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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

For the transition period from ___________________ to ___________________

Commission file number 0-29818

LifePoint Hospitals, Inc.
(Exact name of registrant as specified in its charter)

(615) 372-8500
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES   x       NO o

     As of October 25, 2002, the number of outstanding shares of Common Stock of LifePoint Hospitals, Inc. was 39,502,684.

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Part I — Financial Information

Item 1.   Financial Statements.

LIFEPOINT HOSPITALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes.

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LIFEPOINT HOSPITALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(1)  Derived from audited financial statements.

See accompanying notes.

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LIFEPOINT HOSPITALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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LIFEPOINT HOSPITALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

     At September 30, 2002, the Company was comprised of 23 general, acute care hospitals and related health care entities located in non-urban areas in the states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming.

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

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

NOTE 2 – EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted earnings per share for income before extraordinary item (income in millions and shares in thousands):

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NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets, (the “Statements”). These Statements made significant changes to the accounting for business combinations, goodwill and intangible assets.

     SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS 141 was effective for transactions completed subsequent to June 30, 2001. The application of SFAS 141 did not have a material effect on the Company’s results of operations or financial position.

     Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company adopted SFAS 142 effective January 1, 2002. Pursuant to SFAS 142, the Company completed its transition impairment tests of goodwill during the second quarter of 2002 and did not incur an impairment charge. The Company also performed its initial annual impairment test as of October 1, 2002 and did not incur an impairment charge.

     The table below shows the Company’s income before extraordinary item and net income for the three months and nine months ended September 30, 2002 and 2001 adjusted for the cessation of goodwill amortization required by the new standard as if it had occurred as of January 1, 2001 (dollars in millions except per share amounts):

     In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002, but earlier application is encouraged. SFAS 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated retirement costs. SFAS 143 applies to all entities and to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The Company does not expect SFAS 143 to have a material effect on its results of operations or financial position.

     In August 2001, the FASB also issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 removes goodwill from its scope and clarifies other implementation issues related to SFAS 121. SFAS 144 also provides a single framework for evaluating long-lived assets to be disposed of by sale. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years and, generally, are to be applied prospectively. SFAS 144 did not have a material effect on the Company’s results of operations or financial position.

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     In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Under certain provisions of SFAS 145, gains and losses related to the extinguishment of debt should no longer be segregated on the income statement as extraordinary items net of the effects of income taxes. Instead, those gains and losses should be included as a component of income before income taxes. The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002 with early adoption encouraged. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board Opinion No. 30 for classification as an extraordinary item should be reclassified upon adoption. Had the Company adopted SFAS 145 in the first quarter of fiscal year 2001, the extraordinary loss on early retirement of debt of $4.2 million and $30.5 million, before the $1.7 million and $11.6 million effect of income taxes, for the three months and nine months ended September 30, 2002, respectively, would have been reflected in income before income taxes. In addition, the extraordinary loss on early retirement of debt of $2.6 million, before the $1.0 million effect of income taxes for the nine months ended September 30, 2001, would also have been reflected in income before income taxes. There would be no resulting change in net income.

     Because of the nature of the earnings per share calculation regarding antidilution of the convertible securities and the effect of applying SFAS 145, the computation of basic and diluted earnings per share would have been as follows if the Company had adopted SFAS 145 on January 1, 2001 (income in millions and shares in thousands):

     In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The provisions of this Statement are effective for exit or disposal activities initiated after December 31, 2002. The Company does not anticipate the adoption of this standard to materially impact its results of operations.

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NOTE 4 – ISSUANCE OF CONVERTIBLE NOTES

     Effective May 22, 2002, the Company sold $250 million of Convertible Subordinated Notes due June 1, 2009 (the “Convertible Notes”). The net proceeds were approximately $242.5 million and will be used for general corporate purposes, which may include capital improvements on the Company’s existing facilities, repurchases of the Company’s 10 3/4% Senior Subordinated Notes and working capital. The Convertible Notes bear interest at the rate of 4 1/2% per year, payable semi-annually on June 1 and December 1, beginning on December 1, 2002. The Convertible Notes are convertible at the option of the holder at any time on or prior to maturity into shares of the Company’s common stock at a conversion price of $47.36 per share. The conversion price is subject to adjustment. The Company may redeem all or a portion of the Convertible Notes on or after June 3, 2005, at the then current redemption prices, plus accrued and unpaid interest. Convertible Notes holders may require the Company to repurchase all of the holder’s Convertible Notes at 100% of their principal amount plus accrued and unpaid interest in some circumstances involving a change of control. The Convertible Notes are unsecured and subordinated to the Company’s existing and future senior indebtedness and senior subordinated indebtedness. The Convertible Notes rank junior to the Company’s subsidiary liabilities. The indenture does not contain any financial covenants. A total of 5,278,825 shares of common stock have been reserved for issuance upon conversion of the Convertible Notes.

     Interest expense of $1.9 million and $2.8 million (net of income tax benefits) related to the Convertible Notes was added to income before extraordinary item to compute diluted income before extraordinary item per share for the three months and nine months ended September 30, 2002, respectively. The interest expense of $2.8 million for the nine months ended September 30, 2002 was calculated for the period of May 22, 2002 through September 30, 2002.

NOTE 5 – REPURCHASE OF SENIOR SUBORDINATED NOTES

     During the nine months ended September 30, 2002, the Company repurchased $147.1 million of its $150.0 million 10 3/4% Senior Subordinated Notes due 2009 (the “Notes”) and paid $26.0 million in premiums, commissions and fees on these repurchases. In connection with these repurchases, the Company recorded an extraordinary charge on the early retirement of debt in the amount of $18.9 million, net of tax benefits of $11.6 million.

     Subsequent to September 30, 2002 and after the Company’s earnings release date of October 21, 2002, the Company repurchased the remaining $2.9 million of the Notes and paid $0.6 million in premiums, commissions and fees related to these additional repurchases. The Company will incur an additional extraordinary charge to income of $0.4 million, net of tax benefits of $0.2 million, during the three months ended December 31, 2002 as a result of these additional repurchases.

NOTE 6 – CONTINGENCIES

HCA Investigations, Litigation and Indemnification Rights

     HCA, Inc. is currently the subject of various federal and state investigations, qui tam actions, shareholder derivative and class action suits, patient/payor actions and general liability claims. HCA is also the subject of a formal order of investigation by the SEC. Based on the Company’s review of HCA’s public filings, the Company understands that the SEC’s investigation of HCA includes the anti-fraud, insider trading, periodic reporting and internal accounting control provisions of the federal securities laws. These investigations, actions and claims relate to HCA and its subsidiaries, including subsidiaries that, before the Company’s formation as an independent company, owned certain of the facilities the Company now owns.

     HCA is a defendant in several qui tam actions (actions brought by private parties, known as relators, on behalf of the United States of America) which have been unsealed and served on HCA. The actions allege, in general, that HCA and certain subsidiaries and/or affiliated partnerships violated the False Clams Act, 31 U.S.C. ss. 3729 et seq., for improper claims submitted to the government for reimbursement. The lawsuits generally seek three times the amount of damages caused to the United States by the submission of any Medicare or Medicaid false claims presented by the defendants to the federal government, civil penalties of not less than $5,500 nor more than $11,000 for each such Medicare or Medicaid claim, attorneys’ fees and costs. HCA has disclosed that, on March 15, 2001,

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the Department of Justice filed a status report setting forth the government’s decisions regarding intervention in existing qui tam actions against HCA and filed formal complaints for those suits in which the government has intervened. HCA stated that, of the original 30 qui tam actions, the Department of Justice remains active and has elected to intervene in eight actions. HCA has also disclosed that it is aware of additional qui tam actions that remain under seal and believes that there may be other sealed qui tam cases of which it is unaware.

     Based on the Company’s review of HCA’s public filings, the Company understands that, in December 2000, HCA entered into a Plea Agreement with the Criminal Division of the Department of Justice and various U.S. Attorney’s Offices (the “Plea Agreement”) and a Civil and Administrative Settlement Agreement with the Civil Division of the Department of Justice (the “Civil Agreement”). Based on the Company’s review of HCA’s public filings, the Company understands that the agreements resolve all Federal criminal issues outstanding against HCA and certain issues involving Federal civil claims by or on behalf of the government against HCA relating to diagnosis related group (“DRG”), coding, outpatient laboratory billing and home health issues. Pursuant to the Plea Agreement, HCA paid the government $95 million during the first quarter of 2001. The Civil Agreement was approved by the Federal District Court of the District of Columbia in August 2001. Pursuant to the Civil Agreement, HCA agreed to pay the government $745 million plus interest, which was paid in the third quarter of 2001. Based on the Company’s review of HCA’s public filings, the Company understands that certain civil issues are not covered by the Civil Agreement and remain outstanding, including claims related to costs reports and physician relations issues. The Plea Agreement and the Civil Agreement announced in December 2000 relate only to conduct that was the subject of the federal investigations resolved in the agreements and do not resolve various qui tam actions filed by private parties against HCA, or pending state actions.

     On March 28, 2002, HCA announced that it reached an understanding with the Centers for Medicare and Medicaid Services (“CMS”), to resolve all Medicare cost report, home office cost statement, and appeal issues between HCA and CMS. The understanding provides that HCA would pay CMS $250 million with respect to these matters. The resolution is subject to approval by the Department of Justice and execution of a definitive written agreement.

     HCA has agreed to indemnify the Company for any losses, other than consequential damages, arising from the pending governmental investigations of HCA’s business practices prior to the date of the distribution and losses arising from legal proceedings, present or future, related to the investigation or actions engaged in before the distribution that relate to the investigation. HCA has also agreed that, in the event that any hospital owned by the Company at the time of the spin-off is permanently excluded from participation in the Medicare and Medicaid programs as a result of the proceedings described above, then HCA will make a cash payment to the Company, in an amount (if positive) equal to five times the excluded hospital’s 1998 income from continuing operations before depreciation and amortization, interest expense, management fees, minority interests and income taxes, as set forth on a schedule to the distribution agreement, less the net proceeds of the sale or other disposition of the excluded hospital. However, the Company could be held responsible for any claims that are not covered by the agreements reached with the Federal government or for which HCA is not required to, or fails to, indemnify the Company. If indemnified matters were asserted successfully against the Company or any of the Company’s facilities, and HCA failed to meet its indemnification obligations, then this event could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

     The extent to which the Company may or may not continue to be affected by the ongoing investigations of HCA and the initiation of additional investigations, if any, cannot be predicted with accuracy. These matters could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects in future periods.

Americans with Disabilities Act Claim

     On January 12, 2001, Access Now, Inc., a disability rights organization, filed a class action lawsuit against each of the Company’s hospitals alleging non-compliance with the accessibility guidelines under the Americans with Disabilities Act (the “ADA”). The lawsuit, filed in the United States District Court for the Eastern District of Tennessee, seeks injunctive relief requiring facility modification, where necessary, to meet the ADA guidelines, along with attorneys’ fees and costs. In January 2002, the District Court certified the class action and issued a scheduling order that requires the parties to complete discovery and inspection for approximately six facilities per year. The Company intends to vigorously defend the lawsuit, recognizing the Company’s obligation to correct any deficiencies in order to comply with the ADA.

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Corporate Integrity Agreement

     In December 2000, the Company entered into a corporate integrity agreement with the Office of Inspector General and agreed to maintain its compliance program in accordance with the corporate integrity agreement. This agreement was amended in May 2002. Complying with the compliance measures and reporting and auditing requirements of the corporate integrity agreement will require additional efforts and costs. Failure to comply with the terms of the corporate integrity agreement could subject the Company to significant monetary penalties.

General Liability Claims

     The Company is, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts, wrongful restriction of or interference with physician staff privileges and employment related claims. In certain of these actions, plaintiffs request punitive or other damages against the Company, which may not be covered by insurance. The Company is currently not a party to any proceeding which, in management’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations.

Physician Commitments

     The Company has committed to provide certain financial assistance pursuant to recruiting agreements with various physicians practicing in the communities the Company serves. In consideration for a physician relocating to one of the Company’s communities and agreeing to engage in private practice for the benefit of the respective community, the Company may loan certain amounts of money to a physician, normally over a period of one year, to assist in establishing his or her practice. The Company has committed to advance amounts of approximately $16.2 million at September 30, 2002. The actual amount of such commitments to be subsequently advanced to physicians often depends upon the financial results of a physician’s private practice during the guaranteed period. Generally, amounts advanced under the recruiting agreements may be forgiven pro rata over a period of 48 months contingent upon the physician continuing to practice in the respective community.

Prior Period Cost Report Settlements

     Hospitals participating in the Medicare and some Medicaid programs, whether paid on a reasonable cost basis or under a Prospective Payment System (“PPS”), are required to meet certain financial reporting requirements. Federal and, where applicable, state 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. Since implementation of outpatient PPS in August 2000, the due dates of all Medicare cost reports have been extended due to a delay in receiving certain government reports. The Company anticipates filing substantially all delayed cost reports with extended due dates during the fourth quarter of 2002.

     Net adjustments to estimated third-party payor settlements resulted in an increase to net revenues of $5.8 million and $1.1 million for the three months ended September 30, 2002 and 2001, respectively and $7.9 million and $1.9 million for the nine months ended September 30, 2002 and 2001, respectively. Net adjustments of $5.0 million out of the $5.8 million and $7.9 million mentioned above relate to the favorable settlement of a Kentucky Medicaid rate appeal that covered several fiscal years. The remaining $0.8 million and $2.9 million primarily relates to outpatient PPS revenues. The adjustments had a favorable earnings per share effect of $0.07 and $0.01 for the three months ended September 30, 2002 and 2001, respectively and $0.10 and $0.03 for the nine months ended September 30, 2002 and 2001, respectively. The Company still has 11 cost reports to file which include outpatient PPS revenues.

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Acquisitions

     The Company has acquired and expects to continue to acquire businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company institutes policies designed to conform practices to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities 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.

NOTE 7 – RELATED PARTY TRANSACTIONS

     As part of an officer’s relocation package, the Company purchased a house for approximately $0.6 million in the second quarter of 2002 and subsequently sold it in the fourth quarter of 2002.

     The Company loaned certain Company officers 100% of the purchase price of the Company’s common stock at the fair market value based on the date of purchase during 1999. The loans are reflected as notes receivable for shares sold to employees in the Company’s Condensed Consolidated Balance Sheets. During the third quarter of 2002, Company executive officers repaid $5.2 million of such loans. Other Company officers repaid the remaining $0.5 million during the fourth quarter of 2002.

NOTE 8 – SUBSEQUENT EVENTS

     Effective October 3, 2002, the Company acquired the 100-bed Russellville Hospital in Russellville, Alabama from The Healthcare Authority of Lauderdale County and the City of Florence, Alabama, for approximately $20.4 million, including the cost of inventory and assumption of certain liabilities such as accrued paid time-off obligations to hospital employees.

     The Company purchased the remaining 30% interest in Dodge City Healthcare Group, L.P., the joint venture that owns and operates 110-bed Western Plains Regional Hospital in Dodge City, Kansas, for $25 million in October 2002. In March 1995, prior to the Company’s spin-off from HCA, HCA had acquired a 70% equity interest in the consolidated joint venture. Under the terms of the purchase agreement, the limited partners have agreed not to compete with the hospital for five years. The non-compete agreements will be valued by an independent third party; such amount is estimated to be approximately $5 to $6 million and will be amortized over the life of the agreement.

     On October 7, 2002, the Company entered into a definitive agreement to purchase the 99-bed Carraway Burdick West Medical Center, located in Haleyville, Alabama, and the 71-bed Carraway Northwest Medical Center, located in Winfield, Alabama, from Carraway Methodist Health Systems, a not-for-profit company based in Birmingham, Alabama. The transaction is expected to close during the fourth quarter of 2002.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     You should read this discussion together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report.

Overview

     At September 30, 2002, we operated 23 general, acute care hospitals in the states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming.

Forward-Looking Statements

     This report and other materials we have filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by us, contain, or will contain, disclosures which are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” These forward-looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations and future financial condition and results. These factors include, but are not limited to:

	•		the highly competitive nature of the healthcare business, including the competition to recruit general and specialized physicians;
	•		the efforts of insurers, healthcare providers and others to contain healthcare costs;
	•		possible changes in the Medicare and Medicaid programs that may further limit reimbursements to healthcare providers and insurers;
	•		the ability to attract and retain qualified management and personnel, including physicians, nurses and technicians, consistent with our expectations and targets;
	•		inflationary pressures;
	•		changes in federal, state or local regulation affecting the healthcare industry;
	•		the possible enactment of federal or state healthcare reform;
	•		our ability to acquire hospitals on favorable terms and to successfully complete budgeted capital improvements of our existing facilities;
	•		liabilities and other claims asserted against us;
	•		uncertainty associated with the HIPAA regulations;
	•		the ability to enter into, renegotiate and renew payor arrangements on acceptable terms;
	•		the availability and terms of capital to fund our business strategy;
	•		the availability, cost and terms of insurance coverage for our hospitals and physicians who practice at our hospitals;

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	•		implementation of our business strategy and development plans;
	•		our ongoing efforts to monitor, maintain and comply with applicable laws, regulations, policies and procedures, including those required by the corporate integrity agreement that we entered into with the government in December 2000 (as amended in May 2002) and those that, if violated, could result in monetary damages or cause any of our facilities to lose its state license or its ability to receive payments under the Medicare, Medicaid or TRICARE programs;
	•		the ability to increase patient volumes and control the costs of providing services and supply costs;
	•		the financial viability of third-party payors;
	•		claims and legal actions relating to professional liabilities and other matters;
	•		state laws as they relate to medical malpractice insurance;
	•		successful development (or license) of software and management information systems used for effective claims processing;
	•		volatility in the market value of our common stock and resulting costs to us to administer our ESOP;
	•		changes in accounting practices;
	•		changes in general economic conditions in the markets where our facilities are located; and
	•		other risk factors described in this report.

     As a consequence, current plans, anticipated actions and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of our company. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on such forward-looking statements when evaluating the information presented in this report.

Results of Operations

Revenue/Volume Trends

     We anticipate our patient volumes and related revenues to continue to increase as a result of the following factors:

	•		Expanding Service Offerings. We believe our efforts to improve the quality and broaden the scope of healthcare services available at our facilities will lead to increased patient volumes. Recruiting and retaining both general practitioners and specialists for our non-urban communities is a key to the success of these efforts. Between January 1, 1998 and September 30, 2002, we recruited 323 physicians, of which 243 have been retained by us. Adding new physicians should help increase both inpatient and outpatient volumes which, in turn, should increase revenues. Approximately 57% of our retained physicians are specialists. Continuing to add specialists should also allow us to grow by offering new services. In addition, increases in capital expenditures in our hospitals should increase local market share and help persuade patients to obtain healthcare services within their communities.
	•		Aging U.S. Population. In general, the population of the United States and of the communities that we serve is aging. At the end of 2001, approximately 13% of the U.S. population was 65 years old or older compared to 11% of the population at the end of 1980. This aging trend is projected to continue so that by 2025, approximately 18% of the U.S. population is expected to be older than 65. Generally, the older population tends to use healthcare services more frequently than the younger population.

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•

Medicare Rate Increases. The Medicare, Medicaid and SCHIP Benefit Improvement and Protection Act of 2000 (BIPA) was enacted in December 2000. Under BIPA, we have experienced Medicare rate increases that began in April 2001.

     Although we anticipate our patient volumes to increase, the resulting revenues will likely be impacted in part by the following factors:

	•		Revenues from Medicare, Medicaid and managed care plans. We derive a significant portion of our business from Medicare, Medicaid and managed care plans. Admissions related to Medicare, Medicaid and managed care plan patients were 92.2% and 91.2% of total admissions for the nine months ended September 30, 2002 and 2001, respectively. These payors receive significant discounts.
	•		Our revenue is heavily concentrated in Kentucky and Tennessee, which makes us particularly sensitive to regulatory and economic changes in those states. As of September 30, 2002, we operated 23 hospitals, with seven located in the Commonwealth of Kentucky and seven located in the State of Tennessee. Based on those 23 hospitals, we generated 38.5% of our revenue from our Kentucky hospitals (including 4.1% from state-sponsored Medicaid programs) and 24.1% from our Tennessee hospitals (including 3.4% from state-sponsored TennCare programs) for the nine months ended September 30, 2002. Some managed care organizations that participate in the Medicaid programs of Tennessee and Kentucky have been placed in receivership or encountered other financial difficulties in the past. Other managed care organizations in these or other states in which we operate may encounter similar difficulties in paying claims in the future.
	•		Efforts to Reduce Payments. Other third-party payors also negotiate discounted fees rather than paying standard prices. In addition, an increasing proportion of our services are reimbursed under predetermined payment amounts regardless of the cost incurred.
	•		Growth in Outpatient Services. We anticipate that the growth trend in outpatient services will continue. A number of procedures once performed only on an inpatient basis have been, and will likely continue to be, converted to outpatient procedures. This conversion has occurred through continuing advances in pharmaceutical and medical technologies and as a result of efforts made by payors to control costs. Generally, the payments we receive for outpatient procedures are less than those for similar procedures performed in an inpatient setting. Net outpatient revenues as a percentage of total revenues were 50.1% and 47.6% for the nine months ended September 30, 2002 and 2001, respectively. On a same facility basis, net outpatient revenues as a percentage of total revenues was 49.0% and 47.6% for the nine months ended September 30, 2002 and 2001, respectively.

Cost Containment

     We seek to control costs by, among other things, reducing labor costs by improving labor productivity and decreasing the use of contracted labor, controlling supply expenses through the use of a group purchasing organization and reducing uncollectible revenues. We have implemented cost control initiatives including adjusting staffing levels according to patient volumes, modifying supply purchases according to usage patterns and providing training to hospital staff in more efficient billing and collection processes. For the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001, total operating expenses decreased as a percentage of revenue to 77.5% from 78.9%. We believe that as our company grows, we will likely benefit from our ability to spread fixed administrative costs over a larger base of operations.

     While we were able to control our costs during the nine months ended September 30, 2002, there is no guarantee that we can contain certain costs in the future. As a result of the general shortage of nurses and technicians in the industry, we may experience an increase in salaries and benefits expense as we may be forced to hire additional contract health professionals.

     In addition, the healthcare industry has experienced an increase in the cost of all insurance lines, especially professional and general liability insurance. We have mitigated a portion of these increases for fiscal 2002 by increasing our self-insured retention levels for professional and general liabilities. We currently have no information that would lead us to believe that this trend is only temporary in nature and thus there is no assurance that these costs will not have a material adverse affect on our future operating results.

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     Pressure on payment levels, the increase in outpatient services and the large number of our patients who participate in managed care plans will present ongoing challenges for us. These challenges are exacerbated by our inability to control these trends and the associated risks. To maintain or improve operating margins in the future, we must, among other things, increase patient volumes while controlling the costs of providing services.

Impact of Acquisitions

     Because of the relatively small number of hospitals we own, each hospital acquisition can materially affect our overall operating margin. We typically take a number of steps to lower operating costs when we acquire a hospital. The impact of our actions may be offset by other cost increases to expand services, strengthen medical staff and attract additional patients to our facilities. The benefits of our investments and of other activities to improve operating margins generally do not occur immediately. Consequently, the financial performance of a newly acquired hospital may adversely affect our overall operating margins in the short term. As we acquire additional hospitals, this effect should be mitigated by the expanded financial base of our existing hospitals and the allocation of corporate overhead among a larger number of hospitals.

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Operating Results Summary

     The following is a summary of results of operations for the three months and nine months ended September 30, 2002 and 2001 (dollars in millions except for revenues per equivalent admission):