Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number: 0-29818

LifePoint Hospitals, Inc.

(615) 372-8500
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

     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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

     The aggregate market value of the shares of Common Stock of LifePoint Hospitals, Inc. held by non-affiliates as of June 28, 2002, was approximately $1.2 billion.

     As of February 28, 2003, the number of outstanding shares of Common Stock of LifePoint Hospitals, Inc. was 39,585,648.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive proxy statement for our annual meeting of stockholders to be held on May 21, 2003 are incorporated by reference into Part III of this report.

Table of Contents

PART I

Item 1. Business

General

     We operate 28 general, acute care hospitals with an aggregate of 2,617 licensed beds in non-urban communities. In all but one of our communities, our hospital is the only provider of acute care hospital services. Our hospitals are located in Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah, West Virginia and Wyoming. We generated $743.6 million in net revenues during 2002.

     We were formed as a division of HCA Inc. (“HCA”) in November 1997 to operate general, acute care hospitals in non-urban communities. We became an independent, publicly traded company on May 11, 1999 when HCA distributed all outstanding shares of our common stock to its stockholders.

The Non-Urban Healthcare Market

     We believe that non-urban healthcare markets are attractive because of the following factors:

	•		Less Competition. Non-urban communities have smaller populations with fewer hospitals and other healthcare service providers. We believe that the smaller populations and relative significance of the hospital in these markets may discourage the entry of alternate non-hospital providers, including outpatient surgery centers, rehabilitation centers and diagnostic imaging centers.
	•		Community Focus. We believe that non-urban areas generally view the local hospital as an integral part of the community. Therefore, we believe patients and physicians tend to be more loyal to the hospital.
	•		Acquisition Opportunities. Currently, not-for-profit and governmental entities own most non-urban hospitals. These entities often have limited access to the capital needed to keep pace with advances in medical technology. In addition, these entities sometimes lack the management resources necessary to control hospital expenses, recruit and retain physicians, expand healthcare services and comply with increasingly complex reimbursement and managed care requirements. As a result, patients may migrate to, may be referred by local physicians to, or may be encouraged by managed care plans to travel to, hospitals in larger, urban markets. We believe that, as a result of these pressures, many not-for-profit and governmental owners of non-urban hospitals who wish to preserve the local availability of quality healthcare services are interested in selling or leasing these hospitals to companies, like ours, that are committed to the local delivery of healthcare and that have greater access to capital and management resources.

Operating Philosophy

     We are committed to operating general, acute care hospitals in growing, non-urban markets. As a result, we adhere to an operating philosophy that is focused on the unique patient and provider needs and opportunities in these communities. This philosophy includes a commitment to:

	•		improving the quality and scope of available healthcare services;
	•		providing physicians a positive environment in which to practice medicine, with access to necessary equipment, office space and resources;
	•		providing an outstanding work environment for employees;
	•		recognizing and expanding the hospital’s role as a community asset; and
	•		continuing to improve each hospital’s financial performance.

Table of Contents

Business Strategy

     We manage our hospitals in accordance with our operating philosophy and have developed the following strategies tailored for each of our markets:

•

Expand Breadth of Services and Attract Community Patients. We strive to increase revenues by improving the quality and broadening the scope of healthcare services available at our facilities, and to recruit physicians with a broader range of specialties. We believe that our expansion of available treatments and our community focus will encourage residents in the non-urban markets we serve to seek care locally at our facilities rather than at facilities outside the area. We have undertaken projects in a majority of our hospitals that are targeted at expanding specialty services including the following:

	•		Strengthen Physician Recruiting and Retention. We seek to increase our revenue by enhancing the quality of care available locally. We believe that recruiting physicians in local communities is critical to increasing the quality of healthcare and the breadth of available services at our facilities. In 2000, we recruited 80 physicians, including 49 specialists. In 2001, we recruited 57 physicians, including 41 specialists. In 2002, we recruited 49 physicians, including 30 specialists. Between January 1, 1998 and December 31, 2002, we recruited 339 physicians, of which 244 have been retained by us. Our physician recruitment program is currently focused primarily on recruiting additional specialty care physicians. Our management is focused on working more effectively with individual physicians and physician practices. We believe that expansion of the range of available treatments at our hospitals should also assist in physician recruiting and contribute to the sense that our hospitals are community assets.
	•		Improve Expense Management. We seek to control costs by, among other things, reducing labor costs by improving labor productivity and attempting to decrease the use of contract labor, when appropriate, controlling supply expenses through the use of a group purchasing organization and reducing uncollectible revenues. We have implemented cost control initiatives that include appropriately 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. Our total operating expenses decreased as a percentage of revenues from 78.8% in 2001 to 77.4% in 2002. 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.
	•		Retain and Develop Stable Management. We seek to retain the executive teams at our hospitals to enhance medical staff relations and maintain continuity of relationships within the community. We make a commitment to the rural communities we serve by focusing our recruitment of managers and healthcare professionals to those who wish to live and practice in the communities in which our hospitals are located. In addition, these hospital leaders may purchase our common stock under our stock purchase plans.
	•		Improve Managed Care Position. We strive to improve our revenues from managed care plans by negotiating facility-specific contracts with these payors on terms appropriate for smaller, non-urban markets. We have successfully negotiated a number of contracts that are more appropriate for non-urban markets.

2

Table of Contents

•

Acquire Other Hospitals. We continue to pursue a disciplined acquisition strategy and seek to identify and acquire attractive hospitals in non-urban markets that are the sole or significant market provider of healthcare services in the community. In the fourth quarter of 2002, we acquired five hospitals, Russellville Hospital in Russellville, Alabama, Northwest Medical Center in Winfield, Alabama, Burdick-West Medical Center in Haleyville, Alabama, and Logan Regional Medical Center and Guyan Valley Hospital, both of which are in Logan, West Virginia. Each of these hospitals is located in areas where patients often travel outside of the community for healthcare services. By implementing our operating strategies, we believe that we can attract many of these patients that historically have sought care elsewhere.

We believe that our strategic goals align our interests with those of the local communities served by our hospitals. We believe that the following qualities enable us to successfully compete for acquisitions:

	•		our commitment to maintaining the local availability of healthcare services;
	•		our reputation for providing market-specific, high quality healthcare;
	•		our focus on physician recruiting and retention;
	•		our management’s operating experience;
	•		our access to financing and our liquidity; and
	•		our ability to provide the necessary equipment and resources for physicians.

Operations

     Our general, acute care hospitals usually provide the range of medical and surgical services commonly available in hospitals in non-urban markets. Most of our hospitals also provide diagnostic and emergency services, as well as outpatient and ancillary services including outpatient surgery, laboratory, rehabilitation, radiology, respiratory therapy and physical therapy.

     Each of our hospitals has a local board of trustees that includes members of the hospital’s medical staff as well as community leaders. The board establishes policies concerning medical, professional and ethical practices, monitors these practices, and is responsible for ensuring that these practices conform to established standards. We maintain quality assurance programs to support and monitor quality of care standards and to meet accreditation and regulatory requirements. We also monitor patient care evaluations and other quality of care assessment activities on a regular basis.

     Like most hospitals located in non-urban areas, our hospitals do not engage in extensive medical research and medical education programs. However, a number of our hospitals have an affiliation with medical schools, including the clinical rotation of medical students.

     In addition to providing capital resources, we make available a variety of management services to our healthcare facilities. These services include:

	•		information and clinical systems;
	•		accounting, financial, tax, managed care and reimbursement support;
	•		legal support;
	•		personnel management;
	•		risk management;
	•		corporate compliance;

3

Table of Contents

	•		clinical support;
	•		physician recruiting;
	•		education and training;
	•		HIPAA compliance;
	•		construction oversight and management;
	•		internal auditing; and
	•		materials management.

     We participate, along with other healthcare companies, in a group purchasing organization which makes certain national supply and equipment contracts available to our facilities.

Properties

     The following table lists the hospitals owned by us, except as otherwise indicated, as of February 28, 2003:

4

Table of Contents

(b)		We lease Bluegrass Community Hospital from Woodford Healthcare, Inc., a Kentucky not-for-profit corporation, pursuant to a lease agreement that expires on December 31, 2003, unless extended by the parties. We have an option to extend the lease through 2014.
(c)		We lease the real estate associated with Emerald-Hodgson Hospital from the University of the South, a Tennessee corporation, pursuant to a lease agreement that expires on May 7, 2020.
(d)		We lease the real estate associated with Lander Valley Medical Center from the City of Lander, Wyoming pursuant to a ground lease that expires on December 31, 2073.

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

     Our corporate headquarters are located in approximately 31,500 square feet of leased space in one office building in Brentwood, Tennessee. Our corporate headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for our present needs. Our obligations under our bank credit facilities are secured by a pledge of substantially all of our assets, including first priority mortgages on most of our hospitals.

Services and Utilization

     We believe that two important factors relating to the overall utilization of a hospital are the quality and market position of the hospital and the number, quality and specialties of physicians providing patient care within the facility. Generally, we believe that the ability of a hospital to meet the healthcare needs of its community is determined by the following:

	•		breadth of services;
	•		level of technology; and
	•		emphasis on quality of care and convenience for patients and physicians.

Other factors which impact utilization include:

	•		the size of and growth in local population;
	•		local economic conditions;
	•		physician availability and expertise;
	•		the availability of reimbursement programs such as Medicare and Medicaid;
	•		the ability to negotiate contracts with managed care organizations that are appropriate for non-urban markets;
	•		necessary medical equipment to perform clinical procedures; and
	•		improved treatment protocols as a result of advances in medical technology and pharmacology.

     The following table contains operating statistics for our hospitals for each of the past five years ended December 31. Medical/surgical hospital operations are subject to seasonal fluctuations, including decreases in patient utilization during holiday periods and harsh weather conditions, and increases in patient utilization during the cold weather months.

5

Table of Contents

     Our hospitals have experienced steady growth in outpatient care services compared to inpatient care services. Net outpatient revenues, as a percentage of total revenues, increased from 47.8% in 2001 to 49.8% in 2002. We believe outpatient services provided at our hospitals have increased for two primary reasons. First, because of our ongoing recruiting efforts, many new physicians have admitting privileges to our hospitals. These new physicians tend to provide primarily outpatient care services until they become established in the community and develop a patient base. Second, improvements in technology and clinical practices and hospital payment changes by Medicare, insurance carriers and self-insured employers have also resulted in increased outpatient care services relative to inpatient care services. These hospital payment changes generally encourage the utilization of outpatient, rather than inpatient, services whenever possible, and shortened lengths of stay for inpatient care.

     In response to this increasing demand for outpatient care, we are reconfiguring some of our hospitals to more effectively accommodate outpatient services and restructuring existing surgical capacity in some of our hospitals to permit additional outpatient volume and a greater variety of outpatient services.

Sources of Revenue

     Our hospitals receive payment for patient services from the federal government primarily under the Medicare program, state governments under their respective Medicaid programs, HMOs, PPOs and other private insurers, as

6

Table of Contents

well as directly from patients. The approximate percentages of net inpatient revenues, net outpatient revenues and total net revenues of our facilities from these sources during the years specified below were as follows:

     Medicare provides hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid, a joint federal-state program that is administered by the states, provides hospital benefits to qualifying individuals who are unable to afford care. All of our hospitals are certified as providers of Medicare and Medicaid services. Amounts received under the Medicare and Medicaid programs are generally significantly less than the hospital’s customary charges for the services provided.

     In addition to government programs, our hospitals are reimbursed by private payors including HMOs, PPOs, private insurance companies, employers and individual private payors. To attract additional volume, most of our hospitals offer discounts from established charges to certain large group purchasers of healthcare services. These discount programs often limit our ability to increase charges in response to increasing costs.

     Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for the services under Medicare, Medicaid, some private insurance plans, HMOs or PPOs, but are responsible for services not covered by these plans, exclusions, deductibles or co-insurance features of their coverage. The amount of exclusions, deductibles and co-insurance has generally been increasing each year.

Competition

     The hospital industry is highly competitive. We compete with other hospitals and healthcare providers for patients. The competition among hospitals and other healthcare providers for patients has intensified in recent years. Our hospitals face no direct hospital competition in 26 of our 27 communities because there are no other hospitals in these communities. However, these hospitals do face competition from hospitals outside of their communities, including hospitals in the market area and nearby urban areas that provide more complex services. These facilities are generally located in excess of 25 miles from our facilities. Patients in our primary service areas may travel to these other hospitals for a variety of reasons, including the need for services we do not offer or physician referrals.

7

Table of Contents

Some of these competing hospitals use equipment and services more specialized than those available at our hospitals. Patients who require services from these other hospitals may subsequently shift their preferences to those hospitals for services we do provide. In addition, some of the hospitals that compete with us are owned by tax-supported governmental agencies or not-for-profit entities supported by endowments and charitable contributions. These hospitals, in some instances, are not required to pay sales, property and income taxes. We also face competition from other specialized care providers, including outpatient surgery, orthopedic, oncology, physical therapy, and diagnostic centers, as well as, competing services rendered in physician offices.

     State certificate of need laws, which place limitations on a hospital’s ability to expand hospital services and add new equipment, also may have the effect of restricting competition. Of the nine states where we own hospitals, Alabama, Florida, Kentucky, Tennessee and West Virginia have certificate of need laws. The application process for approval of additional covered services, new facilities, changes in operations and capital expenditures is, therefore, highly competitive in these states.

     The number and quality of the physicians on a hospital’s staff is an important factor in a hospital’s competitive advantage. Physicians decide whether a patient is admitted to the hospital and the procedures to be performed. We believe that physicians refer patients to a hospital primarily on the basis of the quality of services it renders to patients and physicians, the quality of other physicians on the medical staff, the location of the hospital and the quality of the hospital’s facilities, equipment and employees.

     One element of our business strategy is expansion through the acquisition of acute care hospitals in growing, non-urban markets. The competition to acquire rural hospitals is significant. We intend to acquire, on a selective basis, hospitals that are similar to those we currently own and operate.

Employees and Medical Staff

     At February 28, 2003, we had approximately 9,000 employees, including approximately 2,000 part-time employees. None of our employees are subject to collective bargaining agreements. We consider our employee relations to be good. While some of our hospitals experience union organizing activity from time to time, we do not expect these efforts to materially affect our future operations. Our hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate.

     Our hospitals are staffed by licensed physicians who have been admitted to the medical staff of 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 the hospital’s medical staff and the appropriate governing board of the hospital in accordance with established credentialing criteria. With certain exceptions, including exceptions by market, physicians generally are not employees of our hospitals. However, in some cases, physicians provide services in our hospitals by employment contract.

Government Regulation

     Overview. All participants in the healthcare industry are required to comply with extensive government regulation at the federal, state and local levels. Under these laws and regulations, hospitals must meet requirements for licensure and qualify to participate in government programs, including the Medicare and Medicaid programs. These requirements relate to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, hospital use, rate-setting, compliance with building codes and environmental protection laws. There are also extensive regulations governing a hospital’s participation in government programs. If we fail to comply with applicable laws and regulations, we may be subject to criminal penalties and civil sanctions and our hospitals may lose their licenses and ability to participate in government programs. In addition, government regulations frequently change and when regulations change, we may be required to make changes in our facilities, equipment, personnel and services so that our hospitals remain licensed and qualified to participate in these programs. We believe that our hospitals are in substantial compliance with current federal, state and local regulations and standards.

     Hospitals are subject to periodic inspection by federal, state, and local authorities to determine their compliance with applicable regulations and requirements necessary for licensing and certification. All of our hospitals are

8

Table of Contents

licensed under appropriate state laws and are qualified to participate in Medicare and Medicaid programs. In addition, all of our acute care hospitals are accredited by the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”). This accreditation indicates that a hospital satisfies the applicable health and administrative standards to participate in Medicare and Medicaid programs.

     Fraud and Abuse Laws. Participation in the Medicare and/or Medicaid programs is heavily regulated by federal statute and regulation. If a hospital fails to comply substantially with the numerous federal laws governing a facility’s activities, the hospital’s participation in the Medicare and/or Medicaid programs may be terminated and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare and/or Medicaid programs if it performs any of the following acts:

	•		making claims to Medicare and/or Medicaid for services not provided or misrepresenting actual services provided in order to obtain higher payments;
	•		paying money to induce the referral of patients or purchase of items or services where such items or services are reimbursable under a federal or state health program; or
	•		failing to provide appropriate emergency medical screening services to any individual who comes to a hospital’s campus or otherwise failing to properly treat and transfer emergency patients.

     The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal healthcare program. HIPAA created civil penalties for proscribed conduct, including upcoding and billing for medically unnecessary goods or services. It established new enforcement mechanisms to combat fraud and abuse. These include a bounty system, where a portion of the payments recovered is returned to the government agencies, as well as a whistleblower program. HIPAA also expanded the categories of persons that may be excluded from participation in federal and state healthcare programs.

     A provision of the Social Security Act, known as the “anti-kickback” statute, prohibits the payment, receipt, offer or solicitation of money with the intent of generating referrals or orders for services or items covered by a federal or state healthcare program. Violations of the anti-kickback statute may be punished by criminal and civil fines, exclusion from federal and state healthcare programs, and damages up to three times the total dollar amount involved.

     The Office of Inspector General of the Department of Health and Human Services is responsible for identifying fraud and abuse activities in government programs. In order to fulfill its duties, the Office of Inspector General performs audits, investigations and inspections. In addition, it provides guidance to healthcare providers by identifying types of activities that could violate the anti-kickback statute. The Office of Inspector General has identified the following incentive arrangements as potential violations:

	•		payment of any incentive by a hospital each time 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 technique training;
	•		guarantees which 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 which may be forgiven if a physician refers patients to the hospital;
	•		payment of the costs of a physician’s travel and expenses for conferences;

9

Table of Contents

	•		payment of services which require few, if any, substantive duties by the physician or which are in excess of the fair market value of the services rendered; or
	•		purchasing goods or services from physicians at prices in excess of their fair market value.

     We have a variety of financial relationships with physicians who refer patients to our hospitals. Physicians may also own our stock. We also have contracts with physicians providing for a variety of financial arrangements, including employment contracts, leases, independent contractor agreements and professional service agreements. We provide financial incentives to recruit physicians to relocate to communities served by our hospitals. These incentives include minimum revenue guarantees and, in some cases, loans. The Office of Inspector General is authorized to publish regulations outlining activities and business relationships that would be deemed not to violate the anti-kickback statute. These regulations are known as “safe harbor” regulations. The safe harbor regulations do not make conduct illegal, but instead delineate standards that, if complied with, protect conduct that might otherwise be deemed in violation of the anti-kickback statute. We use our best efforts to structure each of our arrangements, especially each of our business arrangements with physicians, to fit as closely as possible within an applicable safe harbor. However, not all of our business arrangements fit wholly within safe harbors, so we cannot guarantee that these arrangements will not be scrutinized by government authorities or, if scrutinized, that they will be determined to be in compliance with the anti-kickback statute or other applicable laws. The failure of a particular activity to comply with the safe harbor regulations does not mean that the activity violates the anti-kickback statute. We believe that all of our business arrangements are in full compliance with the anti-kickback statute. If we violate the anti-kickback statute, we would be subject to criminal and civil penalties and/or possible exclusion from participating in Medicare, Medicaid or other governmental healthcare programs.

     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 selected types of healthcare entities in which they or any of their immediate family members have ownership or other financial interests. These types of referrals are commonly known as “self referrals.” Sanctions for violating the Stark law include civil monetary penalties, assessments equal to twice the dollar value of each service and exclusion from Medicare and Medicaid programs. There are ownership and compensation arrangement exceptions to the self-referral prohibition. One exception allows a physician to make a referral to a hospital if the physician owns an interest in the entire hospital, as opposed to an ownership interest in a department of the hospital. Another exception allows a physician to refer patients to a healthcare entity in which the physician has an ownership interest if the entity is located in a rural area, as defined in the statute. There are also exceptions for many of the customary financial arrangements between physicians and providers, including employment contracts, leases and recruitment agreements. The federal government released regulations interpreting some, but not all, of the provisions included in the Stark law in January 2001, and the government has said it intends to release a second phase of final Stark regulations in the future. We have structured our financial arrangements with physicians to comply with the statutory exceptions included in the Stark law and subsequent regulations. However, the future Stark regulations may interpret provisions of this law in a manner different from the manner in which we have interpreted them. We cannot predict the effect such future regulations will have on us.

     Many states in which we operate also have adopted, or are considering adopting, laws similar to the Stark law. Some of these state laws apply even if the government is not the payor. These statutes typically provide criminal and civil penalties as remedies. While there is little precedent for the interpretation or enforcement of these state laws, we have attempted to structure our financial relationships with physicians and others in light of these laws. However, if a state determines that we have violated such a law, we would be subject to criminal and civil penalties.

     Corporate Practice of Medicine and Fee-Splitting. Some states have laws that prohibit unlicensed persons or business entities, including corporations or business organizations that own hospitals, from employing physicians. Some states also have adopted laws that prohibit 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. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. We attempt to structure our arrangements with healthcare providers to comply with the relevant state laws and the few available regulatory interpretations.

10

Table of Contents

     Emergency Medical Treatment and Active Labor Act. All of our facilities are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency department for treatment and, if the patient is suffering from an emergency medical condition, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patient’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program. In addition, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another hospital’s violation of the law can bring a civil suit against the hospital.

     On May 9, 2002, the Centers for Medicare and Medicaid Services (“CMS”) proposed changes to its rule implementing EMTALA. In the proposed modifications to EMTALA, CMS attempted to clarify when a patient is considered to be on a hospital’s property for purposes of treating the person pursuant to EMTALA. CMS proposed that off-campus facilities such as specialty clinics, surgery centers and other facilities that lack emergency departments should not be subject to EMTALA, but that these locations must have a plan explaining how the location should proceed in an emergency situation such as transferring the patient to the closest hospital with an emergency department. CMS further proposed that hospital-owned ambulances could transport a patient to the closest emergency department instead of the hospital owning the ambulance.

     CMS’ proposed rules did specify “on-call” physician requirements for an emergency department, but provided a subjective standard stating that “on-call” hospital schedules should meet the hospital’s and community’s needs. CMS also did not directly address whether EMTALA applies to direct admissions, individuals who come to a hospital pursuant to a physician’s orders for a routine procedure, individuals who present themselves at a hospital’s psychiatric department or delivery/labor department and whether screening requirements apply to patients transferred from other facilities. Although CMS intended to publish final EMTALA revisions on August 1, 2002, due to the overwhelming amount of comments that CMS received to the proposed rules, CMS indicated that the final EMTALA changes would be published at some later date. Although we believe that we comply with EMTALA, we cannot predict the final modifications CMS will implement in the future and whether we will comply with any new requirements.

     Federal False Claims Act. Another trend in healthcare litigation is the use of the federal False Claims Act. The federal False Claims Act prohibits providers from knowingly submitting false claims for payment to the federal government. This law has been used not only by the federal government, but also by individuals who bring an action on behalf of the government under the law’s “qui tam” or “whistleblower” provisions. When a private party brings a qui tam action under the federal False Claims Act, the defendant will generally not be aware of the lawsuit until the government makes a determination whether it will intervene and take a lead in the litigation.

     Civil liability under the federal False Claims Act can be up to three times the actual damages sustained by the government plus civil penalties for each separate false claim. There are many potential bases for liability under the federal False Claims Act. Although liability under the federal False Claims Act arises when an entity knowingly submits a false claim for reimbursement to the federal government, the federal False Claims Act defines the term “knowingly” broadly. Although simple negligence generally will not give rise to liability under the federal False Claims Act, submitting a claim with reckless disregard to its truth or falsity can constitute “knowingly” submitting a false claim.

     Healthcare Reform. The healthcare industry continues to attract much legislative interest and public attention. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system. Proposals that have been considered include cost controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses and mandatory health insurance coverage for employees. The costs of implementing some of these proposals would be financed, in part, by reductions in payments to healthcare providers under Medicare, Medicaid and other government programs.

11

Table of Contents

     Conversion Legislation. Many states have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have such legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets. These legislative and administrative efforts primarily focus on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the not-for-profit seller. These reviews and, in some instances, approval processes can add additional time to the closing of a not-for-profit hospital acquisition. Future actions by state legislators or attorneys general may seriously delay or even prevent our ability to acquire certain hospitals.

     Certificates of Need. The construction of new facilities, the acquisition or expansion of existing facilities and the addition of new services and expensive equipment at our facilities may be subject to state laws that require prior approval by state regulatory agencies. These certificate of need laws generally require that a state agency determine the public need and give approval prior to the construction or acquisition of facilities or the addition of new services. We operate hospitals in five states that have adopted certificate of need laws — Alabama, Florida, Kentucky, Tennessee and West Virginia. If we fail to obtain necessary state approval, we will not be able to expand our facilities, complete acquisitions or add new services in these states. Violation of these state laws may result in the imposition of civil sanctions or the revocation of hospital licenses.

     HIPAA Transaction, Privacy and Security Requirements. The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data standards for the exchange of information between two parties to carry out financial and administrative activities related to healthcare, including healthcare claims and payment transactions submitted or received electronically. These provisions are intended to improve the efficiency and effectiveness of the healthcare industry by enabling the efficient electronic transmission of certain health information. On August 17, 2000, the Department of Health and Human Services (“DHHS”) published final regulations establishing electronic data transmission standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically. Compliance with these regulations is required by October 16, 2003, although the government required us to submit a plan by October 16, 2002 showing how we plan to meet the transaction standards. We successfully met this deadline. We cannot predict with accuracy the impact that these regulations, when fully implemented, will have on us.

     The Administrative Simplification Provisions also require DHHS to adopt standards to protect the security and privacy of health-related information. DHHS promulgated final regulations containing security standards on February 20, 2003, but compliance with these regulations is not required until April 21, 2005. These final security regulations would require healthcare providers to implement administrative, physical and technical safeguards to protect the integrity, confidentiality and availability of electronically received, maintained or transmitted individually identifiable health-related information.

     In addition, DHHS released final regulations containing privacy standards in December 2000. These privacy regulations became effective April 14, 2001, and compliance with these regulations is required by April 14, 2003. In addition, on August 14, 2002, DHHS made additional changes to the privacy regulations to remove consent requirements which were anticipated to hinder access to care as well as to clarify other provisions related to oral communications, parental access to their children’s records and to prohibit certain marketing without patient authorization. The privacy regulations, including modifications, will extensively regulate the use and disclosure of individually identifiable health-related information and a patient’s rights to his or her health information. The security regulations and the privacy regulations could impose significant costs on our facilities in order to comply with these standards. We cannot predict with accuracy the impact that these final regulations, when fully implemented, will have on us. If we violate these provisions of HIPAA, we will be subject to monetary fines, penalties and criminal sanctions.

Payment

     Medicare. Under the Medicare program, we are paid for inpatient and outpatient services performed by our hospitals.

     Payments for inpatient acute services are generally made pursuant to a prospective payment system, commonly known as “PPS.” Under PPS, our hospitals are paid a prospectively determined amount for each hospital discharge

12

Table of Contents

based on the patient’s diagnosis. Specifically, each discharge is assigned to a diagnosis related group, commonly known as a “DRG,” based on the patient’s condition and treatment during the relevant inpatient stay. This assignment also affects the prospectively determined capital rate paid with each DRG. Each DRG is assigned a payment rate that is prospectively set using national average costs per case for treating a patient for a particular diagnosis. DRG payments do not consider the actual costs incurred by a hospital in providing a particular inpatient service. However, DRG and capital payments are adjusted by a predetermined geographic adjustment factor assigned to the geographic area in which the hospital is located. In addition to DRG and capital payments, hospitals may qualify for “outlier” payments when the relevant patient’s treatment costs exceed a specified threshold. We received approximately $1.4 million, $1.9 million and $0.9 million in outlier payments in 2000, 2001 and 2002, respectively. For 2003, we expect this amount to be even less due to a substantial increase in the cost outlier threshold effective October 1, 2002 (from $21,025 to $33,560). Hospitals qualify for disproportionate share payments when their percentage of low income patients exceed specified thresholds. Under the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (“BIPA”), a majority of our hospitals qualify to receive disproportionate share payments. We received approximately $3.0 million, $7.2 million and $9.9 million in Medicare disproportionate share payments in 2000, 2001 and 2002, respectively.

     The DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The index used to adjust the DRG rates, known as the “hospital market basket index,” gives consideration to the inflation experienced by hospitals in purchasing goods and services. For several years, however, the percentage increases in the DRG payments have been lower than the projected increase in the costs of goods and services purchased by hospitals. DRG rate increases were 0.0% for federal fiscal year 1998, 0.5% for federal fiscal year 1999, 1.1% for federal fiscal year 2000, 3.4% for federal fiscal year 2001, 2.75% for federal fiscal year 2002 and 2.95% for federal fiscal year 2003.

     Outpatient services have traditionally been paid at the lower of customary charges or on a reasonable cost basis. The Balanced Budget Refinement Act of 1999 established a PPS for outpatient hospital services that commenced on August 1, 2000. Outpatient services are assigned ambulatory payment classifications, which are readjusted no less than annually.

     The Balanced Budget Refinement Act of 1999 eliminated the anticipated average reduction of 5.7% for various Medicare outpatient payments under the Balanced Budget Act of 1997. Under the Balanced Budget Refinement Act of 1999, outpatient payment reductions for non-urban hospitals with 100 beds or less are mitigated through a “hold harmless” provision until December 31, 2003. Fifteen of our hospitals qualify for this relief. Payment reductions under Medicare outpatient PPS of non-urban hospitals with greater than 100 beds and urban hospitals will be mitigated through a corridor reimbursement approach, where a percentage of such reductions will be reimbursed through December 31, 2003. Substantially all of our remaining hospitals qualify for relief under this provision.

     Prior to the implementation of the prospective payment systems, payments to exempt hospitals and units, such as inpatient psychiatric, rehabilitation and skilled nursing services, were based upon reasonable costs, subject to a cost per discharge target and maintenance of minimum levels of care. The Balanced Budget Act established a PPS for Medicare skilled nursing facilities which commenced in July 1998 and was implemented progressively over a three-year term. We have experienced reductions in payments for our skilled nursing services. However, BIPA required us to increase the current reimbursement amount for each resource utilization group nursing component of the skilled nursing facility PPS by 16.7% for services between April 1, 2001 and September 30, 2002. Additionally, BIPA increased the skilled nursing facility PPS update to the skilled nursing facility market basket minus 0.5% for fiscal years 2002 and 2003. BIPA also required rates for certain categories to be increased by 6.7% effective April 1, 2001, which is still in effect. The Balanced Budget Refinement Act of 1999 provided for a 20% increase for certain categories effective April 1, 2000, which also is still in effect. This Act required a 4% increase in payment rates for federal fiscal years 2001 and 2002. This adjustment expired September 30, 2002.

     The Balanced Budget Act mandated a PPS for inpatient rehabilitation hospital services. A PPS system for Medicare inpatient rehabilitation services is being phased in over two years beginning January 1, 2002. A PPS for inpatient psychiatric hospitals and exempt units has not yet been proposed.

13

Table of Contents

     As of December 31, 2002, we operated five inpatient psychiatric units, five inpatient rehabilitation units, seven hospital-based skilled nursing facility units, three rural health clinics, four home health agencies, one comprehensive outpatient rehabilitation facility and seventeen hospitals utilizing swing beds.

     The Balanced Budget Refinement Act also required the DHHS to establish a PPS for home health services. The Balanced Budget Act of 1997 put in place the interim payment system, commonly known as “IPS,” until the home health PPS could be implemented. As of October 1, 2000, the home health PPS replaced IPS. The Balanced Budget Refinement Act delayed until one year following implementation of the PPS a 15.0% payment reduction that would have otherwise been effective October 1, 2000. BIPA further delayed the one time 15.0% payment reduction until October 1, 2002. Additionally, BIPA increased the home health agency PPS annual update to 2.2% for services furnished between April 1, 2001 and September 30, 2001. For a two-year period beginning April 1, 2001, BIPA increased Medicare payments 10.0% for home health services furnished in specific rural areas. This provision expires March 31, 2003. Home health PPS rates for 2003, which became effective October 1, 2002, included the mandated 15% reduction in home health spending. The 2003 rates reduce each 60-day episode payment overall by 4.9%. In the fourth quarter of 2002, we purchased four home health agencies associated with our acquisitions. We had previously sold or closed our formerly owned home health agencies.

     Medicaid. Most state Medicaid payments are made under a PPS or under programs which negotiate payment levels with individual hospitals. Medicaid is currently funded jointly by state and federal governments. The federal government and many states are currently considering significantly reducing Medicaid funding. This could adversely affect future levels of Medicaid payments received by our hospitals.

     Annual Cost Reports. Hospitals participating in the Medicare and some Medicaid programs, whether paid on a reasonable cost basis or under a 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. Most of our postponed cost reports were filed during 2002. We have seven cost reports to file related to this delay as of December 31, 2002.

     Annual cost reports required under the Medicare and some Medicaid programs are subject to routine governmental audits. These audits may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs. Finalization of these audits often takes several years. Providers can appeal any final determination made in connection with an audit.

     Commercial Insurance. Our hospitals provide services to individuals covered by private healthcare insurance. Private insurance carriers pay our hospitals or in some cases reimburse their policyholders based on the hospital’s established charges and the coverage provided in the insurance policy. Commercial insurers are trying to limit the payments for hospital services by negotiating discounts. Reductions in payments for services provided by our hospitals to individuals covered by commercial insurers could adversely affect us.

Regulatory Compliance Program

     It is our policy to conduct our business with integrity and in compliance with the law. We have in place and continue to develop a corporate-wide compliance program, which focuses on all areas of regulatory compliance, including billing, reimbursement and cost reporting practices.

     This regulatory compliance program is intended to ensure that high standards of conduct are maintained in the operation of our business and to help ensure that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, we provide initial and periodic legal compliance and ethics training to every employee, review various areas of our operations and develop and implement policies and procedures designed to foster compliance with the law. We regularly monitor our ongoing compliance efforts. The program also includes a mechanism for employees

14

Table of Contents

to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors or designated compliance officers in our hospitals.

     In December 2000, we entered into a corporate integrity agreement with the Office of Inspector General and agreed to maintain our compliance program in accordance with the corporate integrity agreement. This agreement was amended in April 2002. Violations of this agreement could subject us to substantial monetary penalties. The compliance measures and reporting and auditing requirements contained in the corporate integrity agreement include:

	•		continuing the duties and activities of our audit and compliance committee, corporate compliance officer, internal audit and compliance department, local hospital ethics and compliance officers, corporate compliance committee and hospital compliance committees;
	•		maintaining our written code of conduct, which sets out our commitment to full compliance with all statutes, regulations and guidelines applicable to federal healthcare programs;
	•		maintaining our written policies and procedures addressing the operation of our compliance program;
	•		providing general training on the compliance program;
	•		providing specific training for the appropriate personnel on billing, coding and cost report issues;
	•		having an independent third party conduct periodic audits of our facilities’ inpatient DRG coding;
	•		continuing our confidential disclosure program and compliance hotline to enable employees or others to disclose issues or questions regarding possible inappropriate policies or behavior;
	•		enhancing our screening program to ensure that we do not hire or engage employees or contractors who have been sanctioned or excluded from participation in federal healthcare programs;
	•		reporting any material deficiency which resulted in an overpayment to us by a federal healthcare program;
	•		reporting any healthcare related fraud involving any federally funded program; and
	•		submitting annual reports to the Office of Inspector General which describe in detail the operations of our corporate compliance program for the past year.

Arrangements Relating to the Distribution

     Immediately prior to HCA’s distribution of our common stock, we entered into agreements with HCA to define our ongoing relationships after the distribution and to allocate tax, employee benefits and other liabilities and obligations arising from periods prior to the distribution date.

     Distribution Agreement. We entered into a distribution agreement with HCA and Triad Hospitals, Inc. (“Triad”) which governed the corporate transactions required to effect the distribution and other arrangements between the parties after the distribution. The distribution agreement also allocated financial responsibility between the parties for liabilities arising out of the assets and entities that constitute our company, including liabilities arising out of the transfer of the assets and entities to us. HCA agreed in the distribution agreement to indemnify us for any losses 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 prior to the distribution that relate to the investigation.

     Tax Sharing and Indemnification Agreement. We also entered into a tax sharing and indemnification agreement with HCA and Triad which allocated tax liabilities among the parties and addressed other tax matters, including responsibility for filing tax returns, control of and cooperation in tax litigation and qualification of the distribution as a tax-free transaction. Generally, HCA is responsible for taxes that are allocable to periods before the distribution

15

Table of Contents

date and each of HCA, LifePoint and Triad is responsible for its own tax liabilities, including its allocable portion of taxes shown on any consolidated, combined or other tax return filed by HCA, for periods after the distribution date. The tax sharing and indemnification agreement prohibits us from taking actions that could jeopardize the tax treatment of the distribution or the restructuring that preceded the distribution, and requires us to indemnify HCA and Triad for any taxes or other losses that result from our actions.

     Benefits and Employment Matters Agreement. We entered into a benefits and employment matters agreement with HCA and Triad which allocated responsibilities for employee compensation, benefits, labor, benefit plan administration and certain other employment matters on and after the distribution date.

     Insurance Allocation and Administration Agreement. Before the distribution, HCA maintained various insurance policies for the benefit of the facilities that now make up our company. A wholly owned insurance subsidiary of HCA insures HCA against substantially all losses in periods before the distribution. In addition, HCA maintains excess loss policies. We also entered into an insurance allocation and administration agreement with HCA that describes our continuing rights and obligations regarding insurance after the distribution date and that defines our relationship regarding insurance on HCA’s property and our property.

     Computer and Data Processing Services Agreement. HCA’s wholly owned subsidiary, HCA-Information Technology and Services, Inc., entered into a computer and data processing services agreement with us. HCA-Information Technology and Services, Inc. provides computer installation, support, training, maintenance, data processing and other related services to us under this agreement. HCA-Information Technology and Services, Inc. charges us fees for services provided under this agreement.

     Other Agreements. HCA entered into agreements with us by which HCA shares telecommunications services with us under HCA’s agreements with its telecommunications services provider and by which HCA makes account collection services available to us. We also participate, along with other healthcare companies, in a group purchasing organization which makes national supply and equipment contracts available to our facilities.

Available Information

     Our website is www.lifepointhospitals.com. We make available free of charge on this website under “Investor Relations — SEC Filings” our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the United States Securities and Exchange Commission.

Item 2. Properties

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

Item 3. Legal Proceedings

     General. We are, 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 physicians’ staff privileges and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages, that may not be covered by insurance. We are currently not a party to any proceeding which, in management’s opinion, would have a material adverse effect on our business, financial condition or results of operations.

     Americans with Disabilities Act Claim. On January 12, 2001, Access Now, Inc., a disability rights organization, filed a class action lawsuit against each of our hospitals alleging non-compliance with the accessibility guidelines under the Americans with Disabilities Act (“ADA”). The lawsuit, filed in the United States District Court for the Eastern District of Tennessee, does not seek any monetary damages but, instead, seeks only 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

16

Table of Contents

complete discovery and inspection for approximately six facilities per year. We intend to vigorously defend the lawsuit, recognizing our obligation to correct any deficiencies in order to comply with the ADA.

     Governmental Investigation of HCA and Related Litigation. HCA 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. The description of the matters below is based on our review of HCA’s public filings. We understand 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 our formation as an independent company, owned many of the facilities that we now own.

     HCA is a defendant in several qui tam actions brought on behalf of the United States by private parties, known as relators, 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 Claims Act, 31 U.S.C. § 3729, et seq. by submitting improper claims for reimbursement to the government. The lawsuits generally seek: a) restitution of amounts paid to HCA entities as a result of any Medicare or Medicaid false claims, b) a penalty in the amount of three times the restitution amount, c) civil fines of not less than $5,500 nor more than $11,000 for each such claim, and d) attorneys’ fees and costs. HCA has disclosed that, on March 15, 2001, the Department of Justice announced its decision to intervene in certain of the qui tam actions against HCA. HCA stated that, of the original 30 qui tam actions, the Department of Justice elected to intervene in eight actions. HCA has disclosed that it is aware of additional qui tam actions that remain under seal and that it also believes there may be other sealed qui tam cases of which it is unaware.

     In December 2000, HCA entered into a series of agreements with the Criminal Division of the Department of Justice and various U.S. Attorneys’ Offices and with the Civil Division of the Department of Justice which resolved 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 DRG coding, outpatient laboratory billing and home health issues. These December 2000 agreements related only to conduct that was the subject of the various federal investigations and did 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 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.

     On December 18, 2002, HCA announced that it reached an understanding with the Department of Justice to settle, subject to certain conditions, the remaining litigation brought by the Department of Justice against HCA. The understanding provides that, in exchange for releases by the Department of Justice, HCA will pay the Department of Justice an additional $631 million. HCA announced that, in addition, it has also reached an agreement in principle with representatives of certain states to pay $17.5 million to state Medicaid agencies to resolve similar claims against HCA made by those states.

     HCA has agreed to indemnify us for any losses, other than consequential damages, arising from the 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 to make specified payments to us if any hospital owned by us 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. However, we 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 us. In addition, should HCA be unable to fulfill its obligations to the federal government, we could ultimately be held responsible for any settlement related to the former HCA hospitals operated by us. If indemnified matters were asserted successfully against us or any of our facilities, and HCA failed to meet its indemnification obligations, such an event could have a material adverse effect on our business, financial condition, results of operations or prospects.

     We cannot predict with accuracy the extent to which we may or may not continue to be affected by the ongoing investigations of HCA and the initiation of additional investigations, if any. These matters, if resulting in a

17

Table of Contents

successful claim against us, could have a material adverse effect on our business, financial condition, results of operations or prospects in future periods.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of the stockholders during the fourth quarter ended December 31, 2002.

18

Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     Our common stock is quoted on the Nasdaq National Market under the symbol “LPNT.” The following table shows the range of high and low sales prices for our common stock for the periods indicated, as reported by the Nasdaq National Market:

     On February 28, 2003, the last reported sales price for our common stock on the Nasdaq National Market was $21.21 per share. At February 28, 2003, there were 39,585,648 shares of our common stock held by 5,459 holders of record.

     We have never declared or paid dividends on our common stock. We intend to retain future earnings to finance the growth and development of our business and, accordingly, do not currently intend to declare or pay any dividends on our common stock. Our board of directors will evaluate our future earnings, results of operations, financial condition and capital requirements in determining whether to declare or pay cash dividends. Delaware law prohibits us from paying any dividends unless we have capital surplus or net profits available for this purpose. In addition, our credit facilities impose restrictions on our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

19

Table of Contents

Item 6. Selected Financial Data

     The following table contains selected financial data of our Company or a division of HCA, prior to the distribution, for, or as the end of, each of the five years ended December 31, 2002. The selected financial data are derived from our audited financial statements. Financial data for the year ended December 31, 1998 and for the period from January 1, 1999 through May 11, 1999 are derived from HCA. The timing of acquisitions and divestitures completed during 2000, 2001 and 2002 affect the comparability of the selected financial data. You should read this table in conjunction with the consolidated financial statements and related notes included elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

20

Table of Contents

(b)		Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(c)		Represents the average number of licensed beds weighted based on periods operated.
(d)		Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to our hospitals and is used by management and investors as a general measure of inpatient volume.
(e)		Equivalent admissions is used by management and investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions is computed by multiplying admissions (inpatient volume) by the sum gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation “equates” outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume.
(f)		Represents the average number of days admitted patients stay in our hospitals. With the exception of 2002, average length of stays have declined as a result of the continuing pressures from managed care and other payors to restrict admissions and reduce the number of days that are covered by the payors for certain procedures and by technological and pharmaceutical improvements.
(g)		Represents the total number of hospital based emergency room visits.
(h)		Outpatient surgeries are those surgeries that do not require admission to our hospitals.

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

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

Overview

     At December 31, 2002, we operated 28 general, acute care hospitals in the states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah, West Virginia and Wyoming. We generated $743.6 million in net revenues during 2002.

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, results of operations and cash flows. These factors include, but are not limited to:

	•		the highly competitive nature of the healthcare business, including the competition to recruit and retain general and specialized physicians;
	•		reduction in payments to healthcare providers by government and commercial third party payors, as well as cost-containment efforts of insurers and other payors;
	•		the ability to attract and retain qualified management and personnel, including physicians, nurses and clinical support personnel, consistent with our expectations and targets;
	•		failure to comply, or allegations of lack of compliance with, applicable laws and regulations;

21

Table of Contents

	•		the geographic concentration of our operations;
	•		inflationary pressures;
	•		the possibility of adverse changes in federal, state or local regulations affecting the healthcare industry;
	•		our ability to manage healthcare risks resulting from the delivery of patient care, claims and legal actions relating to professional liabilities and the lack of state and federal tort reform;
	•		our ability to acquire hospitals on favorable terms and to successfully complete budgeted capital improvements of our existing facilities;
	•		our ability to successfully integrate newly acquired facilities;
	•		uncertainty associated with compliance with 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 us, our hospitals and physicians who practice at our hospitals;
	•		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 and those that, if violated, could cause any of our facilities to lose its state license or its ability to receive payments under the Medicare, Medicaid and TRICARE programs;
	•		the ability to maintain and increase patient volumes and control the costs of providing services and supply costs;
	•		the potential adverse impact of government investigations and litigation involving the business practices of HCA (to the extent relating to periods prior to our formation) and of other healthcare providers (to the extent such investigations and litigation may affect us or our industry segment);
	•		the financial viability of third-party payors;
	•		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 as required under generally accepted accounting principles in the United States;
	•		changes in general economic conditions in the markets where our facilities are located and how employers provide healthcare coverage to their employees;
	•		changes in our liquidity or indebtedness; 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,

22

Table of Contents

future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.

Critical Accounting Policies and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. As further discussed in Note 1 to our consolidated financial statements, in preparing our financial statements, we make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting estimates are particularly sensitive because of their complexity and the possibility that future events affecting them may differ materially from our current judgments and estimates.

     The listing of critical accounting policies is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for our judgment regarding accounting policy. We believe that of our significant accounting policies, as discussed in Note 1 of the consolidated financial statements, the following involves a higher degree of judgment and complexity:

   (a) Allowance for Doubtful Accounts

     Our ability to collect outstanding receivables is critical to our results of operations and cash flows. The primary uncertainty lies with uninsured patient accounts and deductibles, co-payments or other amounts due from individual patients. Our allowance for doubtful accounts is estimated based primarily upon the age of patient accounts receivable, the patient’s economic inability to pay and the effectiveness of our collection efforts. We routinely monitor our accounts receivable balances and utilize historical collection experience to support the basis for our estimates of the provision for doubtful accounts. Significant changes in payor mix or business office operations could have a significant impact on our results of operations and cash flows. The allowance for doubtful accounts was $59.0 million and $109.1 million as of December 31, 2001 and 2002, respectively. This increase resulted primarily from the acquisition of five hospitals during 2002.

   (b) Allowance for Contractual Discounts

     We derive a significant portion of our revenues from Medicare, Medicaid and other payors that receive discounts from our standard charges. We must estimate the total amount of these discounts to prepare our financial statements. For the year ended December 31, 2002, Medicare, Medicaid and discounted plan patients accounted for 93.7% of our total gross revenues. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and are subject to interpretation and adjustment. We estimate the allowance for contractual discounts on a payor-specific basis given our interpretation of the applicable regulations or contract terms. However, the services we authorized and provided, and the resulting reimbursement, are often subject to interpretation. These interpretations sometimes result in payments that differ from our estimates. Additionally, updated regulations and contract renegotiations occur frequently necessitating continual review and assessment of the estimation process by management. Changes in estimates related to the allowance for contractual discounts affect net revenues reported in our results of operations.

   (c) Professional and General Liability Reserves

     Given the nature of our operating environment, we are subject to medical malpractice lawsuits and other claims. To mitigate a portion of this risk, we maintained insurance for individual malpractice claims exceeding $1.0 million for the years ended December 31, 2000 and 2001. For 2002, we increased our deductible to $10.0 million on individual malpractice claims. We lowered our deductible to $5.0 million on individual malpractice claims effective January 1, 2003. Our reserves for professional and general liability risks are based upon historical claims data, demographic factors, severity factors and other actuarial assumptions calculated by an independent actuary. This estimate is discounted to its present value using rates of 6.0%, 5.0% and 5.0% at December 31, 2000, 2001 and 2002, respectively. The rate changed to 5.0% in 2001 to reflect lower market rates experienced. The estimated

23

Table of Contents

accrual for professional and general liability claims could be significantly affected should current and future occurrences differ from historical claims trends. 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.

     Our reserve for professional and general liability risks was $15.9 million and $25.1 million at December 31, 2001 and 2002, respectively. Our total cost of professional and general liability coverage for 2000, 2001 and 2002 was approximately $8.2 million, $11.4 million and $12.9 million, respectively.

     We believe the estimates, judgments and assumptions used by us under “Allowance for Doubtful Accounts,” “Allowance for Contractual Discounts” and “Professional and General Liability Reserves” are reasonable, but these 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

     The key metrics we use internally to evaluate our revenues are equivalent admissions, which equates to volume, and revenues per equivalent admissions, which relates to pricing and acuity. The growth in outpatient revenues lowers our growth in revenues per equivalent admissions as revenues from outpatient services are generally lower than inpatient revenues. We continue to see the pressures from payors shifting to outpatient settings.

   Revenue/Volume Trends

     We anticipate our patient volumes and related revenues will 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 December 31, 2002, we recruited 339 physicians, of which 244 have been retained by us. Adding new physicians should help increase both inpatient and outpatient volumes which, in turn, should increase revenues. Approximately 58% 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.
	•		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 offset 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 91.5% and 92.2% of total admissions for 2001 and 2002, respectively. These payors receive significant discounts.
	•		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

24

Table of Contents

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 increased from 47.8% in 2001 to 49.8% in 2002.

Cost Containment

     We seek to control costs by, among other things, reducing labor costs by improving labor productivity and attempting to decrease the use of contract labor, when appropriate, 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. Total operating expenses decreased as a percentage of revenue from 78.8% in 2001 to 77.4% in 2002. 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 2002, there is no assurance that we can contain certain costs in 2003 and beyond. Due to the general shortage of nurses and medical technicians in the healthcare industry, we may experience an increase in salaries and benefits expense as we may be forced to hire additional contract health professionals or increase salaries to attract and retain our clinical employees.

     In addition, the healthcare industry has recently experienced an increase in the cost of all insurance lines, especially professional and general liability insurance. We currently have no information that would lead us to believe that this trend is only temporary in nature. Thus, there is no assurance that these costs will not have a material adverse effect on our future operating results.

     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 intensified 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

Acquisitions — 2002

     Effective December 1, 2002, we acquired Northwest Medical Center, a 71-bed acute care hospital located in Winfield, Alabama, and Burdick-West Medical Center, a 99-bed acute care hospital located in Haleyville, Alabama for an aggregate purchase price of approximately $29.0 million, including working capital. The combined historical annual revenues prior to our acquisition of these hospitals were approximately $38.0 million. We used our available cash to fund this acquisition. The allocation of the full purchase price had not been determined as of December 31, 2002. Unallocated purchase price of approximately $25.8 million is included in our consolidated balance sheet as of December 31, 2002, pending a final appraisal from an independent third party. In addition, the allocation of the purchase price is subject to settling amounts related to purchased working capital.

     Effective December 1, 2002, we acquired Logan General Hospital (now known as Logan Regional Medical Center), a 132-bed acute care hospital and Guyan Valley Hospital, a 19-bed critical access hospital both located in Logan, West Virginia for an aggregate purchase price of approximately $88.0 million, including working capital. The combined historical annual revenues prior to our acquisition of these hospitals were approximately $75.0 million. We used our available cash to fund this acquisition. The allocation of the full purchase price had not been determined as of December 31, 2002. Unallocated purchase price of approximately $90.2 million is included in our consolidated balance sheet as of December 31, 2002, pending a final appraisal from an independent third party. In addition, the allocation of the purchase price is subject to settling amounts related to purchased working capital.

     Effective October 3, 2002, we acquired Russellville Hospital, a 100-bed acute care hospital located in Russellville, Alabama, for a total purchase price of approximately $20.1 million, including working capital. The historical annual revenues prior to our acquisition of this hospital was approximately $27.0 million. We used our

25

Table of Contents

available cash to fund this acquisition. The allocation of the full purchase price had not been determined as of December 31, 2002. Unallocated purchase price of approximately $20.1 million is included in our consolidated balance sheet as of December 31, 2002, pending a final appraisal from an independent third party.

     Our motivation to acquire Northwest Medical Center, Burdick-West Medical Center and Russellville Hospital was to create synergies due to the close proximity of these hospitals, such as sharing call coverage between recruited physicians and sharing administrative functions. These synergies should reduce costs and therefore increase shareholder value. We acquired Logan Regional Medical Center and Guyan Valley Hospital to enter into the West Virginia market. We intend to expand services and enhance the quality of care delivered in Logan and southern West Virginia. This will enhance our long-term strategy of delivering high-quality healthcare to the communities we serve.

     We purchased the outstanding 30% limited partner interest in Dodge City Healthcare Group, L.P., the entity that owns and operates 110-bed Western Plains Regional Hospital in Dodge City, Kansas, for $25 million in October 2002. We used our available cash to fund this acquisition. Under the terms of the purchase agreement, the former limited partners have agreed not to compete with the hospital for five years. The non-compete agreements have been valued by an independent third party at $4.0 million and will be amortized over the life of the agreement.

Acquisitions — 2001

     Effective December 1, 2001, we acquired Ville Platte Medical Center, a 116-bed acute care hospital located in Ville Platte, Louisiana for approximately $12.1 million in cash, including working capital and the assumption of long-term liabilities of approximately $2.6 million. We used our available cash to fund this acquisition.

     Effective October 1, 2001, we acquired Athens Regional Medical Center in Athens, Tennessee for approximately $19.9 million in cash, including working capital. We used our available cash to fund this acquisition.

     Effective April 1, 2001, we purchased a diagnostic imaging center in Palatka, Florida for $5.8 million in cash, including working capital. The funds used for the acquisition were obtained from our available cash.

     Effective January 2, 2001, we entered into a two-year lease to operate Bluegrass Community Hospital, a 25-bed critical access hospital located in Versailles, Kentucky, which we mutually agreed to extend until December 31, 2003. We have an option to extend the lease through 2014.

Acquisitions — 2000

     Effective July 1, 2000, we acquired Lander Valley Medical Center in Lander, Wyoming for a purchase price of $33.0 million in cash, including working capital.

     Effective June 16, 2000, we acquired Putnam Community Medical Center in Palatka, Florida for approximately $49.4 million in cash, including working capital.

     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.

26

Table of Contents

Operating Results Summary

     The following tables present summaries of results of operations for the three months ended December 31, 2001 and 2002 and for the years ended December 31, 2000, 2001 and 2002 (dollars in millions):