UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

or

For the transition period from ___________________ to ___________________

Commission File Number: 0-29818

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     As of July 21, 2004, the number of outstanding shares of Common Stock of LifePoint Hospitals, Inc. was 38,703,332.

Table of Contents

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

LIFEPOINT HOSPITALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(Dollars in millions, except per share amounts)

See accompanying notes.

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LIFEPOINT HOSPITALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)

(1)

Derived from audited financial statements.

See accompanying notes.

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LIFEPOINT HOSPITALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In millions)

See accompanying notes.

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LIFEPOINT HOSPITALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
UNAUDITED

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

     LifePoint Hospitals, Inc. is a holding company. Its subsidiaries own, lease and operate their respective facilities and other assets. The term “LifePoint” or the “Company” as used herein refers to LifePoint Hospitals, Inc. and its subsidiaries, unless otherwise stated or indicated by context. As of June 30, 2004, the Company operated 29 general, acute care hospitals with an aggregate of 2,687 licensed beds in non-urban communities. The Company acquired the 106-bed River Parishes Hospital in LaPlace, Louisiana effective July 1, 2004, as discussed in Note 9. The Company’s hospitals are located in the states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah, West Virginia and Wyoming.

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003.

     The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company would include the LifePoint corporate office costs, which were $6.7 million and $7.9 million for the three months ended June 30, 2003 and 2004, respectively, and $11.5 million and $13.7 million for the six months ended June 30, 2003 and 2004, respectively.

     Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no impact on total assets, liabilities, stockholders’ equity, net income or cash flows.

NOTE 2 - EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted earnings per share (dollars in millions, except per share amounts, and shares in thousands):

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     For the second quarter of 2004, approximately 0.9 million of the Company’s stock options outstanding (1.3 million for the first half of 2004) were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average share price for the quarter and six month period, and therefore their inclusion would have been anti-dilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options. For the second quarter of 2003, approximately 2.3 million of the Company’s stock options outstanding (2.1 million for the first half of 2003) were excluded from the calculation of dilutive earnings per share.

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In December 2003, the Financial Accounting Standards Board (“FASB”) issued Revised Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46R”), which requires the consolidation of variable interest entities. FIN 46R, as revised, was applicable to financial statements of companies that had interests in “special purpose entities” during 2003. Effective as of the first quarter of 2004, FIN 46R is applicable to financial statements of companies that have interests in all other types of entities. Adoption of FIN 46R had no effect on the Company’s financial position, results of operations or cash flows.

     The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”), on July 1, 2003. SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity, such as redeemable preferred stock and certain equity derivatives that frequently are used in connection with share repurchase programs. On October 29, 2003, the FASB voted to defer for an indefinite period the application of SFAS No. 150 to classification of noncontrolling interests of limited-life subsidiaries. Neither the adoption of SFAS No. 150 nor the deferral had a material impact on the Company’s results of operations or financial position.

NOTE 4 – STOCK BENEFIT PLANS

     The Company issues stock options and other stock-based awards to key employees and directors under stock-based compensation plans, which are described more fully in Note 6 (stockholders’ equity) to the consolidated financial statements in the Company’s 2003 Annual Report on Form 10-K. SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS No. 148”). SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for companies making a voluntary change to fair value-based accounting for stock-based employee compensation. The Company continues to account for its stock-based compensation plans under the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. SFAS No. 148 also requires disclosure of pro-forma results on a quarterly basis as if the Company had applied the fair value recognition provisions of SFAS No. 123.

     The Company granted 175,000 shares of nonvested stock awards to certain key executives during the first quarter of 2004, under the Company’s 1998 Long-Term Incentive Plan. The nonvested stock awards vest three years from the grant date and contain no vesting requirements other than continued employment of the executive. The fair market value at the date of grant of these nonvested stock awards was $33.17 per share and was recorded as unearned compensation as a component of stockholders’ equity. In addition, the Company granted 21,000 shares of nonvested stock awards to its outside directors during the second quarter of 2004, under the Company’s Outside Directors Stock and Incentive Plan. These nonvested stock awards also vest three years from the grant date and contain no vesting requirements other than continued service of the director. The fair market value at the date of grant of these nonvested stock awards was $37.86 and was recorded as unearned compensation as a component of stockholders’ equity. Unearned compensation is being amortized straight-line in the statements of income over the three-year vesting period of the awards.

     Since the exercise price of all options granted under the Company’s incentive plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation is recognized in net income related to stock options. The following table illustrates the effect on net income and earnings per share (in

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millions, except per share amounts) if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to options granted under the stock option plans. For purposes of this pro-forma disclosure, the value of the options is estimated using a Black-Scholes option pricing model and amortized ratably to expense over the options’ vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options. Changes in the subjective input assumptions can materially affect the fair value estimate. Other option valuation models may produce significantly different fair values of the Company’s employee stock options.

     The weighted average estimated value of stock options granted during the second quarter of 2004 was $14.47 ($7.82 for the second quarter of 2003) and for the first half of 2004 was $12.56 ($7.82 for the first half of 2003). These options were granted with an exercise price equal to the market price at the date of grant. These options become exercisable beginning in part from one year after the date of grant to three years after the date of grant and expire 10 years after the grant date. The above table includes the impact of these additional stock options for the period subsequent to their grant. The values were estimated at the date of grant using the following weighted average assumptions:

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     Additional information with respect to stock benefit plan activity in the Company’s 1998 Long-Term Incentive Plan and Outside Directors Stock and Incentive Plan is as follows:

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Americans with Disabilities Act Claim

     On January 12, 2001, Access Now, Inc., a disability rights organization, filed a class action lawsuit against each of the Company’s hospitals alleging non-compliance with the accessibility guidelines under the Americans with Disabilities Act (the “ADA”). The lawsuit, filed in the United States District Court for the Eastern District of Tennessee, seeks injunctive relief requiring facility modification, where necessary, to meet the ADA guidelines, along with attorneys fees and costs. In January 2002, the District Court certified the class action and issued a scheduling order that requires the parties to complete discovery and inspection for approximately six facilities per year. The Company intends to vigorously defend the lawsuit, recognizing the Company’s obligation to correct any deficiencies in order to comply with the ADA. As of June 30, 2004, the plaintiffs have conducted inspections at 22 of the Company’s hospitals. On July 19, 2004, the United States District Court approved the settlement agreements between the parties relating to two of the Company’s facilities. These facilities have completed the litigation process and now will move forward in implementing facility modifications in accordance with the terms of the settlement.

HCA Investigations, Litigation and Indemnification Rights

     HCA Inc. (“HCA”) has been the subject of various federal and state investigations, qui tam actions, shareholder derivative and class action suits, patient/payor actions and general liability claims. These investigations, actions and claims relate to HCA and its subsidiaries, including subsidiaries that, before the Company’s formation as an independent company, owned many of the facilities that the Company now owns.

     In June 2003, HCA announced agreements with the Department of Justice (“DOJ”) that settled all federal criminal and civil litigation brought by the DOJ against HCA with respect to cost reports, physician relations and wound care issues. The settlement of these issues does not affect qui tam actions in which the DOJ has not intervened. Additionally, HCA has announced that it made payments to the Centers for Medicare and Medicaid Services (“CMS”) in accordance with an agreement to resolve all Medicare cost report, home office cost statement and appeal issues.

     HCA has agreed to indemnify the Company for any losses, other than consequential damages, arising from the governmental investigations of HCA’s business practices prior to the date of the distribution of the outstanding shares of the Company’s common stock to the stockholders of HCA and losses arising from legal proceedings, present or future, related to the investigation or actions engaged in before the distribution that relate to the investigation. However, the Company could be held responsible for any claims that are not covered by the agreements reached with the federal government or for which HCA is not required to, or fails to, indemnify the Company.

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Corporate Integrity Agreement

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

Legal Proceedings and General Liability Claims

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

Physician Commitments

     The Company has committed to provide certain financial assistance pursuant to recruiting agreements with various physicians practicing in the communities it serves. In consideration for a physician relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, the Company may loan certain amounts of money to a physician, normally over a period of one year, to assist in establishing his or her practice. The Company had committed to advance a maximum amount of approximately $24.1 million at June 30, 2004. The actual amount of such commitments to be subsequently advanced to physicians is estimated at $9.6 million and often depends upon the financial results of a physician’s private practice during the guaranteed period. Generally, amounts advanced under the recruiting agreements may be forgiven pro rata over a period of 48 months, contingent upon the physician continuing to practice in the respective community.

Capital Expenditure Commitments

     The Company is reconfiguring some of its facilities to accommodate more effectively patient services and restructuring existing surgical capacity in some of its hospitals to permit additional patient volume and a greater variety of services. The Company had incurred approximately $45.7 million in uncompleted projects as of June 30, 2004, which is included in construction in progress in the Company’s accompanying condensed consolidated balance sheet. At June 30, 2004, the Company had projects under construction with an estimated additional cost to complete and equip of approximately $79.6 million.

     Pursuant to the asset purchase agreement for Ville Platte Medical Center, the Company has agreed to make certain capital improvements, the cost of which, together with the initial cash payment, defeasance of certain bonds and liabilities assumed, is not required to exceed $25.0 million. The capital improvements must be completed by December 1, 2004. The initial cash payment and liabilities assumed totaled $15.1 million, which leaves $9.9 million required for capital improvements. The Company had incurred approximately $4.5 million of the required capital improvements as of June 30, 2004.

     Pursuant to the asset purchase agreement for Logan Regional Medical Center, the Company has agreed to expend, regardless of the results of the hospital’s operations, at least $20.0 million in the aggregate for capital expenditures and improvements during the ten-year period following the date of acquisition of December 1, 2002. The Company had incurred approximately $5.3 million of the required capital improvements as of June 30, 2004.

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Tax Matters

     During 2003, the Internal Revenue Service (“IRS”) notified the Company regarding its findings related to the examination of the Company’s federal income tax returns for the years ended December 31, 1999, 2000 and 2001. The Company reached a settlement with the IRS on all issues except for the Company’s method of determining its bad debt deduction for which the IRS has proposed an additional assessment of $7.4 million. All of the adjustments proposed by the IRS are temporary differences. The IRS has delayed final settlement of this assessment until resolution of certain pending court proceedings related to the use of this bad debt deduction method by HCA. HCA filed a petition with the United States Supreme Court on May 17, 2004 to appeal the ruling of the lower court on the bad debt deduction method. The Company applied its 2002 federal income tax refund in the amount of $6.6 million as a deposit against any potential settlement to forestall the tolling of interest on such settlement beyond the March 15, 2003 deposit date. Management believes that adequate provisions have been reflected in the consolidated financial statements to satisfy final resolution of the remaining disputed issue based upon current facts and circumstances and that final resolution of this dispute will not have a material adverse impact on the Company’s results of operations or financial position.

     HCA and the Company entered into a tax sharing and indemnification agreement as part of the Company’s 1999 spin-off from HCA. Under the agreement, HCA maintains full control and absolute discretion with regard to any combined or consolidated tax filings for periods prior to the 1999 spin-off transaction. In addition, the agreement provides that HCA will generally be responsible for all taxes that are allocable to periods prior to the 1999 spin-off transaction and HCA and the Company will each be responsible for their own tax liabilities for periods after the 1999 spin-off transaction. The tax sharing and indemnification agreement does not have an impact on the realization of deferred tax assets or the payment of deferred tax liabilities of the Company, except to the extent that the temporary differences give rise to such deferred tax assets and liabilities after the 1999 spin-off transaction and are adjusted as a result of final tax settlements after the 1999 spin-off transaction. In the event of such adjustments, the tax sharing and indemnification agreement provides for certain payments between HCA and the Company, as appropriate.

Acquisitions

     The Company has acquired and will continue to acquire businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company institutes policies designed to conform practices to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

NOTE 6 – LONG-TERM DEBT

     Long-term debt consists of the following (in millions):

     During the second quarter of 2004, the Company repurchased $29.0 million of its $250.0 million 4 1/2% Convertible Subordinated Notes due 2009 (the “Convertible Notes”) and paid a $0.9 million premium on these repurchases. In connection with these repurchases, the Company expensed $0.6 million of deferred loan costs attributable to the $29.0 million Convertible Note repurchases. The deferred loan cost charge and the $0.9 million premium paid comprise the $1.5 million debt retirement costs in the Company’s accompanying condensed consolidated statements of income for the three and six months ended June 30, 2004. The $1.5 million of debt retirement costs had a negative $0.02 per diluted share impact for the three and six months ended June 30, 2004.

     The Company borrowed $30.0 million under its $200.0 million, five-year amended and restated credit agreement (“Revolving Credit Facility”) in June 2004 to fund the acquisition of River Parishes Hospital, as described in Note 9,

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and for general corporate purposes. The interest rate related to borrowings under the Revolving Credit Facility was 4.0% at June 30, 2004. In February 2004, the Company used available cash to repay the $20.0 million of indebtedness outstanding at December 31, 2003 under the Revolving Credit Facility.

NOTE 7 – PROFESSIONAL AND GENERAL LIABILITY RESERVES

     The Company is subject to medical malpractice lawsuits and other claims as part of providing healthcare services. To mitigate a portion of this risk, the Company maintains insurance for individual malpractice claims exceeding $10.0 million. The Company’s reserves for professional and general liability claims are based upon independent actuarial calculations, which consider historical claims data, demographic considerations, severity factors and other actuarial assumptions in determining reserve estimates. Reserve estimates are discounted to present value using a 5.0% discount rate and are revised twice each year by the Company’s independent actuaries. The estimated reserve for professional and general liability claims will be significantly affected if current and future claims differ from historical trends. While management monitors reported claims closely and considers potential outcomes as estimated by its actuaries when determining its professional and general liability reserves, the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes complicates the estimation process.

     The Company implemented enhanced processes in monitoring claims and managing losses in high risk areas during 2002 and 2003 to attempt to reduce loss levels and appropriately manage risk. During the second quarter of 2004, the Company received revised reserve estimates for professional and general liability claims from its actuaries based upon more current loss experience information. In addition, the Company ceased receiving reserve estimates from one of the three actuaries that had historically been used to calculate loss reserve estimates. This change in the Company’s estimation process reduced its reserve levels and related professional and general liability insurance expense in the second quarter of 2004 by $1.4 million on a pretax basis, or $0.02 per diluted share. The Company continues to derive its estimates for financial reporting purposes by using a mathematical average of the actuarial valuations from its other two actuaries. The results of the updated actuarial valuations from these two actuaries reduced the Company’s reserve estimates for years prior to 2004 by $1.0 million on a pretax basis, or $0.01 per diluted share, which reduced its professional and general liability expense in the second quarter of 2004.

     The reserve for professional and general liability claims was $27.5 million and $28.0 million at December 31, 2003 and June 30, 2004, respectively. The total cost of professional and general liability coverage, including the changes discussed above, for the three months ended June 30, 2003 and 2004 was $3.8 million and $1.2 million, respectively. The total cost of professional and general liability coverage, including the changes discussed above, for the six months ended June 30, 2003 and 2004 was $7.5 million and $4.8 million, respectively.

     The Company currently estimates that its professional and general liability expense for the year ended December 31, 2004 will be approximately $9 million to $11 million based upon current loss experience information. The Company’s reserve levels are monitored throughout the year and will be reassessed at year-end based upon updated actuarial estimates.

NOTE 8 – MEDICARE REIMBURSEMENT

     During the third quarter of 2003, the Company received correspondence from one of its fiscal intermediaries questioning a particular Medicare disproportionate share designation at one of its hospitals. This hospital has had this designation since 2001 and was previously approved for this designation by its fiscal intermediary. The Company and the fiscal intermediary worked together and contacted CMS for resolution of the designation. The Company reduced revenues by $3.0 million and $0.2 million during the third and fourth quarters of 2003, respectively, representing the three-year difference in reimbursement from this change in designation. The Company received notification from CMS late in the first quarter of 2004 reconfirming the original designation. Based upon the favorable resolution of this issue, the Company increased revenues by $3.2 million in the first quarter of 2004.

NOTE 9 – ACQUISITION OF RIVER PARISHES HOSPITAL

     Effective July 1, 2004, the Company acquired the 106-bed River Parishes Hospital in LaPlace, Louisiana from Universal Health Services, Inc. for approximately $24.5 million in cash, including certain working capital, which is

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included in unallocated purchase price on the Company’s accompanying condensed consolidated balance sheet as of June 30, 2004. The Company borrowed from its Revolving Credit Facility and paid the purchase price for this acquisition on June 30, 2004. Revenues for this facility were approximately $36.0 million during 2003, exclusive of physician revenues. The hospital is located approximately 30 miles west of New Orleans, Louisiana and is the only hospital located in St. John the Baptist Parish.

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

     We recommend that you read this discussion together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report.

     This report, including the condensed consolidated financial statements and related notes, contains forward-looking statements about the Company. Broadly speaking, forward-looking statements include forecasts of future financial results and conditions, expectations for future operations and business, and any assumptions underlying those forecasts and expectations. You should not unduly rely on forward-looking statements. Actual outcomes and results might differ significantly from forecasts and expectations. Please refer to “Factors that May Affect Future Results” later in this report for a discussion of some of the factors that may cause results to differ.

Executive Overview

     The first six months of 2004 were encouraging because of our solid operating performance and increased patient volume levels, including strong growth in inpatient surgeries. We continue to be guardedly optimistic regarding our outlook for the remainder of 2004 as a result of the improved reimbursement environment resulting from the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) and patient volumes more consistent with historical trends. During 2004, we are continuing to focus on physician recruiting and retention, investing capital in our hospitals and seeking additional hospital acquisitions that fit our non-urban strategy. As part of that strategy, we acquired the 106-bed River Parishes Hospital in LaPlace, Louisiana effective July 1, 2004, for approximately $24.5 million. The following table reflects our summarized operating results:

Revenue/Volume Trends

     The key metrics we use internally to evaluate our revenues are equivalent admissions, which equate to volume, and revenues per equivalent admission, which relate to pricing and acuity. We anticipate our patient volumes and related revenues will continue to be impacted by the following factors:

•

Physician Recruitment and Retention. Recruiting and retaining both primary care physicians and specialists for our non-urban communities is a key to increasing revenues and patient volumes. Continuing to add specialists should help our hospitals increase volumes by offering new services. We recruited 62 admitting physicians during the first six months of 2004. Of these 62 physicians recruited, 28 started in the first six months of 2004 and 34 are scheduled to start in the remainder of 2004.

•

Medicare Rate Increases. MMA provides a prescription drug benefit for Medicare beneficiaries and also contains numerous provisions that provide incremental funding to hospitals. Hospitals qualify for Medicare disproportionate share hospital (“DSH”) payments when their percentage of low-income patients exceeds 15%. A majority of our hospitals qualify to receive DSH payments. Effective April 1, 2004, MMA raised the cap on the DSH payment adjustment percentage from 5.25% to 12.0% for rural and small urban hospitals and specified that payments to all hospitals are based on the same conversion factor, regardless of geographic location. A majority of our hospitals are benefiting from these provisions.

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The following table lists our DSH payments from Medicare (in millions):

		Please refer to our 2003 Annual Report on Form 10-K for a discussion of other MMA provisions that affect our reimbursement.
•		Growth in Outpatient Services. A number of procedures once performed only on an inpatient basis have been, and will continue to be, converted to outpatient procedures. This conversion has occurred through continuing advances in pharmaceutical and medical technologies, and as a result of efforts made by payors to control costs. We anticipate that the long-term growth trend in outpatient services will continue. Generally, the payments we receive for outpatient procedures are less than those for similar procedures performed in an inpatient setting. The following table shows net outpatient, inpatient and other revenues as a percentage of our total revenues:

Other Trends

•

Increases in Provision for Doubtful Accounts. We continued to experience an increase in our provision for doubtful accounts during the first six months of 2004. The increase was the result of a combination of broad economic factors, including an increased number of uninsured patients and plan design changes increasing copayments and deductibles. The provision for doubtful accounts relates primarily to self-pay revenues. The following table reflects our self-pay revenues, net of charity and indigent care write-offs (in millions):

Our revenues are reduced when we write-off patient accounts identified as charity and indigent care. Our hospitals write-off a portion of a patient’s account upon the determination that the patient qualifies under a hospital’s charity and indigent care policy. The following table reflects our charity and indigent care write-offs (in millions):

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The approximate percentages of billed hospital receivables (which is a component of total receivables) is summarized as follows:

The approximate percentages of billed hospital receivables in summarized aging categories is as follows:

For the next several quarters, we anticipate that our provision for doubtful accounts will be approximately 9% to 10% of revenues. We are implementing a number of operating strategies which should increase our cash collections of self-pay revenues. If this trend of increasing self-pay revenues continues, it could have a material adverse effect on our results of operations and financial position in the future.

•

Shortage of Clinical Personnel and Increased Contract Labor Usage. In recent years, many hospitals, including the hospitals we own, have encountered difficulty in recruiting and retaining nursing and other clinical personnel. When we are unable to staff our nursing and clinical positions, we are required to use contract labor to ensure adequate patient care. Contract labor generally costs more per hour than employed labor. We have adopted a number of human resources strategies in an attempt to improve our ability to recruit and retain nursing and other clinical personnel. We expect that the staffing shortage related to nurses and other clinical personnel will continue in the near term.

Critical Accounting Estimates

     The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:

•		it requires assumptions to be made that were uncertain at the time the estimate was made; and
•		changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition.

     Our critical accounting estimates are more fully described in our 2003 Annual Report on Form 10-K and continue to include the following areas:

•		Allowance for doubtful accounts and provision for doubtful accounts;
•		Revenue recognition and allowance for contractual discounts;
•		Professional and general liability claims; and
•		Accounting for income taxes.

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     Update of Critical Accounting Estimates. Please refer to Note 7 of our condensed consolidated financial statements included elsewhere herein for a discussion of the impact of recent changes in our reserve for professional and general liability claims.

Results of Operations

Operating Results Summary

     The following tables present summaries of results of operations for the three and six months ended June 30, 2003 and 2004 (dollars in millions, except for revenues per equivalent admission):

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(a)		Represents our cost of salaries and benefits, including employee health benefits and workers compensation insurance, for all hospital and corporate employees and contract labor.
(b)		Includes our hospitals’ costs for pharmaceuticals, blood, surgical instruments and all general supply items, including the cost of freight.
(c)		Consists primarily of contract services, physician recruitment, professional fees, repairs and maintenance, rents and leases, utilities, insurance, information systems fees paid to HCA Information Technology and Services, Inc. (“HCA-IT”), marketing and non-income taxes.
(d)		Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to our hospitals and is used by management and investors as a general measure of inpatient volume.
(e)		Management and investors use equivalent admissions as a general measure of combined inpatient and outpatient volume. We compute equivalent admissions by multiplying admissions (inpatient volume) by the outpatient factor (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 total number of hospital-based emergency room visits.
(g)		Outpatient surgeries are those surgeries that do not require admission to our hospitals.
(h)		Same-hospital information excludes the operations of hospitals that we acquired after January 1, 2003.
(i)		Refers to acuity or severity of illness of an average Medicare patient at our hospitals.
(j)		Inpatient and outpatient surgeries for 2003 and the first quarter of 2004 were restated to reflect appropriate amounts during these periods. This change produced no impact on our historical results of operations.

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For the Quarters Ended June 30, 2003 and 2004

Revenues

     Our revenues for the quarter ended June 30, 2004 increased by $24.8 million, or 11.2%, to $246.4 million compared to the quarter ended June 30, 2003. This increase is attributable to a number of factors, including:

	•		$18.5 million increase in our same-hospital revenues; and
	•		$6.3 million in revenues from our 2003 acquisition of Spring View Hospital.

     Adjustments to estimated reimbursement amounts increased our revenues by $0.8 million for the quarter ended June 30, 2004 compared to $1.4 million for the same period in 2003. Our DSH payments from Medicare for the quarter ended June 30, 2004 were $5.6 million, an increase of $2.9 million over the same period in 2003. This increase is primarily the result of the DSH payment increases under MMA.

     Our same-hospital inpatient revenues for the quarter ended June 30, 2004 increased by $11.1 million, or 10.4%, to $117.8 million compared to the quarter ended June 30, 2003. The primary factor causing this change was a 7.8% increase in same-hospital inpatient surgeries, which involve higher intensive procedures. The increase in higher intensive procedures is the result of capital spending at our facilities and strong physician recruitment in the past year.

     Our same-hospital outpatient revenues for the quarter ended June 30, 2004 increased by $6.6 million, or 5.9%, to $119.4 million compared to the quarter ended June 30, 2003. This outpatient growth was largely driven by an increase in radiology procedures such as CT-scans and MRIs, as well as cardiac catheterization procedures. This increase was partially offset by a 0.3% decrease in same-hospital outpatient surgeries and a 0.5% decrease in same-hospital emergency room visits.

     After factoring all of the above, our equivalent admissions increased by 0.1% on a same-hospital basis for the quarter ended June 30, 2004 compared to the same period in 2003. As it relates to pricing and acuity, our same-hospital revenues per equivalent admission for the quarter ended June 30, 2004 increased 8.2%, or $408 per equivalent admission, over the same period in 2003, reflecting positive pricing trends and higher intensive procedures as discussed above.

     The table below shows the sources of our revenues for the quarters ended June 30, expressed as percentages of total revenues:

     Our historical sources of revenues table in our quarterly and annual reports filed with the Securities and Exchange Commission (the “SEC”) prior to our 2003 Annual Report on Form 10-K required certain reclassifications. Specifically, contractual discounts relating to certain Medicaid state managed care programs were historically classified incorrectly as HMOs, PPOs and other private insurers revenues, instead of as Medicaid revenues. This change produced no impact on our historical results of operations. Generally, these reclassifications reduced Medicaid as a percentage of total revenues and increased HMOs, PPOs and other private insurers as a percentage of total revenues.

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Expenses

     Salaries and benefits increased as a percentage of revenues to 41.2% for the quarter ended June 30, 2004 from 41.0% for the quarter ended June 30, 2003, primarily as a result of an increase in resource-intensive services provided. Man-hours per equivalent admission increased 2.0% for the quarter ended June 30, 2004 over the same period last year. We had a 6.2% increase in salaries and benefits per man-hour in the quarter ended June 30, 2004 compared to the same period in 2003. However, our contract labor costs decreased by 9.2% to $3.7 million in the quarter ended June 30, 2004 compared to $4.1 million in the quarter ended June 30, 2003. Appropriate staffing and minimizing the use of contract labor will continue to be a significant initiative for us.

     Supply costs as a percentage of revenues remained constant at 13.0% in the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003, on both a consolidated and same-hospital basis. On a consolidated and same-hospital basis, our cost of supplies per equivalent admission increased 8.3% and 8.8%, respectively, in the quarter ended June 30, 2004 as a result of rising supply costs compared to the same period in 2003, particularly in the pharmaceutical, cardiac and spine and joint implant areas. In addition, our same-hospital surgeries, which generally incur higher supply costs per equivalent admission, increased by 1.8% for the quarter ended June 30, 2004 over the same period last year.

     Other operating expenses decreased as a percentage of revenues to 16.5% in the quarter ended June 30, 2004 from 19.4% in the quarter ended June 30, 2003, primarily as a result of the 11.2% increase in our revenues and a $2.6 million decrease in our professional and general liability insurance expense. A portion of our other operating expenses are fixed and not volume driven. Our professional and general liability insurance expense was $1.2 million during the quarter ended June 30, 2004 compared to $3.8 million in the quarter ended June 30, 2003. This decrease relates to favorable loss experience as reflected in our external actuarial reports and a change in actuaries used to estimate projected losses under the self-insured portion of our insurance program, as further discussed in Note 7 of our condensed consolidated financial statements included elsewhere herein. In addition, our physician recruiting costs decreased from $2.9 million in the quarter ended June 30, 2003 to $2.1 million in the quarter ended June 30, 2004 as a result of a $0.7 million cash collection from a departed physician.

     Provision for doubtful accounts increased as a percentage of revenues to 8.6% in the quarter ended June 30, 2004 from 7.6% in the quarter ended June 30, 2003. The provision for doubtful accounts related primarily to self-pay amounts due from patients. Our self-pay revenues, net of charity and indigent care write-offs, increased by 28.8% from $18.1 million for the quarter ended June 30, 2003 to $23.3 million for the quarter ended June 30, 2004. The factors influencing this increase are primarily a combination of broad economic factors, including the increased number of uninsured patients and plan design changes increasing copayments and deductibles. On a same-hospital basis, the provision for doubtful accounts increased as a percentage of revenues to 8.5% in the quarter ended June 30, 2004 from 7.6% in the quarter ended June 30, 2003.

     Depreciation and amortization expense increased to $12.0 million in the quarter ended June 30, 2004 from $11.4 million in the quarter ended June 30, 2003, primarily as a result of our acquisition of Spring View Hospital in the fourth quarter of 2003 and depreciation associated with recently completed capital improvements at our facilities.

     The provision for income taxes increased to $12.9 million in the quarter ended June 30, 2004 from $10.4 million in the quarter ended June 30, 2003. The income tax provisions reflected an effective income tax rate of 40.7% for the quarter ended June 30, 2004 compared to 40.3% for the quarter ended June 30, 2003. The effective tax rate increased primarily as a result of the increase in the nondeductible ESOP expense, which increased by $1.0 million in the quarter ended June 30, 2004, as compared to the same period in 2003.

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For the Six Months Ended June 30, 2003 and 2004

Revenues

     Our revenues for the six months ended June 30, 2004 increased by $60.5 million, or 13.7%, to $503.0 million compared to the six months ended June 30, 2003. This increase is attributable to a number of factors, including:

	•		$47.6 million increase in our same-hospital revenues; and
	•		$12.9 million in revenues from our 2003 acquisition of Spring View Hospital.

     Adjustments to estimated reimbursement amounts increased our revenues by $2.2 million for the six months ended June 30, 2004 compared to $4.3 million for the same period in 2003. In addition, as discussed in Note 8 to our condensed consolidated financial statements, we recognized $3.2 million in additional revenues for the quarter ended March 31, 2004 following the confirmation by CMS of a Medicare DSH designation at one of our hospitals. Our DSH payments from Medicare for the six months ended June 30, 2004 were $8.8 million, an increase of $3.7 million over the same period in 2003. This increase is primarily the result of the DSH payment increases under MMA.

     Our same-hospital inpatient revenues for the six months ended June 30, 2004 increased by $27.2 million, or 12.7%, to $241.0 million compared to the six months ended June 30, 2003. The primary factors causing this change were increases in admissions and inpatient surgeries, which involve higher intensive procedures. The increase in higher intensive procedures is the result of capital spending at our facilities and strong physician recruitment in the past year.

     Our same-hospital outpatient revenues for the six months ended June 30, 2004 increased by $19.8 million, or 8.8%, to $243.4 million compared to the six months ended June 30, 2003. This outpatient growth was largely driven by a 1.2% increase in same-hospital outpatient surgeries, a 1.1% increase in same-hospital emergency room visits and an increase in radiology procedures such as CT-scans and MRIs, as well as cardiac catheterization procedures. In addition, the $19.8 million increase in revenues includes $3.2 million from the Medicare DSH designation described in Note 8 to our condensed consolidated financial statements.

     After factoring all of the above, our equivalent admissions increased by 2.8% on a same-hospital basis for the six months ended June 30, 2004 compared to the same period in 2003. As it relates to pricing and acuity, our same-hospital revenues per equivalent admission for the six months ended June 30, 2004 increased 7.8%, or $384 per equivalent admission, over the same period in 2003 reflecting positive pricing trends and higher intensive procedures as discussed above.

     The table below shows the sources of our revenues for the six months ended June 30, expressed as percentages of total revenues: