. Under this prospective payment system, inpatient psychiatric facilities receive a federal per diem base rate that is based on the sum of the average routine operating, ancillary and capital costs for each patient day of psychiatric care in an inpatient psychiatric facility. The federal per diem base rate is then adjusted for budget neutrality, such that the amount of total payments under the prospective payment system are projected to be equal to the total estimated payments that would have been made to inpatient psychiatric facilities under the previous cost-based system of payment. This federal per diem base rate is further adjusted to reflect certain patient and facility characteristics, including patient age, certain diagnostic related groups, facility wage index adjustment, and facility rural location. For federal fiscal year 2013, CMS increased inpatient psychiatric payment rates by 1.9%, which included a market basket increase of 2.7%, reduced by a 0.7% productivity adjustment and a reduction of 0.1% as required by the Health Reform Law. For federal fiscal year 2014, CMS has issued a final rule updating inpatient psychiatric payment rates by 2%, which includes a market basket update of 2.6%, reduced by a 0.5% productivity adjustment and a reduction of 0.1% as required by the Health Reform Law. Inpatient psychiatric facilities also receive additional outlier payments for cases in which estimated costs for the case exceed an adjusted threshold amount plus the total adjusted payment amount for the stay. CMS estimates an additional $15 million increase in aggregate payments to inpatient psychiatric facilities due to an update in the outlier threshold amount for rate year 2014. The Health Reform Law provides for reductions to the inpatient psychiatric facility prospective payment system market basket update, as well as other payment adjustments, in future years as discussed below in the section entitled “Government Regulation and Other Factors—Healthcare Reform.” As of October 1, 2013, we operate one behavioral health hospital facility and fifteen specially designated psychiatric units that are subject to these rules.

Physician Services Reimbursement

Physician services are reimbursed under the physician fee schedule (“PFS”) system, under which CMS has assigned a national relative value unit (“RVU”) to most medical procedures and services that reflects the various resources required by a physician to provide the services relative to all other services. Each RVU is calculated based on a combination of work required in terms of time and intensity of effort for the service, practice expense (overhead) attributable to the service and malpractice insurance expense attributable to the service. These three elements are each modified by a geographic adjustment factor to account for local practice costs then aggregated. The aggregated amount is multiplied by a conversion factor that accounts for inflation and targeted growth in Medicare expenditures (as calculated by the sustainable growth rate (“SGR”)) to arrive at the payment amount for each service. While RVUs for various services may change in a given year, any alterations are required by statute to be virtually budget neutral, such that total payments made under the PFS may not differ by more than $20 million from what payments would have been if adjustments were not made.

The PFS rates are adjusted each year, and reductions in both current and future payments are anticipated. The SGR formula, mandated by statute, is intended to control growth in aggregate Medicare expenditures for physicians’ services. Since 2003, Congress has passed multiple legislative acts delaying application of the SGR to the PFS. We cannot predict whether Congress will intervene to prevent this reduction to payments in the future. Barring delay or repeal of the SGR by Congress, Medicare payments to physicians are scheduled to be cut by approximately 24% effective January 1, 2014.

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Ambulatory Surgery Centers

CMS reimburses ambulatory surgical centers (“ASCs”) using a predetermined fee schedule. Reimbursements for ASC overhead costs are limited to no more than the overhead costs paid to hospital outpatient departments under the Medicare hospital outpatient prospective payment system. All surgical procedures, other than those that pose a significant safety risk or generally require an overnight stay, are payable as ASC procedures. From time to time, CMS considers expanding the services that may be performed in ASCs, which may result in more Medicare procedures that historically have been performed in hospitals, such as ours, being moved to ASCs, potentially reducing surgical volume in our hospitals. For calendar year 2013, CMS increased ASC payment rates by 0.6%, which included a market basket update of 1.4% and a negative 0.8% productivity adjustment. For calendar year 2014, CMS has issued a proposed rule which would increase ASC payment rates by 0.9%, reflecting a market basket update of 1.4% and a negative 0.5% productivity adjustment. The Health Reform Law provides for additional reductions to the ASC prospective payment system in future years as discussed below in the section entitled “Government Regulation and Other Factors—Healthcare Reform.”

CMS has also established a quality reporting program for ASCs under which ASCs that fail to report on certain quality measures will receive a two percentage point reduction in reimbursement beginning with the calendar year 2014 payment determination. ASCs must report on five quality measures for services furnished between October 1, 2012 and December 31, 2012 for the calendar year 2014 payment determination. ASCs must report on seven quality measures for services furnished between January 1, 2013 and December 31, 2013 for the calendar year 2015 payment determination. ASCs are currently required to report on eight quality measures for services furnished between January 1, 2014 and December 31, 2014, but CMS has issued a proposed rule that would add an additional four quality measures.

Managed Medicare

Managed Medicare plans represent arrangements where CMS contracts with private companies to provide members with Medicare Part A, Part B and Part D benefits. Managed Medicare plans can be structured as health maintenance organizations, preferred provider organizations, or private fee-for-service plans. The Medicare program allows beneficiaries to choose enrollment in certain managed Medicare plans. Legislative changes in 2003 increased reimbursement to managed Medicare plans and limited, to some extent, the financial risk to the companies offering the plans. Following these changes, the number of beneficiaries choosing to receive their Medicare benefits through such plans has increased. However, the Health Reform Law provides for reductions to managed Medicare plan payments, which began in 2010, that will result in managed Medicare per capita premium payments becoming equal, on average, to traditional Medicare payments.

Medicaid

Medicaid programs are jointly funded by federal and state governments and are administered by states under an approved plan that provides hospital and other healthcare benefits to qualifying individuals who are unable to afford care. All of our hospitals are certified as providers of Medicaid services. State Medicaid programs may use a prospective payment system, cost-based payment system or other payment methodology for hospital services. However, Medicaid reimbursement is often less than a hospital’s cost of services.

The federal government and many states from time to time consider altering the level of Medicaid funding or expanding Medicaid benefits in a manner that could adversely affect future levels of Medicaid reimbursement received by our hospitals. Additionally, 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 projected 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 healthcare programs or making structural changes that have resulted or may result in a reduction to Medicaid hospital revenues. Additional Medicaid spending cuts or other program changes may be implemented in the future in the states in which we operate. However, the Health Reform Law generally requires states to at least maintain the Medicaid eligibility standards established prior to the enactment of the law until January 1, 2014 for adults and until October 1, 2019 for children. The Health Reform Law also includes provisions allowing states to significantly expand their Medicaid program coverage by 2014. However, states that elect not to implement the law’s Medicaid expansion provisions may do so without the loss of existing federal Medicaid funding. As a result, a number of state governors and legislatures, including Texas and Louisiana, have chosen not to participate in the expanded Medicaid program.

The Health Reform Law prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat certain provider-preventable conditions. CMS has implemented this prohibition for services with dates beginning July 1, 2012. Each state Medicaid program must deny payments to providers for the treatment of healthcare-acquired conditions and provider-preventable conditions designated by CMS as well as any other provider-preventable conditions designated by the state.

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Private Supplemental Medicaid Reimbursement Programs

Certain of our acute care hospitals receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Participation in indigent care affiliation agreements by our Texas hospitals has resulted in an increase in acute care revenue by virtue of the hospitals’ entitlement to supplemental Medicaid inpatient reimbursement. In December 2011, CMS approved a five-year Texas Medicaid waiver that allows Texas to continue receiving supplemental Medicaid reimbursement while expanding its managed Medicaid programs. During fiscal years 2012 and 2013, we experienced significant delays in funding under these Texas supplemental reimbursement programs as the state continued to finalize rules and regulations governing the distribution of such funds.

Supplemental payment programs are currently being reviewed by certain other state agencies, and some states have made or may make waiver requests to CMS to replace their existing supplemental payment programs. It is possible that these reviews and waiver requests will result in the restructuring of such supplemental payment programs and could result in the payments being reduced or eliminated. It is also unclear whether our revenues from these programs will be adversely affected as the provisions of the Health Reform Law are implemented.

Managed Medicaid

Managed Medicaid programs represent arrangements in which states contract with one or more entities for patient enrollment, care management and claims adjudication. The states usually do not give up program responsibilities for financing, eligibility criteria and core benefit plan design. We generally contract directly with one of the designated entities, usually a managed care organization. The provisions of these programs are state-specific.

As state governments seek to control the cost of their Medicaid programs, enrollment in managed Medicaid plans, including states in which we operate, has increased in recent years. For example, in 2011 the Texas legislature and the Health and Human Services Commission (“THHSC”) expanded Medicaid managed care enrollment in the state pursuant to a CMS approved five-year Medicaid waiver that allows Texas to expand its Medicaid managed care program while preserving hospital funding, provides incentive payments for healthcare improvements and directs more funding to hospitals that serve large numbers of uninsured patients. In the future there may be additional expansion of managed Medicaid plans in the states in which we operate, and economic conditions or budgetary pressures may result in reductions in premium payments to these plans.

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Disproportionate Share Hospital Payments

In addition to making payments for services provided directly to beneficiaries, Medicare makes additional payments to hospitals that treat a disproportionately large number of low-income patients (Medicaid and Medicare patients eligible to receive Supplemental Security Income). Disproportionate share hospital (“DSH”) payments are determined annually based on certain statistical information required by the Department and are calculated as a percentage addition to MS-DRG payments. The primary method used by a hospital to qualify for Medicare DSH payments is a complex statutory formula that results in a DSH percentage that is applied to payments on MS-DRGs. Under the Health Reform Law, beginning in federal fiscal year 2014, Medicare DSH payments will be reduced to 25% of the amount they would have been absent the law. The remaining 75% will be effectively pooled, and this pool will be reduced further each year by a formula that reflects reductions in the national level of uninsured who are under age 65. Thus, the greater the level of coverage for the uninsured nationally, the more the Medicare DSH payment pool will be reduced. Each hospital will then be paid, out of the reduced DSH payment pool, an amount allocated based upon its level of uncompensated care. In 2013, CMS issued final rules to implement these reductions. As a result of these final rules, we expect our Medicare DSH payments to increase in our fiscal year 2014.

Hospitals that provide care to a disproportionately high number of low-income patients may also receive Medicaid DSH payments. The federal government distributes federal Medicaid DSH funds to each state based on a statutory formula. The states then distribute the DSH funding among qualifying hospitals. States have broad discretion to define which hospitals qualify for Medicaid DSH payments and the amount of such payments. The Health Reform Law will reduce funding for the Medicaid DSH hospital program in federal fiscal years 2014 through 2020 by the following amounts: 2014 ($500 million); 2015 ($600 million); 2016 ($600 million); 2017 ($1.8 billion); 2018 ($5 billion); 2019 ($5.6 billion); and 2020 ($4 billion). The Jobs Creation Act and the American Taxpayer Relief Act of 2012 provide for additional Medicaid DSH reductions in federal fiscal years 2021 and 2022 estimated at $4.1 billion and $4.2 billion, respectively. CMS has issued a final rule establishing the methodology for allocating the cuts among the states based on the volume of Medicaid inpatients and levels of uncompensated care in each state. States largely retain the ability to manage the reduced allotments and to allocate these cuts among providers within the state.

Annual Cost Reports

All hospitals participating in the Medicare and Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, must meet specific financial reporting requirements. Federal regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. These annual cost reports are subject to routine audits, which may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs. The audit process may take several years to reach the final determination of allowable amounts under the programs. Providers also have the right of appeal, and it is common to contest issues raised in audits of prior years’ reports.

Cost reports filed by our facilities generally remain open for three years after the notice of program reimbursement date. If any of our facilities are found to have been in violation of federal or state laws relating to preparing and filing of Medicare or Medicaid cost reports, whether prior to or after our ownership of these facilities, we and our facilities could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs.

Recovery Audit Contractors and Other Reviews

Under the statutory required Recovery Audit Contractor (“RAC”) program, CMS contracts with third-parties to conduct post-payment reviews of Medicare providers and suppliers. RACs are paid on a contingency fee basis to detect and correct improper payments in the Medicare program. CMS has awarded contracts to four RACs that have implemented the RAC program on a nationwide basis. Medicare RACs utilize a post-payment targeted review process employing data analysis techniques in order to identify those Medicare claims most likely to contain overpayments, such as incorrectly coded services, incorrect payment amounts, non-covered services and duplicate payments. CMS has given RACs the authority to look back at claims up to three years old. The Health Reform Law expanded the RAC program to include managed Medicare.

        CMS has also established the Recovery Audit Prepayment Review (“RAPR”) demonstration, that allows RACs to review claims before they are paid to ensure that the provider complied with all Medicare payment rules. Under the RAPR demonstration, RACs conduct prepayment reviews on certain types of claims that historically result in high rates of improper payments, beginning with those involving short stay inpatient hospital services. These reviews focus on seven states (Florida, California, Michigan, Texas, New York, Louisiana and Illinois) with high populations of fraud and error-prone providers and four states (Pennsylvania, Ohio, North Carolina, and Missouri) with high claims volumes of short inpatient hospital stays. The RAPR demonstration began on August 27, 2012 and runs for a three year period.

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The Health Reform Law expands the RAC program’s scope to include Medicaid claims. States may coordinate with Medicaid RACs regarding recoupment of overpayments and refer suspected fraud and abuse to appropriate law enforcement agencies. In addition, under the Medicaid Integrity Program, CMS employs private contractors, referred to as Medicaid Integrity Contractors (“MICs”), to perform reviews and post-payment audits of Medicaid claims and identify overpayments. MICs are assigned to five geographic jurisdictions and have commenced audits of Medicaid providers in each jurisdiction. The Health Reform Law increases federal funding for the MIC program for federal fiscal year 2011 and later years. In addition to MICs, several other contractors and state Medicaid agencies have increased their review activities.

Managed Care

Managed care payors, including health maintenance organizations and preferred provider organizations, are organizations that provide insurance coverage and a network of healthcare providers to members for a fixed monthly premium. To control costs, these organizations typically contract with hospitals and other providers for discounted prices, review medical services to ensure that no unnecessary services are provided, and market providers within their networks to health plan members. A significant percentage of our overall payor mix is commercial managed care. We generally receive lower payments from commercial managed care payors than from traditional commercial/indemnity insurers for similar services.

Commercial Insurance

Our hospitals provide services to a decreasing number of individuals covered by traditional private healthcare insurance as managed care plans grow in prominence. Private insurance carriers make direct payments to hospitals or, in some cases, reimburse their policy holders, based upon negotiated discounts from the particular hospital’s established charges and the particular coverage provided in the insurance policy.

Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment mechanisms, including prospective payment or diagnosis related group-based payment systems, for more inpatient and outpatient services. In addition, commercial insurers increasingly are implementing quality requirements and refusing to pay for serious adverse events, similar to Medicare. To the extent that these efforts are successful, hospitals may receive reduced levels of reimbursement.

Charity Care

In the ordinary course of business, we provide care without charge to patients who are financially unable to pay for the healthcare services they receive. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in net revenue. We currently record revenue deductions for patient accounts that meet our guidelines for charity care. We provide charity care to patients with income levels below 200% of the federal poverty level (“FPL”). Additionally, at all of our hospitals, a sliding scale of reduced rates is offered to all uninsured patients, who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the FPL.

Uninsured

In the ordinary course of business, we provide care to patients who do not have insurance coverage to pay for the healthcare services they receive, nor do they qualify for charity care, or other federal, state or county indigent care programs. We provide discounts for these patients in an effort to eliminate some of this financial burden. As well, it is common that these patients do not have the financial resources to fully reimburse our hospitals for the discounted services that have been provided. While we typically pursue collection of these account balances, the patient’s lack of financial resources can result in reduced collection rates and increased bad debts.

Government Regulation and Other Factors

A framework of extremely complex federal and state laws, rules and regulations governs the healthcare industry and, for many provisions, there is little history of regulatory or judicial interpretation upon which to rely. The Health Reform Law significantly increases this complexity. Because we operate in a heavily regulated industry subject to shifts in political and regulatory dynamics, we devote significant time and resources to regulatory compliance, including compliance with those laws and regulations described below.

Healthcare Reform

The Health Reform Law changes how healthcare services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to clinical integration and quality of care. In addition, the Health Reform Law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality and contains provisions intended to strengthen fraud and abuse enforcement. The most significant provisions of the Health Reform Law that seek to decrease the number of

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uninsured individuals mostly will become effective January 1, 2014. However, the employer mandate which requires companies with 50 or more employees to provide health insurance or pay fines, as well as insurer reporting requirements, has been delayed until January 1, 2015. In addition, the federal online Exchange has experienced significant technical issues that have negatively impacted the ability of individuals to enroll in Medicaid and to purchase health insurance. These technical issues, especially if not corrected in a timely manner, could lead to the federal government delaying the individual mandate tax penalties past the current March 31, 2014 deadline, further delays in uninsured individuals obtaining health insurance and an increase in the number of individuals who choose to pay the tax mandates rather than to purchase health insurance. Furthermore, states may choose, without losing existing federal Medicaid funding, not to implement the Medicaid expansion provisions of the Health Reform Law, and in those states, the penalty for not carrying insurance will be waived for low-income residents. Because of the many variables involved, including the law’s complexity, the lack of implementing regulations or interpretive guidance, gradual and partially delayed implementation, court challenges, possible amendment, repeal or further implementation delays, uncertainty regarding the success of Exchanges enrolling uninsured individuals, possible reductions in funding by Congress and future reductions in Medicare and Medicaid reimbursement, 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.

Expanded Coverage

Based on the Congressional Budget Office (“CBO”) May 2013 estimates the Health Reform Law will expand coverage to 25 million additional individuals. This increased coverage will occur through a combination of public program expansion and private sector health insurance and other reforms.

Medicaid Expansion. The primary public program coverage expansion will occur through changes in Medicaid, and to a lesser extent, expansion of CHIP. The most significant changes will expand the categories of individuals eligible for Medicaid coverage and permit individuals with relatively higher incomes to qualify. The federal government reimburses the majority of a state’s Medicaid expenses, and it conditions its payment on the state meeting certain requirements. The federal government currently requires that states provide coverage for only limited categories of low-income adults under 65 years old (e.g., women who are pregnant and the blind or disabled). In addition, the income level required for individuals and families to qualify for Medicaid varies widely from state to state.

The Health Reform Law materially changes the requirements for Medicaid eligibility. Commencing January 1, 2014, the Health Reform Law requires all state Medicaid programs to provide, and the federal government will subsidize, Medicaid coverage to virtually all adults under 65 years old with incomes at or under 133% of the FPL. However, states may opt out of the expansion without losing existing federal Medicaid funding based on the U.S. Supreme Court’s June 2012 ruling. For those states that expand Medicaid coverage, the Health Reform Law also requires states to apply a “5% income disregard” to the Medicaid eligibility standard, so that Medicaid eligibility will effectively be extended to those with incomes up to 138% of the FPL. A number of state governors and legislatures, including in Texas and Louisiana, have chosen not to participate in the expanded Medicaid program at this time; however, these states could choose to implement the expansion at a later date.

As Medicaid is a joint federal and state program, the federal government provides states with “matching funds” in a defined percentage, known as the federal medical assistance percentage (“FMAP”). Beginning in 2014, states will receive an enhanced FMAP for the individuals enrolled in Medicaid pursuant to the Medicaid expansion provisions of the Health Reform Law. The FMAP percentage is as follows: 100% for calendar years 2014 through 2016; 95% for 2017; 94% in 2018; 93% in 2019; and 90% in 2020 and thereafter.

The Health Reform Law also provides that the federal government will subsidize states that create non-Medicaid plans for residents whose incomes are greater than 133% of the FPL but do not exceed 200% of the FPL. Approved state plans will be eligible to receive federal funding. The amount of that funding per individual will be equal to 95% of subsidies that would have been provided for that individual had he or she enrolled in a health plan offered through one of the Exchanges, as discussed below.

Historically, states often have attempted to reduce Medicaid spending by limiting benefits and tightening Medicaid eligibility requirements. However, the Health Reform Law requires states to at least maintain the Medicaid eligibility standards established prior to the enactment of the law until January 1, 2014 for adults and until October 1, 2019 for children. States with budget deficits may seek a waiver from this requirement, but only to address eligibility standards that apply to adults making more than 133% of the FPL.

Private Sector Expansion. The expansion of health coverage through the private sector as a result of the Health Reform Law will occur through new requirements applicable to health insurers, employers and individuals. Each health plan must now keep its annual non-medical costs lower than 15% of premium revenue for the group market and lower than 20% in the small group and individual markets or rebate its enrollees the amount spent in excess of the percentage. In addition, health insurers are not permitted to deny coverage to children based upon a pre-existing condition and must allow dependent care coverage for children up to 26 years old. Commencing January 1, 2014, health insurance companies will be prohibited from imposing annual coverage limits, dropping coverage, excluding persons based upon pre-existing conditions or denying coverage for any individual who is willing to pay the premiums for such coverage.

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Larger employers will be subject to new requirements and incentives to provide health insurance benefits to their full-time employees. Employers with 50 or more employees that do not offer health insurance will be subject to a penalty if an employee obtains government-subsidized coverage through an Exchange. The employer penalties will range from $2,000 to $3,000 per employee, subject to certain thresholds and conditions. This requirement, which was originally effective January 1, 2014, has been delayed until January 1, 2015.

The Health Reform Law uses various means to induce individuals who do not have health insurance to obtain coverage. By January 1, 2014, individuals will be required to maintain health insurance for a minimum defined set of benefits or pay a tax penalty. The Internal Revenue Service (“IRS”), in consultation with the Department, is responsible for enforcing the tax penalty, although the Health Reform Law limits the availability of certain IRS enforcement mechanisms. In addition, for individuals and families below 400% of the FPL, the cost of obtaining health insurance will be subsidized by the federal government. Those with lower incomes will be eligible to receive greater subsidies. It is anticipated that those at the lowest income levels will have the majority of their premiums subsidized by the federal government, in some cases in excess of 95% of the premium amount.

To facilitate the purchase of health insurance by individuals and small employers, each state must establish or participate in an Exchange or default to a federally-operated Exchange by January 1, 2014. Based on CBO estimates issued in May 2013, approximately 25 million individuals will obtain their health insurance coverage through an Exchange by 2021. This amount will include individuals who were previously uninsured and individuals who have switched from their prior insurance coverage to a plan obtained through the Exchange. The Health Reform Law requires that the Exchanges be designed to make the process of evaluating, comparing and acquiring coverage simple for consumers. For example, each state’s Exchange must maintain an internet website through which consumers may access health plan ratings that are assigned by the state based on quality and price, view governmental health program eligibility requirements and calculate the actual cost of health coverage. Health insurers participating in the Exchange must offer a set of minimum benefits to be defined by the Department and may offer more benefits. Health insurers must offer at least two, and up to five, levels of plans that vary by the percentage of medical expenses that must be paid by the enrollee. These levels are referred to as platinum, gold, silver, bronze and catastrophic plans, with gold and silver being the two mandatory levels of plans. Each level of plan must require the enrollee to share the following percentages of medical expenses up to the deductible/co-payment limit: platinum, 10%; gold, 20%; silver, 30%; bronze, 40%; and catastrophic, 100%. Health insurers may establish varying deductible/co-payment levels, up to the statutory maximum ($6,250 for 2013 and $6,350 in 2014 for an individual, subject to increase in future years). The health insurers must cover 100% of the amount of medical expenses in excess of the deductible/co-payment limit. For example, an individual making 100% to 200% of the FPL will have co-payments and deductibles reduced to about one-third of the amount payable by those with the same plan with incomes at or above 400% of the FPL.

Public Program Spending

The Health Reform Law provides for Medicare, Medicaid and other federal healthcare program spending reductions between 2010 and 2019. In July 2012, the CBO estimated that from 2013-2022, the Health Reform Law reductions would include $415 billion in Medicare fee-for-service market basket and productivity reimbursement reductions, the majority of which will come from hospitals. The CBO estimate included an additional $56 billion in reductions in Medicare and Medicaid DSH funding.

Payments for Hospitals and ASCs

Inpatient Market Basket and Productivity Adjustment. Under the Medicare program, hospitals receive reimbursement under a prospective payment system for general, acute care hospital inpatient services. CMS establishes fixed prospective payment system payment amounts per inpatient discharge based on the patient’s assigned MS-DRG. These MS-DRG rates are updated each federal fiscal year, which begins October 1, using the market basket, which takes into account inflation experienced by hospitals and other entities outside the healthcare industry in purchasing goods and services.

The Health Reform Law provides for three types of annual reductions in the market basket. The first is a general reduction of a specified percentage each federal fiscal year starting in 2010 and extending through 2019. These reductions are as follows: federal fiscal year 2010, 0.25% for discharges occurring on or after April 1, 2010; 2011, 0.25%; 2012, 0.1%; 2013, 0.1%; 2014, 0.3%; 2015, 0.2%; 2016, 0.2%; 2017, 0.75%; 2018, 0.75%; and 2019, 0.75%.

The second type of reduction to the market basket is a “productivity adjustment” that began in federal fiscal year 2012. The amount of the reduction is equal to the projected average nationwide productivity gains over the preceding 10 years. To determine the projection, the Department will use the Bureau of Labor Statistics (“BLS”) 10-year moving average of changes in specified economy-wide productivity (the BLS data is typically a few years old). The Health Reform Law does not contain guidelines for the Department to use in projecting the productivity figure. For federal fiscal year 2014, CMS announced a negative 0.5% productivity adjustment to the market basket. CMS estimates that the combined market basket and productivity adjustments will reduce Medicare payments under the inpatient prospective payment system by $112.6 billion from 2010 to 2019.

The third type of reduction is in connection with the value-based purchasing program discussed in more detail below. Beginning in federal fiscal year 2013, CMS will reduce the inpatient prospective payment system payment amount for all discharges by the following: 1% for 2013; 1.25% for 2014; 1.5% for 2015; 1.75% for 2016; and 2% for 2017 and subsequent years. For each federal fiscal year, the total amount collected from these reductions will be pooled and used to fund payments to hospitals that satisfy certain quality metrics. While some or all of these reductions may be recovered if a hospital satisfies these quality metrics, the recovery amounts may be delayed.

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If the aggregate of the three market basket reductions described above is more than the annual market basket adjustments made to account for inflation, there will be an overall reduction in the MS-DRG rates paid to hospitals. For example, if market basket increases to account for inflation would result in a 2% market basket update and the aggregate Health Reform Law market basket adjustments would result in a 3% reduction, then the rates paid to a hospital for inpatient services would be 1% less than rates paid for the same services in the prior year.

Quality-Based Payment Adjustments and Reductions for Inpatient Services. The Health Reform Law establishes or expands three provisions to promote value-based purchasing and to link payments to quality and efficiency. First, in federal fiscal year 2013, the Department was directed to implement a value-based purchasing program for inpatient hospital services. This program rewards hospitals that meet certain quality performance standards established by the Department. The Health Reform Law provides the Department considerable discretion over the value-based purchasing program. Under the value-based purchasing program for hospital inpatient services, CMS will distribute an estimated $963 million to hospitals based on their overall performance on a set of quality measures that have been linked to improved clinical processes of care and patient satisfaction. For payments in federal fiscal year 2013, hospitals were scored based on a weighted average of patient experience scores using the Hospital Consumer Assessment of Healthcare Providers and Systems survey and 12 clinical process-of-care measures. CMS adopted 17 clinical process-of-care measures by which hospitals will be scored for payments in federal fiscal year 2014 and has also announced 19 measures for federal fiscal year 2015. CMS scores each hospital based on achievement (relative to other hospitals) and improvement ranges (relative to the hospital’s own past performance) for each applicable measure. Because the Health Reform Law provides that the pool will be fully distributed, hospitals that meet or exceed the quality performance standards set by the Department will receive greater reimbursement under the value-based purchasing program than they would have otherwise. On the other hand, hospitals that do not achieve the necessary quality performance will receive reduced Medicare inpatient hospital payments.

Second, beginning in federal fiscal year 2013, inpatient payments are reduced if a hospital experiences “excess readmissions” within the 30-day period from the date of discharge for heart attack, heart failure, pneumonia or other conditions that may be designated by CMS at a future time. Hospitals with what CMS defines as “excess readmissions” for these conditions receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excess readmissions standard. Each hospital’s performance is publicly reported by CMS.

Third, reimbursement will be reduced based on a facility’s HAC rates. A HAC is a condition that is acquired by a patient while admitted as an inpatient in a hospital, such as a surgical site infection. Beginning in federal fiscal year 2015, hospitals that rank in the worst 25% nationally of HACs for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments. In addition, the Health Reform Law prohibits the use of federal funds under the Medicaid program to reimburse providers for medical services provided to treat certain healthcare-acquired conditions. CMS implemented this prohibition for services with dates beginning July 1, 2012. Each state Medicaid program must deny payments to providers for the treatment of healthcare-acquired conditions and provider-preventable conditions designated by CMS as well as any other provider-preventable conditions designated by the state.

Outpatient Market Basket and Productivity Adjustment. Hospital outpatient services paid under the prospective payment system are classified into APCs. The APC payment rates are updated each calendar year based on the market basket. The first two market basket changes outlined above —the general reduction and the productivity adjustment —apply to outpatient services as well as inpatient services, although these are applied on a calendar year basis. The percentage changes specified in the Health Reform Law summarized above as the general reduction for inpatients —e.g., 0.2% in 2015 —are the same for outpatients. CMS estimates that the combined market basket and productivity adjustments will reduce Medicare payments under the outpatient prospective payment system by $26.3 billion from 2010 to 2019.

Inpatient Rehabilitation Hospitals and Units. The first two market basket changes outlined above for inpatient services—the general reduction and the productivity adjustment—also apply to inpatient rehabilitation services. The percentage changes specified in the Health Reform Law summarized above as the general reduction for inpatients—e.g., 0.2% in 2015—are the same for rehabilitation inpatients. CMS estimates that the combined market basket and productivity adjustments will reduce Medicare payments under the inpatient rehabilitation facilities prospective payment system by $5.7 billion from 2010 to 2019. The Health Reform Law requires each inpatient rehabilitation facility to report certain quality measures to the Department or receive a two percentage point reduction to the market basket update beginning with the market basket update for federal fiscal year 2014. CMS has implemented this requirement by requiring facilities to report two quality measures to receive the full market basket update in federal fiscal year 2015. CMS has indicated that quality to receive the full market basket update in federal fiscal years 2016 and 2017 payments determinations.

Inpatient Psychiatric Facilities. The first two market basket changes outlined above for inpatient services—the general reduction and the productivity adjustment—also apply to inpatient psychiatric services. The percentage changes specified in the Health Reform Law summarized above as the general reduction for inpatients—e.g., 0.2% in 2015—are the same for psychiatric inpatients. CMS estimates that the combined market basket and productivity adjustments will reduce Medicare payments under the inpatient psychiatric facilities prospective payment system by $4.3 billion from 2010 to 2019.

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Medicare and Medicaid Disproportionate Share Hospital Payments. The Health Reform Law provides for certain reductions to both the Medicare and Medicaid DSH payment systems beginning in federal fiscal year 2014 as discussed above in the section entitled “Sources of Acute Care Revenue—Disproportionate Share Hospital Payments.” Though it is difficult to predict the full impact of the Medicare DSH reductions beyond 2014, based on final rules from CMS, we expect our Medicare DSH payments to increase in fiscal 2014. In July 2012, the CBO estimated that the Health Reform Law would result in $56 billion in reductions to Medicare and Medicaid DSH payments between 2013 and 2022.

Accountable Care Organizations. The Health Reform Law requires the Department to establish a Medicare Shared Savings Program (“MSSP”) that promotes accountability and coordination of care through the creation of accountable care organizations (“ACO”). The program allows certain providers, including hospitals, physicians and other designated professionals, to voluntarily form ACOs and work together along with other ACO participants to invest in infrastructure and redesign delivery processes to achieve high quality and efficient delivery of services. The program is intended to produce savings as a result of improved quality and operational efficiency. ACOs that achieve quality performance standards established by the Department will be eligible to share in a portion of the amounts saved by the Medicare program. The Department has significant discretion to determine key elements of the program. Participants may choose between two different ACO tracks, the first of which allows ACOs to share only in the savings under the MSSP. The second track requires ACOs to share in any savings or losses under the MSSP but offers ACOs a greater share of any savings realized under the MSSP. As authorized by the Health Reform Law, certain waivers are available from fraud and abuse laws for ACOs. CMS has approved over 200 to participate. We have applied for ACO status in certain markets. We are also pursuing similar initiatives with commercial insurers, with a focus on building clinically integrated high performance provider networks intended to compete in an environment where commercial insurers increasingly are implementing pay for performance and value-based purchasing reimbursement models similar to those contemplated by the Health Reform Law.

Bundled Payment Pilot Programs. The Health Reform Law created the Center for Medicare and Medicaid Innovation (the “CMS Innovation Center”) with responsibility for establishing demonstration projects and other initiatives in order to identify, develop, test and encourage the adoption of new methods of delivering and paying for healthcare that create savings under the Medicare and Medicaid programs while improving quality of care. One initiative announced by the CMS Innovation Center is the Bundled Payments for Care Improvement initiative, a voluntary initiative through which participating providers receive a single negotiated payment for services provided during an episode of care. In addition, the Health Reform Law requires the Department to establish a separate five-year voluntary, national pilot program on payment bundling for Medicare services which the Department announced on January 1, 2013 as the Bundled Payments for Care Improvement (“BPCI”) initiative. Under the BPCI initiative, organizations will enter into payment arrangements that include financial and performance accountability for episodes of care and these models are intended to lead to higher quality, more coordinated care at a lower cost to the Medicare program. The Health Reform Law also provides a bundled payment demonstration project for Medicaid services, but CMS has not yet implemented this project. The Department will select up to eight states to participate based on the potential to lower costs under the Medicaid program while improving care. State programs may target particular categories of beneficiaries, selected diagnoses or geographic regions of the state. The selected state programs will provide one payment for both hospital and physician services provided to Medicaid patients for certain episodes of inpatient care.

Ambulatory Surgery Centers. The Health Reform Law reduces reimbursement for ASCs through a productivity adjustment to the market basket similar to the productivity adjustment for inpatient and outpatient hospital services, beginning in federal fiscal year 2011. In addition, CMS has established a quality reporting program for ASCs under which ASCs that fail to report on required quality measures will receive a two percentage point reduction in reimbursement beginning with the calendar year 2014 payment determination.

Medicare Managed Care (Medicare Advantage or “MA”). Under the MA program, the federal government contracts with private health plans to provide inpatient and outpatient benefits to beneficiaries who enroll in such plans. Nationally, approximately 26% of Medicare beneficiaries have elected to enroll in MA plans. Effective in 2014, the Health Reform Law requires MA plans to keep annual administrative costs lower than 15% of annual premium revenue. The Health Reform Law reduces, over a three year period, premium payments to the MA Plans such that CMS’ managed care per capita premium payments are, on average, equal to traditional Medicare. In the spring of 2010, the CBO and CMS, respectively, estimated that payments to MA plans would be reduced by $138 billion to $145 billion between 2010 and 2019. These reductions to MA plan premium payments may cause some plans to raise premiums or limit benefits, which in turn might cause some Medicare beneficiaries to terminate their MA coverage and enroll in traditional Medicare. However, CMS has indicated that MA premium rates are expected to increase slightly in 2014 relative to 2013 and that enrollment in MA plans is forecast to increase in 2014.

Physician-owned Hospitals. The Health Reform Law effectively prohibits the formation of physician-owned hospitals after December 31, 2010. While the Health Reform Law grandfathers existing physician-owned hospitals, including our facilities that have physician ownership, it does not allow these hospitals to increase the percentage of physician ownership and significantly restricts our ability to add beds and operating rooms at such physician-owned facilities.

        The Health Reform Law also imposes additional disclosure requirements on physician-owned hospitals. For example, a grandfathered physician-owned hospital is required to submit an annual report to the Department listing each investor in the hospital, including all physician owners, by December 1, 2013 and annually thereafter. In addition, grandfathered physician-owned hospitals must have procedures in place that require each referring physician owner to disclose to patients, with enough notice for the patient to make a meaningful decision regarding receipt of care, the physician’s ownership interest and, if applicable, any ownership interest held by the treating physician. A grandfathered physician-owned hospital also must disclose on its website and in any public advertising the fact that it has physician ownership. The Health Reform Law requires the Department to audit grandfathered physician-owned hospitals’ compliance with these requirements.

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Program Integrity and Fraud and Abuse

The Health Reform Law makes several significant changes to healthcare fraud and abuse laws, provides additional enforcement tools to the government, increases cooperation between agencies by establishing mechanisms for the sharing of information and enhances criminal and administrative penalties for non-compliance. For example, the Health Reform Law: (1) provides $350 million in increased federal funding over 10 years to fight healthcare fraud, waste and abuse; (2) expands the scope of the RAC program to include MA plans and Medicaid; (3) authorizes the Department, in consultation with the Office of the Inspector General (“OIG”), to suspend Medicare and Medicaid payments to a provider of services or a supplier pending an investigation of a credible allegation of fraud; (4) provides Medicare contractors with additional flexibility to conduct random prepayment reviews; and (5) tightens up the requirements for returning overpayments made by governmental health programs and expands the federal False Claims Act (“FCA”) liability to include failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due, whichever is later.

Impact of Health Reform Law on Our Company

The expansion of health insurance coverage under the Health Reform Law may result in a material increase in the number of patients using our facilities who have either private or public program coverage. In addition, a disproportionately large percentage of the new Medicaid coverage is likely to be in states that currently have relatively low income eligibility requirements. Further, the Health Reform Law provides for a value-based purchasing program, the establishment of ACOs and bundled payment pilot programs, which will create possible sources of additional revenue.

However, it is difficult to predict the potential amount of additional revenue resulting from these elements of the Health Reform Law, because of uncertainty surrounding a number of material factors, including the following:

• how many states will eventually implement the Medicaid expansion and under what terms;

• the potential for further delays in or complications related to implementation of Exchanges and other parts of the Health Reform Law, which would continue to delay the anticipated overall expansion of insured individuals resulting from federal reform;

• the possibility of enactment of additional federal or state health care reforms and possible changes to the Health Reform Law;

• how many previously uninsured individuals will obtain coverage as a result of the Health Reform Law (based on the CBO May 2013 estimates, by 2021, the Health Reform Law will expand coverage to 25 million additional individuals);

• what percentage of the newly insured patients will be covered under the Medicaid program and what percentage will be covered by private health insurers;

• the extent to which states will enroll new Medicaid participants in managed care programs;

• the pace at which insurance coverage expands, including the pace of different types of coverage expansion;

• the change, if any, in the volume of inpatient and outpatient hospital services that are sought by and provided to previously uninsured individuals;

• the rate paid to hospitals by private payors for newly covered individuals, including those covered through the newly created Exchanges and those who might be covered under the Medicaid program under contracts with the state;

• the effect of the value-based purchasing program on our hospitals’ revenue and the effects of other quality programs that will be implemented;

• the percentage of individuals in the Exchanges who select the high deductible plans, since health insurers offering those kinds of products have traditionally sought to pay lower rates to hospitals;

• whether employers will drop existing coverage on their employees and choose to pay the related penalties instead; and

• whether the net effect of the Health Reform Law, including the prohibition on excluding individuals based on pre-existing conditions, the requirement to keep medical costs lower than a specified percentage of premium revenue, other health insurance reforms and the annual fee applied to all health insurers, will put pressure on the profitability of health insurers, which in turn might cause them to seek to reduce payments to hospitals with respect to both newly insured individuals and their existing business.

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On the other hand, the Health Reform Law provides for significant reductions in the growth of Medicare spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to quality of care and clinical integration. Reductions in Medicare and Medicaid spending may significantly impact our business and could offset any positive effects of the Health Reform Law. It is difficult to predict the amount of potential revenue reductions resulting from reduced Medicare and Medicaid spending because of uncertainty regarding a number of material factors, including the following:

• the amount of overall revenues we will generate from Medicare and Medicaid business when the reductions are implemented;

• whether reductions required by the Health Reform Law will be changed by statute or judicial decision prior to becoming effective;

• the size of the Health Reform Law’s annual productivity adjustment to the market basket in future years;

• the amount of the Medicare DSH reductions that will be made, beyond federal fiscal year 2014;

• the allocation to our hospitals of the Medicaid DSH reductions, beyond federal fiscal year 2014;

• what the losses in revenues will be, if any, from the Health Reform Law’s quality initiatives;

• how successful ACOs will be at coordinating care and reducing costs;

• the scope and nature of potential changes to Medicare reimbursement methods, such as an emphasis on bundling payments or coordination of care programs;

• whether our revenues from private supplemental Medicaid reimbursement programs will be adversely affected because there may be fewer indigent, non-Medicaid patients for whom we provide services pursuant to these programs; and

• reductions to Medicare payments that CMS may impose for “excess readmissions.”

Because of the many variables involved, we are unable to predict with certainty the net effect of the expected increases in insured individuals using our facilities, the reductions in Medicare spending, including Medicare and Medicaid DSH funding, and numerous other provisions in the Health Reform Law that may affect our business. Further, it is unclear how efforts to revise the Health Reform Law and remaining or new lawsuits challenging its constitutionality will be resolved or what the impact would be of any resulting changes to the law.

Licensure, Certification and Accreditation

Healthcare facility construction and operation is subject to federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Our facilities also are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. We believe that all of our operating healthcare facilities are properly licensed under appropriate state healthcare laws, but we cannot assure you that government agencies or other entities enforcing licensure requirements would find our facilities in compliance with such requirements.

All of our operating hospitals are certified under the Medicare program and are accredited by either Det Norske Veritas (“DNV”) or The Joint Commission, the effect of which is to permit the facilities to participate in the Medicare and Medicaid programs. If any facility loses its accreditation, the facility would be subject to state surveys, potentially be subject to increased scrutiny by CMS and likely lose payment from non-government payors. We intend to conduct our operations in compliance with current applicable federal, state, local and independent review body regulations and standards, but we cannot assure you that government agencies or other entities enforcing such requirements would find our facilities in compliance with such requirements. Licensure, certification, or accreditation requirements also may require notification or approval in the event of certain transfers or changes in ownership or organization. Requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, we may need to make changes in our facilities, equipment, personnel and services.

CMS announced an initiative to require all Medicare-certified providers and suppliers that enrolled prior to March 25, 2011, to revalidate their Medicare enrollment records by March 2015 in order for CMS to implement new screening criteria mandated by the Health Reform Law. Pursuant to this initiative, Medicare contractors have begun and will continue to send mandatory revalidation requests to all affected providers and suppliers, including to our facilities, and our facilities will have a limited time to respond to the requests. We believe that we are in a position to promptly comply with any mandatory revalidation requests, but failure to timely revalidate Medicare enrollment records for our facilities could result in deactivation or termination of our facilities’ Medicare enrollment, which could adversely affect our business.

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Utilization Review

Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients be reviewed by quality improvement organizations that analyze the appropriateness of Medicare and Medicaid patient admissions and discharges, quality of care, validity of diagnosis-related group classifications and appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided, assess fines and recommend to the Department that a provider not in substantial compliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. Most non-governmental managed care organizations also require utilization review.

Federal and State Fraud and Abuse Provisions

Participation in any federal healthcare program, like Medicare, is regulated heavily by statute and regulation. If a hospital provider fails to substantially comply with the numerous conditions of participation in the Medicare or Medicaid program or performs specific prohibited acts, the hospital’s participation in the Medicare and Medicaid programs may be terminated or civil or criminal penalties may be imposed upon it under provisions of the Social Security Act and other statutes.

Among these statutes is a section of the Social Security Act, known as the federal anti-kickback statute. This law prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent of generating referrals or orders for services or items covered by a federal healthcare program. Courts have interpreted this law broadly and held that there is a violation of the anti-kickback statute if just one purpose of the remuneration is to generate referrals, even if there are other lawful purposes. The Health Reform Law further provides that knowledge of the law or specific intent to violate the law is not required to establish a violation of the anti-kickback statute.

The OIG has published safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the anti-kickback statute. Currently there are safe harbors for various arrangements and activities, including the following: investment interests, space rental, equipment rental, practitioner recruitment, personal services and management contracts, sale of practice, referral services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary co-insurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, ambulatory surgery centers, and referral agreements for specialty services.

The fact that conduct or a business arrangement does not fall within a safe harbor does not automatically render the conduct or business arrangement illegal under the anti-kickback statute. The conduct or business arrangement, however, does risk increased scrutiny by government enforcement authorities. We may be less willing than some of our competitors to take actions or enter into business arrangements that do not clearly satisfy the safe harbors. As a result, this unwillingness may put us at a competitive disadvantage.

The OIG, among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse and waste. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to healthcare providers, the OIG has from time to time issued “fraud alerts” that, although they do not have the force of law, identify features of a transaction that may indicate that the transaction could violate the anti-kickback statute or other federal healthcare laws. The OIG has identified several incentive arrangements as potential violations, including:

• payment of any incentive by the hospital when a physician refers a patient to the hospital;

• use of free or significantly discounted office space or equipment for physicians in facilities usually located close to the hospital;

• provision of free or significantly discounted billing, nursing, or other staff services;

• free training for a physician’s office staff, including management and laboratory techniques;

• guarantees that provide that, if the physician’s income fails to reach a predetermined level, the hospital will pay any portion of the remainder;

• low-interest or interest-free loans, or loans that may be forgiven if a physician refers patients to the hospital;

• payment of the costs of a physician’s travel and expenses for conferences or a physician’s continuing education courses;

• coverage on the hospital’s group health insurance plans at an inappropriately low cost to the physician;

• rental of space in physician offices, at other than fair market value terms, by persons or entities to which physicians refer;

• payment for services that require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of the services rendered; or

• “gainsharing,” the practice of giving physicians a share of any reduction in a hospital’s costs for patient care attributable in part to the physician’s efforts.

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In addition to issuing fraud alerts, the OIG from time to time issues compliance program guidance for certain types of healthcare providers. In its hospital compliance guidance, the OIG identifies areas of potential risk of liability under federal fraud and abuse statutes and regulations. These areas of risk include compensation arrangements with physicians, recruitment arrangements with physicians and joint venture relationships with physicians. The OIG recommends structuring arrangements to fit squarely within a safe harbor.

We have a variety of financial relationships with physicians who refer patients to our hospitals. Physicians own interests in nine of our full service acute care hospitals. We also have other joint venture relationships with physicians and contracts with physicians providing for a variety of financial arrangements, including employment contracts, leases and professional service agreements. We provide financial incentives to recruit physicians to relocate to communities served by our hospitals, including minimum cash collections guarantees and forgiveness of repayment obligations. Although we have established policies and procedures to ensure that our arrangements with physicians comply with current law and available interpretations, we cannot assure you that regulatory authorities that enforce these laws will not determine that some of these arrangements violate the anti-kickback statute or other applicable laws. Violation of the anti-kickback statute is a felony, and such a determination could subject us to liabilities under the Social Security Act, including criminal penalties of imprisonment or fines, civil penalties up to $50,000 per violation, damages up to three times the total amount of the improper payment to the referral source and exclusion from participation in Medicare, Medicaid or other federal healthcare programs, any of which could have a material adverse effect on our business, financial condition or results of operations.

The Social Security Act also imposes criminal and civil penalties for submitting false claims to Medicare and Medicaid. False claims include, but are not limited to, billing for services not rendered, misrepresenting actual services rendered in order to obtain higher reimbursement and cost report fraud. Like the anti-kickback statute, these provisions are very broad. Further, the Social Security Act contains civil penalties for conduct including improper coding and billing for unnecessary goods and services. Pursuant to the Health Reform Law, civil penalties may be imposed for the failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due, whichever is later. To avoid liability, providers must, among other things, carefully and accurately code claims for reimbursement, as well as accurately prepare cost reports.

Some of these provisions, including the federal Civil Monetary Penalty Law, require a lower burden of proof than other fraud and abuse laws, including the federal anti-kickback statute. Civil monetary penalties that may be imposed under the federal Civil Monetary Penalty Law range from $10,000 to $50,000 per act, and in some cases may result in penalties of up to three times the remuneration offered, paid, solicited or received. In addition, a violator may be subject to exclusion from federal and state healthcare programs. Federal and state governments increasingly use the federal Civil Monetary Penalty Law, especially where they believe they cannot meet the higher burden of proof requirements under the federal anti-kickback statute.

HIPAA broadened the scope of the fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses that apply to all health benefit programs. This act also created new enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. In addition, federal enforcement officials now have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud. Additionally, this act establishes a violation for the payment of inducements to Medicare or Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner.

The Social Security Act also includes a provision commonly known as the “Stark Law.” This law prohibits physicians from referring Medicare and Medicaid patients to entities with which they or any of their immediate family members have a financial relationship for the provision of certain designated health services that are reimbursable by Medicare or Medicaid, including inpatient and outpatient hospital services. The law also prohibits the entity from billing the Medicare program for any items or services that stem from a prohibited referral. Sanctions for violating the Stark Law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, civil monetary penalties up to $15,000 per item or service improperly billed and exclusion from the federal healthcare programs. The statute also provides for a penalty of up to $100,000 for a scheme intended to circumvent the Stark Law prohibitions. There are a number of exceptions to the Stark Law, including an exception for a physician’s ownership interest in an entire hospital, although the Health Reform Law significantly restricts this exception. There are also exceptions for many of the customary financial arrangements between physicians and providers, including employment contracts, leases, professional services agreements and recruitment agreements. Unlike safe harbors under the anti-kickback statute, with which compliance is voluntary, an arrangement must comply with every requirement of the appropriate Stark Law exception or the arrangement is in violation of the Stark Law. Further, intent does not have to be proven to establish a violation of the Stark Law.

Through a series of rulemakings, CMS has issued final regulations implementing the Stark Law. While these regulations help clarify the requirements of the exceptions to the Stark Law, it is unclear how the government will interpret many of these exceptions for enforcement purposes. We cannot assure you that the arrangements entered into by us and our hospitals will be found to be in compliance with the Stark Law, as it ultimately may be implemented or interpreted.

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Historically the Stark Law has contained an exception, commonly referred to as the whole hospital exception, allowing physicians to own an interest in an entire hospital, as opposed to an interest in a hospital department. However, the Health Reform Law significantly narrows the Stark Law’s whole hospital exception. Specifically, the whole hospital exception is available only to hospitals that had physician ownership in place as of March 23, 2010, and a Medicare provider agreement effective as of December 31, 2010. Thus, the Health Reform Law effectively prevents the formation of new physician-owned hospitals. On November 2, 2010, CMS issued a final rule implementing certain provisions of the amended whole hospital exception. While the amended whole hospital exception grandfathers certain existing physician-owned hospitals, including ours, it generally prohibits a grandfathered hospital from increasing its aggregate percentage of physician ownership beyond the aggregate level that was in place as of March 23, 2010. Subject to limited exceptions, a grandfathered physician-owned hospital may not increase its aggregate number of operating rooms, procedure rooms, and beds for which it is licensed beyond the number as of March 23, 2010. A grandfathered physician-owned hospital must comply with a number of additional requirements, including not conditioning any physician ownership directly or indirectly on the owner making or influencing referrals, not offering any ownership interests to physician owners on more favorable terms than those offered to non-physicians and not providing any guarantee to physician owners to purchase other business interests related to the hospital. Further, a grandfathered hospital cannot have been converted from an ASC to a hospital.

The whole hospital exception, as amended, also contains additional disclosure requirements. For example, a grandfathered physician-owned hospital is required to submit an annual report to the Department listing each investor in the hospital, including all physician owners, by December 1, 2013 and annually thereafter. In addition, grandfathered physician-owned hospitals must have procedures in place that require each referring physician owner to disclose to patients, with enough notice for the patient to make a meaningful decision regarding receipt of care, the physician’s ownership interest and, if applicable, any ownership interest held by the treating physician. A grandfathered physician-owned hospital also must disclose on its website and in any public advertising the fact that it has physician ownership. The Health Reform Law requires the Department to audit grandfathered physician-owned hospitals compliance with these requirements.

In addition to the restrictions and disclosure requirements applicable to physician-owned hospitals set forth in the Health Reform Law, CMS regulations require physician-owned hospitals and their physician owners to disclose certain ownership information to patients. Physician-owned hospitals that receive referrals from physician owners must disclose in writing to patients that such hospitals are owned by physicians and that patients may receive a list of the hospitals’ physician investors upon request. Additionally, a physician-owned hospital must require all physician owners who are members of the hospital’s medical staff to agree, as a condition of continued medical staff membership or admitting privileges, to disclose in writing to all patients whom they refer to the hospital their (or an immediate family member’s) ownership interest in the hospital. A hospital is considered to be physician-owned if any physician, or an immediate family member of a physician, holds debt, stock or other types of investment in the hospital or in any owner of the hospital, excluding physician ownership through publicly traded securities that meet certain conditions. If a hospital fails to comply with these regulations, the hospital could lose its Medicare provider agreement and be unable to participate in Medicare.

Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect many of the arrangements entered into by each of our hospitals. In addition, law enforcement authorities, including the OIG, the courts and Congress are increasing scrutiny of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to improperly pay for patient referrals or other business. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purpose of payments between healthcare providers and potential referral sources.

Many of the states in which we operate also have adopted laws that prohibit payments to physicians in exchange for referrals similar to the federal anti-kickback statute or that otherwise prohibit fraud and abuse activities. Many states also have passed self-referral legislation similar to the Stark Law, prohibiting the referral of patients to entities with which the physician has a financial relationship. Often these state laws are broad in scope and may apply regardless of the source of payment for care. These statutes typically provide for criminal and civil penalties, as well as loss of licensure. Little precedent exists for the interpretation or enforcement of these state laws.

Our operations could be adversely affected by the failure of our arrangements to comply with the anti-kickback statute, the Stark Law, billing laws and regulations, current state laws or other legislation or regulations in these areas adopted in the future. We are unable to predict whether other legislation or regulations at the federal or state level in any of these areas will be adopted, what form such legislation or regulations may take or how they may affect our operations. We are continuing to enter into new financial arrangements with physicians and other providers in a manner structured to comply in all material respects with these laws. We cannot assure you, however, that governmental officials responsible for enforcing these laws or whistleblowers will not assert that we are in violation of them or that such statutes or regulations ultimately will be interpreted by the courts in a manner consistent with our interpretation.

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The Federal False Claims Act and Similar State Laws

Another trend affecting the healthcare industry today is the increased use of the FCA and, in particular, actions being brought by individuals on the government’s behalf under the FCA’s “qui tam” or whistleblower provisions. Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. If the government intervenes in the action and prevails, the party filing the initial complaint may share in any settlement or judgment. If the government does not intervene in the action, the whistleblower plaintiff may pursue the action independently and may receive a larger share of any settlement or judgment. When a private party brings a qui tam action under the FCA, the defendant generally will not be made aware of the lawsuit until the government commences its own investigation or makes a determination whether it will intervene. Further, every entity that receives at least $5.0 million annually in Medicaid payments must have written policies for all employees, contractors or agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal laws, including the FCA, and similar state laws.

When a defendant is determined by a court of law to be liable under the FCA, the defendant must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 to $11,000 for each separate false claim. Settlements entered into prior to litigation usually involve a less severe calculation of damages. There are many potential bases for liability under the FCA, including knowingly and properly avoiding repayment of an overpayment received from the government. Liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government. The FCA broadly defines the term “knowingly.” Although simple negligence will not give rise to liability under the FCA, submitting a claim with reckless disregard to its truth or falsity can constitute “knowingly” submitting a false claim and result in liability. The Health Reform Law provides that submission of a claim for an item or service generated in violation of the anti-kickback statute constitutes a false or fraudulent claim under the FCA. In some cases, whistleblowers, the federal government and courts have taken the position that providers that allegedly have violated other statutes, such as the Stark Law, have thereby submitted false claims under the FCA. Under the Health Reform Law, the FCA is implicated by the knowing failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due, whichever is later. Further, the FCA will cover payments involving federal funds in connection with the new Exchanges to be created pursuant to the Health Reform Law.

A number of states, including states in which we operate, have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court. DEFRA creates an incentive for states to enact false claims laws that are comparable to the FCA. From time to time, companies in the healthcare industry, including ours, may be subject to actions under the FCA or similar state laws.

Corporate Practice of Medicine/Fee Splitting

Certain of the states in which we operate have laws that prohibit unlicensed persons or business entities, including corporations, from employing physicians or laws that prohibit certain direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties and rescission of business arrangements that may violate these restrictions. These statutes vary from state to state, are often vague and seldom have been interpreted by the courts or regulatory agencies. Although we exercise care to structure our arrangements with healthcare providers to comply with relevant state laws, we cannot assure you that governmental officials responsible for enforcing these laws will not assert that we, or transactions in which we are involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with our interpretations.

HIPAA Administrative Simplification and Privacy and Security Requirements

The HIPAA Administrative Simplification provisions are intended to encourage electronic commerce in the healthcare industry. These provisions require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. HIPAA also requires that each provider use a National Provider Identifier. In addition, the Health Reform Law requires the Department to adopt standards for additional electronic transactions and to establish operating rules to promote uniformity in the implementation of each standardized electronic transaction. On August 10, 2012, the Department issued an interim final rule to establish operating rules for healthcare electronic funds transfers and remittance advice transactions. Compliance with the interim final rule is required by January 1, 2014. Further, CMS has published a final rule making changes to the formats used for certain electronic transactions and requiring the use of updated standard code sets for certain diagnoses and procedures known as ICD-10 code sets. Use of the ICD-10 code sets is required by October 1, 2014, and will require significant changes; however, we believe that the cost of compliance with these regulations has not had and is not expected to have a material adverse effect on our business, financial position or results of operations.

        As required by HIPAA, the Department has issued privacy and security regulations that extensively regulate the use and disclosure of individually identifiable health-related information and require covered entities, including healthcare providers, to implement administrative, physical and technical safeguards to protect the security of individually identifiable health information that is electronically maintained or transmitted. Covered entities must also report breaches of unsecured protected health information (“PHI”) to affected individuals without unreasonable delay, but not to exceed 60 days, of discovery of the breach by the covered entity or its agents. Notification must also be made to the Department and, in certain situations involving large breaches, to the media. The American Recovery and Reinvestment Act of 2009 (“ARRA”) broadens the scope of the HIPAA privacy and security regulations. On January 17, 2013, the Department released a final rule that implemented many of the ARRA provisions and became effective March 26, 2013. The final rule has required amendments to many existing agreements with entities that handle PHI on behalf of covered entities, known as business associates. In addition, a covered entity may be subject to penalties as a result of a business associate violating HIPAA, if the business associate is found to be an agent of the covered entity. Covered entities and business associates were required to comply with the final rule by September 23, 2013, except that certain existing business associate agreements may qualify for an extended compliance date of September 23, 2014.

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The privacy and security regulations have and will continue to impose significant costs on our facilities in order to comply with these standards. Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties, which have been significantly increased by ARRA. Furthermore, ARRA has strengthened the enforcement provisions of HIPAA, including requiring the Department to perform audits, which may result in increased enforcement activity. In addition, ARRA authorizes state attorneys general to bring civil actions seeking either injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents. ARRA also broadens the applicability of the criminal penalty provisions to employees of covered entities and requires the Department to impose penalties for violations resulting from willful neglect.

There are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and security concerns. Our facilities remain subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary, may impose additional obligations and could impose additional penalties. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving individually identifiable information (even if no health-related information is involved).

The Emergency Medical Treatment and Labor Act

The federal Emergency Medical Treatment and Labor Act (“EMTALA”) was adopted by Congress in response to reports of a widespread hospital emergency room practice of “patient dumping.” At the time of the enactment, patient dumping was considered to have occurred when a hospital capable of providing the needed care sent a patient to another facility or simply turned the patient away based on such patient’s inability to pay for his or her care. The law imposes requirements upon physicians, hospitals and other facilities that provide emergency medical services. Such requirements pertain to what care must be provided to anyone who comes to such facilities seeking care before they may be transferred to another facility or otherwise denied care. The government broadly interprets the law to cover situations in which individuals do not actually present to a hospital’s emergency department, but present for emergency examination or treatment to the hospital’s campus, generally, or to a hospital-based clinic that treats emergency medical conditions or are transported in a hospital-owned ambulance, subject to certain exceptions. At least one court has interpreted the law also to apply to a hospital that has been notified of a patient’s pending arrival in a non-hospital owned ambulance. Sanctions for violations of this statute include termination of a hospital’s Medicare provider agreement, exclusion of a physician from participation in Medicare and Medicaid programs and civil monetary penalties. In addition, the law creates private civil remedies that enable an individual who suffers personal harm as a direct result of a violation of the law, and a medical facility that suffers a financial loss as a direct result of another participating hospital’s violation of the law, to sue the offending hospital for damages and equitable relief. We can give no assurance that governmental officials responsible for enforcing the law, individuals or other medical facilities will not assert from time to time that our facilities are in violation of this statute.

Conversion Legislation

Many states have enacted or are considering enacting laws affecting the conversion or sale of not-for-profit hospitals. These laws generally include provisions relating to attorney general approval, advance notification and community involvement. In addition, attorneys general in states without specific conversion legislation may exercise authority over these transactions based upon existing law. In many states, there has been an increased interest in the oversight of not-for-profit conversions. The adoption of conversion legislation and the increased review of not-for-profit hospital conversions may increase the cost and difficulty or prevent the completion of transactions with or acquisitions of not-for-profit organizations in various states.

Healthcare Industry Investigations

Significant media and public attention has focused in recent years on the hospital industry. Increased attention has been paid by government investigators as well as private parties pursuing civil lawsuits to a number of issues associated with healthcare operations, including: hospital charges and collection practices for uninsured and indigent patients; cost reporting and billing practices; hospitals with high Medicare outlier payments; recruitment arrangements with physicians; and financial arrangements with referral sources. Further, there are numerous ongoing federal and state investigations regarding multiple issues that have targeted hospital companies as well as their executives and managers. We have substantial Medicare, Medicaid and other governmental billings, which could result in heightened scrutiny of our operations. We continue to monitor these and all other aspects of our business and have developed a compliance program to assist us in gaining comfort that our business practices are consistent with both legal principles and current industry standards. However, because the law in this area is complex and constantly evolving, we cannot assure you that government investigations will not result in interpretations that are inconsistent with industry practices, including ours. In public statements surrounding current investigations, governmental authorities have taken positions on a number of issues, including some for which little official interpretation previously has been available, that appear to be inconsistent with practices that have been common within the industry and that previously have not been challenged in this manner. In some instances, government investigations that have in the past been conducted under the civil provisions of federal law may now be conducted as criminal investigations. Additionally, the federal government has indicated that it plans to expand its use of civil monetary penalties and Medicare program exclusions to focus on those in the healthcare industry who accept kickbacks or present false claims, in addition to the federal government’s continuing efforts to focus on the companies that offer or pay kickbacks. Failure to comply with applicable laws and regulations could subject us to significant regulatory action, including fines, penalties and exclusion from the Medicare and Medicaid programs.

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Many current healthcare investigations are national initiatives in which federal agencies target an entire segment of the healthcare industry. One example is the federal government’s initiative regarding hospital providers’ improper requests for separate payments for services rendered to a patient on an outpatient basis within three days prior to the patient’s admission to the hospital, where reimbursement for such services is included as part of the reimbursement for services furnished during an inpatient stay. Further, the federal government continues to investigate Medicare overpayments to prospective payment hospitals that incorrectly report transfers of patients to other prospective payment system hospitals as discharges. We are aware that prior to our acquisition of them, several of our hospitals were contacted in relation to certain government investigations that were targeted at an entire segment of the healthcare industry. Although we take the position that, under the terms of the acquisition agreements, the prior owners of these hospitals retained any liability resulting from these government investigations, we cannot assure you that the prior owners’ resolution of these matters or failure to resolve these matters, in the event that any resolution was deemed necessary, will not have a material adverse effect on our operations.

The Health Reform Law allocates $350.0 million of additional federal funding over 10 years to fight healthcare fraud, waste and abuse, including $40.0 million for federal fiscal year 2014 and additional increased funding through 2020. In addition, government agencies and their agents, including MACs, may conduct audits of our healthcare operations. Private payors may conduct similar audits, and we also perform internal audits and monitoring.

Certificates of Need

In some states, the construction of new facilities, acquisition of existing facilities or addition of new beds or services may be subject to review by state regulatory agencies under a certificate of need program. Nevada is the only state in which we currently operate that requires approval of acute care hospitals under a certificate of need program. Certificate of need laws generally require appropriate state agency determination of public need and approval prior to the addition of beds or services or other capital expenditures. Failure to obtain necessary state approval can result in the inability to expand facilities, add services and complete an acquisition or change ownership. Further, violation may result in the imposition of civil sanctions or the revocation of a facility’s license.

Environmental Matters

We are subject to various federal, state and local environmental laws and regulations, including those relating to the protection of human health and the environment. The principal environmental requirements applicable to our operations relate to:

• the proper handling and disposal of solid waste, medical waste, hazardous waste, universal waste and low-level radioactive medical waste;

• the proper use, storage and handling of mercury, radioactive materials and other hazardous materials;

• registration and licensing of radiological equipment;

• underground and above-ground storage tanks;

• management of hydraulic fluid or oil associated with elevators, chiller units or other equipment;

• management of asbestos-containing materials or lead-based paint present or likely to be present at some locations;

• air emission permits and standards for boilers or other equipment; and

• wastewater discharge permits or requirements.

We do not expect our obligations under these or other applicable environmental laws and requirements to have a material effect on us. In the course of our operations, we may also identify other circumstances at our facilities, such as water intrusion or the presence of mold or fungus, which warrant action, and we can and do incur additional costs to address those circumstances. Under various environmental laws, we may also be required to clean up or contribute to the cost of cleaning up substances that have been released to the environment either at properties owned or operated by us or our predecessors or at properties to which substances from our operations were sent for off-site treatment or disposal. These remediation obligations may be imposed without regard to fault, and liability for environmental remediation can be substantial. While we cannot predict whether or to what extent we might be held responsible for such cleanup costs in the future, as of the date of this Report, we have not identified any significant cleanup costs or liabilities that are expected to have a material effect on us.

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Professional and General Liability Insurance

As is typical in the healthcare industry, we are subject to claims and legal actions by patients in the ordinary course of business. To cover these claims, we maintain professional malpractice liability insurance and general liability insurance in amounts that we believe to be sufficient for our operations, including our employed physicians, although some claims may exceed the scope of the coverage in effect. We also maintain umbrella coverage.

For our fiscal year 2013, our self-insured retention for professional and general liability coverage remains unchanged at $5.0 million per claim, with an excess aggregate limit of $55.0 million, and maximum coverage under our insurance policies of $75.0 million. Our self-insurance reserves for estimated claims incurred but not yet reported is based upon estimates determined by third-party actuaries. Funding for the self-insured retention of such claims is derived from operating cash flows. We cannot assure you that this insurance will continue to be available at reasonable prices that will allow us to maintain adequate levels of coverage. We also cannot assure you that our cash flow will be adequate to provide for professional and general liability claims in the future.

Our Information Systems

We use a common information systems platform across all of our hospitals. We use McKesson’s clinical, patient accounting, laboratory, radiology and decision support software and Lawson’s financial application and enterprise resource planning software. We use other vendors for specialized information systems needs for our decision support, emergency and radiology departments.

Our information systems are essential to the following areas of our business operations, among others:

• patient accounting, including billing and collection of net revenue;

• financial, accounting, reporting and payroll;

• coding and compliance;

• laboratory, radiology and pharmacy systems;

• materials and asset management;

• negotiating, pricing and administering our managed care contracts; and

• monitoring quality of care and collecting data on quality measures necessary for full Medicare payment updates.

Utilizing a common information systems platform across all our hospitals allows us to:

• enhance patient safety, automate medication administration and increase staff time available for direct patient care;

• optimize staffing levels according to patient volumes, acuity and seasonal needs at each facility;

• perform product line analyses;

• continue to meet or exceed quality of care indicators on a current basis;

• effectively monitor registration, billing, collections, managed care contract compliance and all other aspects of our revenue cycle;

• control supply costs by complying with our group purchasing organization contract; and

• effectively monitor financial results.

The cost of maintaining our information systems has increased significantly in recent years, partially due to the impact of implementing and demonstrating meaningful use of certified EHR technology. Information systems maintenance expense increased $2.7 million to $15.9 million for fiscal year ended September 30, 2013, as compared to the prior year. We expect the trend of increased maintenance costs in this area to continue in the future.

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 fiscal year 2012. On September 4, 2012, CMS published a final rule that specified the Stage 2 criteria for continued participation in the EHR Incentive Programs. 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 was 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.

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Employees and Medical Staff

As of October 1, 2013, we had 13,177 employees, including 3,271 part-time employees. We consider our employee relations to be good. We recruit and retain nurses and medical support personnel by creating a desirable, professional work environment, providing competitive wages, benefits and long-term incentives, and providing career development and other training programs. In order to supplement our current employee base, we have expanded our relationship with local colleges and universities, including our sponsorship of nursing scholarship programs, in our markets.

Our hospitals are staffed by licensed physicians who have been admitted to the medical staff of our individual hospitals. Any licensed physician may apply to be admitted to the medical staff of any of our hospitals, but admission to the staff must be approved by each hospital’s medical staff and the appropriate governing board of the hospital in accordance with established credentialing criteria. In an effort to meet community needs in certain markets in which we operate, we have implemented a strategy of employing physicians, with an emphasis on those practicing within primary care and other certain specialties. While we believe this strategy is consistent with industry trends, we cannot be assured of the long-term success of such a strategy, which includes related integration of physician practice management.

Compliance Program

Our compliance program is designed to ensure that we maintain high standards of conduct in the operation of our business and implement policies and procedures so that employees act in compliance with all applicable laws, regulations and company policies. The organizational structure of our compliance program includes a compliance committee of our board of directors, a corporate management compliance committee and local management compliance committees at each of our hospitals. These committees have the oversight responsibility for the effective development and implementation of our program. Our Vice President of Ethics and Business Practices, who reports directly to our Chief Executive Officer and to the compliance committee of our board of directors, serves as Chief Compliance Officer and is charged with direct responsibility for the development and implementation of our compliance program. Other features of our compliance program include the designation of a Regional Compliance Officer for each of our hospitals, periodic ethics and compliance training and effectiveness reviews, and the development and implementation of policies and procedures, including a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations.

Seasonality

The patient volumes and net revenue at our facilities are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including, without limitation, seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures.

Available Information

We file periodic and current reports and other information with the Securities and Exchange Commission (the “SEC”). All filings made by IASIS with the SEC may be copied and read at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, as IASIS does. The website address of the SEC is http://www.sec.gov.

Additionally, a copy of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to the aforementioned filings, are available on our website, www.iasishealthcare.com, free of charge as soon as reasonably practicable after we electronically file such reports or amendments with, or furnish them to, the SEC. The filings can be found in the SEC filings section of our website. Reference to our website does not constitute incorporation by reference of the information contained on the website and should not be considered part of this Report. All of the aforementioned materials may also be obtained free of charge by contacting us at our principal offices located at 117 Seaboard Lane, Building E, Franklin, TN 37067 or by calling (615) 844-2747.

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Item 1A. Risk Factors.

You should carefully consider the following risks as well as the other information included in this Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and footnotes. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial but become so may also materially and adversely affect our business, financial condition or results of operations.

Risks Related to Our Business

Changes In Governmental Healthcare Programs May Reduce Our Revenues.

Governmental healthcare programs, principally Medicare and Medicaid, including managed Medicare and managed Medicaid, accounted for 43.2%, 46.2% and 46.6% of our hospitals’ net patient revenue for the years ended September 30, 2013, 2012 and 2011, respectively. However, in recent years legislative and regulatory changes have limited, and in some cases reduced, the levels of payments that our hospitals receive for various services under the Medicare, Medicaid and other federal healthcare programs. The BCA provides for new spending on program integrity initiatives intended to reduce fraud and abuse under the Medicare program. The BCA requires automatic spending reductions of $1.2 trillion for federal fiscal years 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. However, the percentage reduction for Medicare may not be more than 2% for a fiscal year, with a uniform percentage reduction across all Medicare programs. These automatic spending reductions are commonly referred to as “sequestration.” Sequestration began on March 1, 2013, with CMS imposing a 2% reduction on Medicare claims beginning April 1, 2013. We are unable to predict what other deficit reduction initiatives may be proposed by the President or the Congress or whether the President and the Congress will restructure or suspend sequestration. It is possible that changes in the law to end or restructure sequestration will result in greater spending reductions than required by the BCA.

Any government healthcare program reductions will be in addition to reductions mandated by the Health Reform Law, which provides for material reductions in the growth of Medicare program spending, including reductions in Medicare market basket updates and Medicare DSH funding. Further, from time to time, CMS revises the reimbursement systems used to reimburse healthcare providers, including changes to the MS-DRG system and other payment systems, which may result in reduced Medicare payments. In some cases, commercial third-party payors and other payors, such as some state Medicaid programs, rely on all or portions of the Medicare MS-DRG system to determine payment rates, and therefore, adjustments that negatively impact Medicare payments may also negatively impact payments from Medicaid programs or commercial third-party payors and other payors.

In addition, from time to time, state legislatures consider measures to reform healthcare programs and coverage within their respective states. Because of economic conditions and other factors, a number of states are experiencing budget problems and have adopted or are considering legislation designed to reduce their Medicaid expenditures, including enrolling Medicaid recipients in managed care programs, reducing the number of Medicaid beneficiaries by implementing more stringent eligibility requirements and imposing additional taxes on hospitals to help finance or expand states’ Medicaid systems. The states in which we operate have decreased funding for healthcare programs or made other structural changes resulting in a reduction in Medicaid hospital rates in recent years. Additional Medicaid spending cuts may be implemented in the future in the states in which we operate, including reductions in supplemental Medicaid reimbursement programs.

Our Texas hospitals participate in private supplemental Medicaid reimbursement programs that are structured to expand the community safety net by providing indigent healthcare services and result in additional revenues for participating hospitals. Although CMS approved a Medicaid waiver that allows Texas to continue receiving supplemental Medicaid reimbursement while expanding its managed Medicaid program, we cannot predict whether the Texas private supplemental Medicaid reimbursement programs will continue or guarantee that revenues recognized from the programs will not decrease. Beginning in 2014, the Health Reform Law provides for significant expansion of the Medicaid program, but the Department may not penalize states that do not implement the Medicaid expansion provisions with the loss of existing federal Medicaid funding. Thus, states may opt not to implement the expansion. We believe that hospital operating margins across the country, including ours, have been and may continue to be under pressure because of limited pricing flexibility and growth in operating expenses in excess of the increase in payments under Medicare and other governmental programs. Current or future healthcare reform efforts, additional changes in laws or regulations regarding government health programs, changes to structure and reimbursement rates of governmental health programs or other changes in the administration of government health programs could have a material, adverse effect on our financial position and results of operations.

We Are Unable To Predict With Certianty The Impact Of The Health Reform Law, Which Represents Significant Change To The Healthcare Industry.

        The Health Reform Law represents significant change across the healthcare industry. The Health Reform Law is expected to decrease the number of uninsured individuals by expanding coverage to additional individuals through a combination of public program expansion and private sector health insurance reforms. The Health Reform Law expands eligibility under existing Medicaid programs and subsidizes states that create non-Medicaid plans for certain residents that do not qualify for Medicaid. States may opt not to implement the expansion. A number of state governors and legislatures, including Texas and Louisiana, have chosen not to participate in the expanded Medicaid program at this time, however these states could choose to implement the expansion at a later date. Further, the Health Reform Law requires states to establish or participate in health insurance exchanges or default to a federally-

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operated Exchange to facilitate the purchase of health insurance by individuals and small businesses. Through the “individual mandate,” the Health Reform Law imposes financial penalties on individuals who fail to carry insurance coverage. However, the federal online Exchange has experienced significant technical issues that have negatively impacted the ability of individuals to enroll in Medicaid and to purchase health insurance. These technical issues, especially if not corrected in a timely manner, could lead to the federal government delaying the individual mandate tax penalties past the current March 31, 2014 deadline, further delays in uninsured individuals obtaining health insurance and an increase in the number of individuals who choose to pay the tax mandates rather than to purchase health insurance. In addition, the employer mandate requires companies with 50 or more employees to provide health insurance or pay fines, as well as insurer reporting requirements, but it has been delayed until January 1, 2015. The Health Reform Law also establishes a number of health insurance market reforms, including a ban on lifetime limits and pre-existing condition exclusions, new benefit mandates, and increased dependent coverage. Although the expansion of health insurance coverage should increase revenues from providing care to certain previously uninsured individuals, many of these provisions of the Health Reform Law will not become effective until 2014 or later.

We believe that the Health Reform Law could adversely affect our business and results of operations due to provisions of the Health Reform Law that are intended to reduce Medicare and Medicaid healthcare costs. Among other things, in order to fund the expansion of coverage to the uninsured population, the Health Reform Law will reduce market basket updates, reduce Medicare and Medicaid DSH funding, and expand efforts to tie payments to quality and clinical integration. Any decrease in payment rates or an increase in rates that is below our increase in costs may adversely affect our results of operations. The Health Reform Law also provides additional resources to combat fraud, waste, and abuse, including expansion of the RAC program, which may result in increased costs for us to appeal or refund any alleged overpayments.

The Health Reform Law contains additional provisions intended to promote value-based purchasing. The Department has established a value-based purchasing system for hospitals that provides incentive payments to hospitals that meet or exceed certain quality performance standards, and such system is funded through decreases in the inpatient prospective payment system market basket updates to all hospitals. Further, hospitals with excess readmissions for conditions designated by the Department receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excess readmissions standard. The Health Reform Law also prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat certain healthcare-acquired conditions and other provider-preventable conditions. In addition, beginning in federal fiscal year 2015, hospitals that fall into the worst 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments.

The Health Reform Law changes how healthcare services are covered, delivered, and reimbursed. However, many variables continue to impact the effect of the Health Reform Law, including the law’s complexity, lack of complete implementing regulations and or interpretive guidance, gradual and partially delayed implementation, possible amendment, repeal or further implementation delays, further technical issues with the federal government’s website, uncertainty regarding the success of Exchanges enrolling uninsured individuals, possible reductions in funding by Congress and future reductions in Medicare and Medicaid reimbursement, how individuals and businesses will respond to the new choices and obligations under the law as well as the uncertainty as to the extent to which states will choose to participate in the expanded Medicaid program. Because of these many variables, we are unable to predict with certainty the net effect on our operations of the expected increases in insured individuals using our facilities, the reductions in government healthcare spending, and numerous other provisions in the Health Reform Law that may affect us. We are unable to predict with certainty how providers, payors, employers and other market participants will respond to the various reform provisions because many provisions will not be implemented for several years under the Health Reform Law’s implementation schedule.

Our Net Revenue And Profitability Could Be Adversely Affected By The Loss Of, Or Changes In, Health Choice’s Contract With AHCCCS, A Failure To Control Medical Costs At Health Choice And Other Factors Related To Health Choice.

Effective October 1, 2013, Health Choice commenced its new contract with AHCCCS. The contract has an initial term of three years and includes two additional one-year renewal options that can be exercised at the discretion of AHCCCS. The contract is terminable without cause on 90 days written notice or for cause upon written notice if we fail to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate our contract in the event of the unavailability of state or federal funding. If our contract with AHCCCS is terminated, our financial condition, cash flows and results of operations would be adversely affected. The new contract allows Health Choice to serve Medicaid members in the following Arizona counties: Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal. For the years ended September 30, 2013, 2012 and 2011, we derived 21.2%, 22.1% and 30.2%, respectively, of our consolidated net revenue from our contract with AHCCCS.

In response to state budgetary issues in Arizona, AHCCCS has taken steps to control its costs, including cuts in provider reimbursement and capitation premiums, targeted reductions in Medicaid eligible beneficiaries, imposition of a tiered profit sharing plan and the implementation of a risk-based or severity-adjusted payment methodology for all health plans. Capitation rates for each health plan and geographic service area are adjusted annually based on the severity of treatment episodes experienced by each plan’s membership compared to the average over a specified 12 month period. Adjustments are calculated using diagnosis codes and procedural information from medical and pharmacy claims data, in addition to member demographic information. Capitation rates are risk adjusted prospectively before the start of each contract year, and are not adjusted retroactively. Additionally, effective October 1,

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2011, AHCCCS has implemented a tiered profit sharing plan, which is administered through an annual reconciliation process with participating managed Medicaid health plans and will effectively limit our net profit margins. If AHCCCS continues to reduce capitation premium rates, implements further eligibility restrictions or makes further alterations to the payment structure of its contracts, our results of operations and cash flows may be adversely affected.

While Health Choice’s enrollment continued to decline during the year ended September 30. 2013, the rate of decline has moderated and, with the award of a new contract covering certain new service areas and an altered competitive landscape following the state’s contract awards, we anticipate enrollment growth in our fiscal year 2014. Additionally, on June 17, 2013, the governor of Arizona signed into law the expansion of its Medicaid program under the Health Reform Law, which includes 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 may result in the addition of approximately 370,000 people to its Medicaid rolls over the next few years. The law may face opposition from groups that are considering lawsuits to challenge the passage of the law. The law is scheduled to go into effect January 1, 2014. If additional changes to the Arizona Medicaid program are implemented in the future, our revenue and earnings could be significantly impacted.

AHCCCS, the state Medicaid agency in Utah, and CMS set the capitated rates we receive at Health Choice which, in turn, subcontracts with physicians, hospitals and other healthcare providers to provide services to its enrollees. If we fail to effectively manage healthcare costs, these costs may exceed the payments we receive. Historically, our medical claims expense as a percentage of premium revenue has fluctuated. Our medical loss ratio for the years ended September 30, 2013, 2012 and 2011, was 84.1%, 83.1% and 84.6%, respectively. Relatively small changes in these medical loss ratios can create significant changes in the profitability of Health Choice. Many factors can cause actual healthcare costs to exceed the capitated rates we receive, including:

• our ability to contract with cost-effective healthcare providers;

• the increased cost of individual healthcare services;

• the type and number of individual healthcare services delivered; and

• the occurrence of catastrophes, epidemics or other unforeseen occurrences.

Although we have been able to manage medical claims expense through a variety of initiatives, we may not be able to continue to effectively manage medical claims expense in the future. Additionally, any future growth in members increases the risk associated with effectively managing health claims expense. If our medical claims expense increases, our financial condition or results of operations may be adversely affected.

Effective October 1, 2013, Health Choice began offering insurance plans on the Arizona state insurance exchange (“AZ Exchange”). The profitability of our insurance plans offered on the AZ Exchange is directly linked with the ability of the AZ Exchange to attract a sufficient cross-section of risk membership to balance high and low cost membership. If the AZ Exchange is not perceived as attractive to healthier low cost consumers, the AZ Exchange could become susceptible to adverse selection. The Health Reform Law includes provisions to mitigate the risk of adverse selection; however, there can be no assurance that these provisions will be effective. The effectiveness of these provisions will not be known until certain provisions of the Health Reform Law are fully implemented. If our profitability decreases as a result of adverse selection, our financial condition or results of operations may be adversely affected.

If We Continue To Experience A Shift in Payor Mix From Commercial And Managed Care Payors To Self-Pay And Medicaid, Our Revenue And Results Of Operations Could Be Adversely Affected.

We have experienced a shift in our patient volumes and revenue from commercial and managed care payors to self-pay and Medicaid, including managed Medicaid. This resulted in pressure on pricing and operating margins from expending the same amount of resources to provide patient care, but for less reimbursement. This shift was reflective of continued high unemployment and the resulting increases in states’ Medicaid rolls and the uninsured population. In addition, certain states such as Arizona have implemented measures to reduce enrollment in Medicaid which, in turn, increases the number of uninsured patients seeking care at our hospitals. Given the high rate of unemployment and its impact on the economy, particularly in the markets we serve, we expect the elevated levels in our self-pay payor mix to continue until the U.S. economy experiences an economic recovery that includes job growth and a meaningful decline in unemployment. In addition, implementation of the Health Reform Law could result in some patients terminating their current insurance plans in favor of lower cost Medicaid plans or other insurance coverage with lower reimbursement levels.

        We believe the decline in managed care volume and revenue mix is not only indicative of the depressed labor market, but also utilization behavior of the insured population resulting from higher deductible and co-insurance plans implemented by employers, which, in turn, has resulted in the deferral of elective and non-emergent procedures. We may be adversely affected by the growth in patient responsibility accounts as a result of increased adoption of plan structures, including health savings accounts, that shift greater responsibility for care to individuals through greater exclusions and higher co-payment and deductible amounts. Patient responsibility accounts may continue to increase even with expanded health plan coverage as a result of increases in plan exclusions and co-payment and deductible amounts. If we continue to experience a shift in patient volumes, our revenue and results of operations may be adversely affected.

If We Are Unable To Retain And Negotiate Reasonable Contracts With Managed Care Plans, Our Net Revenue May Be Reduced.

Our ability to obtain reasonable contracts with health maintenance organizations, preferred provider organizations and other managed care plans significantly affects the revenue and operating results of our hospitals. Revenue derived from health maintenance organizations, preferred provider organizations and other managed care plans accounted for 37.9%, 38.1% and 41.1% of our hospitals’ net patient revenue for the years ended September 30, 2013, 2012 and 2011, respectively. Our hospitals have over 400

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managed care contracts with no one commercial payor representing more than 10.0% of our net patient revenue. In most cases, we negotiate our managed care contracts annually as they come up for renewal at various times during the year. Further, many of these contracts are terminable by either party on relatively short notice. Our future success will depend, in part, on our ability to retain and renew our managed care contracts and enter into new managed care contracts on terms favorable to us. Other healthcare providers, including some with integrated health systems, provider networks, greater geographic coverage or a wider range of services, may impact our ability to enter into managed care contracts or negotiate increases in our reimbursement and other favorable terms and conditions. For example, some of our competitors may negotiate exclusivity provisions with managed care plans or otherwise restrict the ability of managed care companies to contract with us. In one region in which we operate, the largest healthcare provider organization controls one of the largest payor organizations and operates it primarily as a closed network. The patients enrolled in this integrated health system are largely unavailable to us. In addition, consolidation among managed care companies may reduce our ability to negotiate favorable contracts with such payors. It is not clear what impact, if any, the increased obligations on managed care and other payors imposed by the Health Reform Law will have on our ability to negotiate reimbursement increases. If we are unable to retain and negotiate favorable contracts with managed care plans or experience reductions in payment increases or amounts received from non-governmental payors, our revenues may be reduced.

If We Experience Further Growth In Volume And Revenue Related To Uncompensated Care, Our Financial Condition Or Results Of Operations Could Be Adversely Affected.

Like others in the hospital industry, we continue to experience high levels of uncompensated care, including charity care and bad debts. These elevated levels are driven by the number of uninsured and under-insured patients seeking care at our hospitals, the increased acuity levels at which these patients are presenting for treatment, primarily resulting from economic pressures and their related decisions to defer care, increasing healthcare costs and other factors beyond our control, such as increases in the amount of co-payments and deductibles as employers continue to pass more of these costs on to their employees. In addition, as a result of high unemployment and its continued impact on the economy, we believe that our hospitals may continue to experience high levels of or possibly growth in bad debts and charity care.

While the Health Reform Law is expected to decrease over time the number of uninsured individuals through expanding Medicaid and incentivizing employers to offer, and requiring individuals to carry, health insurance or be subject to penalties, these provisions generally will not become effective until January 1, 2014. The federal Exchange has experienced significant technical issues that have negatively impacted the ability of individuals to enroll in Medicaid and to purchase health insurance. Further, the extent to which individual states will participate in the Health Reform Law’s expanded Medicaid program is unclear since the the federal government cannot eliminate or reduce existing federal Medicaid funding if states opt out of the law’s Medicaid expansion. A number of state governors and legislatures, including Texas and Louisiana, have chosen not to participate in the expanded Medicaid program at this time; however, these states could choose to implement the expansion at a later date.

It is difficult to predict with certainty the full impact of the Health Reform Law due to the law’s complexity, lack of implementing regulations or interpretive guidance, gradual and partially delayed implementation, possible amendment of the law, repeal or further implementation delays, continued technical issues with the federal government’s website, uncertainty regarding the success of Exchanges enrolling uninsured individuals, possible reductions in funding by Congress, future reductions in Medicare and Medicaid reimbursement and uncertainty surrounding state participation in the law’s expanded Medicaid program, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them under the law. We may continue to provide charity care to those who choose not to comply with the insurance requirements and undocumented aliens who are not permitted to enroll in a health insurance exchange or government healthcare programs.

Although we continue to seek ways of improving point of service collection efforts and implementing appropriate payment plans with our patients, if we continue to experience further growth in self-pay volume and revenue, including increased acuity levels and continued increases in co-payments and deductibles for insured patients, our results of operations could be adversely affected. Further, our ability to improve collections from self-pay patients may be limited by regulatory and investigatory initiatives, including private lawsuits directed at hospital charges and collection practices for uninsured and underinsured patients.

Industry Trends Towards Value-Based Purchasing May Negatively Impact Our Revenues.

There is a trend in the healthcare industry towards value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs, including Medicare and Medicaid, currently require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events (also called “never events”). Many large commercial payers currently require hospitals to report quality data, and several commercial payers do not reimburse hospitals for certain preventable adverse events. The Health Reform Law contains a number of provisions intended to promote value-based purchasing under Medicare and Medicaid. We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. While we believe we are adopting our business strategies to compete in a value-based reimbursement environment, we are unable at this time to predict how this trend will affect our results of operations, and it could negatively impact our revenues.

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If Controls Imposed By Medicare And Third-Party Payers To Reduce Admissions And Length Of Stay Affect Our Inpatient Volume, Our Financial Condition Or Results Of Operations Could Be Adversely Affected

Controls imposed by Medicare and commercial third-party payers designed to reduce admissions and lengths of stay, commonly referred to as “utilization reviews,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and course of treatment of a patient by managed care plans. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payer-required preadmission authorization and utilization review and by payer pressures to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Efforts to impose more stringent cost controls and reductions are expected to continue. For example, the Health Reform Law potentially expands the use of prepayment review by Medicare contractors by eliminating statutory restrictions on their use. Furthermore, the modified CMS policy on how MACs review inpatient hospital admissions for payment purposes could potentially reduce inpatient volume for patient stays spanning 0-1 midnight.

There has been increased scrutiny of a hospital’s “Medicare Observation Rate” from government enforcement agencies and industry observers. A low rate may raise suspicions that a hospital is inappropriately admitting patients that could be cared for in an observation setting. The industry may be subject to increased scrutiny and litigation risk, including government investigations and qui tam suits, related to inpatient admission decisions and the Medicare Observation Rate. In addition, CMS has established what is referred to as the “two midnight rule” (“TMR”) to guide practitioners admitting patients and contractors conducting payment reviews on when it is appropriate to admit individuals as hospital inpatients. Under the TMR, Medicare beneficiaries are only to be admitted as inpatients when there is a reasonable expectation that the care is medically necessary and expectation that the care will cross two midnights absent unusual circumstances. Compliance with TMR will become subject to audits beginning April 1, 2014, but CMS has advised that reviews will occur for admissions beginning October 1, 2013 at selected facilities to provide educational outreach on the TMR.

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If We Are Unable To Attract And Retain Quality Medical Professionals, Our Financial Condition Or Results Of Operations Could Be Adversely Affected.

The success of our hospitals depends on the following factors, among others:

• the number and quality of the physicians on the medical staffs of our hospitals;

• the referral patterns of those physicians; and

• our maintenance of good relations with those physicians.

Our efforts to attract and retain physicians are affected by our managed care contracting relationships, national shortages in some specialties, the adequacy of our support personnel, the condition of our facilities and medical equipment, the availability of suitable medical office space and federal and state laws and regulations prohibiting financial relationships that may have the effect of inducing patient referrals.

In an effort to meet community needs in certain markets in which we operate, we have implemented a strategy to employ physicians, which has created an expansion of our employed physician base. The execution of a physician employment strategy includes increased salary costs, potential malpractice insurance coverage costs, risks of unsuccessful physician integration and difficulties associated with physician practice management. While we believe this strategy is consistent with industry trends, we cannot be assured of the long-term success of such a strategy.

We also compete with other healthcare providers in recruiting and retaining qualified management and staff to run the day-to-day operations of our hospitals, including nurses, technicians and other non-physician healthcare professionals. Our failure to recruit and retain such management personnel and skilled professionals could adversely affect our financial condition and results of operations.

Our Hospitals Face Competition For Staffing Especially As A Result Of The Shortage Of Nurses, Which Has In The Past And May In The Future Increase Our Labor Costs And Materially Reduce Our Profitability.

We compete with other healthcare providers in recruiting and retaining qualified management and staff personnel responsible for the day-to-day operations of each of our hospitals, including most significantly nurses and other non-physician healthcare professionals. While the national nursing shortage has abated somewhat as a result of the weakened U.S. economy, certain portions of our markets have limited available nursing resources. In the healthcare industry generally, including in our markets, the shortage of nurses and other medical support personnel has become a significant operating issue. This shortage has caused us in the past and may require us in the future to increase wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary personnel. On several occasions in the past, we voluntarily raised, and expect to raise in the future, wages for our nurses and other medical support personnel.

If our labor costs continue to increase, we may not be able to raise our payer reimbursement levels to offset these increased costs. Because substantially all of our net patient revenues consist of payments based on fixed or negotiated rates, our ability to pass along increased labor costs is materially constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control our labor costs, could have a material adverse effect on our profitability.

Our Hospitals Face Competition From Other Hospitals And Healthcare Providers That Could Impact Patient Volume.

In general, the hospital industry is highly competitive. Our hospitals face competition for patients from other hospitals in our markets, large vertically integrated providers, large tertiary care centers and outpatient service providers that provide similar services to those provided by our hospitals. All of our facilities are located in geographic areas in which at least one other hospital provides services comparable to those offered by our hospitals. Some of the hospitals that compete with ours are physician-owned or owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions and can finance capital expenditures and operations on a tax-exempt basis. In addition, the number of freestanding specialty hospitals, outpatient surgery centers, emergency departments, urgent care centers and outpatient diagnostic centers has increased significantly in the areas in which we operate. We also face competition from competitors that are implementing physician alignment strategies, such as employing physicians, acquiring physician practice groups and participating in ACOs or other clinical integration models. Some of our competitors also have greater geographic coverage, offer a wider range of services or invest more capital or other resources than we do. In addition, competitors that operate non-hospital facilities or hospitals not owned by physicians are not subject to the same federal restrictions on expansion as our physician-owned hospitals. If our competitors are unable to achieve greater geographic coverage, improve access and convenience to physicians and patients, recruit physicians to provide competing services at their facilities, expand or improve their services or obtain more favorable managed care contracts, we may experience a decline in patient volume.

CMS publicizes performance data relating to quality measures and data on patient satisfaction surveys that hospitals submit in connection with their Medicare reimbursement. Federal law provides for the future expansion of the number of quality measures that must be reported. Further, the Health Reform Law requires all hospitals annually to establish, update and make public a list of their standard charges for items and services. If any of our hospitals should achieve poor results (or results that are lower than our

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competitors) on these quality criteria, or if our standard charges are higher than those published by our competitors, our patient volumes could decline. In the future, the required reporting of additional quality measures and other trends toward clinical transparency and value-based purchasing of healthcare services may have an adverse impact on our competitive position and patient volume.

If We Fail To Continually Enhance Our Hospitals With The Most Recent Technological Advances In Diagnostic And Surgical Equipment, Our Ability To Maintain And Expand Our Markets May Be Adversely Affected.

Technological advances with respect to CTs, MRIs and PET equipment, as well as other equipment used in our facilities, are continually evolving. In an effort to compete with other healthcare providers, we must constantly evaluate our equipment needs and upgrade equipment as a result of technological improvements. If we fail to remain current with the technological advancements of the medical community, our volumes and revenue may be negatively impacted.

If We Fail To Comply With Extensive Laws And Government Regulations, We Could Suffer Penalties, Be Required To Alter Arrangements With Investors In Our Hospitals Or Be Required To Make Significant Changes To Our Operations.

The healthcare industry, including our company, is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

• billing and coding for services and proper handling of overpayments;

• classification of level of care provided, including proper classification of inpatient admissions, observation status and outpatient care;

• relationships with physicians and other referral sources;

• necessity and adequacy of medical care;

• quality of medical equipment and services;

• qualifications of medical and support personnel;

• confidentiality, maintenance, data breach, identity theft and security issues associated with health related and personal information and medical records;

• screening, stabilization and transfer of individuals who have emergency medical conditions;

• licensure and certification;

• hospital rate or budget review;

• preparation and filing of cost reports;

• activities regarding competitors;

• operating policies and procedures;

• addition of facilities and services;

• provider-based reimbursement, including complying with requirements allowing multiple locations of a hospital to be billed under the hospital’s Medicare provider number;

• incentive payments for the adoption and meaningful use of certified EHR technology; and

• disclosures to patients, including disclosure of any physician ownership in a hospital.

Because many of these laws and regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. For that reason and because these laws and regulations are so complex, hospital companies face a risk of inadvertent violations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses.

If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including:

• criminal penalties;

• civil penalties, including the loss of our licenses to operate one or more of our facilities; and

• exclusion of one or more of our facilities from participation in the Medicare, Medicaid and other federal and state healthcare programs.

The Health Reform Law Imposes Significant Restrictions On Hospitals That Have Physician Owners, Including Our Hospitals That Have Physician Owners.

Some of our hospitals have physician ownership pursuant to an exception to the Stark Law known as the “whole hospital exception.” However, the Health Reform Law significantly narrows the Stark Law’s whole hospital exception to apply only to hospitals that had physician ownership in place as of March 23, 2010, and a Medicare provider agreement effective as of December 31, 2010. On November 2, 2010, CMS issued a final rule implementing certain provisions of the amended whole hospital exception. While the amended whole hospital exception grandfathers certain existing physician-owned hospitals, including ours, it

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generally prohibits a grandfathered hospital from increasing its percentage of physician ownership beyond the aggregate level that was in place as of March 23, 2010. Subject to limited exceptions, a grandfathered physician-owned hospital may not increase its aggregate number of operating rooms, procedure rooms, and beds for which it is licensed beyond the number as of March 23, 2010. A grandfathered physician-owned hospital must comply with a number of additional requirements, including not conditioning any physician ownership directly or indirectly on the owner making or influencing referrals, not offering any ownership interests to physician owners on more favorable terms than those offered to non-physicians and not providing any guarantee to physician owners to purchase other business interests related to the hospital. Further, a grandfathered hospital cannot have been converted from an ASC to a hospital.

The whole hospital exception, as amended, also contains additional disclosure requirements. For example, a grandfathered physician-owned hospital is required to submit an annual report to the Department listing each investor in the hospital, including all physician owners, by December 1, 2013 and annually thereafter. In addition, grandfathered physician-owned hospitals must have procedures in place that require each referring physician owner to disclose to patients, with enough notice for the patient to make a meaningful decision regarding receipt of care, the physician’s ownership interest and, if applicable, any ownership interest held by the treating physician. A grandfathered physician-owned hospital also must disclose on its website and in any public advertising the fact that it has physician ownership. The Health Reform Law requires the Department to audit grandfathered physician-owned hospitals’ compliance with these requirements.

On September 25, 2013, we voluntarily self-disclosed for resolution through the Self-Referral Disclosure Protocol established by CMS non-compliance by ten of our affiliated hospitals with a certain element of an exception of the Stark Law. Provisions of the Affordable Care Act that became effective on September 23, 2011 require, as an element of the Stark Law’s “whole-hospital” exception, that hospitals having physician ownership disclose such ownership on their public websites and in public advertising. The self-disclosure states that, on August 12, 2013, we discovered that our affiliated hospitals partially owned by physicians did not consistently make such disclosures. The self-disclosure also states that, on August 13, 2013, the hospitals added the disclosures to those public websites that did not previously have them and began to include the disclosures in new public advertising. The self-disclosure explains that, as a result of the absence of the website and advertising disclosures, the referrals of direct and indirect physician owners (and physicians who are immediate family members of direct and indirect owners) to the physician-owned hospitals of Medicare beneficiaries did not consistently qualify for the Stark Law’s “whole-hospital” exception from September 23, 2011 through August 13, 2013. On October 21, 2013, we submitted a supplement to the self-disclosure, reporting Medicare payments to the hospitals for services resulting from referrals affected by the non-compliance and the hospitals’ profit distributions to physicians (and known immediate family members of physicians) with respect to their ownership interests in the hospitals during the same period. CMS has made no commitments, as a general matter or in this case, regarding the timing or substance of resolution of self-disclosed Stark Law noncompliance through the voluntary CMS Self-Referral Disclosure Protocol. We express no opinion as to the outcome of this matter, other than to state that, at this time, any repayment obligation to be determined by CMS is unknown and not currently estimable, and that the matter could take up to one year or longer to resolve.

In light of Health Care Reform Law’s restrictions on the whole hospital exception and limited interpretive guidance, it may be difficult for us to determine how the exception will apply to specific situations, including the ones discussed above, that may arise with our hospitals. If any of our hospitals, including the ones discussed above, fail to comply with the amended whole hospital exception, those hospitals could be found to be in violation of the Stark Law, and we could incur significant financial or other penalties.

Providers In The Healthcare Industry Have Been The Subject Of Federal And State Investigations, And We May Become Subject To Additional Investigations In The Future That Could Result In Significant Liabilities Or Penalties To Us.

Both federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the healthcare area. As a result, there are numerous ongoing investigations of hospital companies, as well as their executives and managers. The OIG and the U.S. Department of Justice (“DOJ”) have, from time to time, established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Further, under the FCA, private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions.

Federal and state investigations relate to a wide variety of routine healthcare operations including:

• cost reporting and billing practices;

• financial arrangements with referral sources;

• physician recruitment activities;

• physician joint ventures; and

• hospital charges and collection practices for self-pay patients.

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We engage in many of these and other activities that could be the subject of governmental investigations or inquiries from time to time. For example, we have significant Medicare and Medicaid billings, we have numerous financial arrangements with physicians who are referral sources to our hospitals and we have nine hospitals as of September 30, 2013, that have physician investors. In addition, our executives and managers, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, may be included in governmental investigations or named as defendants in private litigation. Any additional investigations of us, our executives or our managers could result in significant liabilities or penalties to us, as well as adverse publicity.

In addition, governmental agencies and their agents, such as MACs, fiscal intermediaries and carriers, as well as the OIG, CMS and state Medicaid programs, conduct audits of our healthcare operations. Private payors may conduct similar audits, and we also perform internal audits and monitoring. Depending on the nature of the conduct found in such audits and whether the underlying conduct could be considered systemic, the resolution of these audits could have a material, adverse effect on our financial position, results of operations and cash flows.

CMS has implemented a nationwide RAC program pursuant to which it engages private contractors to conduct post-payment reviews to detect and correct improper payments in the Medicare program. The contractors receive a contingency fee based on the amount of corrected, improper payments. The Health Reform Law expanded the RAC program’s scope to include other Medicare programs, including managed Medicare, effective December 31, 2010. In addition, CMS has implemented a pre-payment demonstration project that allows RACs to review claims before they are paid to ensure that the provider complied with all Medicare payment rules. Under the demonstration project, RACs conduct prepayment reviews on certain types of claims that historically result in high rates of improper payments, beginning with those involving short stay inpatient hospital services. These reviews focus on seven states (Florida, California, Michigan, Texas, New York, Louisiana and Illinois) with high populations of fraud and error-prone providers and four states (Pennsylvania, Ohio, North Carolina, and Missouri) with high claims volumes of short inpatient hospital stays. The demonstration project began on August 27, 2012 and runs for a three year period.

In addition, through DEFRA, Congress has expanded the federal government’s involvement in fighting fraud, waste and abuse in the Medicaid program by creating the Medicaid Integrity Program. Under this program, CMS engages private contractors, referred to as MICs, to perform post-payment audits of Medicaid claims and identify overpayments. In addition, the Health Reform Law expanded the RAC program’s scope to include Medicaid claims. In addition to MICs and RACs, several other contractors and state Medicaid agencies have increased their review activities.

Any such audit or investigation could have a material adverse effect on the results of our operations.

We Have Entered Into Sale-Leaseback Arrangements With A Real Estate Investment Trust For Certain Of Our Hospitals’ Real Estate And the Related Lease Terms And Obligations Expose Us To Increased Risk Of Loss Of Property Or Other Unfavorable Leasing Implications, Which Could Materially And Adversely Impact Our Business, Financial Condition And Results Of Operations.

Our leases generally provide for renewal or extension options. These options generally are based upon prescribed formulas but, in certain cases, may be at fair market value. We expect to renew or extend our leases in the normal course of business; however, there can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension. Furthermore, the terms of any such options that are based upon fair market value are inherently uncertain and could be unacceptable or unfavorable to us depending upon the circumstances at the time of exercise.

In addition, our leases can be subject to early termination if we violate certain provisions or covenants contained in the leases. Some of our hospital leases are leased from the same landlord and contain cross-default provisions that would allow that landlord to terminate all leases with us if we violate certain defined provisions related to a single lease with them.

If we are not able to renew or extend our existing leases, or purchase the hospitals subject to such leases, at or prior to the end of the existing lease terms, if the terms of such options are unfavorable or unacceptable to us, or if any landlord terminates a lease because of our breach of the lease, our business, financial condition and results of operation could be materially and adversely affected.

A Failure Of Our Information Systems Would Adversely Affect Our Ability To Properly Manage Our Operations.

We rely on our advanced information systems and our ability to successfully use these systems in our operations. These systems are essential to the following areas of our business operations, among others:

• patient accounting, including billing and collection of net revenue;

• financial, accounting, reporting and payroll;

• coding and compliance;

• laboratory, radiology and pharmacy systems;

• materials and asset management;

• negotiating, pricing and administering managed care contracts; and

• monitoring quality of care and collecting data on quality measures necessary for full Medicare payment updates.

If we are unable to use these systems effectively or if vendors failed to maintain these information systems, we may experience delays in collection of net revenue and may not be able to properly manage our operations or oversee compliance with laws or regulations.

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We Are Subject To Risks Associated With Outsourcing Functions To Third Parties.

To improve operating margins, productivity and efficiency, we outsource selected nonclinical business functions to third parties. We take steps to monitor and regulate the performance of independent third parties to whom we have delegated selected functions which may include revenue cycle management, patient access, billing, cash collections, payment compliance and other support services.

Arrangements with third party service providers may make our operations vulnerable if vendors fail to satisfy their obligations to us as a result of their performance, changes in their own operations, financial condition, or other matters outside of our control. Our use of third party providers may also require changes to our existing operations and the adoption of new procedures and processes for retaining and managing these providers, as well as redistributing responsibilities as needed, in order to realize the potential productivity and operational efficiencies. Effective management, development and implementation of our outsourcing strategies are important to our business and strategy. If there are delays or difficulties in enhancing business processes or our third party providers do not perform as anticipated, we may not fully realize on a timely basis the anticipated economic and other benefits of the outsourcing projects or other relationships we enter into with key vendors, which could result in substantial costs, divert management’s attention from other strategic activities, negatively affect employee morale or create other operational or financial problems for us.

Terminating or transitioning arrangements with key vendors could result in additional costs and a risk of operational delays, potential errors and possible control issues as a result of the termination or during the transition phase.

If We Fail to Effectively and Timely Implement Electronic Health Record Systems And Transition To The ICD-10 Coding System, Our Operations Could Be Adversely Affected.

As required by ARRA, HHS has adopted an incentive payment program for eligible hospitals and health care professionals that implement certified EHR technology and use it consistently with “meaningful use” requirements. If our hospitals and employed or contracted professionals do not meet the Medicare or Medicaid EHR incentive program requirements, we will not receive Medicare or Medicaid incentive payments to offset some of the costs of implementing the EHR systems. Further, beginning in federal fiscal year 2015, eligible hospitals and physicians that fail to demonstrate meaningful use of certified EHR technology will be subject to reduced payments from Medicare. Failure to implement EHR systems effectively and in a timely manner could have a material adverse effect on our financial position and results of operations.

Health plans and providers, including our hospitals, are required to transition to the new ICD-10 coding system, which greatly expands the number and detail of billing codes used for inpatient claims. Use of the ICD-10 system is required beginning October 1, 2014 as a result of an extension granted by CMS. Transition to the new ICD-10 system requires significant investment in coding technology and software as well as the training of staff involved in the coding and billing process. In addition to these upfront costs of transition to ICD-10, it is possible that our hospitals could experience disruption or delays in payment due to technical or coding errors or other implementation issues involving our systems or the systems and implementation efforts of health plans and their business partners. Further, the transition to the more detailed ICD-10 coding system could result in decreased reimbursement if the use of ICD-10 codes result in conditions being reclassified to MS-DRGs or commercial payer or payment groupings with lower levels of reimbursement than assigned under the previous system.

Regional Economic Downturns Or Other Material Changes In The Economic Condition Could Cause Our Overall Business Results To Suffer.

The U.S. economy remains volatile. Instability in consumer spending and high unemployment rates continue to pressure many industries. During times of economic volatility, governmental entities often experience budgetary constraints as a result of increased costs and lower than expected tax collections. These budgetary constraints have resulted in decreased spending for health and human service programs, including Medicare, Medicaid and similar programs, which represent significant payor sources for our hospitals. Many states, including states in which we operate, have decreased funding for state healthcare programs or made other structural changes resulting in a reduction in Medicaid spending. Additional Medicaid spending cuts may be implemented in the future in the states in which we operate. Other risks we face from general economic volatility include patient decisions to postpone or cancel elective and non-emergent healthcare procedures, increases in the uninsured population and further difficulties in our collection of patient co-payment and deductible receivables.

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Our 16 acute care hospital facilities and one behavioral health hospital facility are located in various regions across the country. In addition, Health Choice operates primarily in Phoenix, Arizona. For the fiscal year ended September 30, 2013, our net revenue was generated in the following geographic areas:

Salt Lake City, Utah (excluding Health Choice)	20.0	%
Phoenix, Arizona (excluding Health Choice)	14.2	%
Five cities in Texas, including Houston and San Antonio	31.0	%
Health Choice	23.7	%
Other	11.1	%

The foregoing table does not incorporate net revenues generated from our former Florida operations. See “Item 1. – Business – Company Overview” for more information regarding the disposition of our Florida operations on October 1, 2013. Any material change in the current demographic, economic, competitive or regulatory conditions in any of these regions could adversely affect our overall business results because of the significance of our operations in each of these regions to our overall operating performance. Moreover, our business is not as diversified as some competing multi-facility healthcare companies and, therefore, is subject to greater market risks.

We May Be Subject To Liabilities Because Of Claims Brought Against Our Facilities.

Plaintiffs frequently bring actions against hospitals and other healthcare providers, alleging malpractice, product liability or other legal theories. Many of these actions involve large claims and significant defense costs. For example, certain other hospital companies have been subject to class-action claims in connection with their billing practices relating to uninsured patients or lawsuits alleging inappropriate classification of claims, for billing purposes, between observation and inpatient status.

We maintain professional malpractice liability insurance and general liability insurance in amounts we believe are sufficient to cover claims arising out of the operations of our facilities. Some of the claims could exceed the scope of the coverage in effect or coverage of particular claims or damages could be denied.

The volatility of professional liability insurance and, in some cases, the lack of availability of such insurance coverage for physicians with privileges at our hospitals increases our risk of vicarious liability in cases where both our hospital and the uninsured or underinsured physician are named as co-defendants. As a result, we are subject to greater self-insured risk and may be required to fund claims out of our operating cash flow to a greater extent than currently required. We cannot assure you that we will be able to continue to obtain insurance coverage in the future or that such insurance coverage, if it is available, will be available on acceptable terms.

As of September 30, 2013, our self-insured retention for professional and general liability coverage is $5.0 million per claim, with an excess aggregate limit of $55.0 million, and maximum coverage under our insurance policies is $75.0 million.

In addition, physicians’ professional liability insurance costs in certain markets have dramatically increased to the point where some physicians are either choosing to retire early or leave those markets. If physician professional liability insurance costs continue to escalate in markets in which we operate, some physicians may choose not to practice at our facilities, which could reduce our patient volumes and revenues. Our hospitals may also incur a greater percentage of the amounts paid to claimants if physicians are unable to obtain adequate malpractice coverage since we are often sued in the same malpractice suits brought against physicians on our medical staffs who are not employed by us.

We have employed a significant number of additional physicians from our acquisitions. We expect to continue to employ additional physicians in the future. A significant increase in employed physicians could significantly increase our professional and general liability risks and related costs in future periods.

We May Be Unable To Invest The Proceeds We Received From The Sale-Leaseback Or Other Disposition Of Assets Promptly, Effectively Or On Acceptable Terms To Our Investors. In Addition, We Will Have Broad Discretion As To How To Utilize Such Proceeds, And We May Not Apply Such Proceeds In A Manner That Increases Our Value.

In connection with the disposition of our Florida operations and the sale-leaseback of three of our hospital properties, we received aggregate proceeds of approximately $427 million. Our senior credit agreement requires us to prepay borrowings under the senior secure term loan facility with net cash proceeds of certain asset dispositions unless such proceeds are reinvested within 12 months in existing facilities or 24 months in a greenfield construction project (36 months if there is a binding commitment for such investment within such 12 or 24 month periods). Our indenture similarly requires us to make prepayments with net cash proceeds of certain asset dispositions unless such proceeds have been either reinvested or used to prepay our obligations under the senior secure term loan facility within 365 days (an additional 180 days exists if there is a binding commitment for such investment). See “Item 7.– Management’s Discussion and Analysis – Liquidity and Capital Resources – Capital Resources.”

Delays in investing these or other similar proceeds may, in addition to requiring prepayments as described above, delay and/or impair our growth, revenues and cash flows. We cannot assure you that we will be able to identify any acquisition or development opportunities or other investments that meet our investment objectives or that any investment that we make will produce a positive return. In addition, we may be unable to invest such proceeds on acceptable terms to our investors within the prepayment grace period or at all, which could harm our financial condition and operating results.

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Moreover, our senior credit agreement and indenture allow us flexibility in investing the net proceeds of this disposition, and we may use such proceeds in ways which are not contemplated at the time of this Report. See “Item 7.– Management’s Discussion and Analysis – Liquidity and Capital Resources – Capital Expenditures.” If we do not invest or apply such proceeds in ways that enhance the Company’s value, we may fail to achieve expected financial results and our business, financial condition and result from operations could be materially and adversely impacted.

We May Be Unable To Achieve Our Acquisition And Growth Strategies And We May Have Difficulty Acquiring Non-Profit Hospitals Due To Regulatory Scrutiny.

An important element of our business strategy is expansion by acquiring hospitals and ambulatory care and other facilities in our existing markets and in new urban and suburban markets and by entering into partnerships or affiliations with other healthcare service providers. The competition to acquire these facilities is significant, including competition from healthcare companies with greater financial resources than us. There is no guarantee that we will be able to successfully integrate acquired hospitals and ambulatory care facilities, which limits our ability to complete future acquisitions.

In addition, we may not be able to acquire additional hospitals on satisfactory terms and future acquisitions may be on less than favorable terms. We may have difficulty obtaining financing, if necessary, for future acquisitions on satisfactory terms. Furthermore, we invest capital in our existing facilities to develop new services or expand or renovate our facilities in an effort to generate new, or sustain existing, revenues from our operations. We may not be able to finance these capital commitments or development programs through operating cash flows or additional debt proceeds. Additionally, many states, including some where we have hospitals and others where we may in the future attempt to acquire hospitals, have adopted legislation regarding the sale or other disposition of hospitals operated by non-profit entities. In other states that do not have specific legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste. These legislative and administrative efforts focus primarily on the appropriate valuation of the assets divested and the use of the sale proceeds by the non-profit seller. These review and approval processes can add time to the consummation of an acquisition of a non-profit hospital, and future actions on the state level could seriously delay or even prevent future acquisitions of non-profit hospitals. Furthermore, as a condition to approving an acquisition, the attorney general of the state in which the hospital is located may require us to maintain specific services, such as emergency departments, or to continue to provide specific levels of charity care, which may affect our decision to acquire or the terms upon which we acquire these hospitals.

Difficulties With The Integration Of Acquisitions May Disrupt Our Ongoing Operations.

We may, from time to time, evaluate strategic opportunities such as joint ventures and acquisitions that may be material. The process of integrating acquired hospitals or other acute care operations may require a disproportionate amount of management’s time and attention, potentially distracting management from its other day-to-day responsibilities. In addition, poor integration of acquired facilities could cause interruptions to our business activities, including those of the acquired facilities, and could result in potential loss of key employees or customers of acquired companies. As a result, we may not realize all or any of the anticipated benefits of an acquisition and we may incur significant costs related to the acquisitions or integration of these facilities. In addition, we may acquire hospitals that have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. Although we seek indemnification from prospective sellers covering these matters, we may nevertheless have material liabilities for past activities of acquired hospitals.

We Are Dependent On Key Personnel And The Loss Of One Or More Of Our Senior Management Team Or Local Management Personnel Could Have A Material Adverse Effect On Our Business.

Our business strongly depends upon the services and management experience of our senior management team. We depend on the ability of our senior management team and key employees to manage growth successfully and on our ability to attract and retain skilled employees. If any of our executive officers resign or otherwise are unable to serve, our management expertise and ability to deliver healthcare services efficiently and to effectively execute our business strategy could be diminished. If we fail to attract and retain managers at our hospitals and related facilities, our operations could be adversely effected. Moreover, we do not maintain key man life insurance policies on any of our officers.

Our Hospitals Are Subject To Potential Responsibilities And Costs Under Environmental Laws That Could Lead To Material Expenditures Or Liability.

We are subject to various federal, state and local environmental laws and regulations, including those relating to the protection of human health and the environment. We could incur substantial costs to maintain compliance with these laws and regulations. We could become the subject of future investigations, which could lead to fines or criminal penalties if we are found to be in violation of these laws and regulations. We also may be subject to requirements related to the remediation of substances that have been released into the environment at properties owned or operated by us or our predecessors or at properties where substances were sent for off-site treatment or disposal. These remediation requirements may be imposed without regard to fault, and liability for environmental remediation can be substantial.

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To our knowledge, we have not been and are not currently the subject of any investigations relating to noncompliance with environmental laws and regulations. We maintain insurance coverage for third-party liability related to the storage tanks located at our facilities in the amount of $2.0 million per claim and $15.0 million in the aggregate.

If The Fair Value Of Our Reporting Units Declines, A Material Non-Cash Charge To Earnings From An Impairment Of Our Goodwill May Result.

At September 30, 2013, we had $816.4 million of goodwill recorded in our consolidated financial statements. We expect to recover the carrying value of this goodwill through our future cash flows.

On an ongoing basis, we evaluate, based on the fair value of our reporting units, whether the carrying value of our goodwill is impaired. If the carrying value of our goodwill is impaired, we may incur a material non-cash charge to earnings.

Risk Factors Related to Capital Structure

Servicing Our Indebtedness Requires A Significant Amount of Cash. Our Ability To Generate Sufficient Cash Depends On Numerous Factors Beyond Our Control, And We May Be Unable To Generate Sufficient Cash Flow To Service Our Debt Obligations, Including Making Payments On Our 8.375% Senior Notes and Term Loans.

We have outstanding $850.0 million in aggregate principal amount of 8.375% senior notes due 2019 (the “Senior Notes”), which mature on May 15, 2019. We have also entered into our senior secured credit facilities, which include (1) amounts outstanding under our senior secured term loan of $999.5 million, maturing May 2018 and (2) a senior secured revolving credit facility of $300.0 million with a five-year maturity, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Our ability to borrow funds under our revolving credit facility is subject to the financial viability of the participating financial institutions. If any of our creditors were to suffer financial difficulties, or if the credit markets were to deteriorate, our ability to access available funds under our revolving credit facility could be limited.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowing will be available to us under our Senior Secured Credit Facilities in an amount sufficient to enable us to pay the principal, if any, and interest on our indebtedness, including the Senior Notes and term loans, or to fund our other liquidity needs. Our ability to fund these payments is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may need to refinance all or a portion of our indebtedness, including the Senior Notes and term loans, on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, on commercially reasonable terms or at all. In addition, the terms of existing or future debt agreements, including the amended and restated credit agreement governing the Senior Secured Credit Facilities and the indenture governing the Senior Notes, may restrict us from affecting any of these alternatives.

During the next twelve months, along with interest on our Senior Secured Credit Facilities, we are required to repay $10.1 million in principal under our Senior Secured Credit Facilities and $71.2 million in interest under the Senior Notes. If we cannot make scheduled payments on our debt, we will be in default and, as a result:

• our debt holders could declare all outstanding principal and interest to be due and payable;

• our secured debt lenders could terminate their commitments and commence foreclosure proceedings against our assets; and

• we could be forced into bankruptcy or liquidation.

Our Substantial Indebtedness Could Adversely Affect Our Financial Flexibility And Our Competitive Position.

We have a significant amount of indebtedness. As of September 30, 2013, we had $1,873.7 million of indebtedness outstanding, in addition to availability under the revolving portion of our Senior Secured Credit Facilities. Our substantial amount of indebtedness could have significant consequences on our financial condition and results of operations. For example, it could:

• make it more difficult for us to satisfy our obligations with respect to our outstanding debt;

• increase our vulnerability to adverse economic and industry conditions;

• expose us to fluctuations in the interest rate environment because the interest rates under our Senior Secured Credit Facilities are variable;

• require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

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• limit our flexibility in planning for, or reacting to, changes in the business and industry in which we operate;

• restrict us from exploiting business opportunities;

• place us at a disadvantage compared to our competitors that have less debt; and

• limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy and other general corporate purposes or to refinance our existing debt.

We, Including Our Subsidiaries, Have The Ability To Incur Substantially More Indebtedness, Including Senior Secured Indebtedness.

Subject to the restrictions in our Senior Secured Credit Facilities and the indenture governing the Senior Notes, we, including our subsidiaries, may incur significant additional indebtedness. As of September 30, 2013:

• we had $850.0 million of senior unsecured indebtedness under the notes;

• we had $999.5 million of senior secured debt outstanding under our Senior Secured Credit Facilities;

• subject to compliance with customary conditions, we had available to us $228.9 million (after consideration of outstanding letters of credit totaling $71.1 million under our revolving credit facility) under the revolving portion of our Senior Secured Credit Facilities, which, if borrowed, would be senior secured indebtedness; and

• subject to our compliance with certain covenants and other conditions, including a senior secured leverage ratio, we had the option to request to borrow an unlimited amount of incremental term loans or increase our revolving credit commitments up to $375.0 million, which, if borrowed, would be senior secured indebtedness.

Although the terms of our Senior Secured Credit Facilities and the indenture governing the Senior Notes, contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of important exceptions, and indebtedness incurred in compliance with these restrictions could be substantial. If we and our restricted subsidiaries incur significant additional indebtedness, the related risks that we face could increase.

Our Indebtedness May Restrict Our Current And Future Operations, Which Could Adversely Affect Our Ability To Respond To Changes In Our Business And To Manage Our Operations.

Agreements governing our indebtedness and the indenture governing the Senior Notes contain, and any future indebtedness may contain, a number of restrictive covenants that impose significant operating and financial restrictions on us and our restricted subsidiaries, including restrictions on our or our restricted subsidiaries’ ability to, among other things:

• incur additional indebtedness or issue disqualified stock or preferred stock;

• pay dividends or make other distributions on, redeem or repurchase our capital stock;

• sell certain assets;

• make certain loans and investments;

• enter into certain transactions with affiliates;

• incur liens on certain assets to secure debt;

• impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to us and our restricted subsidiaries; or

• consolidate, merge or sell all or substantially all of our assets.

Our ability to comply with these agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities. The breach of any of these covenants or restrictions could result in a default under the indenture governing the Senior Notes or our Senior Secured Credit Facilities.

A failure by us or our subsidiaries to comply with the covenants contained in the agreements governing our indebtedness could result in an event of default under such indebtedness, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default under any of the agreements governing our indebtedness, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the agreements. If any of our indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay this indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern.

An Increase In Interest Rates Would Increase The Cost Of Servicing Our Debt And Could Reduce Our Profitability.

Borrowings under our Senior Secured Credit Facilities bear interest at variable rates. Interest rate changes will not affect the market value of any debt incurred under such facility, but could affect the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant. We have, and in the future may, enter into interest rate

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hedging instruments in order to reduce our exposure to interest rate volatility; however, any hedging instruments we enter into may not fully mitigate our interest rate risk. As a result, an increase in interest rates, whether because of an increase in market interest rates or an increase in our own cost of borrowing, would increase the cost of servicing our debt and could materially reduce our profitability.

Our Failure To Comply With The Agreements Relating To Our Outstanding Indebtedness, Including As A Result Of Events Beyond Our Control, Could Result In An Event Of Default That Could Materially And Adversely Affect Our Results Of Operations And Our Financial Condition.

If there were an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. Upon acceleration of certain of our other indebtedness, holders of the Senior Notes could declare all amounts outstanding under the Senior Notes immediately due and payable. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. In addition, counterparties to some of our contracts material to our business may have the right to amend or terminate those contracts if we have an event of default or a declaration of acceleration under certain of our indebtedness, which could adversely affect our business, financial condition or results of operations.

We Are Controlled By Our Principal Equity Sponsors.

We are controlled by our principal equity sponsors who have the ability to control our financial-related policies and decisions. For example, our principal equity sponsors could cause us to enter into transactions that, in their judgment, could enhance their equity investment, even though such transactions might reduce our cash flows or capital reserves. So long as our principal equity sponsors continue to own a significant amount of our equity interests, they will continue to be able to strongly influence and effectively control the decisions related to our company. Additionally, our principal equity sponsors may from time to time acquire and hold interests in businesses that compete directly or indirectly with us and, therefore, have interests that may conflict with the interests of our company.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties.

Information with respect to our hospitals and other healthcare related properties can be found in this Report under the caption, “Item 1—Business—Our Properties.”

Additionally, our principal executive offices in Franklin, Tennessee are located in approximately 42,000 square feet of office space. Our office space is leased pursuant to a lease contract, which expires on December 31, 2020.

Our principal executive offices, hospitals and other facilities are suitable for their respective uses and generally are adequate for our present needs. Our obligations under our Senior Secured Credit Facilities are secured by, among other things, mortgage liens on all of our material real property and that of certain of our subsidiaries, including the properties listed in “Item 1—Business—Our Properties.” Also, our properties are subject to various federal, state and local statutes and ordinances regulating their operation. Our management does not believe that maintaining compliance with such statutes and ordinances will materially affect our financial position or results of operations.

Item 3. Legal Proceedings.

        In November 2010, the DOJ sent a letter to IAS requesting a 12-month tolling agreement in connection with an investigation into Medicare claims submitted by our hospitals in connection with the implantation of ICDs during the period 2003 to the present. At that time, neither the precise number of procedures, number of claims, nor the hospitals involved were identified by the DOJ. We understand that the government is conducting a national initiative with respect to ICD procedures involving a number of healthcare providers and is seeking information in order to determine if ICD implantation procedures were performed in accordance with Medicare coverage requirements. On January 11, 2011, IAS entered into the tolling agreement with the DOJ and, subsequently, the DOJ has provided IAS with a list of 194 procedures involving ICDs at 14 hospitals which are the subject of further medical necessity review by the DOJ. We are cooperating fully with the government and, to date, the DOJ has not asserted any claim against our hospitals. We believe that 125 of these procedure claims were properly documented for medical necessity and billed appropriately. On June 29, 2013, our outside counsel submitted to the DOJ summary justifications and supporting evidence relating to the medical claims at four of our hospitals. We continue to search for and develop the documentary support for the remaining 69 of these cases that could have some likelihood of enforcement by the DOJ. If we are unable to place these claims in the no enforcement or lesser enforcement category, the government may require repayment, which could impose a multiplier. The government has not pressed IAS for its response, however, IAS will likely use its extensive training and compliance policies and awareness of the ICD national coverage determination to demonstrate intent to comply with Medicare’s coverage guidelines and commitment to compliance with

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federal and state authority. In April 2013, the government proposed to extend the tolling agreement, which was accepted by IAS, with the tolling agreement currently set to expire on April 30, 2014. IAS will continue to use the tolling period to locate additional medical records for the 69 records potentially falling within a potential enforcement category, in an attempt to provide documentation to the DOJ of the medical necessity of the procedures. As of the date of this Report, additional analysis is being completed and, based on information currently available, we are unable to quantify an estimate for any potential repayment obligation related to this ICD investigation.

On September 25, 2013, we voluntarily self-disclosed for resolution through the Self-Referral Disclosure Protocol established by CMS non-compliance by ten of our affiliated hospitals with a certain element of an exception of the Stark Law. Provisions of the Affordable Care Act that became effective on September 23, 2011 require, as an element of the Stark Law’s “whole-hospital” exception, that hospitals having physician ownership disclose such ownership on their public websites and in public advertising. The self-disclosure states that, on August 12, 2013, we discovered that our affiliated hospitals partially owned by physicians did not consistently make such disclosures. The self-disclosure also states that, on August 13, 2013, the hospitals added the disclosures to those public websites that did not previously have them and began to include the disclosures in new public advertising. The self-disclosure explains that, as a result of the absence of the website and advertising disclosures, the referrals of direct and indirect physician owners (and physicians who are immediate family members of direct and indirect owners) to the physician-owned hospitals of Medicare beneficiaries did not consistently qualify for the Stark Law’s “whole-hospital” exception from September 23, 2011 through August 13, 2013. On October 21, 2013, we submitted a supplement to the self-disclosure, reporting Medicare payments to the hospitals for services resulting from referrals affected by the non-compliance and the hospitals’ profit distributions to physicians (and known immediate family members of physicians) with respect to their ownership interests in the hospitals during the same period. CMS has made no commitments, as a general matter or in this case, regarding the timing or substance of resolution of self-disclosed Stark Law noncompliance through the voluntary CMS Self-Referral Disclosure Protocol. We express no opinion as to the outcome of this matter, other than to state that, at this time, any repayment obligation to be determined by CMS is unknown and not currently estimable, and that the matter could take up to one year or longer to resolve.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

There is no established public trading market for our common interests. At December 20, 2013, all of our common interests were owned by IAS.

See “Item 12— Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” of this Report for information regarding our equity compensation plans.

Item 6. Selected Financial Data.

The following table presents selected historical financial data for the fiscal years ended September 30, 2013, 2012, 2011, 2010 and 2009, and was derived from our audited, consolidated financial statements.

Our audited, consolidated financial statements referenced above, together with the related report of the independent registered public accounting firm, are included under “Item 8. — Financial Statements and Supplementary Data” of this Report. The selected financial information and other data presented below should be read in conjunction with the information contained in “Item 7. —Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report and the audited, consolidated financial statements and the related notes thereto included under “Item 8. — Financial Statements and Supplementary Data” of this Report.

	Year Ended September 30,
	2013			2012			2011			2010			2009
Statement of Operations Data
Net revenue	$	2,376,613		$	2,327,760		$	2,336,264		$	2,141,531		$	1,981,881
Costs and expenses
Salaries and benefits		896,081			833,389			721,890			597,632			572,646
Supplies		315,953			302,815			278,126			231,957			216,053
Medical claims		467,294			466,125			630,203			678,651			592,760
Rentals and leases		55,157			44,595			41,931			35,933			34,862
Other operating expenses		407,660			430,490			392,915			328,959			288,596
Medicare and Medicaid EHR incentives		(22,525	)		(22,426	)		(9,042	)		—			—
Interest expense, net		133,209			137,990			96,026			66,755			67,841
Depreciation and amortization		97,609			103,917			95,032			85,816			86,532
Management fees		5,000			5,000			5,000			5,000			5,000
Hurricane-related property damage		—			—			—			—			938
Loss on extinguishment of debt		—			—			23,075			—			—
Total costs and expenses		2,355,438			2,301,895			2,275,156			2,030,703			1,865,228
Earnings from continuing operations before gain (loss) on disposal of assets and income taxes		21,175			25,865			61,108			110,828			116,653
Gain (loss) on disposal of assets, net		(8,977	)		2,243			131			258			1,486
Earnings from continuing operations before income taxes		12,198			28,108			61,239			111,086			118,139
Income tax expense		5,434			2,572			22,332			41,181			44,397
Net earnings from continuing operations		6,764			25,536			38,907			69,905			73,742
Earnings (loss) from discontinued operations, net of income taxes		3,735			6,052			2,792			4,841			(35,665	)
Net earnings		10,499			31,588			41,699			74,746			38,077
Net earnings attributable to non-controlling interests		(7,215	)		(8,712	)		(10,338	)		(8,279	)		(9,987	)
Net earnings attributable to IASIS Healthcare LLC	$	3,284		$	22,876		$	31,361		$	66,467		$	28,090
	Year Ended September 30,
	2013			2012			2011			2010			2009
Balance Sheet Data
Cash and cash equivalents	$	438,131		$	48,882		$	147,327		$	144,511		$	206,528
Total assets	$	2,880,265		$	2,698,485		$	2,679,777		$	2,353,194		$	2,357,204
Long-term debt and capital lease obligations (including current portion)	$	1,865,562		$	1,866,494		$	1,878,769		$	1,051,578		$	1,059,837
Member’s equity	$	142,262		$	141,589		$	118,000		$	702,135		$	750,932

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Selected Operating Data

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

	Year Ended September 30,
	2013			2012			2011
Acute Care (1)
Number of acute care hospital facilities at end of period (2)		16			16			15
Licensed beds at end of period		3,803			3,732			3,636
Average length of stay (days) (3)		5.1			5.0			4.8
Occupancy rates (average beds in service)		49.8	%		50.1	%		51.1	%
Admissions (4)		109,211			110,278			99,344
Adjusted admissions (5)		192,276			186,822			167,883
Patient days (6)		554,871			546,385			480,306
Adjusted patient days (5)		976,900			925,630			811,677
Net patient revenue per adjusted admission	$	8,939		$	8,915		$	8,883
Outpatient revenue as a % of gross patient revenue		43.2	%		41.0	%		40.8	%
Health Choice
Medicaid covered lives		174,722			174,713			191,425
Dual-eligible lives (7)		4,442			4,093			4,240
Medical loss ratio (8)		84.1	%		83.1	%		84.6	%

(1) Excludes the impact of our Florida operations, which were sold effective October 1, 2013, and are reflected in discontinued operations.

(2) Excludes St. Luke’s Behavioral Hospital.

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

(4) 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.

(5) 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.

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

(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.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the “Cautionary Statement Regarding Forward-Looking Statements” and “Item 1A. —Risk Factors,” our audited, consolidated financial statements, the notes to our audited consolidated financial statements, and the other financial information appearing under “Item 8. —Financial Statements and Supplementary Data” of this Report. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes. It includes the following sections:

• Executive Overview;

• Critical Accounting Policies and Estimates;

• Results of Operations Summary; and

• Liquidity and Capital Resources.

Data for the fiscal years ended September 30, 2013, 2012 and 2011, has been derived from our audited, consolidated financial statements.

EXECUTIVE OVERVIEW

We are a leading provider of high quality, affordable healthcare services primarily in high-growth urban and suburban markets. As of September 30, 2013, we owned or leased 19 acute care hospital facilities and one behavioral health hospital facility with a total of 4,494 licensed beds, several outpatient service facilities and more than 160 physician clinics. On October 1, 2013, we sold our Florida operations, which primarily included three hospitals in the Tampa-St. Petersburg area and all related physician operations. With respect to this disposition, any discussion in this Report regarding our current or future operations or strategies does not include, and will not reflect the impact of, our former Florida operations. Accordingly, as of the date of this Report, we own or lease 16 acute care hospital facilities and one behavioral health hospital facility with a total of 3,803 licensed beds, several outpatient service facilities and more than 145 physician clinics. See “– Recent Events” below for more information regarding certain events affecting our operations that occurred prior to or after September 30, 2013.

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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 currently operate in various regions, including:

• Salt Lake City, Utah;

• Phoenix, Arizona;

• five cities in Texas, including Houston and San Antonio; and

• West Monroe, Louisiana.

Our business consists of two operating segments: (1) our acute care segment comprised of our hospitals, outpatient service facilities and physician clinics and (2) our Health Choice segment. The financial information for our reportable operating segments is presented in Footnote 17 (Segment and Geographic Information) to our audited, consolidated financial statements included under “Item 8. Financial Statements and Supplementary Data” of this Report.

We also own and operate Health Choice, a provider-owned, managed care organization and insurer, headquartered in Phoenix that served more than 179,000 members in Arizona and Utah as of September 30, 2013.

Recent Events

On March 25, 2013, we announced that Health Choice was awarded a new contract by AHCCCS, the state agency that administers Arizona’s state Medicaid program. The contract, which commenced on October 1, 2013, has an initial term of three years and includes two additional one-year renewal options that can be exercised at the discretion of AHCCCS. The new contract allows Health Choice to serve Medicaid members in the following Arizona counties: Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal.

On September 26¸ 2013, we sold the real estate associated with the following three facilities, and thereafter leased back the land and buildings from Medical Properties Trust, Inc.: (1) Glenwood Regional Medical Center in West Monroe, Louisiana; (2) Mountain Vista Medical Center, in Mesa, Arizona; and (3) The Medical Center of Southeast Texas in Port Arthur, Texas. The aggregate proceeds from the sale was $281.3 million. The initial terms of the respective lease agreements are each 15 years with varying renewal options.

On October 1, 2013, we completed the divestiture of our Florida operations, which resulted in proceeds of $145.7 million. Given that further growth opportunities in our Florida operations were limited by a restrictive state certificate of need process, as a result of the capital raised from this transaction, along with the proceeds from the sale-leaseback transaction, we are able to focus more intently on our other markets that are better positioned for our future growth plans, as well as possible expansion into new markets.

Revenue and Volume Trends

Net revenue for the year ended September 30, 2013, increased $48.9 million compared to the prior year. Net revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts as required by authoritative accounting guidance, and premium revenue. Acute care revenue contributed $53.8 million to the increase in net revenue for the year ended September 30, 2013, compared to the prior year, while premium revenue at Health Choice declined $5.0 million compared to the prior year.

Acute Care Revenue

Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, the majority of 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. These 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.

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Admissions decreased 1.0% for the year ended September 30, 2013, compared to the prior year. Admissions have been affected by a recent industry-wide decline in inpatient volume, as well as an increase in observation cases, primarily resulting from the adoption of new InterQual criteria changes that focus on certain diagnoses presenting for emergency services. 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 2.9% for the year ended September 30, 2013, compared to the prior year. Our outpatient volume for the year ended September 30, 2013, has benefited from a 12.8% 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 6.9% increase in emergency room visits for the year ended September 30, 2013, compared to the prior year.

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, free-standing emergency rooms, urgent care centers, outpatient imaging centers, ambulatory surgery centers, our increased marketing efforts to promote our commitment to quality and patient satisfaction, and the general aging of the population.

The following table provides the sources of our hospitals’ gross patient revenue by payor before discounts, contractual adjustments and the provision for bad debts:

	Year Ended September 30,
	2013			2012			2011
Medicare		28.3	%		30.8	%		29.2	%
Managed Medicare		14.4			13.0			12.0
Medicaid and managed Medicaid		20.9			19.9			23.2
Managed care		29.3			30.2			30.1
Self-pay		7.1			6.1			5.5
Total		100.0	%		100.0	%		100.0	%

The increase in our self-pay revenue as a percentage of the total is the result of growth in our uninsured and under-insured volumes, revenue and related acuity levels, particularly in our emergency rooms, which have increased for the year ended September 30, 2013, compared to the prior year.

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

	Year Ended September 30,
	2013			2012			2011
Medicare		20.9	%		23.5	%		21.8	%
Managed Medicare		10.1			9.0			8.7
Medicaid and managed Medicaid		12.2			13.7			16.1
Managed care		37.9			38.1			41.1
Self-pay		18.9			15.7			12.3
Total		100.0	%		100.0	%		100.0	%

Our net patient revenue payor mix for the year ended September 30, 2013, has been impacted by: (i) an increase in observation rates, for which cases are typically reimbursed at lower levels; (ii) Medicare sequestration; (iii) continued increases in self-pay volumes, revenue and related acuity levels; and (iv) continued reimbursement cuts from state Medicaid programs, particularly in Texas.

Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, decreased 0.3% for the year ended September 30, 2013, compared to the prior year. Our pricing metrics for the year ended September 30, 2013, 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, growth in uncompensated care, Medicare sequestration and other industry pressures. In addition, states have been addressing their budget issues by implementing Medicaid 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 results of operations and cash flows.

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

Premium Revenue

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 MAPD 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). In accordance with CMS regulations, SNPs are now expected to meet additional requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

Premium revenue generated by Health Choice represented 23.7% of our consolidated net revenue for the year ended September 30, 2013, compared to 24.5% in the prior year. If AHCCCS were to implement in the near term, reimbursement rate reductions, enrollment reductions, capitation payment deferrals, covered services reductions or limitations or other steps to reduce program expenditures, it could have a material adverse impact on our operating results and cash flows.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our financial statements, we make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

We have determined an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and (2) changes in the estimate would have a material impact on our financial condition or results of operations. There are other items within our financial statements that require estimation but are not deemed critical as defined herein. Changes in estimates used in these and other items could have a material impact on our financial statements.

Allowance for Doubtful Accounts. Our ability to collect outstanding receivables from third-party payors and patients is critical to our operating performance and cash flows. The primary collection risk lies with uninsured patient accounts or patient accounts for which primary insurance has paid but a patient portion remains outstanding. The provision for bad debts and the allowance for doubtful accounts relate primarily to amounts due directly from patients. Our estimation of the allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of our collection efforts. Our policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. We monitor our accounts receivable balances and the effectiveness of our reserve policies on a monthly basis and review various analytics to support the basis for our estimates. These efforts primarily consist of reviewing the following:

• Historical write-off and collection experience using a hindsight or look-back approach;

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

• Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

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

• Trending of days revenue in accounts receivable; and

• Various allowance coverage statistics.

        We regularly perform hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of our process for estimating the allowance for doubtful accounts. We do not pursue collection of amounts related to patients who qualify for charity care under our guidelines. Charity care accounts are deducted from gross revenue and do not affect the provision for bad debts.

At September 30, 2013 and 2012, our self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $336.2 million and $328.5 million, respectively, while our allowance for doubtful accounts was $255.7 million and $235.2 million, respectively. Same-facility days revenue in accounts receivable were 56 at September 30, 2013, compared to 59 days at September 30, 2012. For the year ended September 30, 2013, the provision for bad debts was 17.0% of acute care revenue before provision for bad debts, compared to 13.8% in the prior year. Significant changes in payor mix or business office operations could have a significant impact on the provision for bad debts, as well as our results of operations and cash flows.

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Allowance for Contractual Discounts and Settlement Estimates. We derive a significant portion of our net patient revenue from Medicare, Medicaid and managed care payors that receive discounts from our standard charges. For the years ended September 30, 2013, 2012 and 2011, Medicare, Medicaid and managed care revenue together accounted for 81.1%, 84.3% and 87.7%, respectively, of our hospitals’ net patient revenue.

We estimate contractual discounts and allowances based upon payment terms outlined in our managed care contracts, by federal and state regulations for the Medicare and various Medicaid programs, and in accordance with terms of our uninsured discount program. Contractual discounts for most of our patient revenue are determined by an automated process that establishes the discount on a patient-by-patient basis. The payment terms or fee schedules for most payors have been entered into our patient accounting systems. Automated (system-generated) contractual discounts are recorded, at the time a patient account is billed, based upon the system-loaded payment terms. In certain instances for payors that are not significant or who have not entered into a contract with us, we make manual estimates in determining contractual allowances based upon historical collection rates. At the end of each month, we estimate contractual allowances for all unbilled accounts based on payor-specific six-month average contractual discount rates.

For governmental payors such as Medicare and Medicaid, we determine contractual discounts or allowances based upon the program’s reimbursement (payment) methodology (i.e. either prospectively determined or retrospectively determined based on costs as defined by the government payor). These contractual discounts are determined by an automated process in a manner similar to the process used for managed care revenue. Under prospective payment programs, we record contractual discounts based upon predetermined reimbursement rates. For retrospective cost-based revenues, which are less prevalent, we estimate contractual allowances based upon historical and current factors which are adjusted as necessary in future periods, when final settlements of filed cost reports are received. Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, excluding the $9.7 million net impact of an industry-wide rural floor wage settlement and the newly issued Supplemental Security Income (“SSI”) ratios in fiscal year 2012, resulted in an increase in acute care revenue of $8.4 million, $4.6 million and $2.3 million for the years ended September 30, 2013, 2012 and 2011, respectively.

Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and renewals. All contractual adjustments, regardless of type of payor or method of calculation, are reviewed and compared to actual payment experience on an individual patient account basis. Discrepancies between expected and actual payments are reviewed, and as necessary, appropriate corrections to the patient accounts are made to reflect actual payments received. If a discrepancy exists between the payment terms loaded into the contract management system and the actual discount based on payments received, the system is updated accordingly to ensure appropriate discounting of future charges.

Additionally, we rely on other analytical tools to ensure our contractual discounts are reasonably estimated. These include, but are not limited to, monitoring of collection experience by payor, reviewing total patient collections as a percentage of net patient revenue (adjusted for the provision for bad debts) on a trailing twelve-month basis, gross to net patient revenue comparisons, contractual allowance metrics, etc. As well, patient accounts are continually reviewed to ensure all patient accounts reflect either system-generated discounts or estimated contractual allowances, as necessary.

Medicare and Medicaid regulations and various managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our healthcare facilities, requiring complex calculations and assumptions which are subject to interpretation. Additionally, the services authorized and provided and resulting reimbursement are often subject to interpretation. These interpretations sometimes result in payments that differ from our estimates. Additionally, updates to regulations and contract renegotiations occur frequently, necessitating continual review and assessment of the estimation process by management. We have made significant investments in our patient accounting information systems, human resources and internal controls, which we believe greatly reduces the likelihood of a significant variance occurring between the recorded and estimated contractual discounts. Given that most of our contractual discounts are pre-defined or contractually based, and as a result of continual internal monitoring processes and our use of analytical tools, we believe the aggregate differences between amounts recorded for initial contractual discounts and final contractual discounts resulting from payments received are not significant. Finally, we believe that having a wide variety and large number of managed care contracts that are subject to review and administration on a hospital-by-hospital basis minimizes the impact on our net revenue of any imprecision in recorded contractual discounts caused by the system-load of payment terms of a particular payor. We believe that our systems and processes, as well as other items discussed, provide reasonable assurance that any change in estimate related to contractual discounts is immaterial to our financial position, results of operations and cash flows.

Insurance Reserves. Given the nature of our operating environment, we may become subject to medical malpractice or workers’ compensation claims or lawsuits. We maintain third-party insurance coverage for individual malpractice and workers’ compensation claims to mitigate a portion of this risk. In addition, we maintain excess coverage limiting our exposure to an aggregate annual amount for claims. We estimate our reserve for self-insured professional and general liability and workers’ compensation risks using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At September 30, 2013 and 2012, our professional and general liability accrual for asserted and unasserted claims was $68.2 million and $76.9 million, respectively. For the year ended September 30, 2013, our total premiums and self-insured retention cost for professional and general liability insurance was $15.6 million, compared with $22.8 million in the prior year.

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The estimated accrual for medical malpractice and workers’ compensation claims could be significantly affected should current and future occurrences differ from historical claims trends. The estimation process is also complicated by the complexity and changing nature of tort reform in the states in which we operate. While we monitor current claims closely and consider outcomes when estimating our insurance accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in the estimates.

Valuations from our independent actuary for professional and general liability losses resulted in a change in related estimates for prior years which increased (decreased) professional and general liability expense included in continuing operations by the following amounts (in millions):

Year ended September 30, 2013	$	(8.0	)
Year ended September 30, 2012	$	(0.8	)
Year ended September 30, 2011	$	0.2

Our estimate of the reserve for professional and general liability claims is based upon actuarial calculations that are completed semi-annually. The changes in estimates noted above were recognized in the periods in which the independent actuarial calculations were received. The key assumptions underlying the development of our estimate (loss development, trends and increased limits factors) have not changed materially, as they are largely based upon professional liability insurance industry data published by the Insurance Services Office, a leading provider of data, underwriting, risk management and legal/regulatory services. The reductions in professional and general liability expense related to changes in prior year estimates reflected above for the years ended September 30, 2013, 2012 and 2011, are the result of better than expected claims experience as compared to the industry benchmarks for loss development included in the original actuarial estimate.

Sensitivity in the estimate of our professional and general liability claims reserve is reflected in various actuarial confidence levels. We utilize a statistical confidence level of 50% in developing our best estimate of the reserve for professional and general liability claims. Higher statistical confidence levels, while not representative of our best estimate, provide a range of reasonably likely outcomes upon resolution of the related claims. The following table outlines our reported reserve amounts compared to reserve levels established at the higher statistical confidence levels (in millions):

As reported at September 30, 2013	$	68.2
75% Confidence Level	$	74.5
90% Confidence Level	$	85.5

Valuations from our independent actuary for workers’ compensation losses resulted in a change in related estimates for prior years which increased (decreased) workers’ compensation expense included in continuing operations by the following amounts (in millions):

Year ended September 30, 2013	$	(0.9	)
Year ended September 30, 2012	$	(0.9	)
Year ended September 30, 2011	$	1.3

Medical Claims Payable. Medical claims expense, including claims paid to our hospitals, was $474.4 million, $473.2 million and $640.8 million, or 84.1%, 83.1% and 84.6% of premium revenue, for the years ended September 30, 2013, 2012 and 2011, respectively. For the years ended September 30, 2013, 2012 and 2011, $7.1 million, $7.1 million and $10.6 million, respectively, of health plan payments made to hospitals and other healthcare entities owned by us for services provided to our enrollees were eliminated in consolidation.

The following table shows the components of the change in medical claims payable (in thousands):

	Year Ended September 30, 2013			Year Ended September 30, 2012			Year Ended September 30, 2011
Medical claims payable as of October 1	$	61,142		$	85,723		$	111,373
Medical claims expense incurred during the year
Related to current year		476,217			489,387			648,739
Related to prior years		(1,831	)		(16,170	)		(7,985	)
Total expenses		474,386			473,217			640,754
Medical claims payments during the year
Related to current year		(421,120	)		(430,788	)		(564,920	)
Related to prior years		(56,894	)		(67,010	)		(101,484	)
Total payments		(478,014	)		(497,798	)		(666,404	)
Medical claims payable as of September 30	$	57,514		$	61,142		$	85,723

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As reflected in the table above, medical claims expense for the year ended September 30, 2013, includes an $1.8 million reduction of medical costs related to prior years resulting from favorable development in both the Medicaid product line of $1.5 million and the Medicare product line of $0.3 million.

As reflected in the table above, medical claims expense for the year ended September 30, 2012, includes a $16.2 million reduction of medical costs related to prior years resulting from favorable development in the Medicaid product line of $16.5 million, offset by unfavorable development in the Medicare product line of $0.4 million. The favorable development in the Medicaid product line is attributable to lower than anticipated medical costs resulting from a general decline in medical utilization, the loss of member lives due to changes in Arizona’s Medicaid eligibility structure, AHCCCS provider payment reductions and improvements in care management and other operational initiatives. This favorable development is offset, in part, by $4.9 million in reductions to premium revenue associated with the settlement of prior year profit reconciliations.

As reflected in the table above, medical claims expense for the year ended September 30, 2011, includes an $8.0 million reduction of medical costs related to prior years resulting from favorable development in the Medicaid product line of $8.1 million, offset by unfavorable development in the Medicare product line of $0.1 million. The favorable development in the Medicaid product line is attributable to lower than anticipated medical costs resulting from a general decline in medical utilization, the loss of member lives due to changes in Arizona’s Medicaid eligibility structure, AHCCCS provider payment reductions and improvements in care management and other operational initiatives. This favorable development is offset, in part, by $3.3 million in reductions to premium revenue associated with the settlement of prior year profit reconciliations.

We estimate our medical claims payable using historical claims experience (including severity and payment lag time) and other actuarial analysis including number of enrollees, age of enrollees and certain enrollee health indicators to predict the cost of healthcare services provided to enrollees during any given period. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from our estimates given changes in healthcare costs or adverse experience. For example, our medical claims payable is primarily composed of estimates related to the most recent three months and periods prior to the most recent three months. The claims trend factor, which is developed through a comprehensive analysis of claims incurred in prior months, is the most significant component used in developing the claims liability estimates for the most recent three months. The completion factor is an actuarial estimate, based upon historical experience, of the percentage of incurred claims during a given period that have been adjudicated as of the date of estimation. The completion factor is the most significant component used in developing the claims liability estimates for the periods prior to the most recent three months. The following table illustrates the sensitivity of our medical claims payable at September 30, 2013, and the estimated potential impact on our results of operations, to changes in these factors that management believes are reasonably likely based upon our historical experience and currently available information (dollars in thousands):

Claims Trend Factor						Completion Factor
Increase (Decrease) in Factor			Increase (Decrease) in Medical Claims Payable			Increase (Decrease) in Factor			Increase (Decrease) in Medical Claims Payable
	(3.0	%)	$	(2,860	)		1.0	%	$	(2,486	)
	(2.0	)		(1,907	)		0.5			(1,388	)
	(1.0	)		(953	)		(0.5	)		2,052
	1.0			953			(1.0	)		4,220

Goodwill and Other Intangibles. The accounting policies and estimates related to goodwill and other intangibles are considered critical because of the significant impact that impairment could have on our operating results. We record all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair value as required by Financial Accounting Standards Board (“FASB”) authoritative guidance regarding business combinations. The initial recording of goodwill and other intangibles requires subjective judgments concerning estimates of the fair value of the acquired assets. Goodwill, which was $816.4 million at September 30, 2013, is not amortized but is subject to tests for impairment annually or more often if events or circumstances indicate it may be impaired. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. We did not record an impairment loss during the years ended September 30, 2013, 2012 or 2011. Other identifiable intangible assets, net of accumulated amortization, were $26.0 million at September 30, 2013, compared to $29.2 million at September 30, 2012. These are amortized over their estimated useful lives and are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow projections. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and

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attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions. Other key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles which require amortization. See “Goodwill and Other Intangible Assets” in the Notes to Consolidated Financial Statements for additional information regarding intangible assets. The impact of a 5% impairment charge to goodwill or intangible assets would result in a reduction in pre-tax income of $42.1 million.

Income Taxes. We estimate and record a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized in future periods based on all relevant information. We believe that future income as well as the reversal of deferred tax liabilities will enable us to realize the deferred tax assets we have recorded, net of the valuation allowance we have established.

Certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. Significant judgment is required in determining and assessing the impact of such tax-related contingencies. We apply the provisions of FASB authoritative guidance regarding accounting for uncertainty in income taxes, which prescribe a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Only tax positions that meet the more-likely-than-not recognition threshold have been recognized in connection with these provisions.

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

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

RESULTS OF OPERATIONS SUMMARY

Consolidated

The following table sets forth, for the periods indicated, results of consolidated operations expressed in dollar terms and as a percentage of net revenue. Such information has been derived from our audited, consolidated statements of operations.

	Year Ended September 30, 2013						Year Ended September 30, 2012						Year Ended September 30, 2011
($ in thousands):	Amount			Percentage			Amount			Percentage			Amount			Percentage
Net revenue
Acute care revenue before provision for bad debts	$	2,182,966					$	2,041,124					$	1,793,098
Less: Provision for bad debts		(370,505	)					(282,506	)					(214,143	)
Acute care revenue		1,812,461			76.3	%		1,758,618			75.5	%		1,578,955			67.6	%
Premium revenue		564,152			23.7	%		569,142			24.5	%		757,309			32.4	%
Net revenue		2,376,613			100.0	%		2,327,760			100.0	%		2,336,264			100.0	%
Costs and expenses
Salaries and benefits		896,081			37.7	%		833,389			35.8	%		721,890			30.9	%
Supplies		315,953			13.3	%		302,815			13.0	%		278,126			11.9	%
Medical claims		467,294			19.7	%		466,125			20.0	%		630,203			27.0	%
Rentals and leases		55,157			2.3	%		44,595			2.0	%		41,931			1.8	%
Other operating expenses		407,660			17.1	%		430,490			18.5	%		392,915			16.8	%
Medicare and Medicaid EHR incentives		(22,525	)		(0.9	%)		(22,426	)		(1.0	%)		(9,042	)		(0.4	%)
Interest expense, net		133,209			5.6	%		137,990			5.9	%		96,026			4.1	%
Depreciation and amortization		97,609			4.1	%		103,917			4.5	%		95,032			4.1	%
Management fees		5,000			0.2	%		5,000			0.2	%		5,000			0.2	%
Loss on extinguishment of debt		—			—			—			—			23,075			1.0	%
Total costs and expenses		2,355,438			99.1	%		2,301,895			98.9	%		2,275,156			97.4	%
Earnings from continuing operations before gain (loss) on disposal of assets and income taxes		21,175			0.9	%		25,865			1.1	%		61,108			2.6	%
Gain (loss) on disposal of assets, net		(8,977	)		(0.4	%)		2,243			0.1	%		131			0.0	%
Earnings from continuing operations before income taxes		12,198			0.5	%		28,108			1.2	%		61,239			2.6	%
Income tax expense		5,434			0.2	%		2,572			0.1	%		22,332			0.9	%
Net earnings from continuing operations		6,764			0.3	%		25,536			1.1	%		38,907			1.7	%
Earnings from discontinued operations, net of income taxes		3,735			0.1	%		6,052			0.3	%		2,792			0.1	%
Net earnings		10,499			0.4	%		31,588			1.4	%		41,699			1.8	%
Net earnings attributable to non-controlling interests		(7,215	)		(0.3	%)		(8,712	)		(0.4	%)		(10,338	)		(0.5	%)
Net earnings attributable to IASIS Healthcare LLC	$	3,284			0.1	%	$	22,876			1.0	%	$	31,361			1.3	%

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Acute Care

The following table sets forth, for the periods indicated, results of our acute care operations expressed in dollar terms and as a percentage of acute care revenue. Such information has been derived from our audited, consolidated statements of operations.

	Year Ended September 30, 2013						Year Ended September 30, 2012						Year Ended September 30, 2011
($ in thousands):	Amount			Percentage			Amount			Percentage			Amount			Percentage
Acute care revenue
Acute care revenue before provision for bad debts	$	2,182,966					$	2,041,124					$	1,793,098
Less: Provision for bad debts		(370,505	)					(282,506	)					(214,143	)
Acute care revenue		1,812,461			99.6	%		1,758,618			99.6	%		1,578,955			99.3	%
Revenue between segments (1)		7,092			0.4	%		7,092			0.4	%		10,551			0.7	%
Total acute care revenue		1,819,553			100.0	%		1,765,710			100.0	%		1,589,506			100.0	%
Costs and expenses
Salaries and benefits		872,096			47.9	%		811,862			46.0	%		701,496			44.1	%
Supplies		315,770			17.4	%		302,587			17.1	%		277,925			17.5	%
Rentals and leases		53,613			2.9	%		43,062			2.5	%		40,306			2.5	%
Other operating expenses		384,212			21.1	%		408,012			23.1	%		367,127			23.1	%
Medicare and Medicaid EHR incentives		(22,525	)		(1.2	%)		(22,426	)		(1.3	%)		(9,042	)		(0.6	%)
Interest expense, net		133,209			7.3	%		137,990			7.8	%		96,026			6.0	%
Depreciation and amortization		93,461			5.1	%		100,033			5.7	%		91,476			5.8	%
Management fees		5,000			0.3	%		5,000			0.3	%		5,000			0.3	%
Loss on extinguishment of debt		—			—			—			—			23,075			1.5	%
Total costs and expenses		1,834,836			100.8	%		1,786,120			101.2	%		1,593,389			100.2	%
Loss from continuing operations before gain (loss) on disposal of assets and income taxes		(15,283	)		(0.8	%)		(20,410	)		(1.2	%)		(3,883	)		(0.2	%)
Gain (loss) on disposal of assets, net		(8,977	)		(0.5	%)		2,243			0.2	%		131			0.0	%
Loss from continuing operations before income taxes	$	(24,260	)		(1.3	%)	$	(18,167	)		(1.0	%)	$	(3,752	)		(0.2	%)

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

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Years Ended September 30, 2013 and 2012

Total acute care revenue — Total acute care revenue for the year ended September 30, 2013, was $1.82 billion, an increase of $53.8 million or 3.0%, compared to $1.77 billion in the prior year. The increase in total acute care revenue is primarily due to an increase in adjusted admissions of 2.9%. Excluding the prior year net impact of certain prior period Medicare related adjustments, total acute care revenue for the year ended September 30, 2013, increased $63.5 million or 3.6%. The provision for bad debts for the year ended September 30, 2013, was $370.5 million, an increase of $88.0 million or 31.1%, compared to $282.5 million in the prior year. The increase in the provision for bad debts is the result of increased uninsured volume, revenue and related acuity levels. Excluding the prior year net impact of certain prior period Medicare related adjustments, our uncompensated care as a percentage of total acute care revenue, which includes bad debts, charity care and uninsured discounts, increased to 24.2%, compared to 21.8% in the prior year. Our net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, decreased 0.3% compared to the prior year.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue of $8.4 million and $14.3 million for the years ended September 30, 2013 and 2012, respectively. Net adjustments to estimated third-party payor settlements for the year ended September 30, 2012, includes the net impact of certain prior period Medicare related adjustments totaling $9.7 million related to the industry-wide rural floor wage settlement.

Salaries and benefits — Salaries and benefits expense for the year ended September 30, 2013, was $872.1 million, or 47.9% of total acute care revenue, compared to $811.9 million, or 46.0% of total acute care revenue in the prior year. Excluding the impact of stock-based compensation, salaries and benefits as a percentage of total acute care revenue was 47.7% for the year ended September 30, 2013, compared to 45.4% in the prior year. Salaries and benefits expense as a percentage of total acute care revenue, excluding the impact of stock-based compensation, increased primarily as a result of the expansion of our employed physician base, which requires additional investments in labor and other practice-related costs, including infrastructure and physician support staff.

Supplies — Supplies expense for the year ended September 30, 2013, was $315.8 million, or 17.4% of total acute care revenue, compared to $302.6 million, or 17.1% of total acute care revenue in the prior year.

Other operating expenses — Other operating expenses for the year ended September 30, 2013, were $384.2 million, or 21.1% of total acute care revenue, compared to $408.0 million, or 23.1% of total acute care revenue in the prior year. The decrease in other operating expenses as a percentage of total acute care revenue is primarily due to the result of a reduction in professional fees associated with our Texas hospitals’ participation in certain supplemental reimbursement programs.

Interest expense — Interest expense for the year ended September 30, 2013, was $133.2 million, compared to $138.0 million in the prior year. The decrease in interest expense is due to the execution of an amendment to re-price our senior secured credit facility completed during the second quarter of fiscal year 2013.

Gain (loss) on disposal of assets, net — Loss on disposal of assets for the year ended September 30, 2013, include a $10.2 million loss associated with the sale-leaseback of certain of our hospital properties during the year.

Years Ended September 30, 2012 and 2011

Total acute care revenue — Total acute care revenue for the year ended September 30, 2012, was $1.77 billion, an increase of $176.2 million or 11.1%, compared to $1.59 billion in the prior year. The increase in total acute care revenue, which includes the impact of our St. Joseph acquisition, is due to an increase in adjusted admissions of 11.3%. Excluding the prior year net impact of certain prior period Medicare related adjustments, total acute care revenue for the year ended September 30, 3012, increased $166.5 million or 10.5%. The provision for bad debts for the year ended September 30, 2012, was $282.5 million, an increase of $68.4 million or 31.9%, compared to $214.1 million in the prior year. The increase in the provision for bad debt is the result of increased uninsured volume and revenue, which was particularly impact by the state of Arizona’s efforts to reduce its Medicaid enrollment. Our self-pay admissions as a percentage of total admissions increased to 7.9% for the year ended September 30, 2012, compared to 6.9% in the prior year. Excluding the prior year net impact of certain prior period Medicare related adjustments, our uncompensated care as a percentage of total acute care revenue, which includes bad debts, charity care and uninsured discounts, increased to 21.8%, compared to 18.8% in the prior year. Our net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 0.9% compared to the prior year.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue of $14.3 million and $2.3 million for the years ended September 30, 2012 and 2011, respectively. Net adjustments to estimated third-party payor settlements for the year ended September 30, 2012, includes the net impact of certain prior period Medicare related adjustments totaling $9.7 million related to the industry-wide rural floor wage settlement.

Salaries and benefits — Salaries and benefits expense for the year ended September 30, 2012, was $811.9 million, or 46.0% of total acute care revenue, compared to $701.5 million, or 44.1% of total acute care revenue in the prior year. Excluding the impact of stock-based compensation, salaries and benefits as a percentage of total acute care revenue was 45.4% for the year ended September 30, 2012, compared to 44.0% in the prior year. Salaries and benefits expense as a percentage of total acute care revenue, excluding the impact of stock-based compensation, increased primarily as a result of the expansion of our employed physician base, which requires additional investments in labor and other practice-related costs, including infrastructure and physician support staff.

Supplies — Supplies expense for the year ended September 30, 2012, was $302.6 million, or 17.1% of total acute care revenue, compared to $277.9 million, or 17.5% of total acute care revenue in the prior year. The decrease in supplies as a percentage of total acute care revenue is the result of lower supplies utilization driven by a 20.7% increase in sub-acute services and the impact of supply cost initiatives that have included improved pricing and more effective utilization.

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Other operating expenses — Other operating expenses for the year ended September 30, 2012, were $408.0 million, or 23.1% of total acute care revenue, compared to $367.1 million, or 23.1% of total acute care revenue in the prior year.

Medicare and Medicaid EHR incentives — Medicare and Medicaid EHR incentives for the year ended September 30, 2012, totaled $22.4 million, compared to $9.0 million in the prior year. The increase in our Medicare and Medicaid EHR incentives is due to the timing of EHR implementation and meeting meaningful use requirements at our facilities.

Interest expense — Interest expense for the year ended September 30, 2012, was $138.0 million, compared to $96.0 million in the prior year. The increase in our interest expense is due to our refinancing transaction completed during the third quarter of fiscal year 2011.

Loss on extinguishment of debt — We incurred a loss on extinguishment of debt totaling $23.1 million during the year ended September 30, 2011, as a result of our refinancing transaction. The loss on extinguishment of debt included the write-off of $8.3 million in existing deferred financing costs, $4.9 million in creditor fees and $9.9 million in redemption premiums associated with the repurchase of the 8 ³/₄% senior subordinated notes due 2014.

Loss from continuing operations before income taxes — Loss from continuing operations before income taxes decreased $14.4 million to a loss of $18.2 million for the year ended September 30, 2012, compared to $3.8 million in the prior year. Loss from continuing operations in the year ended September 30, 2012, included the impact of additional interest expense of $42.0 million resulting from our prior year refinancing transaction, offset by additional Medicare and Medicaid EHR incentives of $13.4 million recognized in fiscal year 2012.

Health Choice

The following table sets forth, for the periods indicated, results of our Health Choice operations expressed in dollar terms and as a percentage of premium revenue. Such information has been derived from our audited, consolidated statements of operations.

	Year Ended September 30, 2013					Year Ended September 30, 2012					Year Ended September 30, 2011
($ in thousands):	Amount		Percentage			Amount		Percentage			Amount		Percentage
Premium revenue
Premium revenue	$	564,152		100.0	%	$	569,142		100.0	%	$	757,309		100.0	%
Costs and expenses
Salaries and benefits		23,985		4.3	%		21,527		3.8	%		20,394		2.7	%
Supplies		183		0.0	%		228		0.0	%		201		0.0	%
Medical claims (1)		474,386		84.1	%		473,217		83.1	%		640,754		84.6	%
Other operating expenses		23,448		4.1	%		22,478		4.0	%		25,788		3.4	%
Rentals and leases		1,544		0.3	%		1,533		0.3	%		1,625		0.2	%
Depreciation and amortization		4,148		0.7	%		3,884		0.7	%		3,556		0.5	%
Total costs and expenses		527,694		93.5	%		522,867		91.9	%		692,318		91.4	%
Earnings before income taxes	$	36,458		6.5	%	$	46,275		8.1	%	$	64,991		8.6	%

(1) Medical claims paid to our hospitals of $7.1 million, $7.1 million and $10.6 million for the years ended September 30, 2013, 2012 and 2011, respectively, are eliminated in our consolidated results.

Years Ended September 30, 2013 and 2012

Premium revenue — Premium revenue was $564.2 million for the year ended September 30, 2013, a decrease of $5.0 million or 0.9%, compared to $569.1 million in the prior year. Member months declined 3.2% in the year ended September 30, 2013, compared to the prior year. The decline in member months is primarily impacted by the state of Arizona’s efforts to reduce Medicaid enrollment, particularly related to childless adults.

Medical claims — Medical claims expense was $474.4 million for the year ended September 30, 2013, compared to $473.2 million in the prior year. Medical claims expense as a percentage of premium revenue was 84.1% for the year ended September 30, 2013, compared to 83.1% in the prior year. The increase in medical claims expense as a percentage of premium revenue is primarily due to changes in prior period development that impacted prior years results.

Years Ended September 30, 2012 and 2011

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

Medical claims — Medical claims expense was $473.2 million for the year ended September 30, 2012, compared to $640.8 million in the prior year. Medical claims expense as a percentage of premium revenue was 83.1% for the year ended September 30, 2012, compared to 84.6% in the prior year. The decrease in medical claims as a percentage of premium revenue is primarily impacted by the loss of childless adult lives from its membership rolls, which typically incur higher medical claims costs per member.

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Income Taxes

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

Years Ended September 30, 2013 and 2012

Income tax expense — We recorded a provision for income taxes from continuing operations of $5.4 million, resulting in an effective tax rate of 44.5% for the year ended September 30, 2013, compared to $2.6 million, for an effective tax rate of 9.2% in the prior year. The increase in our effective tax rate is primarily related to the prior year including both a change in certain of our state tax filing positions, which resulted in a tax benefit in the prior year totaling $4.0 million, and the elimination of a reserve for an uncertain tax position totaling $5.0 million.

Years Ended September 30, 2012 and 2011

Income tax expense — We recorded a provision for income taxes from continuing operations of $2.6 million, resulting in an effective tax rate of 9.2% for the year ended September 30, 2012, compared to $22.3 million, for an effective tax rate of 36.5% in the prior year. The decrease in our effective tax rate is primarily the result of a change in certain of our state tax filing positions, which resulted in a tax benefit totaling $4.0 million, and the elimination of a reserve for an uncertain tax position totaling $5.0 million.

Summary of Operations by Quarter

The following table presents unaudited quarterly operating results for the years ended September 30, 2013 and 2012. We believe that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the consolidated financial statements. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.

	Quarter Ended
	Sept. 30, 2013 (1)			June 30, 2013 (2)		March 31, 2013 (3)		Dec. 31, 2012(4)
	(in thousands)
Net revenue	$	584,732		$	599,127	$	601,822	$	590,932
Earnings (loss) from continuing operations before income taxes		(5,010	)		9,476		4,002		3,730
Net earnings (loss) from continuing operations		(2,428	)		5,626		1,425		2,141

	Quarter Ended
	Sept. 30, 2012(5)			June 30, 2012(6)		March 31, 2012(7)		Dec. 31, 2011(8)
	(in thousands)
Net revenue	$	582,545		$	577,619	$	594,072	$	573,524
Earnings (loss) from continuing operations before income taxes		(401	)		2,814		19,756		5,939
Net earnings from continuing operations		359			10,849		11,443		2,885

(1) Results for the quarter ended September 30, 2013, include $11.3 million in Medicare and Medicaid EHR incentives compared to $14.3 million in the prior year quarter. Additionally, results for the quarter ended September 30, 2013, include a $10.2 million loss on the sale of assets associated with our sale-leaseback transactions.

(2) Results for the quarter ended June 30, 2013, include Medicare and Medicaid EHR incentives of $4.8 million.

(3) Results for the quarter ended March 31, 2013, include $5.0 million in Medicare and Medicaid EHR incentives compared to $1.8 million in the prior year quarter.

(4) Results for the quarter ended December 31, 2012, include Medicare and Medicaid EHR incentives of $1.4 million, compared to $6.3 million in the prior year quarter.

(5) Results for the quarter ended September 30, 2012, include $14.3 million in Medicare and Medicaid EHR incentives.

(6) Results for the quarter ended June 30, 2012, include the impact of an $8.0 million income tax benefit.

(7) Results for the quarter ended March 31, 2012, include two separate adjustments related to Medicare revenue. One of these adjustments related to an industry-wide rural floor wage settlement, which resulted in an increase in acute care revenue of $12.8 million, as well as an increase in operating expenses of $3.4 million for related legal and consulting fees. In addition, new SSI ratios were published by CMS for federal fiscal years ending September 30, 2006 through 2009, which resulted in a reduction in acute care revenue of $3.1 million. Additionally, results for the quarter ended March 31, 2012, include $2.0 million in Medicare and Medicaid EHR incentives.

(8) Results for the quarter ended December 31, 2011, include Medicare and Medicaid EHR incentives of $6.3 million.

63

LIQUIDITY AND CAPITAL RESOURCES

Overview of Cash Flow Activities for the Years Ended September 30, 2013 and 2012

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

	Year Ended September 30,
	2013			2012
Cash flows from operating activities	$	95,345		$	41,857
Cash flows from investing activities	$	314,780		$	(115,881	)
Cash flows from financing activities	$	(20,876	)	$	(24,421	)

Operating Activities

Operating cash flows increased $53.5 million for the year ended September 30, 2013, compared to the prior year. Our operating cash flows in the prior year were primarily impacted by delays in funding for certain Texas supplemental Medicaid reimbursement programs and a decline in medical claims payable at Health Choice as a result of the significant reduction in covered lives associated with Arizona’s efforts to curtail its Medicaid enrollment.

At September 30, 2013, excluding the impact of our sale-leaseback transactions and the sale of our Florida market, we had $212.9 million in net working capital, compared to $241.0 million at September 30, 2012. Net accounts receivable increased $14.4 million to $371.0 million at September 30, 2013, from $356.6 million at September 30, 2012. Our days revenue in accounts receivable at September 30, 2013, were 56, compared to 59 at September 30, 2012.

Investing Activities

Investing cash flows increased $430.7 million for the year ended September 30, 2013, compared to the prior year. The increase is primarily due to proceeds of $278.0 million (net of certain transaction costs) received from the sale-leaseback of three of our hospital properties during the year ended September 30, 2013, and the advanced proceeds of $144.8 million (net of certain transaction costs) received in the connection with the sale of our Florida operations, which was effective October 1, 2013.

Financing Activities

Financing cash flows increased $3.5 million for the year ended September 30, 2013, compared to the prior year.

Capital Resources

As of September 30, 2013, we had the following debt arrangements:

• $1.325 billion in senior secured credit facilities; and

• $850.0 million in 8.375% senior notes due 2019.

At September 30, 2013, amounts outstanding under our senior secured credit facilities consisted of $999.5 million in term loans. In addition, we had $71.1 million in letters of credit outstanding under the revolving credit facility. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 4.8% for the year ended September 30, 2013, compared to 5.0% in the prior year.

$1.325 Billion Senior Secured Credit Facilities

We are party to a senior credit agreement, which was amended on February 20, 2013 (the “Repricing Amendment”) as part of a repricing that lowered the interest rate, (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility with a seven-year maturity and (2) a $300.0 million senior secured revolving credit facility with a five-year maturity, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date of the Repricing Amendment, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require installment payments.

Borrowings under the senior secured term loan facility (giving effect to the Repricing Amendment) bear interest at a rate per annum equal to, at our option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum.

64

Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at our option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, we are required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain of our subsidiaries (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all of our future material wholly owned subsidiaries, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of our equity interests and that of the Credit Facility Guarantors, (2) mortgage liens on all of our material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires us to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances, and from a percentage of annual excess cash flow.

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.

8.375% Senior Notes due 2019

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

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

We may redeem the Senior Notes, in whole or in part, at any time prior to May 15, 2014, at a price equal to 100% of the aggregate principal amount of the Senior Notes plus a “make-whole” premium and accrued and unpaid interest and special interest, if any, to but excluding the redemption date. In addition, we may redeem up to 35% of the Senior Notes before May 15, 2014, with the net cash proceeds from certain equity offerings at a redemption price equal to 108.375% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions.

The Indenture contains covenants that limit our (and our restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase our capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to us and our restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If we experience certain kinds of changes of control, we must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, we will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

65

Credit Ratings

The table below summarizes our corporate rating, as well as our credit ratings for the Senior Secured Credit Facilities and Senior Notes as of the date of this filing:

	Moody’s	Standard & Poor’s
Corporate credit	B2	B
Senior secured term loan facility	Ba3	B
Senior secured revolving credit facility	Ba3	BB-
8.375% senior notes due 2019	Caa1	CCC+
Outlook	Stable	Stable

Other

We executed interest rate swaps with Citibank, N.A. (“Citibank”) and Barclays Bank PLC (“Barclays”), as counterparties, with notional amounts totaling $350.0 million, each agreement effective March 28, 2013 and expiring between September 30, 2014 and September 30, 2016. Under these agreements, we are required to make quarterly fixed rate payments to the counterparties at annual rates ranging from 1.6% to 2.2%. The counterparties are obligated to make quarterly floating rate payments to us based on the three-month LIBOR rate, each subject to a floor of 1.25%.

Capital Expenditures

We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our Senior Secured Credit Facilities and other capital sources that may become available. We expect our capital expenditures for fiscal 2014 to be $105.0 million to $110.0 million, including the following significant expenditures:

• $18 million to $20 million for growth and new business projects;

• $62 million to $65 million in replacement or maintenance related projects at our hospitals; and

• $25 million in hardware and software costs related to information systems projects, including healthcare IT stimulus initiatives.

66

Liquidity

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

Including available cash at September 30, 2013, we have available liquidity as follows (in millions):

Cash and cash equivalents	$	438.1
Available capacity under our senior secured revolving credit facility		228.9
Net available liquidity at September 30, 2013	$	667.0

Net available liquidity assumes 100% participation from all lenders currently participating in our senior secured revolving credit facility. In addition to our available liquidity, we expect to generate significant operating cash flows in fiscal 2014. We will also utilize proceeds from our financing activities as needed.

With respect to the disposition of our Florida operations and the sale-leaseback of three of our properties, we received aggregate proceeds of approximately $427 million. The Amended and Restated Credit Agreement requires us to prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions unless such proceeds are reinvested within 12 months in existing facilities or 24 months in a greenfield construction project (36 months if there is a binding commitment for such investment within such 12 or 24 month periods). The Indenture similarly requires us to make prepayments with net cash proceeds of certain asset dispositions unless such proceeds have been either reinvested or used to prepay our obligations under the senior secured term loan facility within 365 days (an additional 180 days exists if there is a binding commitment for such investment). See “Item 7.– Management’s Discussion and Analysis – Liquidity and Capital Resources – Capital Resources.”

Based upon our current level of operations and anticipated growth, we believe we have sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over the next three years. In evaluating the sufficiency of our liquidity for both the short-term and long-term, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our Senior Secured Credit Facilities, compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities.

We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our Senior Secured Credit Facilities, or otherwise, to enable us to grow our business, service our indebtedness, or make anticipated capital expenditures and tax payments. For more information, see Item 1A., “Risk Factors”.

One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence of, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For more information, see Item 1A., “Risk Factors”.

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

67

Tabular Disclosure of Contractual Obligations

The following table reflects a summary of obligations and commitments outstanding including both the principal and interest portions of long-term debt and capital lease obligations at September 30, 2013.

	Payments Due By Period
	Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
	(in millions)
Contractual Cash Obligations
Long-term debt, with interest (1)	$	126.1	$	250.8	$	248.9	$	1,929.0	$	2,554.8
Capital lease obligations, with interest		2.9		3.2		1.5		3.6		11.2
Medical claims		57.5		—		—		—		57.5
Operating leases		47.6		89.9		84.3		92.1		313.9
Estimated self-insurance liabilities		21.9		30.4		16.3		12.2		80.8
Purchase obligations		42.4		37.3		22.8		15.2		117.7
Subtotal	$	298.4	$	411.6	$	373.8	$	2,052.1	$	3,135.9
	Amount of Commitment Expiration Per Period
	Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
	(in millions)
Other Commitments (2)
Guarantees of surety bonds	$	1.4	$	—	$	—	$	—	$	1.4
Letters of credit		—		71.1		—		—		71.1
Other commitments		3.8		0.1		0.1		—		4.0
Subtotal		5.2		71.2		0.1		—		76.5
Total obligations and commitments	$	303.6	$	482.8	$	373.9	$	2,052.1	$	3,212.4

(1) We applied an interest rate of 4.5%, to our Senior Secured Credit Facilities and 8.375% to our Senior Notes.

(2) Excludes $10.0 million of unrecognized tax benefits and related interest that could result in a cash settlement, of which $7.5 million relates to timing differences between book and taxable income that may be offset by a reduction of cash tax obligations in future periods. We have not included these amounts in the above table as we cannot reliably estimate the amount and timing of payments related to these liabilities.

Seasonality

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At September 30, 2013, the following components of our Senior Secured Credit Facilities bear interest at variable rates at specified margins above either the agent bank’s alternate base rate or the LIBOR rate: (i) a $1.025 billion, seven-year term loan; and (ii) a $300.0 million, five-year revolving credit facility. As of September 30, 2013, we had outstanding variable rate debt of $999.5 million.

We have managed our market exposure to changes in interest rates by implementing a comprehensive interest rate hedging strategy that includes converting variable rate debt to fixed rate debt. We have executed interest rate swaps for non-trading and non-speculative purposes with Citibank and Barclays, as counterparties, with notional amounts totaling $350.0 million, each agreement effective March 28, 2013, and expiring between September 30, 2014 and September 30, 2016, at rates ranging from 1.6% to 2.2%. Our interest rate hedging agreements expose us to credit risk in the event of non-performance by our counterparties, Citibank and Barclays. However, we do not anticipate non-performance by either of our counterparties.

Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness, a 0.125% increase in current interest rates would have no estimated impact on pre-tax earnings and cash flows for the next twelve month period given the 1.25% LIBOR floor that exists in our Senior Secured Credit Facilities.

68

We currently believe we have adequate liquidity to fund operations during the near term through the generation of operating cash flows, cash on hand and access to our senior secured revolving credit facility. Our ability to borrow funds under our senior secured revolving credit facility is subject to the financial viability of the participating financial institutions. While we do not anticipate any of our current lenders defaulting on their obligations, we are unable to provide assurance that any particular lender will not default at a future date.

69

Item 8. Financial Statements and Supplementary Data.

IASIS Healthcare LLC

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm		71
Consolidated Balance Sheets at September 30, 2013 and 2012		72
Consolidated Statements of Operations for the Years Ended September 30, 2013, 2012 and 2011		73
Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2013, 2012 and 2011		74
Consolidated Statements of Equity for the Years Ended September 30, 2013, 2012 and 2011		75
Consolidated Statements of Cash Flows for the Years Ended September 30, 2013, 2012 and 2011		76
Notes to Consolidated Financial Statements		77

70

Report of Independent Registered Public Accounting Firm

To the Board of Directors of

IASIS Healthcare Corporation, sole member of IASIS Healthcare LLC

We have audited the accompanying consolidated balance sheets of IASIS Healthcare LLC (“the Company”) as of September 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended September 30, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IASIS Healthcare LLC at September 30, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Nashville, Tennessee

December 20, 2013

71

IASIS HEALTHCARE LLC

CONSOLIDATED BALANCE SHEETS

(In Thousands)

	September 30,		September 30,
	2013		2012
ASSETS
Current assets
Cash and cash equivalents	$	438,131	$	48,882
Accounts receivable, less allowance for doubtful accounts of $255,725 and $235,154 at September 30, 2013 and 2012, respectively		371,006		356,618
Inventories		57,781		67,650
Deferred income taxes		26,096		19,744
Prepaid expenses and other current assets		126,412		117,851
Assets held for sale		119,141		—
Total current assets		1,138,567		610,745
Property and equipment, net		833,169		1,171,657
Goodwill		816,410		818,424
Other intangible assets, net		25,957		29,161
Other assets, net		66,162		68,498
Total assets	$	2,880,265	$	2,698,485
LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	129,542	$	111,928
Salaries and benefits payable		62,884		65,390
Accrued interest payable		27,519		28,034
Medical claims payable		57,514		61,142
Other accrued expenses and other current liabilities		92,553		89,890
Current portion of long-term debt and capital lease obligations		13,221		13,387
Advance on divestiture		144,803		—
Liabilities held for sale		3,208		—
Total current liabilities		531,244		369,771
Long-term debt, capital lease and lease financing obligations		1,852,822		1,853,107
Deferred income taxes		115,592		120,961
Other long-term liabilities		123,120		104,110
Non-controlling interests with redemption rights		105,464		99,164
Equity
Member’s equity		142,262		141,589
Non-controlling interests		9,761		9,783
Total equity		152,023		151,372
Total liabilities and equity	$	2,880,265	$	2,698,485

See accompanying notes.

72

IASIS HEALTHCARE LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)

	Year Ended			Year Ended			Year Ended
	September 30,			September 30,			September 30,
	2013			2012			2011
Net revenue
Acute care revenue before provision for bad debts	$	2,182,966		$	2,041,124		$	1,793,098
Less: Provision for bad debts		(370,505	)		(282,506	)		(214,143	)
Acute care revenue		1,812,461			1,758,618			1,578,955
Premium revenue		564,152			569,142			757,309
Net revenue		2,376,613			2,327,760			2,336,264
Costs and expenses
Salaries and benefits (includes stock-based compensation of $3,855, $10,077 and $1,681, respectively)		896,081			833,389			721,890
Supplies		315,953			302,815			278,126
Medical claims		467,294			466,125			630,203
Rentals and leases		55,157			44,595			41,931
Other operating expenses		407,660			430,490			392,915
Medicare and Medicaid EHR incentives		(22,525	)		(22,426	)		(9,042	)
Interest expense, net		133,209			137,990			96,026
Depreciation and amortization		97,609			103,917			95,032
Management fees		5,000			5,000			5,000
Loss on extinguishment of debt		—			—			23,075
Total costs and expenses		2,355,438			2,301,895			2,275,156
Earnings from continuing operations before gain (loss) on disposal of assets and income taxes		21,175			25,865			61,108
Gain (loss) on disposal of assets, net		(8,977	)		2,243			131
Earnings from continuing operations before income taxes		12,198			28,108			61,239
Income tax expense		5,434			2,572			22,332
Net earnings from continuing operations		6,764			25,536			38,907
Earnings from discontinued operations, net of income taxes		3,735			6,052			2,792
Net earnings		10,499			31,588			41,699
Net earnings attributable to non-controlling interests		(7,215	)		(8,712	)		(10,338	)
Net earnings attributable to IASIS Healthcare LLC	$	3,284		$	22,876		$	31,361

See accompanying notes.

73

IASIS HEALTHCARE LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

	Year Ended			Year Ended			Year Ended
	September 30,			September 30,			September 30,
	2013			2012			2011
Net earnings	$	10,499		$	31,588		$	41,699
Other comprehensive income (loss)
Change in fair value of highly effective interest rate hedges		1,662			(5,914	)		823
Amortization of other comprehensive income related to ineffective interest rate hedges		—			2,057			942
Other comprehensive income (loss) before income taxes		1,662			(3,857	)		1,765
Change in income tax benefit (expense)		(618	)		1,432			(653	)
Other comprehensive income (loss), net of income taxes		1,044			(2,425	)		1,112
Comprehensive income		11,543			29,163			42,811
Net earnings attributable to non-controlling interests		(7,215	)		(8,712	)		(10,338	)
Comprehensive income attributable to IASIS Healthcare LLC	$	4,328		$	20,451		$	32,473

See accompanying notes.

74

IASIS HEALTHCARE LLC

CONSOLIDATED STATEMENTS OF EQUITY

(In Thousands)

	Non-controlling Interests with Redmption Rights			Member’s Equity			Non-controlling Interests			Total Equity
Balance at September 30, 2010	$	72,112		$	702,135		$	10,371		$	712,506
Net earnings		7,651			31,361			48			31,409
Distributions to non-controlling interests		(8,720	)		—			(122	)		(122	)
Repurchase of non-controlling interests		(639	)		—			(507	)		(507	)
Acquistion related adjustments to redemption value of non-controlling interests with redemption rights		33,169			—			—			—
Stock-based compensation		—			1,681			—			1,681
Other comprehensive income		—			1,112			—			1,112
Distribution to parent company in connection with refinancing		—			(632,866	)		—			(632,866	)
Contribution from parent company related to tax benefit from Holdings Senior PIK Loans interest		—			6,981			—			6,981
Adjustment to redemption value of non-controlling interests with redemption rights		(7,596	)		7,596			—			7,596
Balance at September 30, 2011		95,977			118,000			9,790			127,790
Net earnings		8,643			22,876			69			22,945
Distributions to non-controlling interests		(8,580	)		—			(86	)		(86	)
Repurchase of non-controlling interests		(589	)		—			—			—
Acquistion related adjustments to redemption value of non-controlling interests with redemption rights		438			—			—			—
Stock-based compensation		—			10,077			—			10,077
Other comprehensive loss		—			(2,425	)		—			(2,425	)
Adjustments related to tax benefit from parent company tax deductions		—			(191	)		—			(191	)
Income tax benefit from exercised employee stock options		—			6			—			6
Other		(3,479	)		—			10			10
Adjustment to redemption value of non-controlling interests with redemption rights		6,754			(6,754	)		—			(6,754	)
Balance at September 30, 2012		99,164			141,589			9,783			151,372
Net earnings		7,176			3,284			39			3,323
Distributions to non-controlling interests		(5,951	)		—			(61	)		(61	)
Repurchase of non-controlling interests		(1,272	)		—			—			—
Sale of non-controlling interests		1,262			—			—			—
Acquistion related adjustments to redemption value of non-controlling interests with redemption rights		364			—			—			—
Stock-based compensation		—			3,855			—			3,855
Other comprehensive income		—			1,044			—			1,044
Adjustments related to tax benefit from parent company tax deductions		—			489			—			489
Income tax benefit from exercised employee stock options		—			16			—			16
Other		(3,316	)		22			—			22
Adjustment to redemption value of non-controlling interests with redemption rights		8,037			(8,037	)		—			(8,037	)
Balance at September 30, 2013	$	105,464		$	142,262		$	9,761		$	152,023

See accompanying notes.

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IASIS HEALTHCARE LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Year Ended September 30, 2013			Year Ended September 30, 2012			Year Ended September 30, 2011
Cash flows from operating activities
Net earnings	$	10,499		$	31,588		$	41,699
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		97,609			103,917			95,032
Amortization of loan costs		7,612			7,309			4,887
Stock-based compensation		3,855			10,077			1,681
Deferred income taxes		(3,933	)		13,576			3,640
Income tax benefit from exercise of employee stock options		16			6			—
Income tax benefit from parent company		489			(191	)		6,981
Fair value change in interest rate hedges		—			(1,410	)		(1,589	)
Amortization of other comprehensive loss		—			2,057			942
Loss (gain) on disposal of assets, net		8,977			(2,243	)		(131	)
Earnings from discontinued operations, net		(3,735	)		(6,052	)		(2,792	)
Loss on extinguishment of debt		—			—			23,075
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net		(7,947	)		(63,321	)		(19,343	)
Inventories, prepaid expenses and other current assets		(13,368	)		(44,929	)		(3,551	)
Accounts payable, other accrued expenses and other accrued liabilities		2,726			(17,573	)		(19,542	)
Net cash provided by operating activities — continuing operations		102,800			32,811			130,989
Net cash provided by (used in) operating activities — discontinued operations		(7,455	)		9,046			6,112
Net cash provided by operating activities		95,345			41,857			137,101
Cash flows from investing activities
Purchases of property and equipment		(107,344	)		(98,278	)		(86,206	)
Cash received (paid) for acquisitions, net		2,996			(8,163	)		(151,697	)
Cash advance on divestiture		144,803			—			—
Cash received in sale-leaseback of real estate		277,983			—			—
Proceeds from sale of assets		88			30			140
Change in other assets, net		695			4,949			1,176
Net cash provided by (used in) investing activities — continuing operations		319,221			(101,462	)		(236,587	)
Net cash used in investing activities— discontinued operations		(4,441	)		(14,419	)		(13,173	)
Net cash provided by (used in) investing activities		314,780			(115,881	)		(249,760	)
Cash flows from financing activities
Proceeds from refinancing		—			—			1,863,730
Payment of debt and capital lease obligations		(178,500	)		(14,177	)		(1,053,147	)
Proceeds from revolving credit facilities		165,000			—			—
Debt financing costs incurred		(1,024	)		(998	)		(52,254	)
Distributions to parent company		—			—			(632,866	)
Distributions to non-controlling interests		(6,012	)		(8,666	)		(8,842	)
Cash received for the sale of non-controlling interests		849			—			—
Cash paid for the repurchase of non-controlling interests, net		(1,211	)		(589	)		(1,146	)
Other		22			9			—
Net cash provided by (used in) financing activities		(20,876	)		(24,421	)		115,475
Change in cash and cash equivalents		389,249			(98,445	)		2,816
Cash and cash equivalents at beginning of period		48,882			147,327			144,511
Cash and cash equivalents at end of period	$	438,131		$	48,882		$	147,327
Supplemental disclosure of cash flow information:
Cash paid for interest	$	125,613		$	132,134		$	74,774
Cash paid (received) for income taxes, net	$	(16,181	)	$	(13,946	)	$	17,608
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations resulting from acquisitions	$	—		$	—		$	9,559

See accompanying notes.

76

IASIS HEALTHCARE LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

IASIS Healthcare LLC (“IASIS” or the “Company”) provides high quality affordable healthcare services primarily in high-growth urban and suburban markets. As of September 30, 2013, we owned or leased 19 acute care hospital facilities and one behavioral health hospital facility with a total of 4,494 licensed beds, several outpatient service facilities and more than 160 physician clinics. Effective October 1, 2013, the Company sold its Florida operations, which primarily included three hospitals in the Tampa-St. Petersburg area and all related physician operations, which have been included in discontinued operations in these consolidated financial statements for all periods presented. For more information on the Company’s discontinued operations see Note 8. Accordingly, as of the date of filing, the Company owns or leases 16 acute care hospital facilities and one behavioral health hospital facility with a total of 3,803 licensed beds, several outpatient service facilities and more than 145 physician clinics. IASIS operates in various regions including:

• Salt Lake City, Utah;

• Phoenix, Arizona;

• five cities in Texas, including Houston and San Antonio; and

• West Monroe, Louisiana.

The Company also owns and operates Health Choice Arizona, Inc. (“Health Choice” or the “Plan”), a provider-owned, managed care organization and insurer, headquartered in Phoenix that serves over 179,000 members in Arizona and Utah.

Principles of Consolidation

The consolidated financial statements include all subsidiaries and entities under common control of the Company. Control is generally defined by the Company as ownership of a majority of the voting interest of an entity. In addition, control is demonstrated in instances when the Company is the sole general partner in a limited partnership. Intercompany transactions have been eliminated.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no impact on the Company’s total assets or total liabilities and equity.

General and Administrative

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company would include the IASIS corporate office costs, which were $45.4 million, $56.4 million and $48.8 million for the years ended September 30, 2013, 2012 and 2011, respectively.

Discontinued Operations

In accordance with provisions of Financial Accounting Standards Board (“FASB”) authoritative guidance regarding discontinued operations, the Company has presented the operating results, financial position and cash flows of its previously disposed facilities as discontinued operations, net of income taxes, in the accompanying consolidated financial statements.

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2. SIGNIFICANT ACCOUNTING POLICIES

Net Revenue

Acute Care Revenue

The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs and managed care health plans, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Additionally, the Company offers discounts through its uninsured discount program to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans, or charity care.

In the ordinary course of business, the Company provides care without charge to patients who are financially unable to pay for the healthcare services they receive. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported in net revenue. The Company currently records revenue deductions for patient accounts that meet its guidelines for charity care. The Company provides charity care to patients with income levels below 200% of the federal poverty level (“FPL”). Additionally, at all of the Company’s hospitals, a sliding scale of reduced rates is offered to uninsured patients, who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the FPL. The estimated costs incurred by the Company to provide services to patients who qualify for charity care were $12.9 million, $14.0 million and $17.0 million for the years ended September 30, 2013, 2012 and 2011, respectively. These estimates were determined by applying a ratio of costs to gross charges multiplied by the Company’s gross charity care charges.

Acute care revenue is reported at the estimated net realizable amounts from third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted, if necessary, in future periods when final settlements are determined. Net adjustments to estimated third-party payor settlements (“prior year contractuals”) resulted in an increase in net revenue of $8.4 million, $14.3 million and $2.3 million for the years ended September 30, 2013, 2012 and 2011, respectively. The Company also records a provision for bad debts related to uninsured accounts to reflect its self-pay accounts receivable at the estimated amounts expected to be collected. The sources of the Company’s hospital net patient revenue by payor before its provision for bad debts are summarized as follows:

	Year Ended September 30,
	2013			2012			2011
Medicare		20.9	%		23.5	%		21.8	%
Managed Medicare		10.1			9.0			8.7
Medicaid and managed Medicaid		12.2			13.7			16.1
Managed care		37.9			38.1			41.1
Self-pay		18.9			15.7			12.3
Total		100.0	%		100.0	%		100.0	%

Reimbursement Settlements

During fiscal 2012, a settlement agreement (the “Rural Floor Settlement”) was signed between the Centers for Medicare and Medicaid Services (“CMS”) and a large number of healthcare service providers, including the Company’s hospitals. The Rural Floor Settlement is intended to resolve all claims that have been brought or could have been brought relating to CMS’ calculation of the rural floor budget neutrality adjustment that was created by the Balanced Budget Act of 1997 for federal fiscal year 1998 through and including federal fiscal year 2011. As a result of the Rural Floor Settlement, the Company recognized $12.8 million of additional acute care revenue during the year ended September 30, 2012.

During the year ended September 30, 2012, acute care revenue included an unfavorable adjustment of $3.1 million related to the newly issued Supplemental Security Income (“SSI”) ratios utilized for calculating Medicare disproportionate share hospital reimbursement for federal fiscal years 2006 through 2009.

Premium Revenue

Health Choice is primarily a provider-owned, managed care organization and insurer that serves enrollees in Arizona and Utah. The Plan derives most of its revenue through a contract in Arizona with the Arizona Health Care Cost Containment System (“AHCCCS”) to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program. The contract requires the Plan 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. Capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services.

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The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in excess of stated levels of up to $35,000 per claim, depending on the eligibility classification of the member. Qualified costs must be incurred during the contract year and are the lesser of the amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the contract with AHCCCS when healthcare costs exceed stated amounts as provided under the contract, including estimates of such costs at the end of each accounting period.

Health Choice’s amended contract with AHCCCS, which was effective October 1, 2012, provided for a one-year term. On March 25, 2013, Health Choice was awarded a new contract by AHCCCS. The new contract, which commenced on October 1, 2013, has an initial term of three years, and includes two one-year renewal options at the discretion of AHCCCS. The contract is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate the contract in the event of the unavailability of state or federal funding.

Health Choice also provides coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”) provider pursuant to a contract with CMS. The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members (i.e. those that are eligible for Medicare and Medicaid). The contract with CMS includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Health Choice has received notification that CMS is exercising its option to extend its contract through December 31, 2013.

In Arizona and surrounding states, the Plan subcontracts with hospitals, physicians and other medical providers to provide services to its Medicaid and Medicare enrollees in Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal counties, regardless of the actual costs incurred to provide these services.

Medicare and Medicaid EHR Incentives

The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments that began in calendar year 2011 for eligible hospitals and professionals that implement certified electronic health records (“EHR”) technology and adopt the related meaningful use requirements. The Company recognizes income related to the Medicare or Medicaid incentives as the Company is able to satisfy all appropriate contingencies, which includes completing attestations as to eligible hospitals adopting, implementing or demonstrating meaningful use of certified EHR technology, and additionally for Medicare incentives, deferring income until the related Medicare fiscal year has passed and cost report information used to determine the final amount of reimbursement is known. Included in the accompanying consolidated statements of operations for the years ended September 30, 2013, 2012 and 2011 is $22.5 million, $22.4 million and $9.0 million, respectively, of operating income related to Medicare and Medicaid EHR incentives recognized during the respective period. The Company has incurred and will continue to incur both capital costs and operating expenses in order to implement certified EHR technology and meet meaningful use requirements. These costs and expenses are projected to continue during all stages of certified EHR technology and meaningful use implementation. As a result, the timing of the expense recognition will not correlate with the receipt of the incentive payments or the recognition of operating income.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents balances primarily with high credit quality financial institutions. The Company manages its credit exposure by placing its investments in United States Treasury securities or other high quality securities, and by periodically evaluating the relative credit standing of the financial institution.

As discussed in Note 3, cash generated from certain asset dispositions may be subject to prepayment requirements under our senior credit agreement and indenture.

Accounts Receivable

Patient Accounts Receivable

The Company receives payments for services rendered from federal and state agencies (under the Medicare, Medicaid and TRICARE programs), managed care health plans, including Medicare and Medicaid managed health plans, commercial insurance companies, employers and patients. During the years ended September 30, 2013, 2012 and 2011, 43.2%, 46.2% and 46.6%, respectively, of the Company’s acute care revenue before its provision for bad debts related to patients participating in the Medicare and Medicaid programs, including Medicare and Medicaid managed health plans. The Company recognizes that revenue and receivables from government agencies are significant to its operations, but does not believe that there is significant credit risks associated with these government agencies. The Company believes that concentration of credit risk from other payors is limited due to the number of patients and payors.

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Allowance for Doubtful Accounts

The provision for bad debts and the associated allowance for doubtful accounts relate primarily to amounts due directly from patients. The Company’s estimation of its allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of collection efforts. The Company’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. The Company monitors accounts receivable balances and the effectiveness of reserve policies on a monthly basis and reviews various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following:

• Historical write-off and collection experience using a hindsight or look-back approach;

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

• Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

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

• Trending of days revenue in accounts receivable; and

• Various allowance coverage statistics.

The Company performs hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of the process for estimating its allowance for doubtful accounts. The Company does not pursue collection of amounts related to patients who qualify for charity care under the Company’s guidelines. Charity care accounts are deducted from gross revenue and are not included in the provision for bad debts.

At September 30, 2013 and 2012, the Company’s self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $336.2 million and $328.5 million, respectively. At September 30, 2013 and 2012, the Company’s allowance for doubtful accounts was $255.7 million and $235.2 million, respectively. The increase in the allowance for doubtful accounts is due primarily to an increase in self-pay volume and revenue.

Inventories

Inventories, principally medical supplies, implants and pharmaceuticals, are stated at the lower of cost or market.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at September 30, 2013 and 2012, include amounts due to the Company related to the Texas private supplemental Medicaid reimbursement programs totaling $66.8 million and $42.7 million, respectively.

Long-lived Assets

The primary components of the Company’s long-lived assets are discussed below. When events, circumstances or operating results indicate that the carrying values of certain long-lived assets and related identifiable intangible assets (excluding goodwill) that are expected to be held and used might be impaired under the provisions of FASB authoritative guidance regarding accounting for the impairment or disposal of long-lived assets, the Company considers the recoverability of assets to be held and used by comparing the carrying amount of the assets to the undiscounted value of future net cash flows expected to be generated by the assets. If assets are identified as impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets as determined by independent appraisals or estimates of discounted future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. As of September 30, 2013, the Company has not identified any indicators of impairment related to its long-lived assets.

Property and Equipment

Property and equipment are stated at cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized. Buildings and improvements are depreciated over estimated useful lives ranging generally from 14 to 40 years. Estimated useful lives of equipment vary generally from 3 to 25 years. Leasehold improvements are amortized on a straight-line basis over the lesser of the terms of the respective leases or their estimated useful lives. Depreciation expense, including amortization of assets capitalized under capital leases, is computed using the straight-line method and was $94.6 million, $100.9 million and $92.0 million for the years ended September 30, 2013, 2012 and 2011, respectively.

Goodwill and Other Intangible Assets

        Goodwill is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate it may be impaired. Impairment testing for goodwill is done at the reporting unit level. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company completed its annual impairment test of goodwill during fiscal 2013, noting no impairment.

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Other Assets

Other assets includes costs associated with the issuance of debt, which are amortized over the life of the related debt. Amortization of deferred financing costs is included in interest expense and totaled $7.6 million, $7.3 million and $4.9 million for the years ended September 30, 2013, 2012 and 2011, respectively. Deferred financing costs, net of accumulated amortization, totaled $27.3 million and $32.3 million at September 30, 2013 and 2012, respectively.

Insurance Reserves

The Company estimates its reserve for self-insured professional and general liability and workers’ compensation risks using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with FASB authoritative guidance regarding accounting for income taxes and uncertain tax positions. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply when the temporary differences are expected to reverse. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income to determine whether a valuation allowance should be established.

Non-controlling Interests in Consolidated Entities

Non-controlling interests represent the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The Company’s accompanying consolidated financial statements include all assets, liabilities, revenues and expenses at their consolidated amounts, which include the amounts attributable to the Company and the non-controlling interest. The Company recognizes as a separate component of equity and earnings the portion of income or loss attributable to non-controlling interests based on the portion of the entity not owned by the Company.

The Company applies the provisions of FASB authoritative guidance regarding non-controlling interests in consolidated financial statements, which requires the Company to clearly identify and present ownership interests in subsidiaries held by parties other than the Company in the consolidated financial statements within the equity section. It also requires the amounts of consolidated net earnings attributable to the Company and to the non-controlling interests to be clearly identified and presented on the face of the consolidated statements of operations.

The Company consolidates nine subsidiaries with non-controlling interests that include third-party partners that own limited partnership units with certain redemption features. The redeemable limited partnership units require the Company to buy back the units upon the occurrence of certain events at the fair value of the units. In addition, the limited partnership agreements for all of the limited partnerships provide the limited partners with put rights which allow the units to be sold back to the Company, subject to certain limitations, at the fair value of the units. According to the limited partnership agreements, the fair value of the units is generally calculated as the product of the most current audited fiscal period’s EBITDA (earnings before interest, taxes, depreciation, amortization and management fees) and a fixed multiple, less any long-term debt of the entity. The majority of these put rights require an initial holding period of six years after purchase, at which point the holder of the redeemable limited partnership units may put back to the Company 20% of such holder’s units. Each succeeding year, the number of vested redeemable units will increase by 20% until the end of the tenth year after the initial investment, at which point 100% of the units may be put back to the Company. Under no circumstances shall the Company be required to repurchase more than 25% of the total vested redeemable limited partnership units in any fiscal year. The equity attributable to these interests has been classified as non-controlling interests with redemption rights in the accompanying consolidated balance sheets.

Medical Claims Payable

Monthly capitation payments made by Health Choice to physicians and other healthcare providers are expensed in the month services are contracted to be performed. Claims expense for non-capitated arrangements is accrued as services are rendered by hospitals, physicians and other healthcare providers during the year.

        Medical claims payable related to Health Choice includes claims received but not paid and an estimate of claims incurred but not reported. Incurred but not reported claims are estimated using a combination of historical claims experience (including severity and payment lag time) and other actuarial analysis, including number of enrollees, age of enrollees and certain enrollee health indicators, to predict the cost of healthcare services provided to enrollees during any given period. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from estimates given changes in the healthcare cost structure or adverse experience.

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The following table shows the components of the change in medical claims payable (in thousands):

	Year Ended September 30, 2013			Year Ended September 30, 2012			Year Ended September 30, 2011
Medical claims payable as of October 1	$	61,142		$	85,723		$	111,373
Medical claims expense incurred during the year
Related to current year		476,217			489,387			648,739
Related to prior years		(1,831	)		(16,170	)		(7,985	)
Total expenses		474,386			473,217			640,754
Medical claims payments during the year
Related to current year		(421,120	)		(430,788	)		(564,920	)
Related to prior years		(56,894	)		(67,010	)		(101,484	)
Total payments		(478,014	)		(497,798	)		(666,404	)
Medical claims payable as of September 30	$	57,514		$	61,142		$	85,723

As reflected in the table above, medical claims expense for the year ended September 30, 2013, includes a $1.8 million reduction of medical costs related to prior years resulting from favorable development in both the Medicaid product line of $1.5 million and the Medicare product line of $337,000.

As reflected in the table above, medical claims expense for the year ended September 30, 2012, includes a $16.2 million reduction of medical costs related to prior years resulting from favorable development in the Medicaid product line of $16.5 million, offset by unfavorable development in the Medicare product line of $364,000. The favorable development in the Medicaid product line is attributable to lower than anticipated medical costs resulting from a general decline in medical utilization, the loss of member lives due to changes in Arizona’s Medicaid eligibility structure, AHCCCS provider payment reductions and improvements in care management and other operational initiatives. This favorable development is offset, in part, by $4.9 million in reductions to premium revenue associated with the settlement of prior year profit reconciliations.

As reflected in the table above, medical claims expense for the year ended September 30, 2011, includes an $8.0 million reduction of medical costs related to prior years resulting from favorable development in the Medicaid product line of $8.1 million, offset by unfavorable development in the Medicare product line of $62,000. The favorable development in the Medicaid product line is attributable to lower than anticipated medical costs resulting from a general decline in medical utilization, the loss of member lives due to changes in Arizona’s Medicaid eligibility structure, AHCCCS provider payment reductions and improvements in care management and other operational initiatives. This favorable development is offset, in part, by $3.3 million in reductions to premium revenue associated with the settlement of prior year profit reconciliations.

Additional adjustments to prior year estimates may be necessary in future periods as more information becomes available.

Enrollment in Health Choice at September 30, 2013, 2012 and 2011, was 179,164, 178,806 and 195,665, respectively.

Stock-Based Compensation

Although IASIS has no stock option plan or outstanding stock options, the Company, through its parent, IASIS Healthcare Corporation (“IAS”), grants stock options for a fixed number of common shares to employees. The Company accounts for this stock-based incentive plan under the measurement and recognition provisions of FASB authoritative guidance regarding share-based payments (“Share-Based Payments Guidance”). Accordingly, the Company applies the fair value recognition provisions requiring all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on the estimated grant date fair value of each stock-based award. In accordance with the provisions of the Share-Based Payments Guidance, the Company uses the Black-Scholes-Merton model in determining the fair value of its share-based payments. The fair value of compensation costs for time-vested options will generally be amortized on a straight-line basis over the requisite service periods of the awards, generally equal to the awards’ vesting periods, while the fair value of compensation costs for options with market-based conditions are recognized on a graded schedule generally over the awards’ vesting periods.

Interest Rate Hedges

The Company accounts for its interest rate hedges in accordance with the provisions of FASB authoritative guidance regarding accounting for derivative instruments and hedging activities, which also includes enhanced disclosure requirements. In accordance with these provisions, the Company has designated its interest rate swaps as a cash flow hedge instrument. The Company assesses the effectiveness of its cash flow hedge on a quarterly basis, with any ineffectiveness being measured using the hypothetical derivative method.

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Fair Value of Financial Instruments

The Company applies the provisions of FASB authoritative guidance regarding fair value measurements, which provides a single definition of fair value, establishes a framework for measuring fair value, and expands disclosures concerning fair value measurements. The Company applies these provisions to the valuation and disclosure of certain financial instruments. This authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: (i) Level 1, which is defined as quoted prices in active markets that can be accessed at the measurement date; (ii) Level 2, which is defined as inputs other than quoted prices in active markets that are observable, either directly or indirectly; and (iii) Level 3, which is defined as unobservable inputs resulting from the existence of little or no market data, therefore potentially requiring an entity to develop its own assumptions.

Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the accompanying consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s capital lease obligations also approximate carrying value as they bear interest at current market rates.

The estimated fair values of the Company’s 8.375% senior notes due 2019 and senior secured credit facilities were $882.9 million and $1.003 billion, respectively, at September 30, 2013, based on the average of the bid and ask price as determined using published rates at that date and are categorized as Level 2 within the fair value hierarchy. The Company does not record its long-term debt at estimated fair values, but rather at its carrying value.

The Company determines the fair value of its interest rate hedges in a manner consistent with that used by market participants in pricing hedging instruments, which includes using a discounted cash flow analysis based upon the terms of the agreements, the impact of the forward LIBOR curve and an evaluation of credit risk. Given the use of observable market assumptions and the consideration of credit risk, the Company has categorized the valuation of its interest rate hedges as Level 2.

Management Services Agreement

The Company is party to a management services agreement with affiliates of TPG Global, LLC (together with its affiliates, “TPG”), JLL Partners and Trimaran Fund Management. The management services agreement provides that in exchange for consulting and management advisory services that will be provided to the Company by the investors, the Company will pay an aggregate monitoring fee of 0.25% of budgeted net revenue up to a maximum of $5.0 million per fiscal year to these parties (or certain of their respective affiliates) and reimburse them for their reasonable disbursements and out-of-pocket expenses. This monitoring fee is divided among the parties in proportion to their relative ownership percentages in IASIS Investment LLC, parent company and majority stockholder of IAS. The monitoring fee will be subordinated to the senior notes in the event of a bankruptcy of the Company. The management services agreement does not have a stated term. Pursuant to the provisions of the management services agreement, the Company has agreed to indemnify the investors (or certain of their respective affiliates) in certain situations arising from or relating to the agreement, the investors’ investment in the securities of IAS or any related transactions or the operations of the investors, except for losses that arise on account of the investors’ negligence or willful misconduct. For each of the three years ended September 30, 2013, 2012 and 2011, the Company paid $5.0 million in monitoring fees under the management services agreement.

Recent Accounting Pronouncements

Newly Adopted

In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income” (Topic 220): Presentation of Comprehensive Income. This ASU eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Instead, ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income” (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income. This ASU amends ASU 2011-05 to defer the requirement to measure and present reclassification adjustments from accumulated other comprehensive income to net income by income statement line item in net income and also in other comprehensive income. ASU 2011-05, as amended by ASU 2011-12, is required to be applied retrospectively and is effective for fiscal years beginning after December 15, 2011. The Company has adopted this authoritative guidance effective October 1, 2012, and the change in presentation is included in the Company’s accompanying consolidated statements of comprehensive income.

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Recently Issued

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. ASU 2013-02 requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 is required to be applied prospectively and is effective for fiscal years beginning after December 15, 2012, and interim periods within those years. The Company will adopt ASU 2013-02 in the first quarter of its fiscal year 2014. The adoption of ASU 2013-02 is not expected to significantly impact the Company’s consolidated financial statements.

3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

On May 3, 2011, the Company completed a transaction to refinance its then existing debt (“the Refinancing”). The Refinancing included $1.325 billion in new senior secured credit facilities and the issuance by the Company, together with its wholly owned subsidiary IASIS Capital Corporation (“IASIS Capital”), of $850.0 million aggregate principal amount of 8.375% senior notes due 2019 (the “Senior Notes”). Proceeds from the Refinancing were used to refinance amounts outstanding under the Company’s then existing credit facilities; fund a cash tender offer to repurchase any and all of the Company’s $475.0 million aggregate principal amount of 8 ³⁄₄% senior subordinated notes due 2014; repay in full the Holdings Senior Paid-in-Kind (“PIK”) Loans held at IAS; pay fees and expenses associated with the Refinancing; and raise capital for general corporate purposes.

As part of the Refinancing, the Company distributed $632.9 million to IAS, which is comprised of $402.9 million to fund the repayment of the Holdings Senior PIK Loans, including interest that had accrued to the principal balance of the loans totaling $102.9 million, and $230.0 million to be held for future acquisitions and strategic growth initiatives, as well as potential distributions to the equity holders of IAS. On June 6, 2012, IAS distributed $115.0 million to its equity holders. On October 18, 2013, IAS distributed the remaining $115.0 million to its equity holders.

Long-term debt and capital lease obligations consist of the following (in thousands):

	September 30, 2013		September 30, 2012
Senior secured term loan facility	$	996,154	$	1,005,537
Senior Notes		845,711		844,943
Capital leases and other obligations		24,178		16,014
		1,866,043		1,866,494
Less current maturities		13,221		13,387
	$	1,852,822	$	1,853,107

As of September 30, 2013, the senior secured term loan facility balance reflects an original issue discount (“OID”) of $3.4 million, which is net of accumulated amortization of $1.8 million. The Senior Notes balance reflects an OID of $4.3 million, which is net of accumulated amortization of $1.9 million.

As of September 30, 2013, capital leases and other obligations includes a financing obligation totaling $11.1 million, resulting from the Company’s sale-leaseback transactions described in Note 15.

$1.325 Billion Senior Secured Credit Facilities

The Company’s senior credit agreement resulting from the Refinancing was amended on February 20, 2013 (the “Repricing Amendment”) as part of a repricing that lowered the interest rate, (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility with a seven-year maturity and (2) a $300.0 million senior secured revolving credit facility with a five-year maturity, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date of the Repricing Amendment, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require installment payments.

        Borrowings under the senior secured term loan facility (giving effect to the Repricing Amendment) bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at the Company’s option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, the Company is required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain subsidiaries of the Company (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all future material wholly-owned subsidiaries of the Company, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of the equity interests of the Company and the Credit Facility Guarantors, (2) mortgage liens on all of the Company’s material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

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The Amended and Restated Credit Agreement requires the Company to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances, and from a percentage of annual excess cash flow. The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.

8.375% Senior Notes due 2019

The Company, together with IASIS Capital (together, the “Issuers”), have issued an $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers’ wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the “Notes Guarantors”) (the “Indenture”). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis.

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year, and commenced on November 15, 2011.

The Company may redeem the Senior Notes, in whole or in part, at any time prior to May 15, 2014, at a price equal to 100% of the aggregate principal amount of the Senior Notes plus a “make-whole” premium and accrued and unpaid interest and special interest, if any, to but excluding the redemption date. In addition, the Company may redeem up to 35% of the Senior Notes before May 15, 2014, with the net cash proceeds from certain equity offerings at a redemption price equal to 108.375% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions.

The Indenture contains covenants that limit the Company’s (and its restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase the Company’s capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to the Company and its restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of the Company’s assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If the Company experiences certain kinds of changes of control, it must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, the Company will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

4. INTEREST RATE SWAPS

In March 2009, the Company executed interest rate swap agreements with Citibank, N.A. (“Citibank”) and Wachovia Bank, N.A. (currently Wells Fargo Bank, N.A.), as counterparties, with notional amounts totaling $425.0 million, of which $225.0 million expired on February 28, 2011 and $200.0 million expired on February 29, 2012. The Company completed an assessment of these cash flow hedges during the year ended September 30, 2011, and determined that these hedges were effective for all periods up to and including the quarter ended March 31, 2011. The ineffectiveness of these hedging instruments occurred subsequent to March 31, 2011, and was the result of the Company’s refinancing transaction which established a LIBOR floor applicable to borrowings under the Senior Secured Credit Facilities, the source of the Company’s variable rate debt. Accordingly, a $1.4 million and $1.6 million gain resulting from the change in fair value of these hedging instruments has been recognized for the years ended September 30, 2012 and 2011, respectively. The resulting gain has been reflected as a component of interest expense in the accompanying consolidated statements of operations. No gain or loss has been reflected in the accompanying consolidated statements of operations for the periods these cash flow hedges were determined to be effective.

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In August 2011, the Company executed forward starting interest rate swaps with Citibank, N.A. and Barclays Bank PLC, as counterparties, with notional amounts totaling $350.0 million, each agreement effective March 28, 2013 and expiring between September 30, 2014 and September 30, 2016. Under these agreements, the Company is required to make quarterly fixed rate payments at annual rates ranging from 1.6% to 2.2%. The counterparties are obligated to make quarterly floating rate payments to the Company based on the three-month LIBOR rate, each subject to a floor of 1.25%. The Company completed an assessment of these cash flow hedges during the year ended September 30, 2013, and determined that these hedges were highly effective. Accordingly, no gain or loss related to these hedges has been reflected in the accompanying consolidated statements of operations, and the change in fair value has been included in accumulated other comprehensive loss as a component of member’s equity. Additionally, the Company was a party to an interest rate cap with Citibank, as counterparty, for a notional amount totaling $350.0 million and a cap rate of 1.75%, effective from March 1, 2012 until March 31, 2013.

Effective Dates	Total Notional Amounts
	(in thousands)
Interest Rate Swaps
Effective from March 28, 2013 to September 30, 2014	$	50,000
Effective from March 28, 2013 to September 30, 2015	$	100,000
Effective from March 28, 2013 to September 30, 2016	$	200,000

The fair value of the Company’s interest rate hedges at September 30, 2013 and 2012, reflect liability balances of $5.9 million and $7.6 million, respectively, and are included in other long-term liabilities in the accompanying consolidated balance sheets. The fair value of the Company’s interest rate hedges reflects a liability because the effect of the forward LIBOR curve on future interest payments results in less interest due to the Company under the variable rate component included in the interest rate hedging agreements, as compared to the amount due the Company’s counterparties under the fixed interest rate component. Any change in the fair value of the Company’s interest rate swaps that expired on February 28, 2012, net of income taxes, from inception to March 31, 2011, is included in accumulated other comprehensive loss as a component of member’s equity in the accompanying consolidated balance sheets. Any change in fair value of these interest rate swaps since March 31, 2011, has been included as a component of interest expense in the accompanying consolidated statements of operations, as previously described. Any change in the fair value of the Company’s forward starting hedging instruments effective March 1, 2012 and March 31, 2013 are included in accumulated other comprehensive loss.

5. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of the Company’s accumulated other comprehensive loss, net of income taxes, are as follows (in thousands):

	September 30, 2013			September 30, 2012			September 30, 2011
Fair value of interest rate hedges	$	(5,918	)	$	(7,580	)	$	(3,723	)
Income tax benefit		2,289			2,907			1,475
Accumulated other comprehensive loss	$	(3,629	)	$	(4,673	)	$	(2,248	)

6. DISTRIBUTION TO PARENT

As part of the Refinancing, the Company distributed $632.9 million to IAS, $402.9 million to fund the repayment of the Holdings senior paid-in-kind loans, which included interest that had accrued to the principal balance of the loans totaling $102.9 million, and $230.0 million to be held for future acquisitions and strategic growth initiatives, as well as potential distributions to the equity holders of IAS. On June 6, 2012, IAS distributed $115.0 million to its equity holders to redeem all of its remaining outstanding preferred stock and to pay a dividend to its common stockholders (the “Shareholder Distribution”), and on October 18, 2013, IAS distributed the remaining $115.0 million of cash originating from the Refinancing to pay a dividend to its common stockholders.

7. ACQUISITIONS

Effective October 1, 2010, the Company acquired Brim Holdings, Inc. (“Brim”) in a cash-for-stock transaction valued at $95.0 million, subject to changes in net working capital. Brim operates Wadley Regional Medical Center (“Wadley”), a 370-licensed bed acute care hospital facility located in Texarkana, Texas, and Pikes Peak Regional Hospital (“Pikes Peak”), a 15-licensed bed critical access acute care hospital facility, in Woodland Park, Colorado, through operating lease agreements with separate parties. Independent investors, consisting of board-certified physicians on the medical staff of Wadley, retained an aggregate 27.3% ownership interest in Wadley. The Brim acquisition was accounted for as a business combination; therefore, the Company applied the acquisition method of accounting to allocate the assets acquired or liabilities assumed based on their fair values. The excess of the purchase price over those fair values was recorded as goodwill.

Effective May 1, 2011, the Company acquired a 79.1% equity ownership interest in St. Joseph Medical Center (“St. Joseph”), a 792-licensed bed acute care hospital facility located in downtown Houston, Texas, in exchange for cash consideration of $156.8 million, subject to changes in net assets. Independent investors, consisting of board-certified physicians on the medical staff of St. Joseph, retained an aggregate 20.9% ownership interest in the hospital. This acquisition was accounted for as a business combination; therefore, the Company applied the acquisition method of accounting to allocate assets acquired or liabilities assumed based on their fair values. The excess of the purchase price over those fair values was recorded as goodwill.

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8. DISCONTINUED OPERATIONS

Effective October 1, 2013, the Company sold its Florida operations, which primarily included three hospitals in the Tampa – St. Petersburg area and all related physician operations. Accordingly, operating results of the Florida operations are reported as discontinued operations for all periods presented. Proceeds received on September 30, 2013, in connection with the sale transaction are presented in the accompany consolidated balance sheet in cash and cash equivalents, along with a corresponding liability in advance on divestiture. In addition, the assets and liabilities to be sold are classified as assets and liabilities held for sale as of September 30, 2013.

The following table sets forth the components of discontinued operations (in thousands):

	Year Ended September 30,
	2013		2012		2011
Net revenue less provision for bad debts	$	203,315	$	207,957	$	200,201
Earnings before income taxes		6,794		9,522		4,514

The following table provides the components of assets and liabilities held for sale related to the Company’s Florida operations (in thousands):

	September 30, 2013
Inventories	$	7,233
Prepaid expenses and other current assets		2,462
Property and equipment, net		109,326
Other assets, net		120
Assets held for sale	$	119,141
Salaries and benefits payable	$	2,012
Other accrued expenses and other current liabilities		1,196
Liabilities held for sale	$	3,208

Income taxes allocated to the discontinued operations resulted in related effective tax rates of 45.0%, 36.4% and 38.1% for the years ended September 30, 2013, 2012 and 2011, respectively.

9. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

	September 30, 2013			September 30, 2012
Land	$	121,134		$	155,209
Buildings and improvements		646,206			970,396
Equipment		722,183			738,493
		1,489,523			1,864,098
Less accumulated depreciation and amortization		(667,656	)		(704,169	)
		821,867			1,159,929
Construction-in-progress		11,302			11,728
	$	833,169		$	1,171,657

Included in property and equipment are assets acquired under capital leases of $7.8 million and $9.8 million, net of accumulated amortization of $7.2 million and $5.1 million, at September 30, 2013 and 2012, respectively.

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10. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the changes in the carrying amount of goodwill (in thousands):

	Acute Care			Health Choice		Total
Balance at September 30, 2011	$	802,894		$	5,757	$	808,651
Acquisitions		9,773			—		9,773
Balance at September 30, 2012		812,667			5,757		818,424
Adjustments related to acquisitions		(2,014	)		—		(2,014	)
Balance at September 30, 2013	$	810,653		$	5,757	$	816,410

For the years ended September 30, 2013 and 2012, as a result of the Company’s annual impairment testing, the Company has determined all remaining goodwill and long-lived assets to be recoverable.

Other intangible assets includes Health Choice’s contract with AHCCCS, which is amortized over a period of 15 years, the contract’s estimated useful life, including assumed renewal periods. The gross intangible value originally assigned to this asset was $45.0 million. The Company expects amortization expense for this intangible asset to be $3.0 million per year based on its estimated life, and $15.0 million over the next five years. Amortization of this intangible asset is included in depreciation and amortization expense in the accompanying consolidated statements of operations and totaled $3.0 million for each of the years ended September 30, 2013, 2012 and 2011. The unamortized value of Health Choice’s contract with AHCCCS at September 30, 2013 and 2012, was $18.0 million and $21.0 million, respectively.

11. MEMBER’S EQUITY

Common Interests of IASIS

As of September 30, 2013, all of the common interests of IASIS were owned by IAS, its sole member.

12. STOCK OPTIONS

2004 Stock Option Plan

The IAS 2004 Stock Option Plan (the “2004 Stock Option Plan”) was established to promote the Company’s interests by providing additional incentives to its key employees, directors, service providers and consultants. The options granted under the plan represent the right to purchase IAS common stock upon exercise. Each option shall be identified as either an incentive stock option or a non-qualified stock option. The plan was adopted by the board of directors and majority stockholder of IAS in June 2004. The maximum number of shares of IAS common stock that may be issued pursuant to options granted under the 2004 Stock Option Plan is 2,625,975. Certain options totaling rights to purchase 1,980,632 shares of common stock become exercisable over a period not to exceed five years after the date of grant, while other options representing 338,845 shares vest based upon the achievement of specific performance conditions, both subject to earlier vesting provisions as provided for in the 2004 Stock Option Plan. All options granted under the 2004 Stock Option Plan expire no later than 10 years from the respective dates of grant. At September 30, 2013, there were 306,498 options available for grant.

In conjunction with the Shareholder Distribution, the board of directors of IAS authorized management to modify the exercise price of all outstanding stock options to provide protection against the dilutive impact of the common stock dividend on the outstanding options’ intrinsic value. On September 25, 2012, the Company reduced the exercise price for each grant by $4.75 per option. Accordingly, as a result of the modification, an additional $3.7 million was recognized as stock-based compensation for the year ended September 30, 2012.

As of September 30, 2013, the total compensation cost related to nonvested awards not yet recognized is $10.5 million, which is expected to be recognized over a weighted-average period of 3.5 years.

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Information regarding the Company’s stock option activity is summarized below:

	2004 Stock Option Plan
	Options			Option Price Per Share		Weighted Average Exercise Price
Options outstanding at September 30, 2010		1,686,329		$	20.00-$45.66	$	24.58
Granted		404,411		$	45.66	$	45.66
Exercised		(1,450	)	$	20.00	$	20.00
Cancelled/forfeited		(42,804	)	$	20.00-$35.68	$	34.66
Options outstanding at September 30, 2011		2,046,486		$	20.00-$45.66	$	28.54
Granted		433,861		$	45.66	$	45.66
Exercised		—			—		—
Cancelled/forfeited		(109,600	)	$	20.00-$45.66	$	35.66
Options outstanding at September 30, 2012		2,370,747		$	15.25-$40.91	$	26.60
Granted		38,000		$	40.91	$	40.91
Exercised		—			—		—
Cancelled/forfeited		(89,270	)	$	15.25-$40.91	$	33.28
Options outstanding at September 30, 2013		2,319,477		$	15.25-$40.91	$	26.57
Options exercisable at September 30, 2013		1,623,591		$	15.25-$40.91	$	20.68

The following table provides information regarding assumptions used in the fair value measurement for options outstanding at September 30, 2013.

Risk-free interest	0.60%-4.56%
Dividend yield	0.0%
Volatility	30%-50%
Expected option life	4-8 years

The Company used the Black-Scholes-Merton valuation model in determining the fair value measurement. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the option grant having a term equivalent to the expected option life. Volatility for such options was estimated based on the historical stock price information of certain peer group companies for a period of time equal to the expected option life period.

13. INCOME TAXES

Income tax expense on earnings from continuing operations consists of the following (in thousands):

	Year Ended September 30, 2013			Year Ended September 30, 2012			Year Ended September 30, 2011
Current:
Federal	$	5,806		$	(9,336	)	$	15,309
State		3,561			(1,668	)		3,383
Deferred:
Federal		(3,189	)		15,361			4,232
State		(744	)		(1,785	)		(592	)
	$	5,434		$	2,572		$	22,332

A reconciliation of the federal statutory rate to the effective income tax rate applied to earnings from continuing operations before income taxes is as follows (in thousands):

	Year Ended September 30, 2013			Year Ended September 30, 2012			Year Ended September 30, 2011
Federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		15.0			(8.0	)		3.0
Nondeductible compensation		7.7			2.3			0.6
Other nondeductible expenses		6.0			3.7			0.7
Federal tax credits		(3.7	)		(2.5	)		(0.2	)
Income attributable to non-controlling interests		(20.7	)		(10.8	)		(5.9	)
Change in valuation allowance charged to federal income tax expense		3.7			0.8			—
Change in unrecognized tax benefits		1.4			(11.1	)		3.2
Other items, net		0.1			(0.2	)		0.1
Effective income tax rate		44.5	%		9.2	%		36.5	%

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A summary of the items comprising deferred tax assets and liabilities is as follows (in thousands):

	September 30, 2013					September 30, 2012
	Assets			Liabilities		Assets			Liabilities
Depreciation and fixed asset basis differences	$	—		$	71,774	$	—		$	97,339
Amortization and intangible asset basis differences		—			106,573		—			86,313
Accrued other revenue		—			13,192		—			15,645
Accounts receivable		21,640			—		34,405			—
Professional liability		18,708			—		21,700			—
Gain on divestiture of Florida operations		8,720			—		—			—
Deferred gain on sale-leaseback transaction		13,998			—		—			—
Accrued expenses and other liabilities		17,594			—		18,196			—
Basis differences attributable to non-controlling interests		18,881			—		21,087			—
Deductible carryforwards and credits		13,039			—		12,785			—
Other, net		938			—		304			—
Valuation allowance		(11,475	)		—		(10,397	)		—
Total	$	102,043		$	191,539	$	98,080		$	199,297

Net current deferred tax assets of $26.1 million and $19.7 million and net non-current deferred tax liabilities of $115.6 million and $121.0 million are included in the accompanying consolidated balance sheets at September 30, 2013 and 2012, respectively. The Company had a net income tax payable of $33.5 million and a net income tax receivable of $9.3 million at September 30, 2013 and 2012, respectively.

The Company and some of its subsidiaries are included in IAS’ consolidated filing group for U.S. federal income tax purposes, as well as in certain state and local income tax returns that include IAS. With respect to tax returns for any taxable period in which the Company or any of its subsidiaries are included in a tax return filing with IAS, the amount of taxes to be paid by the Company is determined, subject to some adjustments, as if it and its subsidiaries filed their own tax returns excluding IAS. Member’s equity in the accompanying consolidated balance sheets as of September 30, 2013 and 2012, includes $43.2 million and $42.7 million, respectively, in capital contributions representing cumulative tax benefits generated by IAS and utilized by the Company in the combined tax return filings, for which IAS did not require cash settlement from the Company.

The Company maintains a valuation allowance for deferred tax assets it believes may not be utilized. The valuation allowance increased by $1.1 million and $1.8 million during the years ended September 30, 2013 and 2012, respectively. The increase in the valuation allowance for the years ended September 30, 2013 and 2012, relates to the generation of net operating loss carryforwards by certain subsidiaries excluded from the IAS consolidated federal income tax return, as well as state net operating loss carryforwards that may not ultimately be utilized.

As of September 30, 2013, federal net operating loss carryforwards were available to offset $15.4 million of future taxable income generated by subsidiaries of the Company that are excluded from the IAS consolidated return. A valuation allowance has been established against $12.2 million of these carryforwards, which expire between 2026 and 2033. State net operating losses totaling $195.3 million were also available, but largely offset by a valuation allowance. The state net operating loss carryforwards expire between 2018 and 2033.

The liability for unrecognized tax benefits included in the accompanying consolidated balance sheets was $10.0 million, including accrued interest of $1.1 million, at September 30, 2013, and $15.5 million, including accrued interest of $767,000, at September 30, 2012. An additional $6.9 million and $6.7 million of unrecognized tax benefits are reflected as a reduction to deferred tax assets for state net operating losses generated by uncertain tax deductions as of September 30, 2013 and 2012, respectively. Of the total unrecognized tax benefits at September 30, 2013, $1.7 million (net of the tax benefit on state taxes and interest) represents the amount of unrecognized tax and interest that, if recognized, would favorably impact the Company’s effective income tax rate. The

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remainder of the unrecognized tax positions consist of items for which the uncertainty relates only to the timing of the deductibility, and state net operating loss carryforwards for which ultimate recognition would result in the creation of an offsetting valuation allowance due to the unlikelihood of future taxable income in that state.

A summary of activity of the Company’s total amounts of unrecognized tax benefits is as follows (in thousands):

	Year Ended September 30, 2013			Year Ended September 30, 2012			Year Ended September 30, 2011
Unrecognized tax benefits at October 1	$	21,448		$	17,402		$	17,534
Reductions resulting from tax positions taken in a prior period		(6,144	)		(3,634	)		(5,185	)
Additions resulting from tax positions taken in the current period		1,143			8,419			5,219
Reductions resulting from lapse of statute of limitations		(600	)		(739	)		(166	)
Unrecognized tax benefits at September 30	$	15,847		$	21,448		$	17,402

The Company’s policy is to classify interest and penalties as a component of income tax expense. Interest expense totaling $192,000, $174,000 and $73,000 (net of related tax benefits) is included in income tax expense in the accompanying consolidated statements of operations for the years ended September 30, 2013, 2012 and 2011, respectively.

The Company’s tax years 2010 and beyond remain open to examination by U.S. federal and state taxing authorities. It is reasonably possible that unrecognized tax benefits could significantly increase or decrease within the next twelve months. However, the Company is currently unable to estimate the range of any possible change.

14. COMMITMENTS AND CONTINGENCIES

Net Revenue

The calculation of appropriate payments from the Medicare and Medicaid programs, including supplemental Medicaid reimbursement, as well as terms governing agreements with other third-party payors are complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered because of audits by the programs, rights of appeal and the application of numerous technical provisions. In the opinion of management, adequate provision has been made for adjustments that may result from such routine audits and appeals.

Professional, General and Workers’ Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment and personal injuries. To cover these types of claims, the Company maintains professional and general liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any such proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for professional and general liability claims using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At September 30, 2013 and 2012, the Company’s professional and general liability accrual for asserted and unasserted claims totaled $68.2 million and $76.9 million, respectively, with the current portion totaling $16.5 million and $13.8 million during the same respective periods. The semi-annual valuations from the Company’s independent actuary for professional and general liability losses resulted in a change related to estimates for prior years which decreased professional and general liability expense by $9.4 million, $922,000 and $110,000 during the years ended September 30, 2013, 2012 and 2011, respectively, with $1.4 million, $99,000 and $256,000 being allocated to discontinued operations, respectively.

The Company is subject to claims and legal actions in the ordinary course of business relative to workers’ compensation. To cover these types of claims, the Company maintains workers’ compensation insurance coverage with a self-insured retention. The Company accrues costs of workers’ compensation claims based upon estimates derived from its claims experience. The semi-annual valuations from the Company’s independent actuary for workers’ compensation losses resulted in a change related to estimates for prior years which decreased workers’ compensation expense by $1.2 million and $1.1 million during the years ended September 30, 2013 and 2012, respectively, and increased workers’ compensation expense by $1.6 million during the year ended September 30, 2011, with $320,000 and $224,000 and $280,000, respectively, allocated to discontinued operations.

Health Choice

Health Choice has entered into capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic and supplemental payments from AHCCCS and CMS. These services are provided regardless of the actual costs incurred to provide these services. The Company receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes the capitated payments, together with reinsurance and other

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supplemental payments are sufficient to pay for the services Health Choice is obligated to deliver. As of September 30, 2013, the Company has provided a performance guaranty in the form of a letter of credit totaling $39.9 million for the benefit of AHCCCS to support its obligations under the Health Choice contract to provide and pay for the healthcare services. The amount of the performance guaranty is generally based in part upon the membership in the Plan and the related capitation revenue paid to Health Choice.

Acquisitions

The Company has acquired and in the future may choose to acquire businesses with prior operating histories. Such businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures designed to conform business practices to its policies following the completion of any acquisition, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

Other

        In November 2010, the DOJ sent a letter to IAS requesting a 12-month tolling agreement in connection with an investigation into Medicare claims submitted by our hospitals in connection with the implantation of ICDs during the period 2003 to the present. At that time, neither the precise number of procedures, number of claims, nor the hospitals involved were identified by the DOJ. We understand that the government is conducting a national initiative with respect to ICD procedures involving a number of healthcare providers and is seeking information in order to determine if ICD implantation procedures were performed in accordance with Medicare coverage requirements. On January 11, 2011, IAS entered into the tolling agreement with the DOJ and, subsequently, the DOJ has provided IAS with a list of 194 procedures involving ICDs at 14 hospitals which are the subject of further medical necessity review by the DOJ. We are cooperating fully with the government and, to date, the DOJ has not asserted any claim against our hospitals. We believe that 125 of these procedure claims were properly documented for medical necessity and billed appropriately. On June 29, 2013, our outside counsel submitted to the DOJ summary justifications and supporting evidence relating to the medical claims at four of our hospitals. We continue to search for and develop the documentary support for the remaining 69 of these cases that could have some likelihood of enforcement by the DOJ. If we are unable to place these claims in the no enforcement or lesser enforcement category, the government may require repayment, which could impose a multiplier. The government has not pressed IAS for its response, however, IAS will likely use its extensive training and compliance policies and awareness of the ICD national coverage determination to demonstrate intent to comply with Medicare’s coverage guidelines and commitment to compliance with federal and state authority. In April 2013, the government proposed to extend the tolling agreement, which was accepted by IAS, with the tolling agreement currently set to expire on April 30, 2014. IAS will continue to use the tolling period to locate additional medical records for the 69 records potentially falling within a potential enforcement category, in an attempt to provide documentation to the DOJ of the medical necessity of the procedures. As of the date of this Report, additional analysis is being completed and, based on information currently available, we are unable to quantify an estimate for any potential repayment obligation related to this ICD investigation.

On September 25, 2013, we voluntarily self-disclosed for resolution through the Self-Referral Disclosure Protocol established by CMS non-compliance by ten of our affiliated hospitals with a certain element of an exception of the Stark Law. Provisions of the Affordable Care Act that became effective on September 23, 2011 require, as an element of the Stark Law’s “whole-hospital” exception, that hospitals having physician ownership disclose such ownership on their public websites and in public advertising. The self-disclosure states that, on August 12, 2013, we discovered that our affiliated hospitals partially owned by physicians did not consistently make such disclosures. The self-disclosure also states that, on August 13, 2013, the hospitals added the disclosures to those public websites that did not previously have them and began to include the disclosures in new public advertising. The self-disclosure explains that, as a result of the absence of the website and advertising disclosures, the referrals of direct and indirect physician owners (and physicians who are immediate family members of direct and indirect owners) to the physician-owned hospitals of Medicare beneficiaries did not consistently qualify for the Stark Law’s “whole-hospital” exception from September 23, 2011 through August 13, 2013. On October 21, 2013, we submitted a supplement to the self-disclosure, reporting Medicare payments to the hospitals for services resulting from referrals affected by the non-compliance and the hospitals’ profit distributions to physicians (and known immediate family members of physicians) with respect to their ownership interests in the hospitals during the same period. CMS has made no commitments, as a general matter or in this case, regarding the timing or substance of resolution of self-disclosed Stark Law noncompliance through the voluntary CMS Self-Referral Disclosure Protocol. We express no opinion as to the outcome of this matter, other than to state that, at this time, any repayment obligation to be determined by CMS is unknown and not currently estimable, and that the matter could take up to one year or longer to resolve.

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15. LEASES

The Company leases various buildings, office space and equipment under capital and operating lease agreements. These leases expire at various times and have various renewal options.

On September 26¸ 2013, the Company sold the real estate associated with the following three facilities, and thereafter leased the land and buildings from the acquirer: (1) Glenwood Regional Medical Center in West Monroe, Louisiana; (2) Mountain Vista Medical Center, in Mesa, Arizona; and (3) The Medical Center of Southeast Texas in Port Arthur, Texas. The aggregate proceeds from the sale were $281.3 million, which resulted in a current period loss on the sale of assets totaling $10.2 million, included in the Company’s loss on disposal of assets in the accompanying consolidated statement of operations, and a deferred gain of $37.7 million that is reflected in other long-term liabilities in the accompanying consolidated balance sheet. The deferred gain will be amortized as a reduction of rent expense over the initial term of the related agreements, which is 15 years each and includes varying renewal options. Aggregate rent for the base period of these lease agreements is $21.6 million on an annual basis, and is subject to customary annual escalators, which are capped at 2.5%.

Effective September 26, 2013, the Company amended an existing facility lease agreement which extended the term of the lease to September 30, 2028, with two renewal options of five years each. In addition, the amended lease provides for a $1.6 million reduction in annual rent expense. As amended, base year rent expense under this lease is $4.8 million, payable in monthly installments, and is subject to customary annual escalators, capped at 2.5%.

Future minimum lease payments as September 30, 2013, are as follows (in thousands):

	Capital Leases		Operating Leases
2014	$	2,923	$	47,592
2015		2,083		45,639
2016		1,129		44,218
2017		770		42,764
2018		686		41,556
Thereafter		3,651		92,153
Total minimum lease payments	$	11,242	$	313,922
Amount representing interest (at rates ranging from 2.8% to 12.8%)		3,173
Present value of net minimum lease payments	$	8,069

Aggregate future minimum rentals to be received under non-cancellable subleases as of September 30, 2013, were $2.5 million.

16. DEFINED CONTRIBUTION PLAN

Substantially all employees who are employed by the Company or its subsidiaries, upon qualification, are eligible to participate in a defined contribution 401(k) plan (the “Retirement Plan”). Employees who elect to participate generally make contributions from 1% to 20% of their eligible compensation, and the Company matches, at its discretion, such contributions up to a maximum percentage. Employees immediately vest 100% in their own contributions and generally vest in the employer portion of contributions over a period not to exceed five years. Company contributions to the Retirement Plan were $3.5 million, $6.0 million and $6.6 million for the years ended September 30, 2013, 2012 and 2011, respectively.

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17. SEGMENT AND GEOGRAPHIC INFORMATION

The Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively, and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):

	For the Year Ended September 30, 2013
	Acute Care			Health Choice		Eliminations			Consolidated
Acute care revenue before provision for bad debts	$	2,182,966		$	—	$	—		$	2,182,966
Less: Provision for bad debts		(370,505	)		—		—			(370,505	)
Acute care revenue		1,812,461			—		—			1,812,461
Premium revenue		—			564,152		—			564,152
Revenue between segments		7,092			—		(7,092	)		—
Net revenue		1,819,553			564,152		(7,092	)		2,376,613
Salaries and benefits (excludes stock-based compensation)		868,241			23,985		—			892,226
Supplies		315,770			183		—			315,953
Medical claims		—			474,386		(7,092	)		467,294
Rentals and leases		53,613			1,544		—			55,157
Other operating expenses		384,212			23,448		—			407,660
Medicare and Medicaid EHR incentives		(22,525	)		—		—			(22,525	)
Adjusted EBITDA(1)		220,242			40,606		—			260,848
Interest expense, net		133,209			—		—			133,209
Depreciation and amortization		93,461			4,148		—			97,609
Stock-based compensation		3,855			—		—			3,855
Management fees		5,000			—		—			5,000
Earnings (loss) from continuing operations before loss on disposal of assets and income taxes		(15,283	)		36,458		—			21,175
Loss on disposal of assets, net		(8,977	)		—		—			(8,977	)
Earnings (loss) from continuing operations before income taxes	$	(24,260	)	$	36,458	$	—		$	12,198
Segment assets	$	2,571,762		$	308,503				$	2,880,265
Capital expenditures	$	106,465		$	879				$	107,344
Goodwill	$	810,653		$	5,757				$	816,410

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	For the Year Ended September 30, 2012
	Acute Care			Health Choice		Eliminations			Consolidated
Acute care revenue before provision for bad debts	$	2,041,124		$	—	$	—		$	2,041,124
Less: Provision for bad debts		(282,506	)		—		—			(282,506	)
Acute care revenue		1,758,618			—		—			1,758,618
Premium revenue		—			569,142		—			569,142
Revenue between segments		7,092			—		(7,092	)		—
Net revenue		1,765,710			569,142		(7,092	)		2,327,760
Salaries and benefits (excludes stock-based compensation)		801,785			21,527		—			823,312
Supplies		302,587			228		—			302,815
Medical claims		—			473,217		(7,092	)		466,125
Rentals and leases		43,062			1,533		—			44,595
Other operating expenses		408,012			22,478		—			430,490
Medicare and Medicaid EHR incentives		(22,426	)		—		—			(22,426	)
Adjusted EBITDA(1)		232,690			50,159		—			282,849
Interest expense, net		137,990			—		—			137,990
Depreciation and amortization		100,033			3,884		—			103,917
Stock-based compensation		10,077			—		—			10,077
Management fees		5,000			—		—			5,000
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes		(20,410	)		46,275		—			25,865
Gain on disposal of assets, net		2,243			—		—			2,243
Earnings (loss) from continuing operations before income taxes	$	(18,167	)	$	46,275	$	—		$	28,108
Segment assets	$	2,380,761		$	317,724				$	2,698,485
Capital expenditures	$	96,174		$	2,104				$	98,278
Goodwill	$	812,667		$	5,757				$	818,424

95

	For the Year Ended September 30, 2011
	Acute Care			Health Choice		Eliminations			Consolidated
Acute care revenue before provision for bad debts	$	1,793,098		$	—	$	—		$	1,793,098
Less: Provision for bad debts		(214,143	)		—		—			(214,143	)
Acute care revenue		1,578,955			—		—			1,578,955
Premium revenue		—			757,309		—			757,309
Revenue between segments		10,551			—		(10,551	)		—
Net revenue		1,589,506			757,309		(10,551	)		2,336,264
Salaries and benefits (excludes stock-based compensation)		699,815			20,394		—			720,209
Supplies		277,925			201		—			278,126
Medical claims		—			640,754		(10,551	)		630,203
Rentals and leases		40,306			1,625		—			41,931
Other operating expenses		367,127			25,788		—			392,915
Medicare and Medicaid EHR incentives		(9,042	)		—		—			(9,042	)
Adjusted EBITDA(1)		213,375			68,547		—			281,922
Interest expense, net		96,026			—		—			96,026
Depreciation and amortization		91,476			3,556		—			95,032
Stock-based compensation		1,681			—		—			1,681
Management fees		5,000			—		—			5,000
Loss on extinguishment of debt		23,075			—		—			23,075
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes		(3,883	)		64,991		—			61,108
Gain on disposal of assets, net		131			—		—			131
Earnings (loss) from continuing operations before income taxes	$	(3,752	)	$	64,991	$	—		$	61,239
Segment assets	$	2,363,588		$	323,552				$	2,687,140
Capital expenditures	$	84,568		$	1,638				$	86,206
Goodwill	$	802,894		$	5,757				$	808,651

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(1) Adjusted EBITDA represents net earnings from continuing operations before interest expense, income tax expense, depreciation and amortization, stock-based compensation, gain (loss) on disposal of assets, loss on extinguishment of debt and management fees. Management fees represent monitoring and advisory fees paid to TPG, the Company’s majority financial sponsor, and certain other members of IASIS Investment LLC, majority shareholder of IAS. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate hospital performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Company’s Senior Secured Credit Facilities and may not be comparable to similarly titled measures of other companies.

18. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

A summary of accrued expenses and other current liabilities consists of the following (in thousands):

	September 30, 2013		September 30, 2012
Professional and general liabilities—current portion	$	16,546	$	13,773
Employee health insurance payable		12,206		9,920
Accrued property taxes		9,845		8,784
Health Choice program settlements payable		83		25,747
Income taxes payable		33,501		—
Other		20,372		31,666
	$	92,553	$	89,890

19. ALLOWANCE FOR DOUBTFUL ACCOUNTS

A summary of activity in the Company’s allowance for doubtful accounts is as follows (in thousands):

	Beginning Balance		Provision for Bad Debts		Accounts Written Off, Net of Recoveries			Ending Balance
Year Ended September 30, 2011	$	125,406		214,143		(154,068	)	$	185,481
Year Ended September 30, 2012	$	185,481		282,506		(232,833	)	$	235,154
Year Ended September 30, 2013	$	235,154		370,505		(349,934	)	$	255,725

The provision for bad debts increased $88.0 million and $68.4 million during the years ended September 30, 2013 and 2012, respectively, primarily as a result of increases in self-pay volume, revenue and related acuity levels.

20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes described in Note 3 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s existing domestic subsidiaries, other than non-guarantor subsidiaries which include Health Choice and the Company’s non-wholly owned subsidiaries. The guarantees are subject to customary release provisions set forth in the Indenture for the Senior Notes.

Effective May 1, 2011, the operations and net assets of St. Joseph are included in the subsidiary non-guarantor information in the following summarized condensed consolidating financial statements.

Summarized condensed consolidating balance sheets at September 30, 2013 and 2012, condensed consolidating statements of operations, condensed consolidating statements of comprehensive income and condensed consolidating statements of cash flows for the years ended September 30, 2013, 2012 and 2011, for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below. Prior year amounts have been reclassified to conform to the current year presentation.

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IASIS Healthcare LLC

Condensed Consolidating Balance Sheet

September 30, 2013

(in Thousands)

			Subsidiary			Subsidiary					Condensed
	Parent Issuer		Guarantors			Non-Guarantors		Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	—	$	430,047		$	8,084	$	—		$	438,131
Accounts receivable, net		—		124,700			246,306		—			371,006
Inventories		—		16,015			41,766		—			57,781
Deferred income taxes		26,096		—			—		—			26,096
Prepaid expenses and other current assets		—		26,187			100,225		—			126,412
Assets held for sale		—		119,141			—		—			119,141
Total current assets		26,096		716,090			396,381		—			1,138,567
Property and equipment, net		—		234,910			598,259		—			833,169
Intercompany		—		(218,630	)		218,630		—			—
Net investment in and advances to subsidiaries		2,072,847		—			—		(2,072,847	)		—
Goodwill		7,407		65,246			743,757		—			816,410
Other intangible assets, net		—		7,957			18,000		—			25,957
Other assets, net		27,287		24,895			13,980		—			66,162
Total assets	$	2,133,637	$	830,468		$	1,989,007	$	(2,072,847	)	$	2,880,265
Liabilities and Equity
Current liabilities
Accounts payable	$	—	$	52,257		$	77,285	$	—		$	129,542
Salaries and benefits payable		—		28,686			34,198		—			62,884
Accrued interest payable		27,519		(3,229	)		3,229		—			27,519
Medical claims payable		—		—			57,514		—			57,514
Other accrued expenses and other current liabilities		—		75,900			16,653		—			92,553
Current portion of long-term debt and capital lease obligations		10,071		3,150			23,641		(23,641	)		13,221
Advance on divestiture		—		144,803			—		—			144,803
Liabilities held for sale		—		3,208			—		—			3,208
Total current liabilities		37,590		304,775			212,520		(23,641	)		531,244
Long-term debt, capital lease and lease financing obligations		1,832,275		20,547			549,200		(549,200	)		1,852,822
Deferred income taxes		115,592		—			—		—			115,592
Other long-term liabilities		5,918		116,601			601		—			123,120
Total liabilities		1,991,375		441,923			762,321		(572,841)			2,622,778
Non-controlling interests with redemption rights		—		105,464			—		—			105,464
Equity
Member’s equity		142,262		273,320			1,226,686		(1,500,006	)		142,262
Non-controlling interests		—		9,761			—		—			9,761
Total equity		142,262		283,081			1,226,686		(1,500,006	)		152,023
Total liabilities and equity	$	2,133,637	$	830,468		$	1,989,007	$	(2,072,847	)	$	2,880,265

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IASIS Healthcare LLC

Condensed Consolidating Balance Sheet

September 30, 2012

(in Thousands)

			Subsidiary			Subsidiary					Condensed
	Parent Issuer		Guarantors			Non-Guarantors		Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	—	$	39,219		$	9,663	$	—		$	48,882
Accounts receivable, net		—		120,408			236,210		—			356,618
Inventories		—		24,848			42,802		—			67,650
Deferred income taxes		19,744		—			—		—			19,744
Prepaid expenses and other current assets		—		42,468			75,383		—			117,851
Total current assets		19,744		226,943			364,058		—			610,745
Property and equipment, net		—		377,021			794,636		—			1,171,657
Intercompany		—		(204,180	)		204,180		—			—
Net investment in and advances to subsidiaries		2,089,306		—			—		(2,089,306	)		—
Goodwill		7,407		73,357			737,660		—			818,424
Other intangible assets, net		—		8,161			21,000		—			29,161
Other assets, net		32,302		16,001			20,195		—			68,498
Total assets	$	2,148,759	$	497,303		$	2,141,729	$	(2,089,306	)	$	2,698,485
Liabilities and Equity
Current liabilities
Accounts payable	$	—	$	34,171		$	77,757	$	—		$	111,928
Salaries and benefits payable		—		32,267			33,123		—			65,390
Accrued interest payable		28,034		(3,231	)		3,231		—			28,034
Medical claims payable		—		—			61,142		—			61,142
Other accrued expenses and other current liabilities		—		47,480			42,410		—			89,890
Current portion of long-term debt and capital lease obligations		10,250		3,137			63,920		(63,920	)		13,387
Total current liabilities		38,284		113,824			281,583		(63,920	)		369,771
Long-term debt and capital lease obligations		1,840,345		12,762			634,077		(634,077	)		1,853,107
Deferred income taxes		120,961		—			—		—			120,961
Other long-term liabilities		7,580		95,919			611		—			104,110
Total liabilities		2,007,170		222,505			916,271		(697,997	)		2,447,949
Non-controlling interests with redemption rights		—		99,164			—		—			99,164
Equity
Member’s equity		141,589		165,851			1,225,458		(1,391,309	)		141,589
Non-controlling interests		—		9,783			—		—			9,783
Total equity		141,589		175,634			1,225,458		(1,391,309	)		151,372
Total liabilities and equity	$	2,148,759	$	497,303		$	2,141,729	$	(2,089,306	)	$	2,698,485

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IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Year Ended September 30, 2013

(in Thousands)

				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net revenue
Acute care revenue before provision for bad debts	$	—		$	638,571		$	1,551,487		$	(7,092	)	$	2,182,966
Less: Provision for bad debts		—			(125,072	)		(245,433	)		—			(370,505	)
Acute care revenue		—			513,499			1,306,054			(7,092	)		1,812,461
Premium revenue		—			—			564,152			—			564,152
Net revenue		—			513,499			1,870,206			(7,092	)		2,376,613
Costs and expenses
Salaries and benefits		3,855			333,959			558,267			—			896,081
Supplies		—			94,170			221,783			—			315,953
Medical claims		—			—			474,386			(7,092	)		467,294
Rentals and leases		—			19,786			35,371			—			55,157
Other operating expenses		—			100,179			307,481			—			407,660
Medicare and Medicaid EHR incentives		—			(6,622	)		(15,903	)		—			(22,525	)
Interest expense, net		133,209			—			61,876			(61,876	)		133,209
Depreciation and amortization		—			34,934			62,675			—			97,609
Management fees		5,000			(32,629	)		32,629			—			5,000
Equity in earnings of affiliates		(90,294	)		—			—			90,294			—
Total costs and expenses		51,770			543,777			1,738,565			21,326			2,355,438
Earnings (loss) from continuing operations before loss on disposal of assets and income taxes		(51,770	)		(30,278	)		131,641			(28,418	)		21,175
Loss on disposal of assets, net		—			(1,896	)		(7,081	)		—			(8,977	)
Earnings (loss) from continuing operations before income taxes		(51,770	)		(32,174	)		124,560			(28,418	)		12,198
Income tax expense		3,763			—			1,671			—			5,434
Net earnings (loss) from continuing operations		(55,533	)		(32,174	)		122,889			(28,418	)		6,764
Earnings (loss) from discontinued operations, net of income taxes		(3,059	)		6,796			(2	)		—			3,735
Net earnings (loss)		(58,592	)		(25,378	)		122,887			(28,418	)		10,499
Net earnings attributable to non-controlling interests		—			(7,215	)		—			—			(7,215	)
Net earnings (loss) attributable to IASIS Healthcare LLC	$	(58,592	)	$	(32,593	)	$	122,887		$	(28,418	)	$	3,284

100

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Year Ended September 30, 2012

(in Thousands)

				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net revenue
Acute care revenue before provision for bad debts	$	—		$	585,730		$	1,462,486		$	(7,092	)	$	2,041,124
Less: Provision for bad debts		—			(107,303	)		(175,203	)		—			(282,506	)
Acute care revenue		—			478,427			1,287,283			(7,092	)		1,758,618
Premium revenue		—			—			569,142			—			569,142
Net revenue		—			478,427			1,856,425			(7,092	)		2,327,760
Costs and expenses
Salaries and benefits		10,077			304,140			519,172			—			833,389
Supplies		—			87,586			215,229			—			302,815
Medical claims		—			—			473,217			(7,092	)		466,125
Rentals and leases		—			15,876			28,719			—			44,595
Other operating expenses		—			96,591			333,899			—			430,490
Medicare and Medicaid EHR incentives		—			(3,925	)		(18,501	)		—			(22,426	)
Interest expense, net		137,990			—			52,602			(52,602	)		137,990
Depreciation and amortization		—			34,271			69,646			—			103,917
Management fees		5,000			(30,941	)		30,941			—			5,000
Equity in earnings of affiliates		(127,487	)		—			—			127,487			—
Total costs and expenses		25,580			503,598			1,704,924			67,793			2,301,895
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes		(25,580	)		(25,171	)		151,501			(74,885	)		25,865
Gain on disposal of assets, net		—			429			1,814			—			2,243
Earnings (loss) from continuing operations before income taxes		(25,580	)		(24,742	)		153,315			(74,885	)		28,108
Income tax expense		676			—			1,896			—			2,572
Net earnings (loss) from continuing operations		(26,256	)		(24,742	)		151,419			(74,885	)		25,536
Earnings (loss) from discontinued operations, net of income taxes		(3,470	)		9,519			3			—			6,052
Net earnings (loss)		(29,726	)		(15,223	)		151,422			(74,885	)		31,588
Net earnings attributable to non-controlling interests		—			(8,712	)		—			—			(8,712	)
Net earnings (loss) attributable to IASIS Healthcare LLC	$	(29,726	)	$	(23,935	)	$	151,422		$	(74,885	)	$	22,876

101

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Year Ended September 30, 2011

(in Thousands)

				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net revenue
Acute care revenue before provision for bad debts	$	—		$	528,115		$	1,275,534		$	(10,551	)	$	1,793,098
Less: Provision for bad debts		—			(71,290	)		(142,853	)		—			(214,143	)
Acute care revenue		—			456,825			1,132,681			(10,551	)		1,578,955
Premium revenue		—			—			757,309			—			757,309
Net revenue		—			456,825			1,889,990			(10,551	)		2,336,264
Costs and expenses
Salaries and benefits		1,681			285,556			434,653			—			721,890
Supplies		—			85,998			192,128			—			278,126
Medical claims		—			—			640,754			(10,551	)		630,203
Rentals and leases		—			14,887			27,044			—			41,931
Other operating expenses		—			96,238			296,677			—			392,915
Medicare and Medicaid EHR incentives		—			(1,002	)		(8,040	)		—			(9,042	)
Interest expense, net		96,026			—			45,519			(45,519	)		96,026
Depreciation and amortization		—			31,506			63,526			—			95,032
Management fees		5,000			(27,333	)		27,333			—			5,000
Loss on extinguishment of debt		23,075			—			—			—			23,075
Equity in earnings of affiliates		(134,464	)		—			—			134,464			—
Total costs and expenses		(8,682	)		485,850			1,719,594			78,394			2,275,156
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes		8,682			(29,025	)		170,396			(88,945	)		61,108
Gain (loss) on disposal of assets, net		—			(193	)		324			—			131
Earnings (loss) from continuing operations before income taxes		8,682			(29,218	)		170,720			(88,945	)		61,239
Income tax expense		21,118			—			1,214			—			22,332
Net earnings (loss) from continuing operations		(12,436	)		(29,218	)		169,506			(88,945	)		38,907
Earnings (loss) from discontinued operations, net of income taxes		(1,722	)		4,574			(60	)		—			2,792
Net earnings (loss)		(14,158	)		(24,644	)		169,446			(88,945	)		41,699
Net earnings attributable to non-controlling interests		—			(10,338	)		—			—			(10,338	)
Net earnings (loss) attributable to IASIS Healthcare LLC	$	(14,158	)	$	(34,982	)	$	169,446		$	(88,945	)	$	31,361

102

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income

For the Year Ended September 30, 2013

(In Thousands)

				Subsidiary			Subsidiary					Condensed
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Net earnings (loss)	$	(58,592	)	$	(25,378	)	$	122,887	$	(28,418	)	$	10,499
Other comprehensive income
Change in fair value of highly effective interest rate hedges		1,662			—			—		—			1,662
Other comprehensive income before income taxes		1,662			—			—		—			1,662
Change in income tax expense		(618	)		—			—		—			(618	)
Other comprehensive income, net of income taxes		1,044			—			—		—			1,044
Comprehensive income (loss)		(57,548	)		(25,378	)		122,887		(28,418	)		11,543
Net earnings attributable to non-controlling interests		—			(7,215	)		—		—			(7,215	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC	$	(57,548	)	$	(32,593	)	$	122,887	$	(28,418	)	$	4,328

103

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income

For the Year Ended September 30, 2012

(In Thousands)

				Subsidiary			Subsidiary					Condensed
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Net earnings (loss)	$	(29,726	)	$	(15,223	)	$	151,422	$	(74,885	)	$	31,588
Other comprehensive loss
Change in fair value of highly effective interest rate hedges		(5,914	)		—			—		—			(5,914	)
Amortization of other comprehensive income related to ineffective interest rate hedges		2,057			—			—		—			2,057
Other comprehensive loss before income taxes		(3,857	)		—			—		—			(3,857	)
Change in income tax benefit		1,432			—			—		—			1,432
Other comprehensive loss, net of income taxes		(2,425	)		—			—		—			(2,425	)
Comprehensive income (loss)		(32,151	)		(15,223	)		151,422		(74,885	)		29,163
Net earnings attributable to non-controlling interests		—			(8,712	)		—		—			(8,712	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC	$	(32,151	)	$	(23,935	)	$	151,422	$	(74,885	)	$	20,451

104

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income

For the Year Ended September 30, 2011

(In Thousands)

				Subsidiary			Subsidiary					Condensed
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Net earnings (loss)	$	(14,158	)	$	(24,644	)	$	169,446	$	(88,945	)	$	41,699
Other comprehensive income
Change in fair value of highly effective interest rate hedges		823			—			—		—			823
Amortization of other comprehensive income related to ineffective interest rate hedges		942			—			—		—			942
Other comprehensive income before income taxes		1,765			—			—		—			1,765
Change in income tax expense		(653	)		—			—		—			(653	)
Other comprehensive income, net of income taxes		1,112			—			—		—			1,112
Comprehensive income (loss)		(13,046	)		(24,644	)		169,446		(88,945	)		42,811
Net earnings attributable to non-controlling interests		—			(10,338	)		—		—			(10,338	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC	$	(13,046	)	$	(34,982	)	$	169,446	$	(88,945	)	$	32,473

105

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Year Ended September 30, 2013

(In Thousands)

				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities
Net earnings (loss)	$	(58,592	)	$	(25,378	)	$	122,887		$	(28,418	)	$	10,499
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			34,934			62,675			—			97,609
Amortization of loan costs		7,612			—			—			—			7,612
Stock-based compensation		3,855			—			—			—			3,855
Deferred income taxes		(3,933	)		—			—			—			(3,933	)
Income tax benefit from exercise of employee stock options		16			—			—			—			16
Income tax benefit from parent company		489			—			—			—			489
Loss on disposal of assets, net		—			1,896			7,081			—			8,977
Loss (earnings) from discontinued operations, net		3,059			(6,796	)		2			—			(3,735	)
Equity in earnings of affiliates		(90,294	)		—			—			90,294			—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net		—			19,548			(27,495	)		—			(7,947	)
Inventories, prepaid expenses and other current assets		—			5,328			(18,696	)		—			(13,368	)
Accounts payable, other accrued expenses and other accrued liabilities		(2,177	)		30,360			(25,457	)		—			2,726
Net cash provided by (used in) operating activities — continuing operations		(139,965	)		59,892			120,997			61,876			102,800
Net cash used in operating activities — discontinued operations		—			(7,455	)		—			—			(7,455	)
Net cash provided by (used in) operating activities		(139,965	)		52,437			120,997			61,876			95,345
Cash flows from investing activities
Purchases of property and equipment		—			(58,280	)		(49,064	)		—			(107,344	)
Cash received (paid) for acquisitions, net		—			(480	)		3,476			—			2,996
Cash advance on divestiture		—			144,803			—			—			144,803
Cash received in sale-leaseback of real estate		—			86,348			191,635			—			277,983
Proceeds from sale of assets		—			7			81			—			88
Change in other assets, net		—			(5,672	)		6,367			—			695
Net cash provided by investing activities — continuing operations		—			166,726			152,495			—			319,221
Net cash used in investing activities — discontinued operations		—			(4,441	)		—			—			(4,441	)
Net cash provided by investing activities		—			162,285			152,495			—			314,780
Cash flows from financing activities
Payment of debt and capital lease obligations		(10,115	)		(165,265	)		(3,120	)		—			(178,500	)
Proceeds from revolving credit facilities		165,000			—			—			—			165,000
Debt financing costs incurred		(1,024	)		—			—			—			(1,024	)
Distributions to non-controlling interests		—			(6,012	)		—			—			(6,012	)
Cash received for the sale of non-controlling interests		—			849			—			—			849
Cash paid for the repurchase of non-controlling interests, net		—			(1,211	)		—			—			(1,211	)
Other		—			1,065			(1,043	)		—			22
Change in intercompany balances with affiliates, net		(13,896	)		346,680			(270,908	)		(61,876	)		—
Net cash provided by (used in) financing activities		139,965			176,106			(275,071	)		(61,876	)		(20,876	)
Change in cash and cash equivalents		—			390,828			(1,579	)		—			389,249
Cash and cash equivalents at beginning of period		—			39,219			9,663			—			48,882
Cash and cash equivalents at end of period	$	—		$	430,047		$	8,084		$	—		$	438,131

106

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Year Ended September 30, 2012

(In Thousands)

				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities
Net earnings (loss)	$	(29,726	)	$	(15,223	)	$	151,422		$	(74,885	)	$	31,588
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			34,271			69,646			—			103,917
Amortization of loan costs		7,309			—			—			—			7,309
Stock-based compensation		10,077			—			—			—			10,077
Deferred income taxes		13,576			—			—			—			13,576
Income tax benefit from exercise of employee stock options		6			—			—			—			6
Income tax benefit from parent company		(191	)		—			—			—			(191	)
Fair value change in interest rate hedges		(1,410	)		—			—			—			(1,410	)
Amortization of other comprehensive loss		2,057			—			—			—			2,057
Gain on disposal of assets, net		—			(429	)		(1,814	)		—			(2,243	)
Loss (earnings) from discontinued operations, net		3,470			(9,519	)		(3	)		—			(6,052	)
Equity in earnings of affiliates		(127,487	)		—			—			127,487			—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net		—			(12,022	)		(51,299	)		—			(63,321	)
Inventories, prepaid expenses and other current assets		—			(6,273	)		(38,656	)		—			(44,929	)
Accounts payable, other accrued expenses and other accrued liabilities		—			35,739			(53,312	)		—			(17,573	)
Net cash provided by (used in) operating activities — continuing operations		(122,319	)		26,544			75,984			52,602			32,811
Net cash provided by operating activities — discontinued operations		—			9,046			—			—			9,046
Net cash provided by (used in) operating activities		(122,319	)		35,590			75,984			52,602			41,857
Cash flows from investing activities
Purchases of property and equipment		—			(48,114	)		(50,164	)		—			(98,278	)
Cash received (paid) for acquisitions, net		—			12,972			(21,135	)		—			(8,163	)
Proceeds from sale of assets		—			3			27			—			30
Change in other assets, net		—			5,517			(568	)		—			4,949
Net cash used in investing activities — continuing operations		—			(29,622	)		(71,840	)		—			(101,462	)
Net cash used in investing activities — discontinued operations		—			(14,419	)		—			—			(14,419	)
Net cash used in investing activities		—			(44,041	)		(71,840	)		—			(115,881	)
Cash flows from financing activities
Payment of debt and capital lease obligations		(10,250	)		(360	)		(3,567	)		—			(14,177	)
Debt financing costs incurred		(998	)		—			—			—			(998	)
Distributions to non-controlling interests		—			(8,666	)		—			—			(8,666	)
Cash paid for the repurchase of non-controlling interest, net		—			(589	)		—			—			(589	)
Other		—			—			9			—			9
Change in intercompany balances with affiliates		133,567			(82,777	)		1,812			(52,602	)		—
Net cash provided by (used in) financing activities		122,319			(92,392	)		(1,746	)		(52,602	)		(24,421	)
Change in cash and cash equivalents		—			(100,843	)		2,398			—			(98,445	)
Cash and cash equivalents at beginning of period		—			140,062			7,265			—			147,327
Cash and cash equivalents at end of period	$	—		$	39,219		$	9,663		$	—		$	48,882

107

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Year Ended September 30, 2011

(In Thousands)

				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities
Net earnings (loss)	$	(14,158	)	$	(24,644	)	$	169,446		$	(88,945	)	$	41,699
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			31,506			63,526			—			95,032
Amortization of loan costs		4,887			—			—			—			4,887
Stock-based compensation		1,681			—			—			—			1,681
Deferred income taxes		3,640			—			—			—			3,640
Income tax benefit from parent company		6,981			—			—			—			6,981
Fair value change in interest rate hedges		(1,589	)		—			—			—			(1,589	)
Amortization of other comprehensive loss		942			—			—			—			942
Gain on disposal of assets, net		—			193			(324	)		—			(131	)
Loss (earnings) from discontinued operations, net		1,722			(4,574	)		60			—			(2,792	)
Loss on extinguisment of debt		23,075			—			—			—			23,075
Equity in earnings of affiliates		(134,464	)		—			—			134,464			—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net		—			(23,388	)		4,045			—			(19,343	)
Inventories, prepaid expenses and other current assets		—			(37,445	)		33,894			—			(3,551	)
Accounts payable, other accrued expenses and other accrued liabilities		—			46,295			(65,837	)		—			(19,542	)
Net cash provided by (used in) operating activities — continuing operations		(107,283	)		(12,057	)		204,810			45,519			130,989
Net cash provided by operating activities — discontinued operations		—			6,112			—			—			6,112
Net cash provided by (used in) operating activities		(107,283	)		(5,945	)		204,810			45,519			137,101
Cash flows from investing activities
Purchases of property and equipment		—			(39,712	)		(46,494	)		—			(86,206	)
Cash paid for acquisitions, net		—			(150,291	)		(1,406	)		—			(151,697	)
Proceeds from sale of assets		—			—			140			—			140
Change in other assets, net		—			(1,586	)		2,762			—			1,176
Net cash used in investing activities — continuing operations		—			(191,589	)		(44,998	)		—			(236,587	)
Net cash used in investing activities — discontinued operations		—			(13,173	)		—			—			(13,173	)
Net cash used in investing activities		—			(204,762	)		(44,998	)		—			(249,760	)
Cash flows from financing activities
Proceeds from refinancing		1,863,730			—			—			—			1,863,730
Payment of debt and capital lease obligations		(1,050,385	)		(307	)		(2,455	)		—			(1,053,147	)
Debt financing costs incurred		(52,254	)		—			—			—			(52,254	)
Distributions to parent company		(632,866	)		—			—			—			(632,866	)
Distributions to non-controlling interests		—			(8,842	)		—			—			(8,842	)
Cash paid for the repurchase of non-controlling interest, net		—			(1,146	)		—			—			(1,146	)
Change in intercompany balances with affiliates		(20,942	)		217,440			(150,979	)		(45,519	)		—
Net cash provided by (used in) financing activities		107,283			207,145			(153,434	)		(45,519	)		115,475
Change in cash and cash equivalents		—			(3,562	)		6,378			—			2,816
Cash and cash equivalents at beginning of period		—			143,599			912			—			144,511
Cash and cash equivalents at end of period	$	—		$	140,037		$	7,290		$	—		$	147,327

108

21. SUBSEQUENT EVENT

On October 1, 2013, the Company sold its Florida operations, which primarily included three hospitals in the Tampa – St. Petersburg area and all related physician operations. The impact of the Company’s Florida operations has been included in discontinued operations for all periods presented.

109

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluations of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act as of September 30, 2013. Based on this evaluation, the principal executive officer and principal accounting officer concluded that, as of September 30, 2013 our disclosure controls and procedures were effective as of September 30, 2013.

Report of Management on Internal Control over Financial Reporting

The management of IASIS is responsible for the preparation, integrity and fair presentation of the consolidated financial statements appearing in our periodic filings with the SEC. The consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles and, accordingly, include certain amounts based on our best judgments and estimates.

Management is also responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel including a dedicated compliance department and a written Code of Business Conduct and Ethics adopted by our board of directors, applicable to all of our directors, officers and employees.

Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected in a timely manner. Because of its inherent limitations, including the possibility of human error and the circumvention or overriding of control procedures, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Therefore, even those internal controls determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting, as of September 30, 2013 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of September 30, 2013. Management discussed and reviewed the results of management’s assessment with our Audit Committee.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting because that requirement under Section 404 of the Sarbanes-Oxley Act of 2002 was permanently removed for non-accelerated filers pursuant to the provisions of Section 989G(a) set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted into federal law in July 2010.

Changes in Internal Control Over Financial Reporting

During the fourth fiscal quarter of the period covered by this Report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The following table sets forth the name, age and position of the directors and executive officers of IAS and executive officers of IASIS. See “Certain Relationships and Related Transactions.”

Name	Age		Position	IAS	IASIS
W. Carl Whitmer		49	Director, Chief Executive Officer and President	X	X
Phillip J. Mazzuca		54	Chief Operating Officer		X
John M. Doyle		53	Chief Financial Officer		X
Frank A. Coyle		49	Secretary and General Counsel		X
James Moake		44	Operations Chief Financial Officer		X
Edward H. Lamb		56	President, Western Division		X
Bryanie W. Swilley		53	President, Eastern Division		X
Peter Stanos		50	Vice President, Ethics and Business Practices		X
Mike Uchrin		37	Chief Executive Officer, Health Choice Arizona, Inc.		X
David R. White		66	Chairman of the Board	X
Jonathan J. Coslet		49	Director	X
David Dupree		60	Director	X
Kirk E. Gorman		63	Director	X
Greg Kranias		36	Director	X
Todd B. Sisitsky		42	Director	X
Paul S. Levy		66	Director	X
Jeffrey C. Lightcap		54	Director	X
Sharad Mansukani		44	Director	X

W. Carl Whitmer became a Director of IAS in April 2010. He has served as President since April 2010 and was appointed Chief Executive Officer in November 2010. Prior to that time, he served as Chief Financial Officer since November 2001 and Vice President and Treasurer from March 2000 to October 2001. Prior to joining our company, Mr. Whitmer served various roles including Vice President of Finance and Treasurer and Chief Financial Officer of PhyCor Inc., where he was employed from July 1994 through February 2000. Mr. Whitmer’s responsibilities at PhyCor included mergers and acquisitions, capital planning and management, investor relations, treasury management and external financial reporting. Prior to joining PhyCor Inc., Mr. Whitmer served as a Senior Manager with the accounting firm of KPMG LLP, where he was employed from July 1986 to July 1994. Mr. Whitmer also served on the board of directors, including the audit committee, of Fenwal Transfusion Therapies, from which Mr. Whitmer resigned in December of 2012.

Phillip J. Mazzuca was appointed Chief Operating Officer in October 2010. Prior to joining our company, Mr. Mazzuca served as President and Chief Executive Officer of Brim Holdings, Inc., for the previous two years. Prior to joining Brim Holdings, Inc., Mr. Mazzuca served for three years as the Executive Vice President and Chief Operating Officer of Charlotte, North Carolina-based MedCath Corporation, where he oversaw the company’s hospital operations. Starting in 1999, he spent six years at IASIS, rising to Division President for the Texas and Florida markets. In previous years, he served in operations leadership roles for a number of hospitals and hospital companies, including Chief Executive Officer of hospitals in several states including Alabama, California, Illinois and Virginia.

John M. Doyle has served as Chief Financial Officer since April 2010. Prior to that time, he served as Vice President and Chief Accounting Officer since July 2006 and Vice President and Treasurer from April 2002 to July 2006. Prior to joining our company, Mr. Doyle was a Senior Manager at Ernst & Young LLP from February 1997 until March 2002 and at KPMG LLP from August 1994 to January 1997, where he specialized in healthcare audit and business advisory services, including mergers and acquisitions. In addition, from October 1991 to August 1994, Mr. Doyle was the Chief Financial Officer for two community hospitals in East Tennessee and North Carolina.

Frank A. Coyle has been Secretary and General Counsel since October 1999. From August 1998 until October 1999, Mr. Coyle served as Secretary and General Counsel of a company formed by members of our management that was merged into one of our subsidiaries. Mr. Coyle served from May 1995 to August 1998 as Assistant Vice President Development in Physician Services and in-house Development Counsel for Columbia/HCA. From May 1990 to May 1995, Mr. Coyle was an attorney with Baker, Worthington, Crossley, Stansberry & Woolf where his work included mergers, acquisitions, securities transactions, not-for-profit representation and formation of Tennessee health maintenance organizations.

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James Moake has served as Operations Chief Financial Officer since February 2005. Prior to that time, he served as a Division Chief Financial Officer since March 2003. From November 2002 to March 2003, Mr. Moake served as Operations Controller. Prior to joining our company, from March 2000 to November 2002, he served as the Chief Financial Officer for two regional medical centers of Province Healthcare Corporation. Mr. Moake served as the Chief Financial Officer of HMA, Inc.’s Community Hospital of Lancaster (PA) from July 1999 to March 2000 and the Assistant Chief Financial Officer of HMA, Inc.’s Biloxi Regional Medical Center (MS) from June 1998 to June 1999. From December 1994 to May 1998, he served as the Chief Financial Officer of Grant Regional Health Center, Inc. in Wisconsin.

Edward H. Lamb joined our company as President – Western Division, effective October 1, 2011. In this role, Mr. Lamb oversees our Arizona, Colorado, Nevada and Utah hospitals. Prior to joining our company, Mr. Lamb spent fourteen years with HCA Inc. in various positions, most recently as the President and Chief Executive Officer of Corpus Christi Medical Center, a four-campus, 583-bed system in Corpus Christi, Texas. Prior to that, Mr. Lamb served as President and Chief Executive Officer of HCA’s Alaska Regional Hospital, a 250-bed tertiary care, circumpolar referral medical center in Anchorage, Alaska. He also has served as Chief Executive Officer of two behavioral health hospitals in Arizona – Charter Hospital of the East Valley and St. Luke’s Behavioral Health Center, before its acquisition by IASIS. Mr. Lamb started his career as a Medical Technologist with Orem Community Hospital in Orem, Utah.

Bryanie W. Swilley was promoted to President – Eastern Division, effective July 1, 2012. Prior to that time, Mr. Swilley served twelve years as Chief Executive Officer of Jordan Valley Medical Center, including the last five of which he also served as Chief Executive Officer of Pioneer Valley Hospital.

Peter Stanos has served as Vice President, Ethics & Business Practices since April 2003. Prior to that time, he served as Regional Director Clinical Operations for our Utah market since July 2002. Prior to joining our company, from May 2000 until July 2002, Mr. Stanos was employed by Province Healthcare Corporation as Chief Quality Officer of Havasu Regional Medical Center and as Regional Director of Quality and Resource Management. From 1997 until 2000, Mr. Stanos was employed by HCA and Triad Hospitals, Inc. as an Associate Administrator and Director of Quality and Resource Management, Materials, Pharmacy and Risk Management. Prior to joining HCA, Mr. Stanos served as Regional Director of several healthcare companies, as well as an independent healthcare consultant.

Mike Uchrin has served as Chief Executive Officer of Health Choice since April 2012. Mr. Uchrin joined Health Choice in 2002 as a project manager and later became our Director of Information Technology, before becoming our Chief Operating Officer, a position he held for the five years previous to his promotion to Chief Executive Officer.

David R. White currently serves as Chairman of the Board of Directors of IAS. Mr. White served as our Chief Executive Officer from December 1, 2000 to October 2010 and President from May 2001 through May 2004. Mr. White served as President and Chief Executive Officer of LifeTrust, an assisted living company, from November 1998 until November 2000. From June 1994 to September 1998, Mr. White served as President of the Atlantic Group at Columbia/HCA, where he was responsible for 45 hospitals located in nine states. Previously, Mr. White was Executive Vice President and Chief Operating Officer at Community Health Systems, Inc., a for-profit hospital management company that operated approximately 20 acute-care hospitals.

Jonathan J. Coslet became a Director of IAS in June 2004. Mr. Coslet is a TPG Senior Partner. Mr. Coslet is also a member of the firm’s Investment Committee and Management Committee. Prior to joining TPG in 1993, Mr. Coslet was in the Investment Banking Department of Donaldson, Lufkin & Jenrette, specializing in leveraged acquisitions and high yield finance from 1991 to 1993. Mr. Coslet serves on the boards of PETCO Animal Supplies, Inc., Biomet, Inc. and Quintiles Transnational Corp. and served until October 2013 on the board of Directors of Nieman Marcus Group, Inc.

David Dupree became a Director of IAS in April 2007. Mr. Dupree has been Managing Director and Chief Executive Officer of The Halifax Group since 1999. Mr. Dupree serves on numerous Halifax portfolio boards. Prior to co-founding Halifax, Mr. Dupree was a Managing Director and Partner with The Carlyle Group, where he was primarily responsible for investments in health, wellness and related sectors. Prior to joining The Carlyle Group in 1992, Mr. Dupree was a Principal in Corporate Finance with Montgomery Securities. Mr. Dupree is a Director Emeritus of Whole Foods Market, Inc., a natural and organic foods supermarket company where he served as Director from 1997 until 2008 and was a director of Primo Water Corporation, a supplier of bottled water dispensers, from 2008 to 2010.

Kirk E. Gorman was appointed a Director of IAS in August 2004. Mr. Gorman currently serves as Executive Vice President and Chief Financial Officer of Jefferson Health System, a not-for-profit health system based in Radnor, Pennsylvania, which he joined in October 2003. Prior to joining Jefferson Health System, Mr. Gorman served as Senior Vice President and Chief Financial Officer of Universal Health Services, Inc., a public hospital company based in Pennsylvania, from 1987 to February 2003. Mr. Gorman also has 13 years of experience in the banking industry and served as Senior Vice President of Mellon Bank prior to his work in the healthcare industry. Mr. Gorman serves as a director of BioTelemetry Inc., a leading provider of mobile cardiac outpatient telemetry services, and Health Management Associates, Inc. Mr. Gorman served as a director of Care Investment Trust, a real estate investment and finance company, from 2007 to 2009.

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Greg Kranias became a Director of IAS in May 2010. Mr. Kranias serves as a TPG Principal. Prior to joining TPG in 2005, Mr. Kranias worked at the private equity firm Forstmann Little & Company. Before joining Forstmann Little & Company in 2001, Mr. Kranias was an investment banker with Goldman, Sachs & Co. Mr. Kranias is involved with the investment by affiliates of Caesars Entertainment Corporation, Catellus Corporation and Taylor Morrison and serves on the Board of Directors of Catellus Corporation and Taylor Morrison. He received his M.B.A. from the Stanford Graduate School of Business and his A.B. from Harvard College, where he graduated Phi Beta Kappa.

Todd B. Sisitsky became a Director of IAS in June 2004. Mr. Sisitsky is a TPG Partner, where he leads the firm’s investment activities in the healthcare services, pharmaceutical and medical device sectors. In addition to our company, he played leadership roles in connection with investments by TPG in Aptalis Pharma, Biomet, Inc., Fenwal Transfusion Therapies, Surgical Care Affiliates, LLC, HealthScope and IMS Health and serves on the board of directors of each of these companies other than the board of directors of Fenwal Transfusion Therapies, from which Mr. Sisitsky resigned in December 2012. Prior to joining TPG in 2003, Mr. Sisitsky worked at Forstmann Little & Company and Oak Hill Capital Partners.

Paul S. Levy has been a Director of IAS since October 1999. Mr. Levy is a Managing Director of JLL Partners, Inc., which he founded in 1988. Mr. Levy serves as a director of several companies, including American Dental Partners, Inc., Builders FirstSource, Inc., JGWPT Holdings Inc., Medical Card Systems, Inc., Patheon Inc. and PGT Inc.

Jeffrey C. Lightcap has been a Director of IAS since October 1999. Since October 2006, Mr. Lightcap is a founding partner and the Senior Managing Director of HealthCor Partners Management, LP (“HCP”). Prior to joining HCP, Mr. Lightcap was a Senior Managing Director at JLL Partners, Inc., which he joined in June 1997. From February 1993 to May 1997, Mr. Lightcap was a Managing Director at Merrill Lynch & Co., Inc., where he was the head of leveraged buyout firm coverage for the Mergers & Acquisitions group. Mr. Lightcap also serves as a director of CareView Communications, Inc., a healthcare technology provider.

Sharad Mansukani became a Director of IAS in April 2005. Dr. Mansukani serves as a TPG senior advisor, and serves on the faculty at both the University of Pennsylvania and Temple University School of Medicine. Dr. Mansukani previously served as a senior advisor to the Administrator of CMS from 2003 to 2005, and as Senior Vice President and Chief Medical Officer of Health Partners, a non-profit Medicaid and Medicare health plan owned at the time by Philadelphia-area hospitals. Dr. Mansukani completed a residency and fellowship in ophthalmology at the University of Pennsylvania School of Medicine and a fellowship in quality management and managed care at the Wharton School of Business. Dr. Mansukani also served as a director of Healthspring, Inc. from 2007 until January 2012.

Director Qualifications

The certificate of incorporation and by-laws of IAS provide that its board of directors will consist of not less than three nor more than 15 members, the exact number of which shall be determined by the board of directors in a resolution. Our board of directors is currently comprised of ten directors. The directors are elected at the annual meeting of stockholders for one-year terms and until their successors are duly elected and qualified.

Pursuant to the limited liability company operating agreement of IASIS Investment LLC (“IASIS Investment”), JLL is entitled to nominate two directors to IAS’ board of directors. TPG is entitled to nominate the remaining directors. Messrs. Levy and Lightcap serve on IAS’ board of directors as designees of JLL. The remaining directors serve as designees of TPG.

When considering whether the directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the board of directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the board of directors focused primarily on the information discussed in each of the directors’ biographical information set forth above.

Each of the directors possesses high ethical standards, acts with integrity, and exercises careful, mature judgment. Each is committed to employing their skills and abilities to aid the long-term interests of the stakeholders of the Company. In addition, our directors are knowledgeable and experienced in one or more business, governmental, or civic endeavors, which further qualifies them for service as members of the board of directors. Alignment with our stockholders is important in building value at the Company over time.

As a group, the non-management directors possess experience in owning and managing enterprises like the Company and are familiar with corporate finance, strategic business planning activities and issues involving stakeholders more generally.

The management director brings leadership, extensive business, operating, financial, legal and policy experience, and knowledge of our Company and the Company’s industry, to the board of directors. In addition, the management director brings the broad strategic vision for our Company to the board of directors.

Audit Committee and Audit Committee Financial Expert

IAS’ board of directors has a standing audit committee. The current members of the audit committee are Messrs. Kranias, Lightcap and Gorman. IAS’ board of directors has determined that Mr. Gorman is an “audit committee financial expert” as that term is defined by SEC regulations. IAS’ board of directors has not made a determination as to whether Mr. Gorman and the other directors are “independent” because all of the members of IAS’ board have been appointed by JLL and the TGP Funds. See “Item 13 – Certain Relationships and Related Transactions, and Director Independence – IASIS Investment Limited Liability Company Operating Agreement” for further discussion regarding director independence.

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Code of Ethics

We have adopted a code of ethics for our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. Our Code of Ethics has been posted on our Internet website at www.iasishealthcare.com under “About Us: Code of Ethics.” Please note that our Internet website address is provided as an inactive textual reference only. We will disclose within four business days any amendments to, or waivers of, the Code of Ethics granted to any of our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions, by posting such information on our website rather than by filing a Form 8-K.

Item 11. Executive Compensation.

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

This section discusses the principles underlying our executive compensation policies and decisions. It provides qualitative information regarding the manner in which compensation is earned by our executive officers and places in context the data presented in the tables that follow. In particular, we address the compensation paid or awarded during our 2013 fiscal year to the following executive officers: W. Carl Whitmer, our President and Chief Executive Officer; Philip J. Mazzuca, our Chief Operating Officer; John M. Doyle, our Chief Financial Officer; Bryanie W. Swilley, President of our Eastern Division; and Edward Lamb, President of our Western Division. We refer to these five executive officers as our “named executive officers.”

Since the equity of our company is owned by a group of sophisticated investment funds that also control our board of directors, our compensation structure is largely driven by these investment funds, which draw upon their extensive experience and expertise with respect to executive compensation structures and incentives. Our Compensation Committee (the “Committee”) is made up of three individuals, including David White, the Chairman of the Board of Directors of IAS, Jeffrey C. Lightcap, a representative of JLL Partners, and Todd Sisitsky, a TPG partner who chairs the Committee.

The Committee seeks to design compensation policies that motivate executive officers to grow the Company’s value, aligning the officers’ financial interests with its investors’ while encouraging long-term executive retention. We believe that these policies have enabled us to attract and retain a senior executive team comprised of talented individuals with deep healthcare industry experience. To promote top performance and long-term retention, under the Committee’s direction and supervision, we have developed a compensation structure that uses base salary to compensate our executives in a manner that we believe is appropriate, while also offering annual cash incentive compensation and long-term equity awards designed to focus our management team on our Company’s annual and long-term strategic and operational objectives. The Committee believes that in years of outstanding achievement by the Company, our named executive officers should be properly rewarded for contributing to our success through a combination of incentive-based cash and equity awards.

The Company faced a challenging healthcare industry environment in 2013 and did not meet its annual adjusted EBITDA target, despite numerous strategic achievements including the sale of its Florida market, the closing of sale-leasebacks at several facilities and a return of capital to investors. Thus, with respect to 2013 performance, our named executive officers’ compensation consisted almost entirely of base salary and standard Company benefits, reflecting the absence of incentive payments with respect to a year in which the annual adjusted EBITDA target was not achieved.

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The Executive Compensation Process

The Compensation Committee

The Committee oversees and administers our executive compensation program. The Committee’s responsibilities include, but are not limited to, the following:

• Reviewing and approving our compensation philosophy;

• Determining executive compensation levels and components thereof;

• Annually reviewing and assessing performance goals and objectives for all named executive officers, placing particular emphasis with respect to the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, which we consider to be the Company’s most significant senior executive positions in terms of responsibility and influence; and

• Determining short-term and long-term incentive compensation for all named executive officers, with particular emphasis with respect to the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer.

Mr. Sisitsky, the Chair of the Committee, makes final decisions with respect to the compensation of the Chief Executive Officer. Annually, the non-executive directors of the board of directors evaluate the performance of the Chief Executive Officer and that evaluation is then communicated to the Chief Executive Officer by Mr. Sisitsky. The Chief Executive Officer recommends to Mr. Sisitsky compensation decisions for our Chief Operating Officer and our Chief Financial Officer, respectively. Our Chief Executive Officer and Mr. Sisitsky discuss these recommendations in detail before reaching a final decision. With respect to the other named executive officers, our Chief Executive Officer is generally responsible for conducting reviews and making compensation decisions.

During our fiscal year ended September 30, 2013, the Committee did not engage or rely on the advice or reports of any external compensation consultant in making compensation decisions. As TPG has substantial experience and expertise in executive compensation, including with respect to executive compensation practices at its own portfolio companies, and in some cases internally employs compensation experts, the Committee may from time to time rely upon such internal experience and expertise which is provided by TPG and TPG’s compensation experts at no cost to the Company.

Our Chief Executive Officer, as discussed above, plays an important role in many compensation decisions. Other named executive officers may also attend the Committee meetings and participate only as and if required by the Committee. As discussed above, the Chief Executive Officer does not participate on behalf of the Committee or the board of directors in decisions regarding his own compensation. Any discussion by the Committee regarding compensation for the Chief Executive Officer or other named executive officers is conducted by the Committee in executive session without such executive officers in attendance.

Process

The Committee’s process for determining executive compensation is straightforward and involves consideration of executive compensation practices at TPG’s portfolio companies, as well as the highly competitive market for healthcare executives. While the Committee does not benchmark to any specified peer group or seek to set compensation in relation to compensation averages at other healthcare industry companies, our management team prepares for the Committee informal schedules that compare our cash compensation to the cash compensation offered by certain comparable companies in the acute hospital industry that file such information with the SEC. The Committee also, from time to time, relies on analysis performed by TPG that compares the compensation of our executive officers with that of other portfolio companies or private-equity backed companies, to the extent internally or publicly available. These comparisons are part of the total mix of information used to annually evaluate base salary, short-term and long-term incentive compensation and total compensation. Since one of the objectives of our compensation program is to consistently reward and retain top performers, compensation will also vary depending on individual and Company performance, as well as reflect the bargaining and negotiations associated with attracting and retaining top performers.

Pay for Performance

Our compensation philosophy seeks to align compensation with both Company and individual performance. With respect to our named executive officers, the primary factor that we use in structuring annual incentive compensation, including payouts under our short-term incentive plan is adjusted EBITDA (as such term is defined in Note 17 to our consolidated financial statements) compared to our Company budget for such year. We believe that adjusted EBITDA represents the single best measure of our Company’s operating performance, financial health and long-term value creation. Other factors that may be in the Committee’s discretion be considered in certain years include:

• Year-over-year growth in adjusted EBITDA;

• Free cash flow;

• Return on equity;

• Peer company comparisons including comparisons of net revenue growth, expense margins and return on capital;

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• Individual, company or division performance including certain quality and other core performance measures;

• Execution of key strategic initiatives and transactions, including business and provider network development efforts that enhance shareholder equity value;

• Promotion of an effective, company-wide program that fosters a culture of legal compliance; and

• Response to unusual or extreme events.

Another component of the Company’s pay for performance compensation philosophy is to promote significant equity holdings by our named executive officers through the issuance of long-term equity awards. During the 2013 fiscal year, only Mr. Swilley was granted common stock options, which we discuss in more detail below under “Long-Term Incentive Compensation.”

Internal Pay Equity

Internal pay equity is not a material factor with respect to the Committee’s compensation decisions among our named executive officers. The Committee believes that the variation in compensation among the named executive officers is reasonable in light of each executive’s experience, individual contribution, level of responsibility and general importance to the Company.

Components of the Executive Compensation Program

Employment Agreements

Mr. Whitmer and the Company negotiated a new employment agreement with the Company upon his promotion to President during fiscal 2010. Mr. Doyle entered into a negotiated employment agreement upon his promotion to Chief Financial Officer at the same time. Mr. Mazzuca’s employment agreement was negotiated and entered into in conjunction with his return to the Company at the beginning of the 2011 fiscal year. Mr. Lamb entered into a negotiated employment agreement upon joining the Company in 2011. Mr. Swilley entered into a negotiated employment agreement with the Company upon his promotion to President of our Eastern Division in April 2012.

Base Salary

Base salary represents the fixed component of our named executive officers’ compensation and is intended to compensate the executive for competence in the executive role. The Committee attempts to maintain base salaries at competitive levels while also reserving a substantial portion of compensation for the other compensation elements that are directly related to Company and individual performance. Our named executive officers did not receive base salary increases with respect to fiscal year 2013.

The Committee annually reviews base salaries of the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. The Chief Executive Officer approves all base salary increases for other named executive officers. Any base salary increase during this annual process is generally intended to compensate the executive for exceptional performance or contributions, cost of living increases, changes in responsibility and changes in the competitive landscape. Base salaries may also be adjusted at any time during the year if Mr. Sisitsky, the Committee, or the Chief Executive Officer, as relevant, finds it necessary or advisable to maintain a competitive level or to compensate an individual for increased responsibility or achievement.

Mr. Whitmer’s, Mr. Doyle’s, Mr. Mazzuca’s, Mr. Lamb’s and Mr. Swilley’s fiscal year 2013 annual base salaries were $787,500, $412,000, $600,000, $450,000, and $425,000, respectively. Each of our named executive officers base salaries was established as part of the employment agreements each negotiated with our Company as described above.

Short-Term Incentive Compensation

Our named executive officers have the opportunity to earn cash incentive awards pursuant to the Corporate Incentive Plan or the Market Executive Incentive Plan based upon the level of achievement of Company and individual financial performance metrics. The range of potential payouts for Mr. Whitmer, Mr. Mazzuca, Mr. Doyle, Mr. Lamb, and Mr. Swilley are set forth in their employment agreements and were highly negotiated. Our named executive officers did not receive short-term incentive awards with respect to fiscal year 2013.

Before the end of the first quarter of the relevant fiscal year, the Company, with the input of members of the board of directors and the investors, establishes target levels for adjusted EBITDA and, in certain years, other operating metrics such as revenue growth and free cash flow that are used both for compensation and budgeting purposes. Our adjusted EBITDA for the year (taking into account certain adjustments that we believe are customary for executive compensation purposes) versus the adjusted EBITDA target levels is the primary factor in calculating the short-term incentive compensation paid to our Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. The performance of our divisions during the year versus the adjusted EBITDA target levels is the primary factor, along with the execution of strategic initiatives, the achievement of certain quality and customer service metrics, cash collections and other operational goals, in calculating the short-term incentive compensation paid to the Presidents of our Eastern and Western Divisions. We then establish threshold, target and maximum target incentive levels based on each named executive officer’s employment agreement, where applicable, and what we believe to be appropriate levels relative to the executive’s position in the Company.

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For 2013, we established the following annual incentive target levels for our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, President-Western Division, and President – Eastern Division:

Annual Short-Term Incentive Award Ranges (as a Percentage and a Dollar Amount of Base Salary) for Fiscal 2013

				Percentage								Dollars
	Threshold			Target			Maximum			Threshold		Target		Maximum
W. Carl Whitmer		20	%		100	%		200	%	$	157,500	$	787,500	$	1,575,000
Phillip J. Mazzuca		10	%		50	%		100	%	$	60,000	$	300,000	$	600,000
John M. Doyle		10	%		50	%		100	%	$	41,200	$	206,000	$	412,000
Ed Lamb		—			50	%		100	%		—	$	225,000	$	450,000
Bryanie Swilley		—			50	%		100	%		—	$	212,500	$	425,000

While the primary factor in calculating short-term incentive compensation payouts for Mr. Whitmer, Mr. Doyle and Mr. Mazzuca is adjusted EBITDA, Mr. Sisitsky or the Committee, as relevant, may consider, in his or its discretion, other qualitative and quantitative factors in awarding annual incentive compensation to executives, including those discussed above under “Pay for Performance” and other metrics such as quality and customer service metrics, cash collections, certain operational and individual goals, in either determining whether an incentive payment is to be made or setting the amount of the incentive paid. For Mr. Lamb and Mr. Swilley, the primary factors in calculating short-term incentive compensation are adjusted EBITDA of the Company’s Western Division and Eastern Division, respectively, along with the execution of strategic initiatives and the achievement of certain quality and customer service metrics, and Mr. Whitmer, as relevant, may consider, in his discretion, other qualitative and quantitative factors in awarding annual incentive compensation.

For executive bonus purposes, the Committee considers an EBITDA calculation that is based on the Company’s adjusted EBITDA (as set forth in Footnote 17 to the consolidated financial statements) but also takes into consideration certain adjustments that are allowed under our senior credit agreement, an approach which we believe is customary and appropriate for executive compensation. After consideration of adjustments for facilities opening and project start-up costs, severance and other non-recurring restructuring costs and other senior credit agreement-defined adjustments, the amount of adjusted EBITDA earned by the Company in fiscal year 2013 for executive compensation purposes was $268.2 million, which did not meet our annual target amount—which, as discussed above, was difficult to achieve due to the challenging healthcare industry environment. These challenges included reductions in Medicaid reimbursement, Medicare sequestration and industry-wide declines in volume, as well as continued significant costs related to our physician alignment efforts and increases in uncompensated care at our hospitals. Because the Company did not meet its earnings target, the Committee made a decision not to award our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer short-term incentive awards for fiscal year 2013. Our Chief Executive Officer also made a decision that Mr. Lamb and Mr. Swilley would not receive short-term incentive awards based on the performance of the Western Division and Eastern Division, respectively. The Committee did, however, recognize the numerous Company efforts made in fiscal year 2013 to achieve strategic objectives, including the sale of its Florida market, the sale-leaseback transactions at numerous of its facilities, and the dividend paid to investors following the closing of these transactions. Since much of the work to achieve these strategic objectives occurred in fiscal year 2013, but a number of the related transactions did not ultimately close until the beginning of fiscal year 2014, the Committee decided that, while these accomplishments would not result in 2013 bonuses, they could be taken into account with respect to any 2014 executive compensation awards.

Long-Term Incentive Compensation

Our executive officer compensation has a substantial equity component, as we believe superior equity investors’ returns are achieved through a culture that focuses on long-term performance by our named executive officers and other key associates. By providing our executives with an equity stake in the Company, we are better able to align the interests of our named executive officers and our equity holders. Our named executive officers did not receive long-term incentive awards with respect to fiscal year 2013 Company performance.

IAS maintains the Amended and Restated IAS 2004 Stock Option Plan and from time to time may grant additional options to the named executive officers pursuant to this plan. In making long-term equity incentive grants to the named executive officers, certain factors are considered, including but not limited to, the present ownership levels of the named executive officers and the level of the executive’s total compensation package compared to peer companies. It is the responsibility of Mr. Sisitsky to recommend grants to the Committee for the Chief Executive Officer, the Chief Executive Officer to recommend grants to the Committee for the Chief Operating Officer and Chief Financial Officer, and the Chief Executive Officer, Chief Operating Officer or Chief Financial Officer to recommend grants to the Committee for any other named executive officers.

Generally, the exercise price of an option grant is set at no less than the fair market value of a share of the common stock as of the grant date, as determined by the IAS board of directors in good faith and, as necessary, supplemented and supported by an independent third party valuation. We have no formal practices regarding the timing of option grants.

Due to our current privately-held equity structure, an optionee is expected at the time of grant to enter into an agreement that will generally provide that for the 90-day period following the later of (i) a termination of employment or (ii) six months and one day following the date that shares of common stock were acquired pursuant to the exercise of the option, we have the right to repurchase each share then owned by the participant at fair value, as determined in good faith by the IAS board of directors.

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During fiscal 2013, Mr. Swilley received an option to purchase an additional 25,000 shares of IAS common stock as part of our desire to motivate him in his duties as our President of our Eastern Division. The specific terms of this option award are disclosed in the tables below entitled “Grants of Plan-Based Awards in Fiscal Year 2013” and “Outstanding Equity Awards at Fiscal 2013 Year-End.”

Non-qualified Executive Savings Plan

We provide certain of our employees a non-qualified executive savings plan. The plan is a voluntary, tax-deferred savings vehicle that is available to those employees earning a minimum base salary ($115,000 in 2013). The executive savings plan was implemented in order to assist in the recruitment and retention of key executives by providing the ability to defer additional pre-tax compensation in excess of the limits allowed by the Company’s 401(k) plan.

An eligible employee must contribute the maximum allowed by law to the IASIS 401(k) plan in order to participate in the non-qualified executive savings plan. There are two types of deferrals available under the plan: excess deferrals and additional deferrals. Excess deferrals are contributions that are deposited into the non-qualified executive savings plan because either (a) the participant’s earnings have exceeded $250,000 and/or (b) the participant’s deferrals into the 401(k) plan have reached a dollar limit stipulated by the IRS ($17,500 in 2013). Excess deferrals are automatically deposited into the non-qualified executive savings plan if these limits are reached. Executive excess deferrals are matched at the same rate as contributions to the IASIS 401(k) plan. There is a five-year service requirement for participants to vest in the IASIS excess matching contributions. Currently, none of the named executive officers participates in the plan.

Additional deferrals are contributions to the non-qualified executive savings plan that are independent of a participant’s 401(k) contribution election. These contributions are voluntary and are capped according to applicable IRS guidelines for such a plan.

The non-qualified executive savings plan offers a range of investment options that act as “benchmark funds.” Benchmark funds are defined as the investment fund or funds used to represent the performance and current deemed balance of a participant’s non-qualified account, which is considered a notional deferred compensation account. Contributions become part of our general assets. Investment options under the non-qualified executive savings plan are the same as those available under the IASIS 401(k) plan.

Severance and Change in Control Agreements

Mr. Whitmer entered into a new negotiated employment agreement upon his promotion to President during fiscal 2010. Mr. Doyle entered into a negotiated employment agreement upon his promotion to Chief Financial Officer during fiscal 2010. Mr. Mazzuca entered into a negotiated employment agreement upon his return to the Company at the beginning of the 2011 fiscal year, which included a $75,000 sign-on bonus to induce him to return to our Company and the Nashville, Tennessee area. Mr. Lamb entered into a negotiated employment agreement upon joining the Company as President of our Western Division in 2011. Mr. Swilley entered into a negotiation employment agreement with the Company upon his promotion to President of our Eastern Division in April 2012. We believe that reasonable and appropriate severance and change in control benefits are appropriate in order to be competitive in our executive retention efforts. In agreeing to these benefits, the board of directors recognized that it may be difficult for such executives to find comparable employment within a short period of time. In addition, the board of directors recognized that formalized severance and change in control arrangements are common benefits offered by employers competing for similar senior executive talent. Information regarding applicable payments under such agreements for the named executive officers is provided under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” and “Potential Payments Upon Termination or Change in Control.”

Perquisites

From time to time we agree to provide certain executives with perquisites. We provide these perquisites on a limited basis in order to attract key talent and to enhance business efficiency. We believe these perquisites are in line with market practice. For fiscal 2013, we provided the named executive officers with the following perquisite:

Group term life insurance premiums. We paid insurance premiums with respect to group term life insurance for the named executive officers.

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Impact of Tax and Accounting Rules

The forms of our executive compensation are largely dictated by our capital structure and have not been designed to achieve any particular accounting treatment. We do take tax considerations into account, both to avoid tax disadvantages, and obtain tax advantages where reasonably possible consistent with our compensation goals. Certain tax advantages for our executives benefit us by reducing the overall compensation we must pay to provide the same after-tax income to our executives. Thus, our severance pay plans are designed to take account of and avoid “parachute” excise taxes under Section 280G of the Internal Revenue Code. Since we currently have no publicly traded equity interests, we are not currently subject to the $1,000,000 limitation on deductions for certain executive compensation under Section 162(m)(l) of the Internal Revenue Code, though that rule will be considered if our equity interests become publicly traded. We are subject to the $500,000 limitation on compensation deductions under Section 162(m)(6) of the Internal Revenue Code applicable to certain health insurance providers. This limitation applies to cash compensation paid after September 30, 2013 and certain deferred compensation accrued after September 2010 and paid after September 30, 2013. Incentives paid to executives under our annual incentive plan are taxable at the time paid to our executives.

Recovery of Certain Awards

We do not have a formal policy for recovery of annual incentives paid on the basis of financial results which are subsequently restated. Under the Sarbanes-Oxley Act of 2002, as amended, our Chief Executive Officer and Chief Financial Officer must forfeit incentive compensation paid on the basis of previously issued financial statements for which they were responsible and which have to be restated due to such officers’ actions. If the situation arises, we would consider our course of action in light of the particular facts and circumstances, including the culpability of the individuals involved.

Risk Analysis of Compensation Plans

After analysis, we believe that our compensation policies and practices for our employees, including our executives, do not encourage excessive risk or unnecessary risk-taking and in our opinion the risks arising from such compensation policies and practices are not reasonably likely to have a material adverse effect on us. Our compensation programs have been balanced to focus our key employees on both short- and long-term financial and operational performance.

Compensation Committee Conclusion

The Committee’s philosophy for executive pay for fiscal 2013 was intended to reflect the unique attributes of our company and each employee individually in the context of our pay positioning policies, emphasizing an overall analysis of the executive’s performance for the prior year, projected role and responsibilities, required impact on execution of our strategy, vulnerability to recruitment by other companies, external pay practices, total cash compensation and equity positioning internally, current equity holdings, and other factors the Committee deemed appropriate. We believe our approach to executive compensation emphasized significant time and performance-based elements intended to promote long-term investor value and strongly aligned the interests of our executive officers with those of investors.

Committee Interlocks and Insider Participation

During fiscal 2013, the Committee was composed of David R. White, Todd Sisitsky and Jeffrey C. Lightcap. Mr. White currently serves as our Chairman and served as our Chief Executive Officer until November 1, 2010. Mr. Sisitsky and Mr. Lightcap are currently Directors of IAS. None of our executive officers serves, or in the past year served, as a member of the board of directors or compensation committee of any entity that has or had one or more of its executive officers serving on IAS’ board of directors or the Committee. Each of Mr. White and Mr. Sisitsky is a nominee of, and is affiliated with, the TGP Funds, and Mr. Lightcap is a nominee of, and is affiliated with, JLL. Pursuant to the limited liability company operating agreement of IASIS Investment, JLL is entitled to nominate two directors to the IAS board of directors. The TPG Funds are entitled to nominate the remaining directors. The limited liability company operating agreement of IASIS Investment and certain of its terms are described in greater detail in “Item 13 – Certain Relationships and Related Transactions, and Director Independence – IASIS Investment Limited Liability Company Operating Agreement.”

Compensation Committee Report

The Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon such review and discussions, the Committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in this Report.

Compensation Committee:

Todd Sisitsky

David R. White

Jeffrey C. Lightcap

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Summary Compensation Table — Fiscal 2013

The following table sets forth, for the fiscal year ended September 30, 2013, the compensation earned by our named executive officers during 2013. There are no above-market, preferential or other earnings on deferred compensation. Consequently, the table does not include earnings on deferred amounts. None of the named executive officers is eligible for pension benefits as we do not have a defined benefit program.

Name and Principal Position	Year		Salary ($)		Option Awards ($)(1)		Non-Equity Incentive Plan Compensation ($)(2)		All Other Compensation ($)(3)		Total ($)(4)
W. Carl Whitmer
President and Chief		2013		787,500		—		—		2,310		789,810
Executive Officer		2012		787,500		636,071		500,000		3,060		1,926,631
		2011		741,667		3,733,992		1,100,000		8,123		5,583,782
Phillip J. Mazzuca
Chief Operating Officer		2013		600,000		—		—		3,117		603,117
		2012		600,000		55,148		195,000		3,117		853,265
		2011		536,905		3,480,840		415,000		82,452		4,515,197
John M. Doyle
Chief Financial Officer		2013		412,000		—		—		3,629		415,629
		2012		412,000		115,858		130,000		2,111		659,969
		2011		400,000		1,307,952		250,000		8,316		1,966,268
Edward Lamb (5)
President – Western Division		2013		450,000		—		—		5,439		455,439
		2012		450,000		1,288,143		85,500		225,490		2,049,133
Bryanie W. Swilley (6)
President – Eastern Division		2013		425,000		284,250		—		78,337		787,587

1. The amounts reported represent the grant date fair value calculated pursuant to ASC 718 of option awards granted during the applicable fiscal year and does not represent an amount paid to or realized by the named executive officer. The amounts reported for 2012 include the incremental fair value calculated pursuant to ASC 718 in regards to a stock option price adjustment completed by the Company in September 2012 that related to a shareholder return of capital, as follows: Mr. Whitmer, $636,071; Mr. Mazzuca, $55,148; Mr. Doyle, $115,858; and Mr. Lamb, $21,143. There is no certainty that the named executive officer will realize any value from these stock options or the price adjustment and to the extent they do, the amounts realized may have no correlation to the amounts reported above. For option awards subject to performance conditions, if any, grant date fair value is calculated based on the probable outcome of the relevant performance conditions, excluding the effect of estimated forfeitures. Refer to “Note 12 – Stock Options” to the audited consolidated financial statements for a discussion of the relevant assumptions used to determine the grant date fair value of these awards.

2. Represents compensation to the named executive officers made pursuant to the Company’s Corporate Incentive Plan for Messrs. Whitmer, Mazzuca, and Doyle, and compensation paid pursuant to the Company’s Market Executive Incentive Plan for Mr. Lamb and Mr. Swilley.

3. The amounts listed in this column reflect, for each named executive officer, the sum of (i) the amounts contributed by us to the IASIS 401(k) Plan; (ii) the dollar value of insurance premiums paid for group term life insurance; and (iii) relocation allowances and expenses. Listed in the table below are the dollar values of the amounts reported in this column for 2013.

Named Executive Officer	Company Match in IASIS 401(k) Plan ($)		Insurance Premiums Paid for Group Term Life Insurance ($)		Relocation Allowances and Expenses ($)
W. Carl Whitmer		1,500		810		—
Phillip J. Mazzuca		1,875		1,242		—
John M. Doyle		2,630		999		—
Edward Lamb		3,375		2,064		—
Bryanie W. Swilley		2,923		1,035		74,379

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4. See footnote 1 above regarding the difference between the amounts reported for purposes of stock option grants and price adjustments under SEC and accounting rules and amounts actually realized by the named executive officer (if any).

5. Because Mr. Lamb was not a named executive officer for 2011, compensation information is provided only for fiscal years 2012 and 2013.

6. Because Mr. Swilley was not a named executive officer for 2011 or 2012, compensation information is provided only for fiscal year 2013.

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Grants of Plan-Based Awards in Fiscal Year 2013

Name of Executive(1)	Grant Date		Exercise or Base Price of Option Awards(2)		Grant Date Fair Value of Option Awards(3)
Bryanie W. Swilley		5/29/2013	$	40.91	$	284,250

1. During fiscal 2013, Mr. Swilley was granted an option to purchase 25,000 shares of common stock of IAS at fair market value on the date of grant. Mr. Swilley was the only named executive officer to receive a grant of a plan-based award in 2013. See “Item 11 – Executive Compensation – Compensation Discussion and Analysis – Components of the Executive Compensation Program – Short-Term Incentive Compensation” and “Item 11 – Executive Compensation – Compensation Discussion and Analysis – Components of the Executive Compensation Program – Long-Term Incentive Compensation” for more detail. For a description regarding the vesting of this option award, please see Footnote 9 to the Outstanding Equity Awards at Fiscal 2013 Year-End.

2. The exercise price of an option grant is set at no less than the fair market value of a share of the common stock as of the grant date, as determined by the IAS board of directors in good faith and, as necessary, supplemented and supported by an independent third party valuation.

3. The amount reported represents the grant date fair value calculated pursuant to ASC 718 of option awards granted during 2013 and does not represent an amount paid to or realized by Mr. Swilley. There is no certainty that Mr. Swilley will realize any value from these stock options and, to the extent that he does, the amounts realized may have no correlation to the amount reported above. For option awards subject to performance conditions, if any, grant date fair value is calculated based on the probable outcome of the relevant performance conditions, excluding the effect of estimated forfeitures. Refer to “Note 12 – Stock Options” to the audited consolidated financial statements in this Report for a discussion of the relevant assumptions used to determine the grant date fair value of this award.

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

Employment Agreements

Effective April 2010, upon his promotion to President, Mr. Whitmer entered into a new negotiated employment agreement. Under the terms of the employment agreement, Mr. Whitmer was entitled to an initial base salary of $650,000 per year during the period in which he served as President of the Company which was one month in fiscal 2011 and was entitled to $750,000 per year during the period in which he serves as Chief Executive Officer of the Company which began on November 1, 2010. In addition, Mr. Whitmer was also entitled to receive an annual cash target bonus of 75% of his base salary and an annual cash maximum bonus of 150% of his base salary during the period in which he served as the Company’s President and is entitled to an annual cash target bonus of 100% of his base salary and an annual cash maximum bonus of 200% of his base salary during the period in which he serves as the Company’s Chief Executive Officer, in each case based upon the achievement of certain performance objectives set annually by the IAS board of directors. In October 2010, pursuant to the employment agreement, Mr. Whitmer was also granted an option to purchase 88,500 shares of common stock of IAS at fair market value on the date of grant, and, upon his promotion to Chief Executive Officer in November 2010, an option to purchase an additional 88,500 shares of common stock of IAS at fair market value on the date of grant, in each case under the terms of the related grant agreement and the Amended and Restated IAS 2004 Stock Option Plan.

Also in April 2010, Mr. Doyle entered into a negotiated employment agreement upon his promotion to Chief Financial Officer. Under the terms of the employment agreement, Mr. Doyle is entitled to an initial base salary of $400,000 per year. Mr. Doyle was also entitled to receive an annual cash target bonus of 50% of his base salary and an annual cash maximum bonus of 100% of his base salary based upon the achievement of certain performance objectives set annually by the IAS board of directors. In October 2010, pursuant to the terms of the employment agreement, Mr. Doyle was also granted an option to purchase 62,000 shares of common stock of IAS at fair market value on the date of grant and under the terms of the related grant agreement and the Amended and Restated IAS 2004 Stock Option Plan.

In connection with his return to the Company as Chief Operating Officer, Mr. Mazzuca entered into a negotiated employment agreement. Under the terms of the employment agreement, Mr. Mazzuca is entitled to an initial base salary of $550,000 per year. He also received a sign-on bonus of $75,000 to induce him to relocate and rejoin our Company. Mr. Mazzuca was entitled to receive an annual cash target bonus of 50% of his base salary and an annual cash maximum of 100% of his base salary based upon the achievement of certain performance objectives set annually by the IAS board of directors. In October 2010, pursuant to the terms of the employment agreement, Mr. Mazzuca was also granted an option to purchase 165,000 shares of common stock of IAS at fair market value on the date of grant and under the terms of the related grant agreement and the Amended and Restated IAS 2004 Stock Option Plan.

In 2011, Mr. Lamb entered into a negotiated employment agreement upon joining the Company as President of our Western Division. Under the terms of the employment agreement, Mr. Lamb is entitled to an initial base salary of $450,000 per year. He also received a relocation bonus of $200,000 to induce him to relocate and join our Company. Mr. Lamb is entitled to receive an annual cash target bonus of 50% of his base salary and an annual cash maximum of 100% of his base salary based upon the achievement of certain performance objectives as defined in the Company’s Market Executive Incentive Program. In January 2012, pursuant to the terms of the employment agreement, Mr. Lamb was also granted an option to purchase 70,000 shares of common stock of IAS at fair market value on the date of grant and under the terms of the related grant agreement and the Amended and Restated IAS 2004 Stock Option Plan.

On April 23, 2012, Mr. Swilley entered into a negotiated employment agreement as President of our Eastern Division. Under the terms of the employment agreement, Mr. Swilley is entitled to an initial base salary of $425,000 per year. He also received a relocation bonus of $74,379. Mr. Swilley is entitled to receive an annual cash target bonus of 50% of his base salary and an annual cash maximum of 100% of his base salary based upon the achievement of certain performance objectives as defined in the Company’s Market Executive Incentive Program. Pursuant to the terms of the employment agreement, Mr. Swilley was also granted an option to purchase 25,000 shares of common stock of IAS at fair market value on the date of grant and under the terms of the related grant agreement and the Amended and Restated IAS 2004 Stock Option Plan.

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The 2004 Stock Option Plan

All outstanding options were granted pursuant to the Amended and Restated IAS 2004 Stock Option Plan. Generally, the exercise price of the options will equal the fair market value of a share of the common stock as of the grant date as determined by the IAS board of directors. Upon a change in control, the options will become 100% vested if the participant’s employment is terminated without “cause” or by the participant for good reason within the 2-year period immediately following such change in control. On a termination of a participant’s employment outside the change in control context, unvested options automatically expire and vested options expire on the earlier of (i) the commencement of business on the date the employment is terminated for “cause”; (ii) 90 days after the date employment is terminated for any reason other than cause, death or disability; (iii) one year after the date employment is terminated by reason of death or disability; or (iv) the 10th anniversary of the grant date for such option.

In connection with the plan, each participant is expected to enter into an agreement that will generally provide that for the 90-day period following the later of (i) a termination of employment or (ii) six months and one day following the date that shares of common stock were acquired pursuant to the exercise of the option, we have the right to repurchase each share then owned by the participant at fair value, as determined in good faith by the IAS board of directors.

The maximum number of shares of IAS common stock that may be issued pursuant to options granted under the plan is 2,625,975.

The terms and conditions applicable to options are set forth by the Committee in each individual option agreement. However, no option granted under this plan may expire later than ten years from its date of grant. In addition, the Committee may not grant incentive stock options to any person who is not our employee on the date of the grant, and the exercise price of an incentive stock option cannot be less than the fair market value of a share of IAS common stock on the date of its grant. The exercise price of an incentive stock option granted to a stockholder who owns at the time of the grant shares of IAS common stock with more than 10% of the total combined voting power of all classes of IAS capital stock cannot be less than 110% of the fair market value of a share of IAS common stock on the date of the grant and the exercise period shall not exceed five years from the date of the grant. Furthermore, the aggregate fair market value of the shares of IAS common stock for which incentive stock options granted under this plan or any other stock option plan, determined as of the date of grant, that become exercisable for the first time by any person during any calendar year may not exceed $100,000. Any incentive stock options granted in excess of this limitation will be treated for all purposes as non-qualified stock options.

The IAS board of directors may amend this plan at any time for any reason subject to the stockholders approval to the extent necessary to meet the requirements of applicable law. However, no amendment can adversely affect an optionee’s right under a previously granted option without the consent of the optionee. Unless terminated earlier by the board of directors, this plan will terminate by its terms effective June 22, 2014, although previously granted options may be exercised after plan termination in accordance with the terms of the plan as in effect upon termination.

As of September 30, 2013, options to purchase a total of 2,319,477 shares had been granted and were outstanding under this plan, of which 1,623,591 were then vested and exercisable.

Compensation Mix

As discussed in more detail in the section of this Report entitled “Item 11 – Executive Compensation – Compensation Discussion and Analysis – Components of the Executive Compensation Program,” in 2013, our compensation program was comprised of various elements, including: (i) base salary, (ii) short-term incentive compensation and (iii) long-term equity incentive compensation. Although it does not allocate a fixed percentage of the NEO compensation packages to each of these elements, the Committee does seek to achieve an appropriate balance among these elements to motivate the named executive officers to grow the Company’s value, thereby aligning their financial interests with the interests of the Company’s investors, and to encourage long-term executive retention.

In 2013, base salaries comprised 99.7%, 99.1%, 99.5%, 98.8% and 54.0% of total compensation for Messrs. Whitmer, Doyle, Mazzuca, Lamb and Swilley, respectively, reflecting the Company’s absence of executive bonuses and incentive payments with respect to fiscal year 2013 (and, in Mr. Swilley’s case, the equity award related to this promotion to President of our Eastern Division). The base salaries of each of our named executive officers for 2013 were established in connection with the negotiation of their respective employment agreements. In 2013, short term incentive compensation comprised 0.0% of total compensation for Messrs. Whitmer, Doyle, Mazzuca, Lamb and Swilley. The actual award amounts are determined in accordance with the quantitative and qualitative factors described in detail under the caption “Compensation Discussion and Analysis – Components of the Executive Compensation Program – Short Term Incentive Compensation.” In addition, in 2013, long-term equity incentive compensation comprised 0.0% for Messrs. Whitmer, Doyle, Mazzuca and Lamb, and 36.1% of total compensation for Mr. Swilley (again, in Mr. Swilley’s case, reflecting the equity award relating to his promotion). The actual award amounts are determined in accordance with the quantitative and qualitative factors described in detail under the caption “Compensation Discussion and Analysis – Components of the Executive Compensation Program – Long Term Incentive Compensation.” Finally, in 2013, all other compensation comprised 0.3%, 0.9%, 0.5%, 1.2% and 9.9% of total compensation for Messrs. Whitmer, Doyle, Mazzuca, Lamb and Swilley, respectively.

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Outstanding Equity Awards at Fiscal 2013 Year-End

The following table summarizes the outstanding equity awards held by each named executive officer at September 30, 2013.

	Option Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration Date
W. Carl Whitmer		116,800		—		—		15.25		6/23/14	(1)
		85,200		—		—		15.25		3/22/15	(3)
		3,250		—		—		30.93		4/1/16	(4)
		4,400		1,100		—		30.00		10/2/18	(5)
		31,860		21,240		35,400		40.91		10/11/20	(6)
		21,240		31,860		35,400		40.91		11/1/20	(7)
Phillip J. Mazzuca		39,600		59,400		66,000		40.91		10/11/20	(6)
John M. Doyle		18,300		—		—		15.25		9/9/14	(2)
		6,700		—		—		15.25		3/22/15	(3)
		13,000		—		—		30.93		4/1/16	(4)
		9,600		2,400		—		30.00		10/2/18	(5)
		22,320		14,880		24,800		40.91		10/11/20	(6)
Edward Lamb		8,400		33,600		28,000		40.91		1/14/22	(8)
Bryanie W. Swilley		7,000		—		—		15.25		9/9/14	(2)
		1,400		—		—		30.93		4/1/16	(4)
		9,280		2,320		—		30.00		10/2/18	(5)
		600		2,400		2,000		40.91		1/14/22	(8)
		3,000		12,000		10,000		40.91		5/29/23	(9)

Option Award Vesting Schedule

Named Executive Officers

Grant Date	Vesting Schedule
(1) 6/23/2004	20% vests each year for five years from date of grant
(2) 9/9/2004	20% vests each year for five years from date of grant
(3) 3/22/2005	20% vests each year for five years from date of grant
(4) 4/1/2006	20% vests each year for five years from date of grant
(5) 10/2/2008	20% vests each year for five years from date of grant
(6) 10/11/2010	60% of the total amount of options granted vest ratably over a five year period; 40% of the total amount of options granted vest based on the Company achieving certain performance measures
(7) 11/1/2010	60% of the total amount of options granted vest ratably over a five year period; 40% of the total amount of options granted vest based on the Company achieving certain performance measures
(8) 1/14/2012	60% of the total amount of options granted vest ratably over a five year period; 40% of the total amount of options granted vest based on the Company achieving certain performance measures
(9) 5/29/2013	60% of the total amount of options granted vest ratably over a five year period; 40% of the total amount of options granted vest based on the Company achieving certain performance measures

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Pension Benefits

We maintain a 401(k) plan as previously discussed in the Compensation Discussion and Analysis. We do not maintain any defined benefit plans.

Non-qualified Deferred Compensation for Fiscal 2013

We introduced our non-qualified executive savings plan July 1, 2006. The plan is a voluntary, tax-deferred savings vehicle that is available to those employees, including physicians, earning a certain minimum base salary ($115,000 in 2013). The executive savings plan was implemented in order to contribute to the recruitment and retention of key executives and other employees, including physicians, by providing the ability to defer additional pre-tax compensation in excess of the limits allowed by our 401(k) plan.

An eligible employee must contribute the maximum allowed by law to the IASIS 401(k) Retirement Savings Plan in order to participate in the non-qualified executive savings plan. There are two types of deferrals available under the plan: excess deferrals and additional deferrals. Excess deferrals are contributions that are deposited into the non-qualified executive savings plan because either (a) the participant’s earnings have exceeded $250,000 and/or (b) the participant’s deferrals into the 401(k) retirement plan have reached a dollar limit stipulated by the IRS ($17,500 in 2013). Excess deferrals are automatically deposited into the non-qualified executive savings plan if these limits are reached. Physician excess deferrals are not matched. Executive excess deferrals are matched at the same rate as contributions to the IASIS 401(k) plan. There is a five-year service requirement for participants to vest in the IASIS excess matching contributions. Currently, none of the named executive officers participates in the plan.

Additional deferrals are contributions to the non-qualified executive savings plan that are independent of a participant’s 401(k) contribution election. These contributions are voluntary and are capped according to applicable IRS guidelines for such a plan.

The non-qualified executive savings plan offers a range of investment options that act as “benchmark funds.” Benchmark funds are defined as the investment fund or funds used to represent the performance and current deemed balance of a participant’s non-qualified account, which is considered a notional deferred compensation account. Contributions become part of our general assets. Investment options under the non-qualified executive savings plan are the same as those available under the IASIS 401(k) plan.

Employment Agreements

Mr. Whitmer entered into a new negotiated employment agreement upon his promotion to President during fiscal 2010. Mr. Doyle entered into a negotiated employment agreement upon his promotion to Chief Financial Officer at the same time. Mr. Mazzuca entered into a negotiated employment agreement upon rejoining the Company as Chief Operating Officer at the beginning of the 2011 fiscal year. Mr. Lamb entered into a negotiated employment agreement in 2011. Mr. Swilley entered into a negotiated employment agreement in April 2012. Information regarding these employment agreements is provided under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” and “Potential Payments Upon Termination or Change of Control.”

Potential Payments Upon Termination or Change in Control

Messrs. Whitmer and Mazzuca have employment agreements in place that require payment upon certain termination events including, in certain circumstances, a change of control. Messrs. Doyle, Lamb, and Swilley also have employment agreements in place that require payment upon certain termination events.

Death

The employment agreements provide that the respective estates of Mr. Whitmer, Mr. Mazzuca, and Mr. Doyle will receive the following upon the death of such named executive officer:

(i) all base salary and benefits to be paid or provided to the executive through the date of death;

(ii) with respect to Mr. Whitmer, an amount equal to the sum of executive’s base salary at the then-current rate of base salary and the annual cash target bonus;

(iii) to the extent applicable, an amount equal to the pro rata bonus;

(iv) with respect to Mr. Mazzuca and Mr. Doyle, any other death benefits arrangements available to senior executive officers of the Company generally, as in effect on the date of termination;

(v) with respect to Mr. Whitmer, the Company will also provide the executive’s eligible dependents continued health and medical benefits through the date one year after the date of death; the company may satisfy this obligation by paying such dependents’ health and medical continuation coverage (“COBRA”) premium payments (with the dependents paying the portion of such COBRA payments that the executive was required to pay with respect to such dependents prior to the date of death); and

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(vi) additionally, all of the executive’s options to purchase shares of capital stock of IAS which are unvested as of the date of death but otherwise scheduled to vest on the first vesting date scheduled to occur following the date of death, will immediately vest and become exercisable while all remaining unvested options will terminate as of the date of death. All of the vested options must be exercised within the earlier of (i) the tenth anniversary of the date the options were granted or (ii) two years in the case of Mr. Whitmer, and one year, in the case of Mr. Mazzuca and Mr. Doyle, following the date of death.

Mr. Lamb’s employment agreement does not provide for benefits to be paid to upon death. Mr. Swilley is eligible to receive, following his death, any annual incentive compensation payable for that year, prorated to reflect the actual number of months worked.

Disability

The employment agreements provide that Mr. Whitmer, Mr. Mazzuca and Mr. Doyle will receive the following upon the disability of such named executive officer:

(i) all base salary and benefits to be paid or provided to the executive through the date of disability;

(ii) with respect to Mr. Whitmer, a severance amount equal to the executive’s base salary at the then-current rate of base salary provided, however, that in the event the date of termination is the date of delivery of the final required physician’s opinion that the executive will be disabled for 6 consecutive months, the payment with respect to base salary, together with all base salary paid to the executive following the first date that the executive was disabled will equal one hundred and fifty percent (150%) of the executive’s base salary and; provided, further, that amounts payable to the executive must be reduced by the proceeds of any short or long-term disability payments to which the executive may be entitled during such period under policies maintained at the expense of the Company;

(iii) with respect to Mr. Whitmer, an amount equal to 100% of his annual cash target bonus;

(iv) to the extent applicable, an amount equal to the pro rata bonus;

(v) with respect to Mr. Mazzuca and Mr. Doyle, any other disability benefits arrangements available to senior executive officers of the Company generally, as in effect on the date of termination;

(vi) with respect to Mr. Whitmer, the Company will pay for the executive and his eligible dependents’ continued health and medical benefits through the date one year after the date of termination (provided, however, that in the event that the date of termination is the date of delivery of the final physician’s opinion referred to above, the Company will provide health and medical benefits through the date that is eighteen (18) months following the first date that Executive was unable to perform his duties; the Company may satisfy this obligation by paying COBRA premium payments with respect to the executive and his eligible dependents (with the executive paying the portion of such COBRA payments that executive was required to pay prior to the date of termination); and

(vii) additionally, all of the executive’s options to purchase shares of capital stock of IAS which are unvested as of the date of termination but otherwise scheduled to vest on the first vesting date scheduled to occur following the date of termination, will immediately vest and become exercisable while all remaining unvested options will terminate as of the date of termination. All of the vested options must be exercised within the earlier of (i) the tenth anniversary of the date the options were granted or (ii) two years, in the case of Mr. Whitmer, and one year, in the case of Mr. Mazzuca and Mr. Doyle, from the date of disability.

Mr. Lamb’s employment agreement does not provide for benefits to be paid to upon disability. Mr. Swilley is eligible to receive, following disability, any annual incentive compensation payable for that year, prorated to reflect the actual number of months worked.

Termination by the Company for Cause

Upon termination for cause, the executive will be entitled to receive all base salary and benefits to be paid or provided to the executive through the date of termination. In the event of a termination for cause, Mr. Lamb will be required to repay the retention bonus, with such amount being reduced 25% on each anniversary of the date of his employment agreement.

By the Company without Cause

The employment agreements provide that Mr. Whitmer, Mr. Mazzuca and Mr. Doyle will receive the following upon the termination by the Company without cause of such named executive officer:

(i) all base salary and benefits to be paid or provided to the executive through the date of termination;

(ii) an amount equal to the sum of (i) two hundred percent (200%), in the case of Mr. Whitmer and Mr. Mazzuca and one hundred fifty percent (150%) in the case of Mr. Doyle, of the executive’s base salary at the then-current rate of base salary and (ii) two hundred percent (200%), in the case of Mr. Whitmer and Mr. Mazzuca and one hundred fifty percent (150%) in the case of Mr. Doyle, of the annual cash target bonus;

(iii) to the extent applicable, an amount equal to the pro rata bonus,

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(iv) a lump sum payment equal to the then present value of all major medical, disability and life insurance coverage through the date two years (eighteen months with respect to Mr. Doyle) after the date of termination, provided that under such circumstances the executive shall make all COBRA premium payments on his own behalf; and

(v) additionally, all of the executive’s options to purchase shares of capital stock of IAS which are unvested as of the date of termination but otherwise scheduled to vest on the first vesting date scheduled to occur following the date of termination, will immediately vest and become exercisable while all remaining unvested options will terminate as of the date of termination. All of the vested options must be exercised within the earlier of (i) the tenth anniversary of the date the options were granted or (ii) two years, in the case of Mr. Whitmer, and one year, in the case of Mr. Mazzuca and Mr. Doyle, following the date of termination.

Mr. Lamb’s and Mr. Swilley’s employment agreements provide that following their termination by the Company without cause, they will receive an amount equal to one year of base salary, and Mr. Lamb shall not be required to repay the retention bonus.

By the Executive for Good Reason

The employment agreements provide that Mr. Whitmer, Mr. Mazzuca, and Mr. Doyle will receive the following upon the resignation by such executive for good reason:

(i) all base salary and benefits to be paid or provided to the executive through the date of termination;

(ii) an amount equal to the sum of (i) two hundred percent (200%), in the case of Mr. Whitmer and Mr. Mazzuca and one hundred fifty percent (150%), in the case of Mr. Doyle, of the executive’s base salary at the then-current rate of base salary and (ii) two hundred percent (200%), in the case of Mr. Whitmer and Mr. Mazzuca and one hundred fifty percent (150%), in the case of Mr. Doyle, of the annual cash target bonus;

(iii) to the extent applicable, an amount equal to the pro rata bonus;

(iv) a lump sum payment equal to the then present value of all major medical, disability and life insurance coverage through the date two years (eighteen months with respect to Mr. Doyle) after the date of termination, provided that under such circumstances the executive shall make all COBRA premium payments on his own behalf; and

(v) additionally, all of the executive’s options to purchase shares of capital stock of IAS which are unvested as of the date of termination but otherwise scheduled to vest on the first vesting date scheduled to occur following the date of termination, will immediately vest and become exercisable while all remaining unvested options will terminate as of the date of termination. All of the vested options must be exercised within the earlier of (i) the tenth anniversary of the date the options were granted or (ii) two years, in the case of Mr. Whitmer, and one year, in the case of Mr. Mazzuca, and Mr. Doyle, following the date of termination.

Mr. Lamb’s and Mr. Swilley’s employment agreements do not address this scenario.

By the Executive without Good Reason or the Executive’s Failure to Extend the Employment Term

Upon termination by the executive without good reason or failure to extend the employment term, the executive will be entitled to receive all base salary and benefits to be paid or provided to the executive through the date of termination. Mr. Lamb’s employment agreement also provides that he will be required to pay the remaining 25% of the retention bonus upon termination due to non-renewal at the end of the term.

Definition of Good Reason

Each of the following events shall constitute “good reason” for resignation for purposes of the employment agreements of Mr. Whitmer, Mr. Mazzuca, and Mr. Doyle:

(i) with respect to Mr. Whitmer, the one-year anniversary of the date of any Change of Control (as defined below) unless the acquirer is in the healthcare facilities business, in which case the one-year anniversary will be reduced to six months after the date of the Change of Control;

(ii) the removal of the executive from or the failure to elect or re-elect the executive to his or her respective positions within the company or on the board;

(iii) any material reduction in duties or responsibilities (including on a Change in Control, in the case of Mr. Mazzuca) of the respective executive or any assignment materially inconsistent with his position;

(iv) relocation of the executive’s principal office under certain circumstances without his approval;

(v) failure of the Company to maintain certain indemnification provisions in its organizational documents; and

(vi) any breach by the Company of the respective employment agreement.

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Mr. Lamb’s and Mr. Swilley’s employment agreements do not address termination for good reason.

The Company’s Failure to Extend the Employment Term

The employment agreements provide that Mr. Whitmer, Mr. Mazzuca, and Mr. Doyle will receive the following upon the Company’s failure to the extend the employment term:

(i) all base salary and benefits to be paid or provided to the executive through the date of termination;

(ii) an amount equal to the sum of (i) the executive’s base salary at the then-current rate of base salary and (ii) the annual cash target bonus;

(iii) to the extent applicable, an amount equal to the pro rata bonus;

(iv) a lump sum payment equal to the then present value of all major medical, disability and life insurance coverage through the date one year after the date of termination, provided that under such circumstances the executive shall make all COBRA premium payments on his own behalf; and

(v) additionally, with respect to Mr. Whitmer, all of the executive’s options to purchase shares of capital stock of IAS which are unvested as of the date of termination but otherwise scheduled to vest on the first vesting date scheduled to occur following the date of termination, will immediately vest and become exercisable while all remaining unvested options will terminate as of the date of termination. All of the vested options must be exercised within the earlier of (i) the tenth anniversary of the date the options were granted and (ii) two years following the date of termination.

Mr. Lamb’s employment agreement provides that he will receive the following upon the Company’s failure to extend the employment term: (i) a waiver of the obligation to repay the remaining 25% of his retention bonus; and (ii) an amount equal to one year of base salary.

Mr. Swilley’s employment agreement provides that he will receive an amount equal to one year of base salary upon the Company’s failure to extend the employment term.

Resignation

Mr. Lamb’s and Mr. Swilley’s employment agreements provide that upon their resignation during the term, Mr. Lamb and Mr. Swilley will be entitled to base salary and benefits to be paid or provided to Mr. Lamb and Mr. Swilley through the date of resignation. In addition, Mr. Lamb will be required to repay the retention bonus, with such amount being reduced 25% on each anniversary of the date of his employment agreement.

Definition of Change of Control

The employment agreements of Mr. Whitmer and Mr. Mazzuca define a change of control as any transaction where a person or group of persons (other than the present private equity investors in the Company or their affiliates):

(i) acquire a majority interest in IAS or IASIS Investment, its parent; or

(ii) acquire all or substantially all of the assets of IAS or IASIS Investment, its parent; or

The initial public offering of IAS shares or any secondary offering of such shares will not constitute a change of control.

In addition, the employment agreements contain non-competition and non-solicitation provisions pursuant to which Mr. Whitmer, Mr. Mazzuca, Mr. Doyle, Mr. Lamb, and Mr. Swilley will not compete with IAS or its subsidiaries within 25 miles of the location of any hospital we manage for two years (eighteen months with respect to Mr. Doyle and twelve months with respect to Mr. Lamb and Mr. Swilley) following the date of termination of such person’s employment. The agreements provide that during this time such person will not solicit or recruit our business partners and employees, respectively.

IAS 2004 Stock Option Plan

Vesting Date of Options

Each stock option grant agreement must indicate the date or conditions under which the option will become exercisable. However, unless otherwise provided in a participant’s stock option grant agreement, if within the two-year period following a Change of Control the executive’s employment is:

(i) terminated by the company or its Affiliates without cause; or

(ii) terminated by the executive with good reason,

all of the executive’s options granted hereunder shall immediately become vested and exercisable.

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Definition of Change of Control

The Amended and Restated IAS 2004 Stock Option Plan defines Change of Control in substantially the same way as the employment agreements of Mr. Whitmer and Mr. Mazzuca.

Definition of Good Reason

The Amended and Restated IAS 2004 Stock Option Plan defines good reason as:

(i) a material reduction in an executive’s duties and responsibilities other than a change in such executive’s duties and responsibilities that results from becoming part of a larger organization following a Change of Control,

(ii) a decrease in an executive’s base salary or benefits other than a decrease in benefits that applies to all employees of the company otherwise eligible to participate in the affected plan, or

(iii) a relocation of an executive’s primary work location more than 50 miles from the executive’s primary work location, as in effect immediately before a Change of Control, without written consent.

Definition of Cause

The Amended and Restated IAS 2004 Stock Option Plan defines termination with cause as the termination of the executive’s employment because of:

(i) dishonesty in the performance of such executive’s duties;

(ii) the executive’s willful misconduct in connection with such executive’s duties or any act or omission which is materially injurious to the financial condition or business reputation of the Company or any of its subsidiaries or affiliates;

(iii) a breach by an executive of the participant’s duty of loyalty to the Company and its affiliates;

(iv) the executive’s unauthorized removal from the premises of the Company of any document (in any medium or form) relating to the company or the customers of the company; or

(v) the commission by the executive of any felony or other serious crime involving moral turpitude.

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Summary of Payments Made Upon Termination or a Change of Control

The following tables describe the potential payments and benefits under our compensation and benefit plans and arrangements to which Messrs. Whitmer, Mazzuca, Doyle, Lamb, and Swilley would be entitled upon a termination of their employment under their employment agreements. In accordance with SEC disclosure rules, dollar amounts below assume a termination of employment on September 30, 2013 (the last business day of our last completed fiscal year).

	Involuntary Termination Without Cause ($)			Involuntary Termination For Cause ($)			Resignation ($)			Resignation For Good Reason ($)		Retirement ($)		Death ($)			Disability ($)			Change In Control ($)
W. Carl Whitmer
Cash severance		3,150,000			—			—			3,150,000		—		1,575,000			1,575,000			3,150,000
Health and welfare continuation		26,510			—			—			26,510		—		26,510			26,510			26,510
Total		3,176,510			—			—			3,176,510		—		1,601,510			1,601,510			3,176,510
Philip J. Mazzuca
Cash severance		1,800,000			—			—			1,800,000		—		600,000			600,000			1,800,000
Health and welfare continuation		26,510			—			—			26,510		—		26,510			26,510			26,510
Total		1,826,510			—			—			1,826,510		—		626,510			626,510			1,826,510
John M. Doyle
Cash severance		927,000			—			—			927,000		—		412,000			412,000			—
Health and welfare continuation		20,107			—			—			20,107		—		20,107			20,107			—
Total		947,107			—			—			947,107		—		432,107			432,107			—
Edward Lamb
Cash severance		450,000			—	(1)		—	(1)		—		—		—			—			—
Health and welfare continuation		—			—			—			—		—		—			—			—
Total		450,000			—			—			—		—		—			—			—
Bryanie W. Swilley
Cash severance		425,000	(3)		—			—			—		—		425,000	(2)		425,000	(2)		—
Health and welfare continuation		—			—			—			—		—		—			—			—
Total		425,000			—			—			—		—		—			—			—

1. In connection with this scenario, Mr. Lamb is required to repay his retention bonus, with such amount being reduced 25% on each of the anniversaries of the date of his employment agreement.

2. Assumes that Mr. Swilley’s death or disability occurred on September 30, 2013 and that Mr. Swilley received the maximum annual cash incentive compensation payable to him under the Market Executive Incentive Plan.

3. In Mr. Swilley’s case, the “Involuntary Termination Without Cause” payment includes the scenario of non-renewal of his employment agreement at the end of its initial term.

Director Compensation for Fiscal 2013

The following table and text discuss the compensation of persons who served as members of IAS’ board of directors during all or part of 2013, other than Mr. Whitmer whose compensation is discussed under “Executive Compensation” above and who was not separately compensated for board service.

Name	Fees Earned or Paid in Cash ($)		Stock Awards ($)		Option Awards ($)		All Other Compensation ($)		Total ($)
Jonathan J. Coslet		—		—		—		—		—
David Dupree		—		—		—		—		—
Kirk E. Gorman		45,000		18,750		—		—		63,750
Greg Kranias		—		—		—		—		—

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Name	Fees Earned or Paid in Cash ($)		Stock Awards ($)		Option Awards ($)		All Other Compensation ($)		Total ($)
Todd B. Sisitsky		—		—		—		—		—
Paul S. Levy		—		—		—		—		—
Jeffrey C. Lightcap		—		—		—		—		—
Sharad Mansukani		75,000		—		—		—		75,000
David R. White		125,000		—		—		—		125,000

Name	Aggregate Options Held at Fiscal Year End		Aggregate Stock Awards Held at Fiscal Year End
Jonathan J. Coslet		—		—
David Dupree		—		—
Kirk E. Gorman		4,143		4,601
Greg Kranias		—		—
Todd B. Sisitsky		—		—
Paul S. Levy		—		—
Jeffrey C. Lightcap		—		—
Sharad Mansukani		13,084		3,084
David R. White		497,250		—

On February 14, 2005, pursuant to a Director Compensation and Restricted Share Award Agreement, IAS granted Kirk Gorman options to purchase 1,175 shares of IAS’s common stock and committed to grant Mr. Gorman, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, options to purchase a number of shares valued at $18,750 based on the fair market value of the common stock as determined on each such anniversary. These grants were made pursuant to the form of a stock option grant agreement under the IAS 2004 Stock Option Plan. In addition, IAS entered into a Director Compensation and Restricted Share Award Agreement with Mr. Gorman on the grant date. Pursuant to such Director Compensation and Restricted Share Award Agreement, IAS agreed to pay Mr. Gorman cash compensation of $9,375 for the fiscal quarter ended December 31, 2004 and annual cash compensation of $37,500 for the remaining term (five years or until the date on which, for any reason, Mr. Gorman no longer serves as a director of the company) in equal quarterly installments, in consideration for his services as a member of IAS’s board of directors. IAS also granted Mr. Gorman 1,175 shares of restricted common stock on the grant date and committed to grant Mr. Gorman, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, restricted common stock valued at $18,750 based on the fair market value of the common stock as determined on each such anniversary. On February 1, 2011, pursuant to a new Director Compensation and Restricted Share Award Agreement, IAS granted Mr. Gorman options to purchase 411 shares of IAS’s common stock and committed to grant Mr. Gorman on the first anniversary of the grant date, provided that he is still a director, options to purchase a number of shares valued at $18,750 based on the fair market value of the common stock as determined on each such anniversary. These grants were made pursuant to the form of a stock option grant agreement under the IAS 2004 Stock Option Plan. In addition, IAS entered into a Director Compensation and Restricted Share Award Agreement with Mr. Gorman on the grant date. Pursuant to such Director Compensation and Restricted Share Award Agreement (three years or until the date on which, for any reason, Mr. Gorman no longer serves as a director of the Company), IAS agreed to pay Mr. Gorman annual cash compensation of $45,000 in consideration for his services as a member of IAS’s board of directors. IAS also granted Mr. Gorman 411 shares of restricted common stock on the grant date.

On April 14, 2005, IAS granted Sharad Mansukani options to purchase 938 shares of IAS’s common stock and committed to grant Dr. Mansukani, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, options to purchase a number of shares of common stock valued at $18,750 based on the fair market value of the common stock on each such anniversary. These grants were made pursuant to the form of a stock option grant agreement under the IAS 2004 Stock Option Plan. In addition, IAS entered into a Director Compensation and Restricted Share Award Agreement with Dr. Mansukani on the grant date. Pursuant to such Director Compensation and Restricted Share Award Agreement, IAS agreed to pay Dr. Mansukani annual cash compensation of $37,500 for the term (five years or until the date on which, for any reason, Dr. Mansukani no longer serves as a director of the Company) of the Director Compensation and Restricted Share Award Agreement, payable in equal quarterly installments, in consideration for his services as a member of IAS’s board of directors. IAS also granted Dr. Mansukani 938 shares of restricted common stock on the grant date and committed to grant Dr. Mansukani, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, restricted common stock valued at $18,750 based on the fair market value of the common stock on each such anniversary. On April 1, 2011, pursuant to a new Director Compensation Agreement (three years or until the date on which, for any reason, Dr. Mansukani no longer serves as a director of the Company), IAS agreed to pay Dr. Mansukani annual cash compensation of $75,000 in consideration for his services as a member of IAS’s board of directors.

On December 20, 2010, IAS entered into an agreement with David R. White, effective October 31, 2010. Pursuant to the agreement, IAS agreed to pay Mr. White an annual fee of $250,000 for his service as Chairman of the Board of IAS for the period of November 1, 2010 through October 31, 2011. In addition, Mr. White agreed to provide certain consulting services to IAS from the

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period November 1, 2010 through October 31, 2012. Pursuant to the agreement, Mr. White received $70,000 in exchange for the consulting services provided from November 1, 2010 through January 31, 2011, and a monthly fee of $23,333 for the consulting services provided from February 1, 2011 through October 31, 2011, and receive a monthly fee of $20,833 for the consulting services provided from November 1, 2011 through October 31, 2012. Mr. White received $125,000 in fiscal year 2013 for his continued service to the Company as Chairman. Options to purchase 497,250 shares of IAS’s common stock were granted to Mr. White pursuant to his employment with the Company as its Chief Executive Officer prior to his retirement on October 31, 2010.

Currently, IAS’s other directors, including Mr. Whitmer, do not receive any compensation for their services. IAS does, however, reimburse them for travel expenses and other out-of-pocket costs incurred in connection with attendance at board of directors and committee meetings.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Equity Compensation Plans

The table below sets forth the following information as of September 30, 2013, with respect to IAS’ equity compensation plans (including individual compensation arrangements) under which its equity securities are authorized for issuance, aggregated by (i) all compensation plans previously approved by IAS’ security holders and (ii) all compensation plans not previously approved by IAS’ security holders:

• the number of securities to be issued upon the exercise of outstanding options;

• the weighted-average exercise price of the outstanding options; and

• the number of securities remaining available for future issuance under the plans.

The IAS 2004 Stock Option Plan is IAS’ only equity compensation plan and has been approved by its stockholders. IAS has not issued any warrants or other rights to purchase its equity securities.

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options		Weighted-average Exercise Price of Outstanding Options		Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected  in the first column)
Equity compensation plans approved by security holders (1)		2,319,477	$	26.57		306,498
Equity compensation plans not approved by security holders		—		—		—
Total		2,319,477	$	26.57		306,498

(1) Consists of 2,319,477 shares of common stock to be issued upon exercise of options issued under IAS’ 2004 Stock Option Plan, with exercise prices ranging from $15.25 to $40.91 per share. Of the 2,625,975 shares of common stock currently authorized for issuance under the 2004 Stock Option Plan, as of September 30, 2013, 306,498 shares remain available for future issuance under the IAS 2004 Stock Option Plan.

Beneficial Ownership of Common Stock

IASIS is a limited liability company consisting of 100% common interests owned by IAS. IAS’ outstanding shares consist of one class of common stock and 99.9% of the outstanding common stock is owned by IASIS Investment. The outstanding equity interest of IASIS Investment is held 74.4% by the TPG Funds (as defined below), 18.8% by JLL and 6.8% by Trimaran.

The following table presents information as of December 20, 2013, regarding ownership of shares of IAS common stock by each person known to be a holder of more than 5% of IAS common stock, the members of the IAS board of directors, each named executive officer listed in the summary compensation table and all current directors and executive officers as a group.

When reviewing the following table, you should be aware that the amounts and percentage of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days.

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Unless otherwise indicated, the address of each person listed below is 117 Seaboard Lane, Building E, Franklin, Tennessee 37067.

Beneficial Owners	Common Shares Beneficially Owned (a)		Percentage of Common Shares Beneficially Owned
IASIS Investment (b)(c)		14,600,000		99.9	%
W. Carl Whitmer		262,750		1.8	%
Phillip J. Mazzuca		39,600			*
John M. Doyle		69,920			*
Edward Lamb		8,400			*
Bryanie W. Swilley		21,280			*

Beneficial Owners	Common Shares Beneficially Owned (a)			Percentage of Common Shares Beneficially Owned
Jonathan J. Coslet (d)		—			—
David Dupree		—			—
Kirk E. Gorman		8,286	(e)			*
Greg Kranias (d)		—			—
Todd B. Sisitsky (d)		—			—
Paul S. Levy (f)		2,744,800			18.8	%
Jeffrey C. Lightcap		—			—
Sharad Mansukani (g)		7,368	(e)			*
David White		497,250			3.3	%
Current directors and executive officers as a group (18 persons)		3,740,826			20.4	%

* Less than 1%.

(a) The following shares of common stock subject to options currently exercisable or exercisable within 60 days of December 20, 2013, include: Mr. Whitmer, 274,470; Mr. Mazzuca, 59,400; Mr. Doyle, 72,320; Mr. Lamb, 16,800; Mr. Swilley, 23,600; and all current directors and executive officers as a group (18 persons) 1,096,707.

(b) The membership interests of IASIS Investment are owned as follows: the TPG Funds, 74.4%, JLL, 18.8%, and Trimaran, 6.8%.

(c) The membership interests of IASIS Investment (the “TPG Membership Interests”) owned by the TPG Funds (as defined below) reflect an aggregate of the following: (i) 199,045 membership units of IASIS Investment beneficially owned by TPG IASIS III LLC, a Delaware limited liability company (“TPG IASIS III”), whose sole member is TPG Partners III, L.P., a Delaware limited partnership, whose general partner is TPG GenPar III, L.P., a Delaware limited partnership, whose general partner is TPG Advisors III, Inc., a Delaware corporation (“Advisors III”), (ii) 318,507 membership units of IASIS Investment beneficially owned by TPG IASIS IV LLC (“TPG IASIS IV”), whose sole member is TPG Partners IV, L.P., a Delaware limited partnership (“Partners IV”), whose general partner is TPG GenPar IV, L.P., a Delaware limited partnership, whose general partner is TPG GenPar IV Advisors, LLC, a Delaware limited liability company, whose sole member is TPG Holdings I, L.P., a Delaware limited partnership, whose general partner is TPG Holdings I-A, LLC, a Delaware limited liability company, whose sole member is TPG Group Holdings (SBS), L.P., a Delaware limited partnership, whose general partner is TPG Group Holdings (SBS) Advisors, Inc., a Delaware corporation (“Group Advisors”), (iii) 193,201 membership units of IASIS Investment beneficially owned by TPG IASIS Co-Invest I LLC, a Delaware limited liability company (“TPG Co-Invest I”), whose managing member is Partners IV, and (iv) 32,398 membership units of IASIS Investment beneficially owned by TPG IASIS Co-Invest II LLC, a Delaware limited liability company (“TPG Co-Invest II” and, together with TPG IASIS III, TPG IASIS IV and TPG Co-Invest I, the “TPG Funds”), whose managing member is Partners IV. David Bonderman and James G. Coulter are directors, officers and sole shareholders of Advisors III and Group Advisors and may therefore be deemed to be the beneficial owners of the TPG Membership Interests. Messrs. Bonderman and Coulter disclaim beneficial ownership of the TPG Membership Interests except to the extent of their pecuniary interest therein. The address of Messrs. Bonderman and Coulter is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. The TPG Funds have the right to designate four of the directors of IAS (collectively, the “TPG Directors”), and each TPG Director shall have three votes.

(d) Jonathan J. Coslet is a TPG Senior Partner, Todd B. Sisitsky is a TPG Partner and Greg Kranias is a TPG Principal. None of Messrs. Coslet, Sisitsky or Kranias has voting or investment power over and each disclaims beneficial ownership of the TPG Membership Interests. The address of Messrs. Coslet, Sisitsky and Kranias is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.

(e) Represents shares of restricted stock and options currently or exercisable within 60 days of December 20, 2013, granted to Messrs. Gorman and Mansukani pursuant to Director Compensation and Restricted Stock Award Agreements.

(f) Mr. Levy is a managing director of JLL Partners, Inc. which, through its controlling interest in JLL, which owns 18.8% of IASIS Investment, may be deemed to beneficially own 18.8% of the shares of preferred stock and common stock owned by IASIS Investment. Accordingly, Mr. Levy may be deemed to beneficially own 18.8% of the shares of preferred stock and common stock owned by IASIS Investment.

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(g) Sharad Mansukani is a TPG senior advisor. Mr. Mansukani has no voting or investment power over and disclaims beneficial ownership of the TPG Membership Interests. The address of Mr. Mansukani is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.

All of the membership interests in IASIS are pledged to our lenders as security for our obligations under our Senior Secured Credit Facilities. In the event of a default under our Senior Secured Credit Facilities, our lenders would have the right to foreclose on such membership interests, which would result in a change of control of our company.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

IASIS Investment Limited Liability Company Operating Agreement

The TPG Funds are party to a limited liability company operating agreement of IASIS Investment with Trimaran and JLL. The TPG Funds, JLL and Trimaran hold approximately 74.4%, 18.8% and 6.8%, respectively, of the equity interests of IASIS Investment. TPG IASIS IV is the managing member of IASIS Investment.

The board of directors has not made a determination as to whether each director is “independent” because all of the members of our board have been appointed by our equity sponsors. Pursuant to the limited liability company operating agreement of IASIS Investment, JLL is entitled to nominate two directors to the IAS board of directors. The TPG Funds are entitled to nominate the remaining directors. Messrs. Levy and Lightcap serve on the IAS board of directors as designees of JLL. The remaining directors serve as designees of the TPG Funds. The right of JLL to nominate two directors is subject to its ownership percentage in IASIS Investment remaining at or above 9.4%. In the event JLL’s ownership percentage in IASIS Investment falls below 9.4%, but is at least 4.7%, JLL will have the right to nominate one director. If JLL’s ownership percentage falls below 4.7%, it will not have the right to nominate any directors. The agreement also places certain restrictions on the transfer of membership interests in IASIS Investment. JLL and Trimaran have the right to participate in certain dispositions by the TPG Funds and can be required to participate on the same terms in any sale by the TPG Funds in excess of a specified percentage of its collective interest.

We have no securities listed for trading on a national securities exchange or in an automated inter-dealer quotation system of a national securities association, which have requirements that a majority of directors be independent. We do not believe any of our directors would be considered independent under the New York Stock Exchange’s definition of independence.

Investor Rights Agreement

IASIS Investment is the majority stockholder of IAS, which owns 100% of the common interests of IASIS. IASIS Investment is party to an investor rights agreement with IAS. Pursuant to this agreement, IASIS Investment can cause IAS to register its interests in IAS under the Securities Act and to maintain a shelf registration statement effective with respect to such interests. IASIS Investment is also entitled to participate on a pro rata basis in any registration of our equity interests under the Securities Act that IAS may undertake. The agreement also grants IASIS Investment preemptive rights over certain additional issuances of equity securities by IAS.

Management Services Agreement

We are party to a management services agreement with TPG, JLL and Trimaran. The management services agreement provides that in exchange for consulting and management advisory services that will be provided to us by the investors, we will pay an aggregate monitoring fee of 0.25% of budgeted net revenue up to a maximum of $5.0 million per fiscal year to these parties (or certain of their respective affiliates) and reimburse them for their reasonable disbursements and out-of-pocket expenses. This monitoring fee will be subordinated to the Senior Notes in the event of a bankruptcy of the company. For each of the years ended September 30, 2013, 2012 and 2011, we paid $5.0 million in monitoring fees under the management services agreement.

Income Tax Allocations

We and some of our subsidiaries are included in IAS’ consolidated filing group for U.S. federal income tax purposes, as well as in certain state and local income tax returns that include IAS. With respect to tax returns for any taxable period in which we or any of our subsidiaries are included in a tax return filing with IAS, the amount of taxes to be paid by us is determined, subject to some adjustments, as if we and our subsidiaries filed their own tax returns excluding IAS.

Policy on Transactions with Related Persons

On an annual basis, each director, director nominee and executive officer is required to complete a Director and Officer’s Questionnaire that requires disclosure of any transaction in which the director or executive officer has a direct or indirect material interest and in which the company participates and the amount involved exceeds $120,000. The board has not adopted a formal policy for the review, approval or ratification of such transactions. However, pursuant to the company’s corporate code of ethics, executive officers may not participate in, or benefit from, a related party transaction without the approval of our compliance officer. See “Item 10. – Directors, Executive Officers and Corporate Governance – Code of Ethics” for more detail.

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During fiscal year 2013, there were no transactions between our company and a related person requiring disclosure under applicable securities laws.

Item 14. Principal Accountant Fees and Services.

The following table sets forth the aggregate fees for services related to fiscal years 2013 and 2012 provided by Ernst & Young LLP, our principal accountants:

	Fiscal 2013		Fiscal 2012
Audit Fees (a)	$	1,467,182	$	1,508,304
Audit-Related Fees (b)		671,744		296,894
Tax Fees (c)		56,555		2,400
All Other Fees (d)		—		—
Total	$	2,195,481	$	1,807,598

(a) Audit Fees represent fees billed for professional services rendered for the audit of our annual financial statements and review of our quarterly financial statements, and audit services provided in connection with other statutory or regulatory filings.

(b) Audit-Related Fees represent fees billed for assurance services related to the audit of our financial statements, as well as certain due diligence projects.

(c) Tax Fees represents fees for professional services for tax compliance, tax advice and tax planning.

(d) All Other Fees represent fees for services provided to us not otherwise included in the categories above.

During fiscal 2013, we reviewed our existing practices regarding the use of our independent auditors to provide non-audit and consulting services, to ensure compliance with SEC proposals. Our audit committee pre-approval policy provides that our independent auditors may provide certain non-audit services which do not impair the auditors’ independence. In that regard, our audit committee must pre-approve all audit services provided to our company, as well as all non-audit services provided by our company’s independent auditors. This policy is administered by our senior corporate financial management, which reports throughout the year to our audit committee. Our audit committee pre-approved all audit and non-audit services provided by Ernst & Young LLP during fiscal years 2013 and 2012. Our audit committee concluded that the provision of audit-related services, tax services and other services by Ernst & Young LLP was compatible with the maintenance of the firm’s independence in the conduct of its auditing functions.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) 1. Financial Statements: See “Item 8 – Financial Statements and Supplementary Data,” which is incorporated herein by reference.

2. Financial Statement Schedules: Not Applicable

3. Exhibits: See the Index to Exhibits at the end of this Report, which is incorporated herein by reference.

(b) Exhibits: See the Index to Exhibits at the end of this Report, which is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	IASIS HEALTHCARE LLC
Date: December 20, 2013	By:	/s/ W. Carl Whitmer
		W. Carl Whitmer
		Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ David R. White	Chairman of the Board	December 20, 2013
David R. White
/s/ W. Carl Whitmer W. Carl Whitmer	Chief Executive Officer and President and Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC) (Principal Executive Officer)	December 20, 2013
/s/ John M. Doyle John M. Doyle	Chief Financial Officer (Principal Financial and Accounting Officer)	December 20, 2013
/s/ Jonathan J. Coslet Jonathan J. Coslet	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 20, 2013
/s/ David Dupree David Dupree	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 20, 2013
/s/ Kirk E. Gorman Kirk E. Gorman	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 20, 2013
/s/ Greg Kranias Greg Kranias	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 20, 2013
/s/ Todd B. Sisitsky Todd B. Sisitsky	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 20, 2013
/s/ Paul S. Levy Paul S. Levy	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 20, 2013
/s/ Jeffrey C. Lightcap Jeffrey C. Lightcap	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 20, 2013
/s/ Sharad Mansukani Sharad Mansukani	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 20, 2013

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EXHIBIT INDEX

Exhibit No	Description of Exhibits
3.1	Certificate of Formation of IASIS Healthcare LLC, as filed with the Secretary of State of the State of Delaware on May 11, 2004 (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
3.2	Limited Liability Company Agreement of IASIS Healthcare LLC dated as of May 11, 2004 (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
4.1	Indenture, dated as of May 3, 2011, among IASIS Healthcare LLC, IASIS Capital Corporation, the Guarantors named therein and the Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 8.375% Senior Notes due 2019 (incorporated by reference to the Company’s Current Report on Form 8-K filed on May 6, 2011 (Comm. File No. 333-117362)).
4.2	Registration Rights Agreement dated as of May 3, 2011 by and among IASIS Healthcare LLC, IASIS Capital Corporation, the Guarantors named therein and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., Citigroup Global Markets Inc., Goldman, Sachs & Co., J.P. Morgan Securities LLC, Deutsche Bank Securities Inc. and SunTrust Robinson Humphrey, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed on May 6, 2011 (Comm. File No. 333-117362)).
10.1	Restatement Agreement, dated as of May 3, 2011, among IASIS Healthcare LLC, IASIS Healthcare Corporation, the lenders party thereto and Bank of America, N.A., as administrative agent and attached thereto as Exhibit A, the Amended and Restated Credit Agreement, dated as of May 3, 2011, among IASIS Healthcare LLC, IASIS Healthcare Corporation, Bank of America, N.A., as administrative agent, swing line lender and L/C issuer and each lender from time to time party thereto (incorporated by reference to the Company’s Current Report on Form 8-K filed on May 6, 2011 (Comm. File No. 333-117362)).
10.2	Amendment No. 1, dated as of February 20, 2013, to the Amended and Restated Credit Agreement, dated as of May 3, 2011, among IASIS Healthcare LLC, IASIS Healthcare Corporation, Bank of America, N.A., as administrative agent, swing line lender and L/C issuer and each lender from time to time party thereto (incorporated by reference to the Company’s Current Report on Form 8-K filed on February 25, 2013 (Comm. File No. 333-117362)).
10.3	Contract No. between the Arizona Healthcare Cost Containment System (AHCCCS) and Health Choice Arizona, Inc., effective October 1, 2013 (referred to by the State of Arizona as “Amendment No. 1” and in this Exhibit Index as the “AHCCCS Contract).
10.4	Amendment No. 1 to the AHCCCS Contract, effective October 1, 2013.
10.5	Amendment No 2 to the AHCCCS Contract, effective January 1, 2014.
10.6	Purchase and Sale Agreement by and Among Mountain Vista Medical Center, LP, IASIS Glenwood Regional Medical Center, LP and the Medical Center of Southeast Texas, LLP, collectively, as Sellers and MPT of Mesa, LLC, MPT of Port Arthur, LLC and MPT of West Monroe, LLC, collectively, as Purchasers, dated as of August 8, 2013.
10.7	Information System Agreement, dated February 23, 2000, between McKesson Information Solutions LLC and IASIS Healthcare Corporation, as amended (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)). (1)
10.8*	Form of Indemnification Agreement (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
10.9*	Employment Agreement, dated as of September 30, 2010, by and between IASIS Healthcare Corporation and W. Carl Whitmer (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 6, 2010 (Comm. File No. 333-117362)).

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Exhibit No	Description of Exhibits
10.10*	Employment Agreement, dated September 30, 2010, by and between IASIS Healthcare Corporation and John M. Doyle (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 6, 2010 (Comm. File No. 333-117362)).
10.11*	Employment Agreement, dated October 11, 2010, by and between IASIS Healthcare Corporation and Phillip J. Mazzuca (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 15, 2010 (Comm. File No. 333-117362)).
10.12*	Employment Agreement, dated August 9, 2011, by and between IASIS Management Company and Ed Lamb.
10.13*	Employment Agreement, dated as of December 19, 2011, by and between IASIS Healthcare Corporation and Frank A. Coyle (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 (Comm. File No. 333-117362)).
10.14*	Employment Agreement, dated as of April 23, 2013, by and between Bryanie Swilley and IASIS Management Company.
10.15*	Form of Roll-over Option Letter Agreement (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
10.16*	Amended and Restated IASIS Healthcare Corporation 2004 Stock Option Plan (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 15, 2010 (Comm. File No. 333-117362)).
10.17	Management Services Agreement dated as of June 22, 2004 by and among IASIS Healthcare LLC, Trimaran Fund II, L.L.C., Trimaran Parallel Fund II, L.P., Trimaran Capital L.L.C., CIBC Employee Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I LLC and TPG IASIS Co-Invest II LLC (incorporated by reference to the Company’s Registration Statement on Form S-4 (Registration No. 333-117362)).
10.18	Investor Rights Agreement dated as of June 22, 2004, by and between IASIS Investment LLC and IASIS Healthcare Corporation (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
10.19*	Form of Management Stockholders Agreement between IASIS Healthcare Corporation and W. Carl Whitmer (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
10.20*	Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
10.21*	Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
10.22*	Stock Option Award Agreement, dated October 11, 2010, by and between IASIS Healthcare Corporation and W. Carl Whitmer (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 15, 2010 (Comm. File No. 333-117362)).
10.23*	Stock Option Award Agreement, dated October 11, 2010, by and between IASIS Healthcare Corporation and John M. Doyle (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 15, 2010 (Comm. File No. 333-117362)).
10.24*	Stock Option Agreement, dated October 11, 2010, by and between IASIS Healthcare Corporation and Phillip J. Mazzuca (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 15, 2010 (Comm. File No. 333-117362)).
10.25*	Form of Management Stockholders Agreement for Rollover Options (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
10.26*	IASIS Corporate Incentive Plan (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
10.27*	IASIS Market Executive Incentive Program (incorporated by reference to the Company’s Registration Statement on Form S-4 (Comm. File No. 333-117362)).
10.28*	Director Compensation and Restricted Share Award Agreement, dated as of February 14, 2005, between IASIS Healthcare Corporation and Kirk Gorman (incorporated by reference to the Company’s Current Report on Form 8-K filed on February 18, 2005 (Comm. File No. 333-117362)).

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Exhibit No	Description of Exhibits
10.29*	Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005, between IASIS Healthcare Corporation and Sharad Mansukani (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2005 (Comm. File No. 333-117362)).
10.30*	IASIS Healthcare Non-Qualified Deferred Compensation Program (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006 (Comm. File No. 333-117362)).
14	Code of Ethics (incorporated by reference to IASIS Healthcare Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 (Comm. File No. 333-194521)).
21	Subsidiaries of IASIS Healthcare Corporation.
31.1	Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the SEC on December 20, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the consolidated balance sheets at September 30, 2013 and 2012, (ii) the consolidated statements of operations for the years ended September 30, 2013, 2012 and 2011, (iii) the consolidation statements of comprehensive income for the years ended September 30, 2013, 2012 and 2011, (iv) the consolidated statements of equity for the years ended September 30, 2013, 2012 and 2011, (v) the consolidated statements of cash flows for the years ended September 30, 2013, 2012 and 2011, and (vi) the notes to the consolidated financial statements. (2)

* Management contract or compensatory plan or arrangement.

(1) Portions of this exhibit have been omitted and filed separately with the Commission pursuant to a grant of confidential treatment pursuant to Rule 24(b)-2 promulgated under the Securities Exchange Act of 1934, as amended.

(2) The XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

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