HCA INC/TN - 10-Q Quarterly Report


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


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

(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock of the latest practicable date.

HCA Inc. is a holding company whose affiliates own and operate hospitals and related health care entities. The term “affiliates” includes direct and indirect subsidiaries of HCA Inc. and partnerships and joint ventures in which such subsidiaries are partners. At June 30, 2003, these affiliates owned and operated 184 hospitals, 76 freestanding surgery centers and provided extensive outpatient and ancillary services. Affiliates of HCA Inc. are also partners in 50/50 joint ventures that own and operate six hospitals and four freestanding surgery centers which are accounted for using the equity method. The Company’s facilities are located in 23 states, England and Switzerland. The terms “HCA” or the “Company,” as used in this Quarterly Report on Form 10-Q refer to HCA Inc. and its affiliates unless otherwise stated or indicated by context.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The majority of the Company’s expenses are “cost of revenue” items. Operating results for the quarter and six months ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

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

HCA applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock benefit plans. Accordingly, no compensation cost has been recognized for HCA’s stock options granted under the plans because the exercise prices for options granted were equal to the quoted market prices on the option grant dates and all option grants were to employees or directors.

HCA determined the pro forma net income and earnings per share as if compensation cost for HCA’s employee stock option and stock purchase plans had been determined based upon fair values at the grant dates. These pro forma amounts for the respective quarters and six months ended June 30, 2003 and 2002 are as follows (dollars in millions, except per share amounts):

The weighted average fair values of HCA’s stock options granted for the quarters ended June 30, 2003 and 2002 were $11.24 and $15.32 per share, respectively. For the six months ended June 30, 2003 and 2002 the weighted average fair values were $13.52 and $13.30 per share, respectively. The fair values were estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

The expected volatility is derived using weekly data drawn from the seven years preceding the date of grant. The risk-free interest rate is the approximate yield on four-year United States Treasury Strips on the date of grant. The expected life is an estimate of the number of years the option will be held before it is exercised. The valuation model was not adjusted for nontransferability, risk of forfeiture or the vesting restrictions of the options, all of which would reduce the value if factored into the calculation.

The amount of the provision for doubtful accounts is based upon management’s assessment of historical and expected net collections, business and economic conditions, trends in Federal and state governmental health care coverage and other collection indicators. Management relies on detailed reviews of historical collections and write-offs at facilities that represent a majority of HCA’s revenues and accounts receivable (the “hindsight analysis”). The Company has previously performed the hindsight analysis on an annual basis. The results of the hindsight analysis that was completed during the second quarter of 2003 indicated an increasing proportion of accounts receivable being comprised of uninsured accounts and the collectability of this category of accounts had deteriorated. In response to the hindsight results and the noted trends, the Company increased the estimated allowance for doubtful accounts by $106 million during the quarter ended June 30, 2003. The Company has decided to increase the frequency of the hindsight analysis and perform a quarterly, rolling twelve-month hindsight analysis in future periods to enable the Company to react more quickly to trends affecting the collectability of the accounts receivable. Adverse changes in general economic conditions, business office operations, payer mix, or trends in Federal or state governmental health care coverage could affect HCA’s collection of accounts receivable, cash flows and results of operations.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51” (“FIN 46”). FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003,

regardless of when the variable interest entity was established. The Company does not expect this statement to have a material impact on its results of operations or financial position.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”). SFAS 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement No. 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In the case of derivatives that contain a financing element, SFAS 149 requires the derivative counterparty who is considered the “borrower” in the derivative to report all of the derivative’s cash inflows and outflows as “financing activities” in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and hedging relationships designated after June 30, 2003. HCA does not expect this statement to have a material impact on its results of operation or financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). This statement generally requires liability classification for two broad classes of financial instruments. Under SFAS 150, instruments that represent, or are indexed to, an obligation to buy back the issuer’s shares, regardless whether the instrument is settled on a net-cash or gross physical basis are required to be classified as liabilities. Obligations that can be settled in shares, but either derive their value predominately from some other underlying, have a fixed value, or have a value to the counterparty that moves in the opposite direction as the issuer’s shares, are also required to be classified as liabilities under this statement. SFAS 150 must be applied immediately to instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. HCA does not expect this statement to have a material impact on its results of operation or financial position.

Commencing in 1997, HCA was the subject of governmental investigations and litigation relating to its business practices. The governmental investigations included activities for certain entities for periods prior to their acquisition by the Company and activities for certain entities that have been divested. As part of the investigation, the United States intervened in a number of qui tam actions brought by private parties.

The investigation was concluded through a series of agreements executed in 2000 and 2003. In December 2000, HCA entered into a Plea Agreement with the Criminal Division of the Department of Justice (the “DOJ”) and various U.S. Attorneys’ offices (the “Plea Agreement”) and a Civil and Administrative Settlement Agreement with the Civil Division of the DOJ (the “Civil Agreement”). The agreements 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. The civil issues that were not covered by the Civil Agreement included claims related to physician relations, cost reports and wound care issues. The Civil Agreement was approved by the Federal District Court of the District of Columbia in August 2001. HCA paid the government $840 million (plus $60 million of accrued interest), as provided by the Civil Agreement and Plea Agreement, during 2001. HCA also entered into a Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the Department of Health and Human Services.

(the “DOJ Agreement”). The DOJ Agreement received court approval in July 2003, and HCA paid the DOJ $641 million (including accrued interest of $10 million) during July 2003. The DOJ Agreement does not affect qui tam cases in which the government has not intervened. In addition, the CIA previously entered into by the Company remains in effect. The Company also finalized an agreement with a negotiating team representing states that may have claims against the Company. Under this agreement HCA paid $17.7 million in July 2003 to state Medicaid agencies to resolve these claims. The Company also paid $33 million for reasonable legal fees of the private parties. In connection with the DOJ Agreement, HCA recorded a pretax charge of $603 million ($418 million after-tax) in the fourth quarter of 2002.

Upon the Company making the payment provided under the DOJ Agreement, the Company no longer has any remaining obligation to maintain letters of credit with the DOJ.

During June 2003, HCA announced that the Company and the Centers for Medicare and Medicaid Services (“CMS”) had signed an agreement, documenting the understanding announced in March 2002, to resolve all Medicare cost report, home office cost statement and appeal issues between HCA and CMS (the “CMS Agreement”) for cost report periods ended before August 1, 2001. As a result of the CMS Agreement, HCA paid CMS $250 million in June 2003. HCA recorded a pretax charge of $260 million ($165 million after-tax) consisting of the accrual of $250 million for the settlement payment and the write-off of $10 million of net Medicare cost report receivables. This charge was recorded in the consolidated income statement for the year ended December 31, 2001.

HCA remains the subject of a December 1997 formal order of investigation by the Securities and Exchange Commission (the “SEC”). HCA understands that the investigation includes the anti-fraud, insider trading, periodic reporting and internal accounting control provisions of the Federal securities laws. The CIA previously entered into by the Company remains in effect.

If HCA was found to be in violation of Federal or state laws relating to Medicare, Medicaid or similar programs or breach of the CIA, HCA could be subject to substantial monetary fines, civil and criminal penalties and/or exclusion from participation in the Medicare and Medicaid programs. Any such sanctions or expenses could have a material adverse effect on HCA’s financial position, results of operations and liquidity. See Note 10 — Contingencies and Part II, Item 1: Legal Proceedings.

During the respective quarters and six months ended June 30, 2003 and 2002, HCA recorded $1 million and $13 million, and $5 million and $30 million, respectively, of professional fees in connection with the governmental investigations. The professional fees related to investigations represent incremental legal and accounting expenses that are being recognized on the basis of when the costs are incurred.

During the first six months of 2003, HCA recognized a net pretax gain of $75 million ($43 million after-tax) on the sales of two leased hospitals and one consolidating hospital and a working capital settlement for a sale completed in 2002. Proceeds from the sales were used to repay bank borrowings.

The following is a summary of acquisitions consummated during the six months ended June 30, 2003 and 2002 (dollars in millions):

The purchase price paid in excess of the fair value of identifiable net assets of acquired entities aggregated $518 million in 2003 and $21 million in 2002. The pro forma effect of these acquisitions on the Company’s results of operations for the periods prior to the respective acquisition dates was not significant.

During April 2003, HCA completed the acquisition of the Health Midwest hospital system in Kansas City, and the results of operations of the Health Midwest facilities were consolidated with those of HCA beginning April 1, 2003. Pursuant to the transaction, HCA will spend or commit to spend $450 million in capital expenditures over the next five years.

During the second quarter of 2003, HCA announced plans to discontinue activities associated with the internal development of a new patient accounts receivable management system resulting in a non-cash, pretax charge of $130 million ($79 million after-tax). The impairment charge affected the “property and equipment” asset category by $105 million and the “other accrued expenses” category by $25 million and the “corporate and other” operating segment.

During the second quarter of 2002, HCA management decided to delay the development and implementation of certain financial and procurement information system components of its enterprise resource planning program to concentrate and direct efforts to the patient accounting and human resources information system components, resulting in a non-cash, pretax charge of $19 million. HCA reduced the carrying value for certain capitalized costs associated with the information system components that have been delayed. This decision to delay these activities should not have a significant impact on HCA’s operations or cash flows for future periods. The impairment charge affected the “property and equipment” asset category, and the “corporate and other” operating segment.

HCA is currently contesting before the Appeals Division of the IRS, the United States Tax Court (the “Tax Court”) the United States Court of Federal Claims and the United States Court of Appeals for the Sixth Circuit, certain claimed deficiencies and adjustments proposed by the IRS in conjunction with its examinations of HCA’s 1994-1998 Federal income tax returns, Columbia Healthcare Corporation’s (“CHC”) 1993 and 1994 Federal income tax returns, HCA-Hospital Corporation of America, Inc.’s (“Hospital Corporation of America”) 1987 through 1988 and 1991 through 1993 Federal income tax returns and

Healthtrust, Inc. — The Hospital Company’s (“Healthtrust”) 1990 through 1994 Federal income tax returns. The disputed items include the amount of gain or loss recognized on the divestiture of certain non-core business units in 1998 and the allocation of costs among fixed assets and goodwill in connection with certain hospitals acquired by HCA in 1996. The IRS is claiming an additional $331 million in income taxes and interest through June 30, 2003.

During 2002, the IRS began an examination of HCA’s 1999 through 2000 Federal income tax returns. HCA is presently unable to estimate the amount of any additional income tax and interest that the IRS may claim upon completion of this examination.

Management believes that adequate provisions have been recorded to satisfy final resolution of the disputed issues. Management believes that HCA, CHC, Hospital Corporation of America and Healthtrust properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS during previous examinations and that final resolution of these disputes will not have a material adverse effect on the results of operations or financial position.

Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options and other stock awards, using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share for the quarters and six months ended June 30, 2003 and 2002 (dollars in millions, except per share amounts and shares in thousands):

A summary of the insurance subsidiary’s investments at June 30, 2003 follows (dollars in millions):

The fair value of investment securities is generally based on quoted market prices.

At June 30, 2003, the investments of HCA’s insurance subsidiary were classified as “available for sale.” The aggregate common stock investment is comprised of 378 equity positions at June 30, 2003, with 303 positions reflecting unrealized gains and 75 positions reflecting unrealized losses (none of the individual unrealized loss positions exceed $2 million). None of the equity positions with unrealized losses at June 30, 2003 represent situations where there is a continuous decline from cost for more than six months. The equity positions (including those with unrealized losses) at June 30, 2003, are not concentrated in any particular industries.

HCA’s revolving credit facility (the “Credit Facility”) is a $1.75 billion agreement expiring April 2006. As of June 30, 2003, HCA had $905 million outstanding under the Credit Facility.

As of June 30, 2003, interest is payable generally at either LIBOR plus 0.7% to 1.5% (depending on HCA’s credit ratings), the prime lending rate or a competitive bid rate. The Credit Facility contains customary covenants which include (i) a limitation on debt levels, (ii) a limitation on sales of assets, mergers and changes of ownership and (iii) maintenance of minimum interest coverage ratios. As of June 30, 2003, HCA was in compliance with all such covenants.

In February 2003, HCA issued $500 million of 6.25% notes due February 15, 2013. Proceeds from the notes were used for general corporate purposes. Of the $1.5 billion available under HCA’s shelf registration statement filed in May 2002, $1.0 billion has been issued at June 30, 2003.

In July 2002, HCA announced an authorization to repurchase up to 12 million shares of its common stock. During 2002, HCA made open market purchases of 6.2 million shares for $282 million. During the first quarter of 2003, HCA made open market purchases of 3.7 million shares for $148 million. During the second quarter of 2003, HCA made open market purchases of 2.1 million shares for $66 million, which completed the repurchases under this authorization.

In April 2003, HCA announced an authorization to repurchase up to $1.5 billion of its common stock. During the second quarter of 2003, HCA made open market purchases under this authorization of 10.2 million shares for $328 million.

In connection with its share repurchase programs, HCA entered into a Letter of Credit Agreement with the DOJ in 1999. As part of the agreement, HCA provided the government with letters of credit totaling $1 billion. As provided under the Civil Agreement with the government, as discussed in Note 2 — Investigations and Settlement of Certain Government Claims, the letters of credit were reduced from $1 billion to $250 million upon payment of the Civil Settlement. Upon the Company making the payments in July 2003 provided under the DOJ Agreement, the Company no longer has any remaining obligation to maintain letters of credit with the DOJ.

Various lawsuits, claims and legal proceedings (see Note 2 — Investigations and Settlement of Certain Government Claims and Part II, Item 1: Legal Proceedings, for descriptions of the ongoing government investigations and other legal proceedings) have been and are expected to be instituted or asserted against HCA. While the amounts claimed may be substantial, the ultimate liability cannot be determined or reasonably estimated at this time due to the considerable uncertainties that exist. Therefore, it is possible that results of operations, financial position and liquidity in a particular period could be materially, adversely affected upon the resolution of certain of these contingencies.

HCA is subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants may seek punitive damages against HCA, which may not be covered by insurance. It is management’s opinion that the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on HCA’s results of operations or financial position.

The components of comprehensive income, net of related taxes, for the quarters and six months ended June 30, 2003 and 2002 are as follows (in millions):

The components of accumulated other comprehensive income, net of related taxes are as follows (in millions):

HCA operates in one line of business, which is operating hospitals and related health care entities. During the quarters ended June 30, 2003 and 2002, approximately 27% and 28%, respectively, and during both the six months ended June 30, 2003 and 2002, approximately 28% of the Company’s revenues related to patients participating in the Medicare program.

HCA’s operations are structured into two geographically organized groups: the Eastern Group includes 91 consolidating hospitals located in the Eastern United States and the Western Group includes 85 consolidating hospitals and six non-consolidating hospitals included in 50/50 joint ventures located in the Western United States. These two groups represent HCA’s core operations and are typically located in urban areas that are characterized by highly integrated facility networks. HCA also operates eight consolidating hospitals in England and Switzerland and these facilities are included in the Corporate and other group.

Adjusted segment EBITDA is defined as income before depreciation and amortization, interest expense, gains on sales of facilities, impairment of long-lived assets, investigation related costs, minority interests and income taxes. HCA uses adjusted segment EBITDA as an analytical indicator for purposes of allocating resources to geographic areas and assessing their performance. Adjusted segment EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. Adjusted segment EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from adjusted segment EBITDA are significant components in understanding and assessing financial performance. Because adjusted segment EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, adjusted segment EBITDA as presented may not be comparable to other similarly titled measures of other companies. The geographic distributions of HCA’s revenues, equity in earnings of affiliates, adjusted segment EBITDA and depreciation and amortization, as well as a reconciliation of adjusted segment EBITDA to income before minority interests and income taxes

for the quarters and six months ended June 30, 2003 and 2002, are summarized in the following table (dollars in millions):

This Quarterly Report on Form 10-Q contains disclosures which contain “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 like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “initiative” or “continue.” These forward-looking statements are based on the current plans and expectations of HCA and are subject to a number of known and unknown uncertainties and risks, many of which are beyond HCA’s control, that could significantly affect current plans and expectations and HCA’s future financial position and results of operations. These factors include, but are not limited to, (i) the highly competitive nature of the health care business, (ii) the efforts of insurers, health care providers and others to contain health care costs, (iii) possible changes in the Medicare and Medicaid programs (including changes to Medicare outlier payments) that may impact reimbursements to health care providers and insurers, (iv) the ability to achieve expected levels of patient volumes and control the costs of providing services, (v) changes in Federal, state or local regulations affecting the health care industry, (vi) the possible enactment of Federal or state health care reform, (vii) the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical support personnel, (viii) liabilities and other claims asserted against HCA, (ix) fluctuations in the market value of HCA’s common stock, (x) changes in accounting practices, (xi) changes in general economic conditions including growing numbers of uninsured and unemployed patients, (xii) future divestitures which may result in additional charges, (xiii) changes in revenue mix and the ability to enter into and renew managed care provider arrangements on acceptable terms, (xiv) the availability and terms of capital to fund the expansion of the Company’s business, (xv) changes in business strategy or development plans, (xvi) delays in receiving payments, (xvii) the ability to develop and implement the financial enterprise resource planning (“ERP”) information system within the expected time and cost projections and, upon implementation, to realize the expected benefits and efficiencies, (xviii) the outcome of pending and any future tax audits, appeals, and litigation associated with HCA’s tax positions, (xix) the outcome of HCA’s continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures and HCA’s corporate integrity agreement with the government, (xx) the ability to complete and the impact of the share repurchase program, (xxi) the ability to successfully integrate the operations of Health Midwest and fund expected capital improvements, (xxii) the collectibility of uninsured accounts and deductible and co-pay amounts, (xxiii) the impact of the charity care and self-pay discounting policy changes, and (xxiv) other risk factors detailed in the Company’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission (“SEC”). As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

relations, cost reports and wound care issues. The Civil Agreement was approved by the Federal District Court of the District of Columbia in August 2001. HCA paid the government $840 million (plus $60 million of accrued interest), as provided by the Civil Agreement and Plea Agreement, during 2001. HCA also entered into a Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the Department of Health and Human Services.

The remaining aspects of the investigation were resolved during 2003. In June 2003, HCA announced that the Company and the Civil Division of the DOJ had signed agreements whereby the United States would dismiss the various claims it had brought related to physician relations, cost reports and wound care issues (the “DOJ Agreement”). The DOJ Agreement received court approval in July 2003, and HCA paid the DOJ $641 million (including accrued interest of $10 million) during July 2003. The DOJ Agreement does not affect qui tam cases in which the government has not intervened. In addition, the CIA previously entered into by the Company remains in effect. The Company also finalized an agreement with a negotiating team representing states that may have claims against the Company. Under this agreement HCA paid $17.7 million in July 2003 to state Medicaid agencies to resolve these claims. The Company also paid $33 million for reasonable legal fees of the private parties. In connection with the DOJ Agreement, HCA recorded a pretax charge of $603 million ($418 million after-tax) in the fourth quarter of 2002.

Upon the company making the payment provided under the DOJ Agreement, the Company no longer has any remaining obligation to maintain letters of credit with the DOJ.

During June 2003, HCA announced that the Company and the Centers for Medicare and Medicaid Services (“CMS”) had signed an agreement, documenting the understanding announced in March 2002, to resolve all Medicare cost report, home office cost statement and appeal issues between HCA and CMS (the “CMS Agreement”) for cost report periods ended before August 1, 2001. As a result of the CMS Agreement, HCA paid CMS $250 million in June 2003. HCA recorded a pretax charge of $260 million ($165 million after-tax), consisting of the accrual of $250 million for the settlement payment and the write-off of $10 million of net Medicare cost report receivables. This charge was recorded in the consolidated income statement for the year ended December 31, 2001.

If HCA was found to be in violation of Federal or state laws relating to Medicare, Medicaid or similar programs or breach of the CIA, HCA could be subject to substantial monetary fines, civil and criminal penalties and/or exclusion from participation in the Medicare and Medicaid programs. Any such sanctions or expenses could have a material adverse effect on HCA’s financial position, results of operation and liquidity. See Note 10 — Contingencies and Part II, Item 1: Legal Proceedings.

HCA’s primary objective is to provide the communities it serves a comprehensive array of quality health care services in the most cost-effective manner and consistent with HCA’s ethics and compliance program, governmental regulations and guidelines and industry standards. HCA also seeks to enhance financial performance by increasing utilization of its facilities and improving operating efficiencies. To achieve these objectives, HCA pursues the following strategies:


	•	Emphasize a “patients first” philosophy: The foundation of HCA is putting patients first and providing quality health care services in the communities HCA serves. HCA continuously updates and implements quality assurance procedures to monitor level of care and patient safety issues. HCA has


		instituted a number of patient safety initiatives, including bar coding, computerized physician order entry and quality audits, and identifies best practices in its many health care facilities and shares those practices throughout its network of hospitals and health care facilities to help achieve better outcomes for patients.

	•	Commitment to Ethics and Compliance: HCA is committed to a values-based corporate culture that prioritizes the care and improvement of human life. The values highlighted by HCA’s corporate culture — compassion, honesty, integrity, fairness, loyalty, respect and kindness — are the cornerstone of HCA. To reinforce HCA’s dedication to these values and to ensure integrity in all that it does, HCA has developed and implemented a comprehensive ethics and compliance program that articulates a high set of values and behavioral standards. HCA believes that this program reinforces the dedication to providing excellent patient care.

	•	Focus on strong assets and invest capital in select, core communities: HCA focuses on communities where it is, or can be, the number one or number two health care provider and which are typically located in urban areas characterized by highly integrated health care facility networks. HCA intends to continue to optimize core assets through capital expenditures and selected acquisitions and divestitures.

	•	Develop comprehensive local health care networks with a broad range of health care services: HCA seeks to operate each of its facilities as part of a network with other health care facilities that HCA’s affiliates own or operate within a common region. This should enable these local health care networks to effectively contract with managed care and other payers, and attract and serve patients and physicians.

	•	Grow through increased patient volume, expansion of specialty services and emergency rooms and selective acquisitions: HCA plans capital spending to increase bed capacity, provide new or expanded services, and provide renovated and expanded emergency rooms, operating rooms, women’s services, imaging, oncology, open-heart areas and intensive and critical care units.

	•	Improve operating efficiencies through enhanced cost management and resource utilization, and the implementation of shared services and other initiatives: HCA has initiated several measures designed to improve the financial performance of its facilities. To address labor costs, HCA implemented a best practices initiative that provides HCA’s hospitals with strategies to improve recruiting, compensation programs and productivity; implemented various leadership and career development programs; and created an internal contract labor agency that provides for improved quality at a reduced cost. To curtail supply costs, HCA formed a group purchasing organization that allows the achievement of better pricing in negotiating purchasing and supply contracts. In addition, as HCA grows in select core markets, the benefits should continue to be realized from economies of scale, including supply chain efficiencies and volume discount cost savings. HCA expects to be able to reduce operating costs and be better positioned to work with health maintenance organizations, preferred provider organizations and employers, by sharing certain services among several facilities in the same market through the consolidation of hospitals’ back office functions such as billings and collections and standardizing and upgrading financial and human resources systems (ERP).

	•	Recruit, develop and maintain relationships with physicians: HCA actively recruits physicians to enhance patient care and fulfill the needs of the communities it serves. HCA believes that recruiting and retaining quality physicians is essential to being a premier provider of health care services.

	•	Streamline and decentralize management, consistent with HCA’s local focus: HCA’s strategy to streamline and decentralize management structure affords management of HCA’s facilities greater flexibility to make decisions that are specific to the respective local communities. This operating structure creates a more nimble, responsive organization.


	•	Effectively allocate capital to maximize return on investments: HCA maintains and replaces equipment, renovates and constructs replacement facilities and adds new services to increase the attractiveness of its hospitals and other facilities to patients and physicians. In addition, HCA evaluates acquisitions that complement its strategies and assesses opportunities to enhance stockholder value, including repayment of indebtedness and stock repurchases.

The collection of outstanding receivables from Medicare, managed care payers, other third-party payers and patients is HCA’s primary source of cash and is critical to the Company’s operating performance. The primary collection risks relate to the uninsured patient accounts and patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and co-payments) remain outstanding. Because HCA does not pursue collection of amounts related to patients that meet the Company’s guidelines to qualify as charity care, they are not reported in revenues and do not have an impact on the provision for doubtful accounts. The revenues associated with uninsured patients that do not meet the Company’s current guidelines to qualify as charity care are generally reported in revenues at gross charges. In the first quarter of 2003, the Company announced that patients treated at an HCA wholly-owned hospital for non-elective care who have income at or below 200% of the Federal poverty level are eligible for charity care, a standard HCA estimates that 70% of its hospitals were previously using. The Federal poverty level is established by the Federal government and is based on income and family size. In the third or fourth quarter of 2003, HCA expects to implement a sliding scale of discounts for uninsured patients treated at an HCA wholly-owned hospital for non-elective care with income between 200% and 400% of the Federal poverty level. HCA received conceptual approval during the second quarter of 2003 from CMS and one of its Medicare fiscal intermediaries that the program would not adversely affect HCA’s payments from the Medicare program. HCA believes approvals from the remaining fiscal intermediaries are forthcoming. When fully implemented, the revised charity care and self-pay discounting policy changes will reduce both revenues and the provision for doubtful accounts.

HCA’s revenues depend upon inpatient occupancy levels, the ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charge and negotiated payment rates for such services.

Hospital volumes appear to be adversely impacted by several factors including general economic softness, higher unemployment levels in several key markets, increased co-payments and deductibles, physician issues related to increases in costs of physician malpractice insurance and various competitive pressures in certain markets. The operations and the volumes during the second quarter of 2003 also reflect the completed acquisition of eleven hospitals in Kansas City. Admissions for the second quarter of 2003 increased 4.5% compared to the second quarter of 2002 while same facility admissions, which excludes the hospitals acquired in Kansas City in April 2003, increased 0.6% in the second quarter of 2003 compared to the second quarter of 2002.

Admissions related to Medicare, managed care and other discounted plans, and Medicaid and self pay for the quarters and six months ended June 30, 2003 and 2002 are set forth below.

Same facility outpatient surgeries declined 3.6% in the second quarter of 2003 when compared to the same quarter of 2002. Important factors affecting outpatient surgeries were increased competition from physician owned specialty hospitals and physician owned freestanding surgery centers and physician issues related to physicians relocating or retiring due to rising malpractice insurance rates for physicians.

Managed care plan provisions that are structured to influence patients to utilize outpatient or alternative delivery services as well as competition from physician owned specialty hospitals or freestanding surgery centers are expected to present ongoing challenges. To maintain and improve its operating margins in future periods, HCA must increase patient volumes while controlling the cost of providing services.

Management believes that the proper response to these challenges includes the delivery of a broad range of quality health care services to physicians and patients, with operating decisions being made by the local management teams and local physicians, and a focus on reducing operating costs through implementation of its shared services initiatives. HCA also expects to increase, consistent with applicable laws, its participation in the development of physician partnerships for outpatient services in selected markets.

HCA’s health care facilities’ gross charges typically do not reflect what the facilities are actually paid. HCA’s health care facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from gross charges. HCA’s facilities have experienced revenue growth due to changes in patient mix and favorable pricing trends. HCA has experienced increases in same facility revenue per equivalent admission over the prior period of 7.5% and 8.4%, for the quarters ended June 30, 2003 and 2002, respectively, and increases of 8.7% and 8.8% for the six months ended June 30, 2003 and 2002, respectively. There can be no assurance that HCA will continue to receive these levels of increases in the future. These increases were the result of renegotiating and renewing

certain managed care contracts on more favorable terms, shifts of managed care admissions to more favorable plans and improved reimbursement from the government.

The second quarter 2003 moderation in the rate of increase in same facility revenue per equivalent admission compared to prior periods reflects the Company’s roll out of a portion of the charity policies that HCA announced in March 2003. Beginning in the second quarter of 2003, patients treated at an HCA wholly-owned hospital for non-elective care who have income at or below 200% of the Federal poverty level are eligible for charity care, a standard HCA estimates that 70% of its hospitals were previously using. In the third or fourth quarter of 2003, HCA expects to implement a sliding scale of discounts for uninsured patients treated at an HCA wholly-owned hospital for non-elective care with income between 200% and 400% of the Federal poverty level. HCA received conceptual approval from CMS and one of the Company’s Medicare fiscal intermediaries that the program would not adversely affect HCA’s payments from the Medicare program. HCA believes approvals from the remaining fiscal intermediaries is forthcoming. When fully implemented, the revised charity and self-pay discounting policies are expected to reduce annual earnings before taxes by approximately $25 million.

The approximate percentages of inpatient revenues of the Company’s facilities related to Medicare, managed care and other discounted plans, and Medicaid and self pay for the quarters and six months ended June 30, 2003 and 2002 are set forth below:

HCA receives a significant portion of its revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. Future legislation or other changes or interpretation of government health programs could have an adverse effect on reimbursement from the government.

Excluding the hospitals included in the Kansas City acquisition, HCA recorded $63 million and $77 million of revenues related to Medicare operating outlier cases for the quarters ended June 30, 2003 and 2002, respectively. These amounts represent 1% and 2% of revenues and 4% and 6% of Medicare revenues for the quarters ended June 30, 2003 and 2002, respectively. There can be no assurances that HCA will continue to receive these levels of Medicare operating outlier payments in future periods. Based on the Company’s estimates, future Medicare operating outlier payments will be materially, adversely affected by (a) the final regulations on outlier payments published by CMS in June 2003; and (b) the final regulation published in August 2003 for changes to the hospital inpatient prospective payment system, including the threshold for outlier payments for the Federal fiscal year beginning October 1, 2003. The outlier threshold for the 2004 Federal fiscal year has been set by CMS and has decreased to $31,000 as compared to $33,560 for the 2003 Federal fiscal year. As a result of these changes and assuming the Company does not experience changes in Medicare patient acuity levels, then the Company’s monthly revenue from operating outlier payments may be reduced by up to $12 million.

The following are comparative summaries of results from operations for the quarters and six months ended June 30, 2003 and 2002 (dollars in millions, except per share amounts):


(a)	Income and earnings per share amounts for 2001 are based upon adjusted net income (excludes goodwill amortization, net of taxes).
(b)	Represents the total number of patients admitted to the Company’s hospitals and is used by management and certain investors as a general measure of inpatient volume.
(c)	Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation “equates” outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume.
(d)	Same facility information excludes the operations of hospitals and their related facilities which were either acquired or divested during the current and prior period.

Income before income taxes decreased 32.9% from $581 million in the second quarter of 2002 to $390 million in the second quarter of 2003. The results for the second quarter of 2003 include an increase in the allowance for doubtful accounts of $106 million and an impairment of long-lived assets of $130 million.

In April 2003, HCA completed the acquisition of eleven hospitals in Kansas City. During the second quarter of 2003, the Kansas City hospitals that were acquired produced revenues of $232 million and a loss before income taxes of $13 million. The Kansas City hospitals are included in the Company’s Western Group.

For the second quarter of 2003, admissions increased 4.5% and same facility admissions increased by 0.6% compared to the same period last year. Outpatient surgical volumes increased 1.5%, but decreased 3.6% on a same facility basis. The weaker than expected volumes were the result of general economic conditions in certain markets, increased co-payments and deductibles, physician issues related to physicians relocating or retiring due to rising physician malpractice insurance rates and various competitive pressures in certain markets.

Salaries and benefits decreased, as a percentage of revenues, to 39.8% in the second quarter of 2003 from 40.0% in the same quarter of 2002. During the second quarter of 2003, significant steps were taken to ensure that hospitals were effectively matching labor with hospital volume trends.

Supplies remained flat as a percentage of revenues. Rising supply costs, particularly in the pharmaceutical, orthopedic and cardiac areas, continue to be a challenge for the Company.

Other operating expenses, as a percentage of revenues, increased to 17.0% in the second quarter of 2003 compared to 16.8% in the second quarter of 2002, due primarily to other operating expenses being higher, as a percent of revenues, for the acquired Kansas City hospitals. Other operating expenses is primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and non-income taxes.

Provision for doubtful accounts, as a percentage of revenues, increased to 10.6% in the second quarter of 2003 from 7.6% in the second quarter of 2002. During the second quarter of 2003, the provision for doubtful accounts was increased by $106 million based upon the results of the Company’s customary “hindsight analysis”, in which the Company’s accounts receivable during a previous twelve-month period are analyzed. The historical “look back” results, along with considerations of current economic trends and collection indicators, are used as the basis for the Company’s estimate of the appropriate amount of allowance for doubtful accounts for its current accounts receivable. The Company will begin updating the hindsight analysis on a quarterly basis in the future. Once the charity care and self-pay discounting policy changes are fully implemented, the Company expects an annual reduction in net revenues of approximately $325 million to $375 million, as well as a corresponding reduction to the provision for doubtful accounts of $300 million to $350 million.

Equity in earnings of affiliates decreased from $55 million in the second quarter of 2002 to $53 million in the second quarter of 2003 due to decreases in operating results at joint ventures accounted for under the equity method of accounting.

Depreciation and amortization decreased, as a percentage of revenues, to 5.1% in the second quarter of 2003 from 5.2% in the second quarter of 2002.

Interest expense increased to $123 million in the second quarter of 2003 from $108 million in the second quarter of 2002. The average of the beginning and ending debt balances for the Company increased from $7.1 billion for the second quarter of 2002 to $8.0 billion for the second quarter of 2003.

During the second quarter of 2003, HCA announced plans to discontinue activities associated with the internal development of a new patient accounts receivable management system resulting in a non-cash, pretax charge of $130 million. The Company is now redirecting efforts in this area to the implementation of enhancements to its existing patient accounting system. During the second quarter of 2002, HCA management decided to delay the development and implementation of certain financial and procurement information system components of its ERP project, resulting in a non-cash, pretax charge of $19 million.

During the second quarters of 2003 and 2002, respectively, HCA incurred $1 million and $13 million of professional fees (legal and accounting) related to the governmental investigations.

Minority interests increased from $42 million for the second quarter of 2002 to $47 million for the second quarter of 2003 due to improved operating results at certain of HCA’s consolidating joint ventures.

Income before income taxes decreased 4.4% from $1.207 billion for the six months ended June 30, 2002 to $1.155 billion in the first half of 2003. The results of the first six months of 2003 include an increase in the allowance for doubtful accounts of $106 million, an asset impairment charge of $130 million and gains on sales of facilities of $75 million.

For the first six months of 2003, admissions increased 1.9% and same facility admissions increased by 0.1% compared to the same period last year. Outpatient surgical volumes decreased 1.1%, and decreased 3.2% on a same facility basis. HCA experienced weaker than expected volumes during the first quarter of 2003 due to a weak flu season, the general economic conditions in certain markets, the non-renewal of certain managed care contracts, increased co-payments and deductibles, physician issues related to physicians relocating or retiring due to rising physician malpractice insurance rates and various competitive pressures in certain markets. While volumes were closer to the Company’s expectations in the second quarter of 2003, many of these trends continued into the second quarter of 2003. Revenues increased 9.9% to $10.7 billion for the first half of 2003 compared to $9.8 billion for 2002. The increase was primarily due to an increase in revenue per equivalent admission of 8.6%.

Salaries and benefits, as a percentage of revenues, remained relatively flat at 39.8% in 2003 and 2002. Lower than expected volumes required steps to ensure that hospitals match labor costs with volume trends.

Supply costs remained relatively flat as a percentage of revenues at 16.0% for the six months ended June 30, 2003 compared to 15.9% for the six months ended June 30, 2002.

Other operating expenses (primarily consisting of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance and non-income taxes) as a percentage of revenues, decreased to 16.5% in 2003 from 16.7% in 2002. These expenses tend to decrease, as a percentage of revenues, when the Company experiences revenue increases, because the majority of these expenses are fixed in nature.

Provision for doubtful accounts, as a percentage of revenues, increased to 9.4% in the six months ended June 30, 2003 from 7.6% in the six months ended June 30, 2002. During the second quarter of 2003, the provision for doubtful accounts was increased by $106 million. This change in estimate was based upon the results of the Company’s customary “hindsight analysis”, in which the Company’s accounts receivable during a previous twelve-month period are analyzed. The historical “look back” results, along with considerations of current economic trends and collection indicators, are used as the basis for the Company’s estimate of the appropriate amount of allowance for doubtful accounts for its current accounts receivable.

Equity in earnings of affiliates increased from $106 million in the first six months of 2002 to $111 million in the first six months of 2003 due to increases in operating results at joint ventures accounted for under the equity method of accounting.

Depreciation and amortization decreased, as a percentage of revenues, to 4.9% in the six months ended June 30, 2003 from 5.2% in the six months ended June 30, 2002 due to the fixed nature of these costs combined with increases in revenues of 9.9% in the first six months of 2003 compared to same period of 2002.

Interest expense increased to $237 million in the six months ended June 30, 2003 from $229 million in the six months ended June 30, 2002. The average of the beginning and ending debt balances for the Company increased from $7.3 billion for the six months ended June 30, 2002 to $7.7 billion for the six months ended June 30, 2003.

During the first six months of 2003, HCA recognized a pretax gain of $75 million ($43 million after-tax) on the sales of two leased hospitals and one consolidating hospital, and the working capital settlement of a sale completed in 2002. Proceeds from the sales were used to repay bank borrowings.

During the second quarter of 2003, HCA announced plans to discontinue activities associated with the internal development of a new patient accounts receivable management system resulting in a non-cash, pretax charge of $130 million. During the second quarter of 2002, HCA management decided to delay the development and implementation of certain financial and procurement information system components of its ERP project, resulting in a non-cash, pretax charge of $19 million.

During the first six months of 2003 and 2002, respectively, HCA incurred $5 million and $30 million of professional fees (legal and accounting) related to the governmental investigations.

Minority interests increased to $86 million for the six months ended June 30, 2003 from $77 million for the six months ended June 30, 2002 due to improved operating results at certain of HCA’s consolidating joint ventures.

Cash provided by operating activities totaled $1.075 billion in the first six months of 2003 compared to $1.224 billion in the first six months of 2002. Working capital totaled $945 million at June 30, 2003 and $766 million at December 31, 2002. During the second quarter of 2003, the Company paid CMS $250 million.

Cash used in investing activities was $1.797 billion in the first six months of 2003 compared to $882 million in the first six months of 2002. Excluding acquisitions, capital expenditures were $920 million in 2003 and $829 million in 2002. HCA has reduced planned capital expenditures from $2.1 billion for 2004 to $1.8 to $1.9 billion. At June 30, 2003, there were projects under construction, which had an estimated additional cost to complete and equip over the next five years of approximately $2.3 billion. During April 2003, HCA completed the acquisition of the Health Midwest system in Kansas City. The aggregate cash paid by HCA at closing was $855 million. HCA expects to finance capital expenditures with internally generated and borrowed funds.

In addition to cash flows from operations, available sources of capital include amounts available under HCA’s $1.75 billion revolving credit facility (the “Credit Facility”) ($512 million available as of July 31, 2003) and anticipated access to public and private debt markets. Management believes that its available sources of capital are adequate to expand, improve and equip its existing health care facilities and to complete selective acquisitions.

Investments of HCA’s professional liability insurance subsidiary are held to maintain statutory equity and pay claims and totaled $1.849 billion and $1.655 billion at June 30, 2003 and December 31, 2002, respectively. Claims payments, net of reinsurance recoveries, during the next twelve months are expected to approximate $300 million. The estimation of the timing of claims payments beyond a year can vary significantly. HCA’s wholly-owned insurance subsidiary has entered into certain reinsurance contracts, and the obligations covered by the reinsurance contracts remain on the balance sheet as the subsidiary remains liable to the extent that the reinsurers do not meet their obligations under the reinsurance contracts. To minimize its exposure to losses from reinsurer insolvencies, HCA routinely monitors the financial condition of its reinsurers. The amounts receivable related to the reinsurance contracts of $246 million and $265 million at June 30, 2003 and December 31, 2002, respectively, are included in other assets.

Cash provided by financing activities totaled $745 million during the first six months of 2003 compared to cash used in financing activities of $376 million during the first six months of 2002. During 2003, HCA accessed the Credit Facility and the public debt market to raise capital.

During the second quarter of 2003, HCA paid CMS $250 million to resolve all Medicare cost report, home office cost statement, and appeal issues between HCA and CMS for the cost report periods ending before August 1, 2001. During July 2003, HCA paid the DOJ $641 million (including $10 million in accrued interest) to resolve all remaining investigation issues between the Company and the DOJ. HCA also paid $17.7 million to state Medicaid agencies and $33 million for private party legal fees. Upon the Company making the payments to the DOJ, the Company no longer has any remaining obligation to maintain letters of credit with the DOJ.

In February 2003, HCA issued $500 million of 6.25% notes due February 15, 2013. In July 2003, HCA issued $500 million of 6.75% notes due July 15, 2013. Following the issuance of the July 2003 notes, the Company has issued debt securities equal to the amount registered in the $1.5 billion shelf registration statement filed in May 2002.

During July 2003, HCA filed a shelf registration statement and prospectus with the SEC which allows the Company to issue from time to time, up to $2.5 billion in debt securities.

HCA’s $2.5 billion credit agreement (the “2001 Credit Agreement”) which includes the Credit Facility has a final maturity in April 2006. Interest under the 2001 Credit Agreement is payable at a spread to LIBOR, a spread to the prime lending rate or a competitive bid rate. The spread is dependent on HCA’s credit ratings. The 2001 Credit Agreement contains customary covenants which include (i) limitations on debt levels, (ii) limitations on sales of assets, mergers and changes of ownership, and (iii) maintenance of minimum interest coverage ratios. As of July 31, 2003, HCA was in compliance with all such covenants.

In April 2003, HCA announced an authorization to repurchase $1.5 billion of its common stock. HCA expects to repurchase its shares from time-to-time through open market purchases or privately negotiated transactions. During the second quarter 2003, HCA, through open market purchases, repurchased under this authorization 10.2 million shares of its common stock for $328 million.

In July 2002, HCA announced an authorization to repurchase up to 12 million shares of its common stock. HCA made open market purchases during 2002 of 6.2 million shares for $282 million, and during the first quarter of 2003, 3.7 million shares for $148 million. During the second quarter of 2003, HCA made open market purchases of 2.1 million shares for $66 million, which completed the repurchases under this authorization. The repurchases were intended to offset the dilutive effect of employee stock compensation programs.

During 2001, HCA entered into an agreement with a financial institution that resulted in the financial institution investing in an entity that would acquire HCA common stock. This consolidated affiliate acquired

16.8 million of HCA shares in connection with HCA’s settlement of certain forward purchase contracts. In June 2002, HCA repaid the financial institution and received 16.8 million shares of the Company’s common stock. The quarterly return on the financial institution’s investment, based on LIBOR plus 87.5 basis points return rate was recorded as minority interest expense during 2002.

During the second quarter of 2003, HCA announced plans to discontinue activities associated with the development of a patient accounting software system resulting in a non-cash, pretax charge of $130 million. HCA had estimated that the patient accounting project would have required total expenditures of approximately $400 million to develop and install. The Company is now redirecting efforts in this area to the implementation of enhancements to its existing patient accounting system. HCA is also in the process of implementing an enterprise resource planning (“ERP”) system to replace its financial and human resources information systems and reporting process. The ERP system is designed to improve the integration among the Company’s various software systems and allow for more efficient collecting, sharing and analyzing of data. The ERP system should provide more flexibility to format reports to fit facilities’ needs and allow employees to use their personal computers to gather and analyze information. Management estimates that the ERP project will require total expenditures of approximately $330 million to develop and install. At June 30, 2003, project-to-date costs incurred were $180.3 million ($111.8 million of the costs incurred have been capitalized and $68.5 million have been expensed). Management expects that the ERP system development, testing, data conversion and installation will continue through 2006. There can be no assurance that the development and implementation of ERP will not be delayed, that the total cost will not be significantly more than currently anticipated, that business processes will not be interrupted during implementation or that HCA will realize the expected benefits and efficiencies from the developed products.

Management believes that cash flows from operations, amounts available under the Credit Facility and HCA’s anticipated access to public and private debt markets are sufficient to meet expected liquidity needs during the next twelve months.

HCA is exposed to market risk related to changes in market values of securities. The investments in debt and equity securities of HCA’s wholly-owned insurance subsidiary were $1.263 billion and $586 million, respectively, at June 30, 2003. These investments are carried at fair value with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. The fair value of investments is generally based on quoted market prices. During the third quarter of 2002, due to a continued overall market decline and management’s review and evaluation of the individual investment securities, management concluded that certain unrealized losses of HCA’s insurance subsidiary’s equity investments were considered “other-than-temporary.” HCA recorded an impairment charge on the identified investment securities of $168 million. The declines in fair value and any resulting losses incurred on sales of the securities on which the impairment charge was recorded do not present a current liquidity concern to the Company, as professional liability claim payments, net of reinsurance recoveries, during the next twelve months are estimated to be approximately $300 million and $1.849 billion of investment securities are available. However, if the insurance subsidiary were to experience market declines in its investments, this could require additional investment by the Company to allow the insurance subsidiary to satisfy its minimum capital requirements.

HCA evaluates, among other things, the financial position and near term prospects of the issuer, conditions in the issuer’s industry, liquidity of the investment, changes in the amount or timing of expected future cash flows from the investment, and recent downgrades of the issuer by a rating agency to determine if and when a decline in the fair value of an investment below amortized cost is considered “other-than-temporary”. The length of time and extent to which the fair value of the investment is less than amortized cost and HCA’s ability and intent to retain the investment to allow for any anticipated recovery in the investment’s

fair value are important components of management’s investment securities evaluation process. At June 30, 2003, HCA had a net unrealized gain of $130 million on the insurance subsidiary’s investment securities.

HCA is also exposed to market risk related to changes in interest rates on its indebtedness, and HCA periodically enters into interest rate swap agreements to manage its exposure to these fluctuations. HCA’s interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts and interest payments in these agreements match the cash flows of the related liabilities. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not assets or liabilities of HCA. Any market risk or opportunity associated with these swap agreements is offset by the opposite market impact on the related debt. HCA’s credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives and the related hedged debt amounts have been recognized in the financial statements at their respective fair values.

With respect to HCA’s interest-bearing liabilities, approximately $2.4 billion of long-term debt at June 30, 2003 is subject to variable rates of interest, while the remaining balance in long-term debt of $6.0 billion at June 30, 2003 is subject to fixed rates of interest. Both the general level of interest rates and, for the 2001 Credit Agreement, the Company’s credit rating affect HCA’s variable interest rate. HCA’s variable rate debt is comprised of the Company’s Credit Facility on which interest is payable generally at LIBOR plus 0.7% to 1.5% (depending on HCA’s credit ratings), a bank term loan on which interest is payable generally at LIBOR plus 1% to 2%, and fixed rate notes on which interest rate swaps have been employed on which interest is payable at LIBOR plus 1.9% to 2.4%. Due to decreases in LIBOR and the improvement in the Company’s credit rating, the average rate for the Company’s Credit Facility decreased from 2.55% for the quarter ended June 30, 2002 to 1.93% for the quarter ended June 30, 2003, and the average rate for the Company’s term loans decreased from 2.84% for the quarter ended June 30, 2002 to 2.25% for the quarter ended June 30, 2003. The estimated fair value of HCA’s total long-term debt was $8.8 billion at June 30, 2003. The estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities. Based on a hypothetical 1% increase in interest rates, the potential annualized reduction to future pretax earnings would be approximately $24 million. The impact of such a change in interest rates on the fair value of long-term debt would not be significant. The estimated changes to interest expense and the fair value of long-term debt are determined considering the impact of hypothetical interest rates on HCA’s borrowing cost and long-term debt balances. To mitigate the impact of fluctuations in interest rates, HCA generally targets a portion of its debt portfolio to be maintained at fixed rates. Foreign operations and the related market risks associated with foreign currency are currently insignificant to HCA’s results of operations and financial position.

The Company is contesting income taxes and related interest, proposed by the IRS for prior years, aggregating approximately $331 million as of June 30, 2003. Management believes that final resolution of these disputes will not have a material adverse effect on the results of operations or liquidity of the Company. See Note 5 — Income Taxes in the notes to condensed consolidated financial statements for a description of the pending IRS disputes.

The information called for by this item is provided under the caption “Market Risk” under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

HCA’s chief executive officer and principal financial officer have reviewed and evaluated the effectiveness of HCA’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and principal financial officer have concluded that HCA’s disclosure controls and procedures effectively and timely provide them with material information relating to HCA and its consolidated subsidiaries required to be disclosed in the reports HCA files or submits under the Exchange Act.

During the period covered by this report, there has been no change in the Company’s internal controls over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal controls over financial reporting.

The Company operates in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against the Company from time to time. The resolution of any such lawsuits, claims or legal and regulatory proceedings could materially, adversely affect the Company’s results of operations and financial position in a given period.

HCA continues to be the subject of the following governmental investigations and litigation related to its business practices. While it is premature to predict the final outcome of these matters, it is possible that an adverse resolution of these matters could have a material adverse impact of the Company’s results of operations and financial position in a given period.

The investigation was concluded through a series of agreements executed in 2000 and 2003. In December 2000, HCA entered into a Plea Agreement with the Criminal Division of the Department of Justice (the “DOJ”) and various U.S. Attorneys’ offices (the “Plea Agreement”) and a Civil and Administrative Settlement Agreement with the Civil Division of the DOJ (the “Civil Agreement”). The agreements 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. The civil issues that were not covered by the Civil Agreement included claims related to physician relations, cost report and wound care issues. The Civil Agreement was approved by the Federal District Court of the District of Columbia in August 2001. HCA paid the government $840 million (plus $60 million of accrued interest), as provided by the Civil Agreement and Plea Agreement, during 2001. HCA also entered into a Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the Department of Health and Human Services.

The remaining aspects of the investigation were resolved during 2003. In June 2003, HCA announced that the Company and the Civil Division of the DOJ signed agreements whereby the United States would dismiss the various claims it had brought related to physician relations, cost reports and wound care issues (the “DOJ Agreement”). The DOJ Agreement received court approval in July 2003, and HCA paid the DOJ $641 million (including accrued interest of $10 million) during July 2003. The DOJ Agreement does not affect qui tam cases in which the government has not intervened. In addition, the CIA previously entered into by the Company remains in effect. The Company also finalized an agreement with a negotiating team representing states that may have claims against the Company. Under this agreement HCA paid $17.7 million in July 2003 to state Medicaid agencies to resolve these claims. The Company also paid $33 million for reasonable legal fees of the private parties. In connection with the DOJ Agreement, HCA recorded a pretax charge of $603 million ($418 million after-tax) in the fourth quarter of 2002.

Upon the Company making the payment provided under the DOJ Agreement, the Company no longer has any remaining obligation to maintain letters of credit with the DOJ.

During June 2003, HCA announced that the Company and the Centers for Medicare and Medicaid Services (“CMS”) signed an agreement, documenting the understanding announced in March 2002, to resolve all Medicare cost report, home office cost statement and appeal issues between HCA and CMS (the “CMS Agreement”) for cost report periods ended before August 1, 2001. As a result of the CMS Agreement, HCA paid CMS $250 million in June 2003. HCA recorded a pretax charge of $260 million ($165 million after-tax), consisting of the accrual of $250 million for the settlement payment and the write-off of $10 million

of net Medicare cost report receivables. This charge was recorded in the consolidated income statement for the year ended December 31, 2001.

If HCA was found to be in violation of Federal or state laws relating to Medicare, Medicaid or similar programs or breach of the CIA, HCA could be subject to substantial monetary fines, civil and criminal penalties and/or exclusion from participation in the Medicare and Medicaid programs. Any such sanctions or expenses could have a material adverse effect on HCA’s financial position, results of operation and liquidity. See Note 10 — Contingencies and Part II, Item 1: Legal Proceedings.

Several qui tam actions have been brought by relators on behalf of the United States and have been unsealed and served on the Company. The actions allege, in general, that the Company and certain affiliates violated the False Claims Act, 31 U.S.C. § 3729, et seq., for improper claims submitted to the government for reimbursement. The lawsuits generally seek damages of three times the amount of Medicare or Medicaid claims (involving false claims) presented by the defendants to the Federal government, civil penalties of not less than $5,500 or more than $11,000 for each such Medicare or Medicaid claim, attorneys’ fees and costs. In many instances there are additional common law claims.

In February 1999, the United States filed a motion before the Judicial Panel on Multidistrict Litigation (“MDL”) seeking to transfer and consolidate, pursuant to 28 U.S.C. § 1407, qui tam actions against the Company, including those sealed and unsealed, for purposes of discovery and pretrial matters, to the United States District Court for the District of Columbia. The MDL panel granted the motion and all of the qui tam cases subject to the motion have been consolidated to the U.S. District Court of the District of Columbia.

In June 2003, HCA announced that the Company and the Civil Division of the DOJ signed agreements whereby the United States would dismiss the remaining claims in the various qui tam cases in which it had intervened. The dismissals were entered in July 2003, and HCA made a payment of $641 million, including accrued interest.

The United States intervened in eight of the consolidated cases, which fall generally in three categories: (1) cost reports allegedly constituting false claims; (2) alleged improper financial arrangements with physicians to induce referrals; and (3) alleged false claims pertaining to certain management fees paid to Curative Health Services. The dismissed cases include:

United States ex rel. Alderson v. Columbia/HCA, et al., Case No. 97-2-35-CIV-T-23E.

United States ex rel. Schilling v. Columbia/HCA, Civil Action No. 96M-1264-CIV-T-23B.

United States ex rel. Michael R. Marine v. Columbia Aventura Medical Center, et al., Case No. 97-4368 (S.D. Fla.).

United States ex rel. James Thompson v. Columbia/HCA Healthcare Corp., et al., Civil Action No. C-95-110.

United States ex rel. King v. Columbia/HCA Healthcare Corp., et al., Civ. Action No. EP-96-CA-342 (W.D. Tex.)

United States ex rel. Ann Mroz v. Columbia/HCA Healthcare Corp., Civil Action No. 97-2828 (S.D. Fla.)

United States of America ex rel. Joseph “Mickey” “Parslow v. Columbia/HCA Healthcare Corporation and Curative Health Services, Incorporated, No. 98-1260-CIV-T-23F

United States et rel. Lanni v. Curative Health Services, et al., 98 Civ. 2501 (S.D.N.Y.)

B. Remaining Qui Tam Actions in Which the United States Has Not Intervened

United States of America, ex rel. Scott Pogue v. Diabetes Treatment Centers of America, Inc., et al., Civil Action No. 3-94-0515. HCA, Relator Pogue and the United States have agreed to settle claims against West Paces Ferry Hospital, the only HCA facility named in the action, for $1.5 million. A motion to dismiss these claims is pending.

In 1998, the case United States ex rel. Barrett and Goodwin v. Columbia/HCA Healthcare Corp., et al., Civ. Action No. H-98-0861 (S.D. Tex) was filed in the United States District Court for the Southern District of Texas. In general, the complaint alleges that the Company engaged in improper financial arrangements with physicians to induce referrals in violation of the Anti-kickback Statute as well as improper upcoding of DRG codes. The relators served the complaint, and the Company filed a motion to dismiss. The United States District Court for the District of Columbia dismissed the False Claims Act causes of action with leave to amend, but denied the defendant’s motion to dismiss the relator’s retaliatory discharge claims.

In 1997, the case United States ex rel. Hockett, Thompson & Staley v. Columbia/HCA Healthcare Corp. et al., Civ. Action No. 97-MC-29-a (W.D. Va.) was filed in the United States District Court for the Western District of Virginia. In general, the case alleges that the Company filed false claims in connection with the filing of its cost reports such as including improper inflation of cost basis, costs relating to unnecessary care to patients, and falsification of records. The Company has been served with the complaint, which it answered. Another defendant filed a motion to dismiss, which was denied on February 14, 2003. The case is now entering the discovery phase.

In 1999, the case United States ex rel. McCready v. Columbia North Monroe Hospital, Civil Action No. 99-1099M was filed in the United States District Court for the Western District of Louisiana. In general, the case alleges that a Company hospital failed to timely transfer patients to the rehabilitation unit, a practice that allegedly resulted in improper cost allocation to the hospital’s acute care services and thus improperly increased reimbursement. The Company was served with the complaint and filed an answer. Another defendant filed a motion to dismiss, which was denied. The case is now entering the discovery phase.

During the April 1997 to October 1997 period, numerous securities class action and derivative lawsuits were filed in the United States District Court for the Middle District of Tennessee against the Company and a number of its current and former directors, officers and/or employees.

In August 1997, the court entered an order consolidating the above-mentioned securities class action claims into a single-captioned case, Morse, Sidney, et al. v. R. Clayton McWhorter, et al., Case No. 3-97-0370. The court administratively closed all of the other individual securities class action lawsuits. The consolidated Morse lawsuit is a purported class action seeking the certification of a class of persons or entities who acquired the Company’s common stock from April 9, 1994 to September 9, 1997. The consolidated lawsuit was brought against the Company, Richard Scott, David Vandewater, Thomas Frist, Jr., R. Clayton McWhorter, Carl E. Reichardt, Magdalena Averhoff, M.D., T. Michael Long and Donald S. MacNaughton. The lawsuit alleges, among other things, that the defendants committed violations of the Federal securities laws by materially

inflating the Company’s revenues and earnings through a number of practices, including upcoding, maintaining reserve cost reports, disseminating false and misleading statements, cost shifting, illegal reimbursements, improper billing, unbundling and violating various Medicare laws. The lawsuit seeks damages, costs and expenses.

The defendants filed a motion to dismiss the Morse lawsuit. On July 28, 2000, the District Court entered an order granting the defendants’ motions to dismiss in Morse. The District Court’s order dismissed Morse with prejudice. In August 2000, plaintiffs filed a motion to alter or amend judgment and for leave to file an amended complaint and requested oral argument on their motion. The plaintiffs’ motion to alter or amend was denied in October 2000. In October 2000, plaintiffs filed their Notice of Appeal. That appeal was heard before the Sixth Circuit Court of Appeals in April 2002. The Sixth Circuit reversed and remanded the case to district court. Plaintiffs filed a fourth amended complaint, and defendants have moved to dismiss.

The Company intends to pursue the defense of the shareholder class action complaints vigorously.

In August 1997, the court entered an order consolidating the above-mentioned derivative law claims into a single-captioned case, Carl H. McCall as Comptroller of the State of New York and as Trustee of the New York State Common Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare Corporation v. Richard L. Scott, et al., No. 3-97-0838. The court administratively closed all of the other derivative lawsuits. The consolidated McCall lawsuit was brought against the Company, Thomas Frist, Jr., Richard L. Scott, David T. Vandewater, R. Clayton McWhorter, Magdalena Averhoff, M.D., Frank S. Royal, M.D., T. Michael Long, William T. Young and Donald S. MacNaughton. The lawsuit alleges, among other things, derivative claims against the individual defendants that they intentionally or negligently breached their fiduciary duties to the Company by authorizing, permitting or failing to prevent the Company from engaging in various schemes involving improperly increasing revenue, upcoding, improper cost reporting, improper referrals, improper acquisition practices and overbilling. In addition, the lawsuit asserts a derivative claim against some of the individual defendants for breaching their fiduciary duties by allegedly engaging in improper insider trading. The lawsuit seeks restitution, damages, recoupment of fines or penalties paid by the Company, restitution and pre-judgment interest against the alleged insider trading defendants, and costs and expenses. In addition, the lawsuit seeks orders: (i) prohibiting the Company from paying individual defendants employment benefits; (ii) terminating all improper business relationships with individual defendants; and (iii) requiring the Company to implement effective corporate governance and internal control mechanisms designed to monitor compliance with Federal and state laws and ensure reports to the Board of material violations.

The defendants filed a motion to dismiss the McCall lawsuit. In September 1999, the District Court entered an order granting the defendants’ motion to dismiss McCall with prejudice. The plaintiffs in the McCall lawsuit filed an appeal from that order. In February 2001, the United States Court of Appeals for the Sixth Circuit entered an order reversing, in part, the district court’s dismissal order and remanding the case to the trial court. In April 2001, the Sixth Circuit denied defendants’ motion for rehearing, or certification to the Delaware Supreme Court. In July 2001, the trial court issued a second case management order. The parties reached a settlement in principle that was approved by the HCA Board of Directors on January 30, 2003. The settlement was presented to the court on February 27, 2003 and received preliminary approval. Notice of the settlement by mail to shareholders and by publication occurred in March 2003. Following a notice period, final court approval was granted on June 3, 2003. The McCall settlement also provides for the dismissal of the following derivative claims:

Barron, Evelyn, et al. v. Magdelena Averhoff, et al., (Civil Action No. 15822NC), filed on July 22, 1997, and Kovalchick, John E. v. Magdelena Averhoff, et al., (Civil Action No. 15829NC), filed on July 29, 1997, in the Court of Chancery of the State of Delaware in and for New Castle County.

Williams v. Averhoff, (Civil Action No. 15055-NC) filed on August 5, 1997, in the Court of Chancery of the State of Delaware in and for New Castle County.

State Board of Administration of Florida, the public pension fund of the State of Florida in behalf of itself and in behalf of all other stockholders of Columbia/HCA Healthcare Corporation derivatively in behalf of Columbia/HCA Healthcare Corporation vs. Magdalena Averhoff, et al., (No. 97-2729), filed in the Circuit Court in Davidson County, Tennessee.

The matter of Louisiana State Employees Retirement System, a public pension fund of the State of Louisiana, in behalf of itself and in behalf of all other stockholders of Columbia/HCA Healthcare Corporation derivatively in behalf of Columbia/HCA Healthcare Corporation v. Magdalena Averhoff, et al., filed on March 19, 1998 in the Circuit Court of the Eleventh Judicial Circuit, Dade County, Florida, General Jurisdiction Division (Case No. 98-6050 CA04), and removed to the United States District Court, Southern District of Florida (Case No. 98-814-CIV).

In 1996, 1997, 1998 and 2000, certain plaintiffs brought purported class action lawsuits against the Company and/or its subsidiaries and affiliates. On February 4, 2003, plaintiffs in each of these cases combined their claims in a single complaint for settlement purposes in the proceeding captioned In re: Columbia/HCA Healthcare Corporation Billing Practices Litigation, Master File No. MDL 1227, pending in the United States District Court for the Middle District of Tennessee (described more fully below). Also on February 4, 2003, the District Court granted preliminary approval to a Settlement Agreement to resolve each of the following combined cases.

The matter of In re: Columbia/HCA Healthcare Corporation Billing Practices Litigation, Master File No. MDL 1227, was commenced by order of the MDL Panel entered on June 11, 1998 granting the Company’s petition to consolidate the Boyson and Operating Engineers cases (see cases below) for pretrial purposes in the Middle District of Tennessee pursuant to 28 U.S.C. 1407. Three other cases (see cases below) that have been consolidated with Boyson and Operating Engineers in the MDL proceeding are (i) Board of Trustees of the Carpenters & Millwrights of Houston & Vicinity Welfare Trust Fund, (ii) Board of Trustees of the Texas Ironworkers’ Health Benefit Plan, and (iii) Tennessee Laborers Health and Welfare Fund. On September 21, 1998, the plaintiffs in five consolidated cases filed a coordinated class action complaint, which the Company answered on October 13, 1998. Effective November 2, 1999, a sixth case, The United Paperworkers International Union, et al. v. Columbia/HCA Healthcare Corporation, et al., was transferred by the MDL Panel for consolidated pretrial proceedings. On December 30, 1999, the plaintiffs filed a motion seeking leave to file a first amended coordinated complaint. On March 15, 2000, the court entered an order granting the plaintiffs’ motion. The amended complaint did not include Board of Trustees of the Texas Ironworkers’ Health Benefit Plan as a plaintiff but added a new plaintiff, Board of Trustees of the Pipefitters Local 522 Hospital, Medical and Life Benefit Fund. The defendants have filed an answer to the amended complaint. The plaintiffs’ complaint seeks certification of two proposed classes including all private individuals and all employee welfare benefit plans that have paid for health-related goods or services provided by the Company. The complaint alleges, among other things, that the Company has engaged in a pattern and practice of inflating charges, concealing the true nature of patients’ illnesses, providing unnecessary medical care, and billing for services never rendered. The plaintiffs seek damages, attorneys’ fees and costs, as well as disgorgement and injunctive relief. The plaintiffs filed a motion for class certification on July 19, 2002, seeking certification only of the class of employee welfare benefit plans, naming only two of the named plaintiffs (the Carpenters & Millwrights and Tennessee Laborers plans) as class representatives, and focusing their claims on claims for services never rendered. The Company filed its response to the motion for class certification on August 16, 2002. On August 14, 2002, the United Paperworkers International Union voluntarily withdrew from the case as a named plaintiff, and on September 6, 2002, the Board of Trustees of the Pipefitters Local 522 Hospital, Medical and Life Benefit Fund also voluntarily withdrew from the case as a named plaintiff. In addition, in an order and memorandum opinion dated April 12, 2000, the court ordered the Company to produce certain documents that the Company listed as subject to the attorney-client privilege and/or the attorney work product doctrine on privilege logs. The Company appealed the court’s decision to the United States Court of Appeals for the Sixth Circuit. A three-judge panel of the Court of Appeals affirmed the district court’s decision on June 10, 2002. The Company moved for reconsideration of the decision on June 24,

2002, and requested rehearing of the matter by the full court. On September 9, 2002, the full Court of Appeals denied the motion and remanded the case to the district court. The parties reached a tentative settlement that received preliminary court approval on February 4, 2003. Following a notice period, final court approval was granted on June 4, 2003. Cases dismissed as a result of this settlement include:

The matter of Boyson, Cordula, on behalf of herself and all others similarly situated v. Columbia/HCA Healthcare Corporation filed on September 8, 1997 in the United States District Court for the Middle District of Tennessee, Nashville Division (Civil Action No. 3-97-0936).

The matter of Operating Engineers Local No. 312 Health & Welfare Fund, on behalf of itself and as representative of a class of those similarly situated v. Columbia/HCA Healthcare Corporation filed in the United States District Court for the Eastern District of Texas (Civil Action No. 597CV203).

Board of Trustees of the Carpenters & Millwrights of Houston & Vicinity Welfare Trust Fund v. Columbia/HCA Healthcare Corporation, Case No. 598CV157, and Board of Trustees of the Texas Ironworker’s Health Benefit Plan v. Columbia/HCA Healthcare Corporation, Case No. 598CV158, filed in the United States District Court for the Eastern District of Texas.

The matter of Tennessee Laborers Health and Welfare Fund, on behalf of itself and all others similarly situated vs. Columbia/HCA Healthcare Corporation, Case No. 3-98-0437, filed in the United States District Court of the Middle District of Tennessee, Nashville Division, on May 14, 1998.

The matter of The United Paperworkers International Union, et al. v. Columbia/HCA Healthcare Corporation, et al., filed on September 3, 1998 in the Circuit Court for Washington County, Tennessee, Civil Action No. 19350.

The matter of Brown, Nancy, individually and on behalf of all others similarly situated v. Columbia/HCA Healthcare Corporation filed on November 16, 1995, in the Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida, Case No. 95-9102 AD.

The matter of Jackson, Harald F., individually and on behalf of all others similarly situated v. Columbia/HCA Healthcare Corporation filed in the Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida on December 23, 1997, Case No. 97-011419-AI.

Ferguson, Charles, on behalf of himself and all other similarly situated v. Columbia/HCA Healthcare Corporation, et al. filed on September 16, 1997 in the Circuit Court for Washington County, Tennessee, Civil Action No. 18679.

The matter of Hoop, Kemp, et al. v. Columbia/HCA Healthcare Corporation, et al., filed on August 18, 1997 in the District Court of Johnson County, Texas, Civil Action No. 249-171-97.

The matter of Rocky Mountain Medical Center, Inc. v. Northern Utah Healthcare Corporation, d/b/a/ St. Mark’s Hospital, Case No. 000906627, was filed in the Third Judicial District Court of Salt Lake County, Utah on August 22, 2000 with a request for injunctive relief and damages under Utah antitrust law. Specific counts in the complaint include illegal boycott, unreasonable restraint of trade, attempt to monopolize and interference with prospective economic relations. At issue are St. Mark’s Hospital’s contracts with certain managed care organizations. The court denied the plaintiff’s request for a preliminary injunction. Both parties filed cross-motions for summary judgment and both motions were denied in December 2001. Discovery is ongoing.

Two law firms representing groups of health insurers have approached the Company and alleged that the Company’s affiliates may have overcharged or otherwise improperly billed the health insurers for various types of medical care during the time frame from 1994 through 1997. The Company is engaged in discussions with these insurers, but no litigation has been filed. The Company is unable to determine if litigation will be filed, and if filed, what damages would be asserted.

The Company intends to pursue the defense of these actions and prosecution of its counterclaims and third-party claims vigorously.

The Company is a party to certain proceedings relating to claims for income taxes and related interest in the United States Tax Court, the United States Court of Federal Claims and the Sixth Circuit. For a description of those proceedings, see Note 5 — Income Taxes in the notes to condensed consolidated financial statements.

The Company is also subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or for wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants have asked for punitive damages against the Company, which may not be covered by insurance. In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on the Company’s results of operations or financial position.

The Company’s annual meeting of stockholders was held on May 22, 2003. The following matters were voted upon at the meeting:


	Exhibit 10.1 — Administrative Settlement Agreement dated June 25, 2003, by and between the United States Department of Health and Human Services, acting through the Centers for Medicare and Medicaid Services, and HCA Inc.

	Exhibit 10.2 — Civil Settlement Agreement by and among the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services, the TRICARE Management Activity, and HCA Inc.

	Exhibit 12 — Statement re: Computation of Ratio of Earnings to Fixed Charges.


	Exhibit 31.1 — Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

	Exhibit 31.2 — Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

	Exhibit 32.1 — Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.


	On April 2, 2003, the Company filed a report on Form 8-K under Items 5 and 7 which announced the completion of its acquisition of the Health Midwest system in Kansas City.

	On April 16, 2003, the Company filed a report on Form 8-K under Item 9 which announced expectations relating to first quarter earnings results.

	On April 22, 2003, the Company filed a report on Form 8-K under Item 9 which included its operating results for the 2003 first quarter.

	On April 30, 2003, the Company filed a report on Form 8-K under Item 9 which announced a $1.5 Billion Share Repurchase Program.

	On May 23, 2003, the Company filed a report on Form 8-K under Item 9 which announced a plan to discontinue development of a new patient accounting information system.

	On June 30, 2003, the Company filed a report on Form 8-K under Item 12 which announced the issuance of a press release relating to certain settlement agreements.

	Notwithstanding the foregoing, information furnished under Item 9 and Item 12 of the Company’s Current Reports on Form 8-K, including the related exhibits shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	HCA INC.

	/s/ R. MILTON JOHNSON

	R. Milton Johnson
	Senior Vice President and Controller


Delaware (State or other jurisdiction of incorporation or organization)		75-2497104 (I.R.S. Employer Identification No.)

One Park Plaza Nashville, Tennessee (Address of principal executive offices)		37203 (Zip Code)


Class of Common Stock		Outstanding at July 15, 2003

Voting common stock, $.01 par value		478,523,800 shares
Nonvoting common stock, $.01 par value		21,000,000 shares


	CONDENSED CONSOLIDATED INCOME STATEMENTS
	HCA INC. CONDENSED CONSOLIDATED BALANCE SHEETS
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
HCA INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
Part II: Other Information
	Item 1: Legal Proceedings
	Item 4: Submission of Matters to a Vote of Security Holders
	Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
EX-10.1 ADMINISTRATIVE SETTLEMENT AGREEMENT
EX-10.2 CIVIL SETTLEMENT AGREEMENT
EX-12 COMPUTATION OF RATIO OF EARNINGS TO CHARGES
EX-31.1 302 CERTIFICATION OF THE CEO
EX-31.2 302 CERT. OF PRINCIPAL FINANCIAL OFFICER
EX-32.1 906 CERTIFICATION


		Page of
		Form 10-Q

Part I.	Financial Information

Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Income Statements — for the quarters and six months ended June 30, 2003 and 2002		3
	Condensed Consolidated Balance Sheets — June 30, 2003 and December 31, 2002		4
	Condensed Consolidated Statements of Cash Flows — for the six months ended June 30, 2003 and 2002		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosure of Market Risk		34
Item 4.	Controls and Procedures		34
Part II.	Other Information
Item 1.	Legal Proceedings		35
Item 4.	Submission of Matters to a Vote of Security Holders		41
Item 6.	Exhibits and Reports on Form 8-K		41
Signatures			43



			Quarter						Six Months

			2003			2002			2003			2002

Revenues			$	5,467		$	4,903		$	10,740		$	9,776
Salaries and benefits				2,178			1,960			4,274			3,890
Supplies				870			778			1,715			1,556
Other operating expenses				926			832			1,779			1,632
Provision for doubtful accounts				577			371			1,005			739
Insurance subsidiary (gains) losses on sales of investments				1			(1	)		1			4
Equity in earnings of affiliates				(53	)		(55	)		(111	)		(106	)
Depreciation and amortization				278			255			539			499
Interest expense				123			108			237			229
Gains on sales of facilities				(1	)		—			(75	)		—
Impairment of long-lived assets				130			19			130			19
Investigation related costs				1			13			5			30

				5,030			4,280			9,499			8,492

Income before minority interests and income taxes				437			623			1,241			1,284
Minority interests in earnings of consolidated entities				47			42			86			77

Income before income taxes				390			581			1,155			1,207
Provision for income taxes				150			231			446			472

		Net income	$	240		$	350		$	709		$	735

Per share data:
	Basic earnings per share		$	0.47		$	0.68		$	1.39		$	1.44
	Diluted earnings per share		$	0.47		$	0.66		$	1.37		$	1.40
	Cash dividends per share		$	0.02		$	0.02		$	0.04		$	0.04
Shares used in earnings per share calculations (in thousands):
	Basic			506,727			513,185			508,995			510,811
	Diluted			514,412			528,068			518,374			524,841


		June 30,			December 31,
		2003			2002

ASSETS
Current assets:
	Cash and cash equivalents	$	184		$	161
	Accounts receivable, less allowance for doubtful accounts of $2,378 and $2,045		2,873			2,788
	Inventories		493			462
	Deferred income taxes		640			568
	Other		606			526

			4,796			4,505
Property and equipment, at cost			17,893			16,800
Accumulated depreciation			(7,399	)		(7,079	)

			10,494			9,721
Investments of insurance subsidiary			1,549			1,355
Investments in and advances to affiliates			661			679
Goodwill			2,501			1,994
Deferred loan costs			67			67
Other			402			420

		$	20,470		$	18,741

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	765		$	809
	Accrued salaries		461			438
	Other accrued expenses		1,134			1,113
	Government settlement accrual		683			933
	Long-term debt due within one year		808			446

			3,851			3,739
Long-term debt			7,568			6,497
Professional liability risks			1,271			1,193
Deferred income taxes and other liabilities			1,128			999
Minority interests in equity of consolidated entities			672			611
Stockholders’ equity:
	Common stock $.01 par; authorized 1,650,000,000 shares; outstanding 501,053,300 shares in 2003 and 514,176,000 shares in 2002		5			5
	Capital in excess of par value		—			93
	Other		6			6
	Accumulated other comprehensive income		112			73
	Retained earnings		5,857			5,525

			5,980			5,702

		$	20,470		$	18,741


				2003			2002

Cash flows from operating activities:
	Net income			$	709		$	735
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for doubtful accounts			1,005			739
		Depreciation and amortization			539			499
		Income taxes			(17	)		117
		Settlement with Federal Government			(250	)		—
		Gains on sales of facilities			(75	)		—
		Impairment of long-lived assets			130			19
		Changes in operating assets and liabilities			(1,052	)		(937	)
		Other			86			52

			Net cash provided by operating activities		1,075			1,224

Cash flows from investing activities:
		Purchase of property and equipment			(920	)		(829	)
		Acquisition of hospitals and health care entities			(884	)		(83	)
		Disposition of hospitals and health care entities			121			39
		Change in investments			(110	)		(4	)
		Other			(4	)		(5	)

			Net cash used in investing activities		(1,797	)		(882	)

Cash flows from financing activities:
		Issuance of long-term debt			509			505
		Net change in revolving bank credit facility			805			(595	)
		Repayment of long-term debt			(52	)		(70	)
		Payment of cash dividends			(20	)		(20	)
		Repurchases of common stock			(542	)		(400	)
		Issuances of common stock			51			208
		Other			(6	)		(4	)

			Net cash provided by (used in) financing activities		745			(376	)

Change in cash and cash equivalents					23			(34	)
Cash and cash equivalents at beginning of period					161			85

Cash and cash equivalents at end of period				$	184		$	51

Interest payments				$	211		$	218
Income tax payments				$	463		$	355


NOTE 1 —	INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 —	INVESTIGATIONS AND SETTLEMENT OF CERTAIN GOVERNMENT CLAIMS (continued)


				2003			2002

Number of hospitals					11			1
Number of licensed beds					2,292			164
Purchase price information:
	Hospitals:
		Fair value of assets acquired		$	1,185		$	28
		Liabilities assumed			(319	)		—

			Net assets acquired		866			28
	Other health care entities acquired				18			55

			Net cash paid	$	884		$	83



		June 30, 2003


				Unrealized
				Amounts
		Amortized						Fair
		Cost		Gains		Losses		Value

Debt securities:
	United States government	$	4	$	1	$	—	$	5
	States and municipalities		907		75		1		981
	Mortgage-backed securities		67		2		2		67
	Corporate and other		71		5		—		76
	Money market funds		130		—		—		130
	Redeemable preferred stocks		4		—		—		4

			1,183		83		3		1,263

Equity securities:
	Perpetual preferred stocks		6		—		—		6
	Common stocks		530		56		6		580

			536		56		6		586

		$	1,719	$	139	$	9		1,849

Amounts classified as current assets									(300	)

Investment carrying value								$	1,549


NOTE 12 —	SEGMENT AND GEOGRAPHIC INFORMATION (continued)



		Quarters						Six Months

		2003			2002			2003			2002

Revenues:
	Eastern Group	$	2,604		$	2,440		$	5,275		$	4,926
	Western Group		2,722			2,331			5,183			4,589
	Corporate and other		141			132			282			261

		$	5,467		$	4,903		$	10,740		$	9,776

Equity in earnings of affiliates:
	Eastern Group	$	(3	)	$	(2	)	$	(5	)	$	(5	)
	Western Group		(48	)		(50	)		(102	)		(99	)
	Corporate and other		(2	)		(3	)		(4	)		(2	)

		$	(53	)	$	(55	)	$	(111	)	$	(106	)

Adjusted segment EBITDA:
	Eastern Group	$	498		$	541		$	1,107		$	1,121
	Western Group		502			537			1,053			1,060
	Corporate and other		(32	)		(60	)		(83	)		(120	)

		$	968		$	1,018		$	2,077		$	2,061

Depreciation and amortization:
	Eastern Group	$	120		$	109		$	232		$	216
	Western Group		125			110			238			216
	Corporate and other		33			36			69			67

		$	278		$	255		$	539		$	499


Adjusted segment EBITDA		$	968		$	1,018		$	2,077		$	2,061
	Depreciation and amortization		278			255			539			499
	Interest expense		123			108			237			229
	Gains on sales of facilities		(1	)		—			(75	)		—
	Impairment of long-lived assets		130			19			130			19
	Investigation related costs		1			13			5			30

Income before minority interests and income taxes		$	437		$	623		$	1,241		$	1,284


		As of June 30,		As of December 31,
		2003		2002

Assets:
	Eastern Group	$	7,243	$	7,046
	Western Group		8,287		6,866
	Corporate and other		4,940		4,829

		$	20,470	$	18,741


							Corporate
		Eastern			Western		and
		Group			Group		Other			Total

Goodwill:
	Balance at December 31, 2002	$	918		$	841	$	235		$	1,994
	Acquisitions		5			513		—			518
	Sales of facilities		(3	)		—		(10	)		(13	)
	Foreign currency translation		—			—		2			2

Balance at June 30, 2003.		$	920		$	1,354	$	227		$	2,501


		For the transition period from to



	Quarter						Six Months

	2003			2002			2003			2002

Risk-free interest rate		2.33	%		2.50	%		2.61	%		2.16	%
Expected volatility		38	%		37	%		37	%		37	%
Expected life, in years		4			4			4			4
Expected dividend yield		0.20	%		0.18	%		0.19	%		0.18	%


	Six Months Ended June 30, 2003 and 2002


	Market Risk (continued)


			2003		2002

CONSOLIDATING
Number of hospitals in operation at:
	March 31			173		175
	June 30			184		175
	September 30					175
	December 31					173
Number of freestanding outpatient surgical centers in operation at:
	March 31			74		74
	June 30			76		75
	September 30					74
	December 31					74
Licensed hospital beds at(a):
	March 31			39,898		40,054
	June 30			42,152		39,930
	September 30					40,056
	December 31					39,932
Weighted average licensed beds(b):
	Quarter:
		First		39,957		40,079
		Second		42,178		39,844
		Third				39,998
		Fourth				40,020
	Year					39,985
Average daily census(c):
	Quarter:
		First		22,524		22,897
		Second		22,201		21,185
		Third				20,883
		Fourth				21,099
	Year					21,509
Admissions(d):
	Quarter:
		First		404,500		407,300
		Second		409,000		391,400
		Third				392,400
		Fourth				391,700
	Year					1,582,800


			2003		2002

Equivalent admissions(e):
	Quarter:
		First		587,300		594,700
		Second		605,300		584,200
		Third				585,200
		Fourth				575,300
	Year					2,339,400
Average length of stay (days)(f):
	Quarter:
		First		5.0		5.1
		Second		4.9		4.9
		Third				4.9
		Fourth				5.0
	Year					5.0
Emergency room visits(g):
	Quarter:
		First		1,216,200		1,206,900
		Second		1,268,300		1,198,000
		Third				1,211,900
		Fourth				1,186,000
	Year					4,802,800
Outpatient surgeries(h):
	Quarter:
		First		194,600		202,000
		Second		209,500		206,500
		Third				201,400
		Fourth				200,000
	Year					809,900
NON-CONSOLIDATING(i)
Number of hospitals in operation at:
		March 31.		6		6
		June 30.		6		6
		September 30.				6
		December 31.				6
Number of freestanding outpatient surgical centers in operation at:
		March 31.		4		3
		June 30.		4		5
		September 30.				4
		December 31.				4


		2003		2002

Licensed hospital beds at:
	March 31.		2,093		2,063
	June 30.		2,093		2,063
	September 30.				2,047
	December 31.				2,047


(a)		Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(b)		Weighted average licensed beds represents the average number of licensed beds, weighted based on periods owned.
(c)		Represents the average number of patients in the Company’s hospital beds each day.
(d)		Represents the total number of patients admitted to the Company’s hospitals and is used by management and certain investors as a general measure of inpatient volume.
(e)		Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation “equates” outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume.
(f)		Represents the average number of days admitted patients stay in the Company’s hospitals.
(g)		Represents the number of patients treated in the Company’s emergency rooms.
(h)		Represents the number of surgeries performed on patients who were not admitted to the Company’s hospitals. Pain management and endoscopy procedures are not included in outpatient surgeries.
(i)		The non-consolidating facilities include facilities operated through 50/50 joint ventures which are not controlled by the Company and are accounted for using the equity method of accounting.


	Shareholder Derivative and Class Action Complaints Filed in the U.S. District Courts


		Votes in Favor		Votes Withheld

1.	Election of Directors
	Magdalena H. Averhoff, M.D.		425,377,038		5,653,897
	Jack O. Bovender, Jr.		423,005,497		8,025,438
	Richard M. Bracken		425,436,151		5,594,784
	Martin Feldstein		420,714,732		10,316,203
	Thomas F. Frist, Jr., M.D.		422,644,744		8,386,191
	Frederick W. Gluck		420,691,902		10,339,033
	Glenda A. Hatchett		425,361,477		5,669,458
	Charles O. Holliday, Jr.		425,388,042		5,642,893
	T. Michael Long		425,357,470		5,673,465
	John H. McArthur		423,302,963		7,727,972
	Kent C. Nelson		425,379,638		5,651,297
	Franck S. Royal, M.D.		425,113,636		5,917,299
	Harold T. Shapiro		420,692,889		10,338,046


		Votes in Favor		Votes Against		Abstentions

2.	Stockholder Proposal Relating to Chief Executive Officer’s Compensation		21,097,451		353,886,270		7,670,028