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UNITED STATES

FORM 10-Q

(Mark One)

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

		For the quarterly period ended September 30, 2004

OR

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

		For the transition period from                 to

Commission file number 1-11239

HCA Inc.

(615) 344-9551

Not Applicable

     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 as of the latest practicable date.

HCA INC.

Form 10-Q

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HCA INC.

See accompanying notes.

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HCA INC.

See accompanying notes.

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HCA INC.

See accompanying notes.

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HCA INC.

      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 September 30, 2004, these affiliates owned and operated 183 hospitals, 81 freestanding surgery centers and provided extensive outpatient and ancillary services. Affiliates of HCA Inc. are also partners in joint ventures that own and operate seven hospitals and ten 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. Costs that could be classified as general and administrative by HCA would include the HCA corporate office costs, which were $39 million and $40 million for the quarters ended September 30, 2004 and 2003, respectively, and $115 million and $113 million for the nine months ended September 30, 2004 and 2003, respectively. Operating results for the quarter and nine months ended September 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.

      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.

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      As required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), HCA has determined 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 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 September 30, 2004 and 2003 were $11.78 and $10.69 per share, respectively. For the nine months ended September 30, 2004 and 2003 the weighted average fair values were $12.90 and $13.49 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, historical market price data for periods 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 an 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.

      A substantial portion of HCA’s professional liability risks is insured through a wholly-owned insurance subsidiary of HCA, which is funded annually. Reserves for professional liability risks were $1.590 billion and $1.624 billion at September 30, 2004 and December 31, 2003, respectively. The current portion of these reserves, $310 million at both September 30, 2004 and December 31, 2003, is included in “other accrued expenses” in the condensed consolidated balance sheet. Provisions for losses related to professional liability

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risks were $82 million and $95 million for the quarters ended September 30, 2004 and 2003, respectively, and $210 million and $282 million for the nine months ended September 30, 2004 and 2003, respectively, and are classified in “other operating expenses” in the Company’s condensed consolidated income statement. The provision for losses for the nine months ended September 30, 2004 includes a $59 million reduction, or $0.07 per diluted share, to the Company’s estimated professional liability insurance reserves. The amount of the change to the estimated professional liability insurance reserves was determined based upon the semiannual, independent actuarial analyses, which noted favorable claim and payment trends, the adoption of tort reform and limitations on losses in certain states and low inflation rates. HCA believes the favorable claim and payment trends are, in part, the result of the Company’s patient safety programs.

      In October 2004, the FASB concluded that Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), which would require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value, would be effective for public companies for interim or annual periods beginning after June 15, 2005. Retroactive application of the requirements of SFAS 123 (not SFAS 123R) to the beginning of the fiscal year that includes the effective date would be permitted, but not required. HCA would be required to apply SFAS 123R beginning July 1, 2005 (adopt SFAS 123R in its financial statements for the quarter ending September 30, 2005), and could choose to apply SFAS 123 retroactively from January 1, 2005 to June 30, 2005 (restate the year-to-date period in its third quarter 2005 Form 10-Q to account for all share-based payments under the fair value method from January 1, 2005; under SFAS 123 for the first six months and under SFAS 123R thereafter). The cumulative effect of adoption, if any, would be measured and recognized on July 1, 2005. The FASB’s current plan is to issue SFAS 123R during December 2004. SFAS 123R is expected to have a material effect on HCA’s consolidated financial statements. The stock-based employee compensation expense determined under a fair value method, net of income taxes, was $22 million and $20 million, for the quarters ended September 30, 2004 and 2003, respectively, and was $65 million and $73 million for the nine months ended September 30, 2004 and 2003, respectively.

      In May 2003, the Financial Accounting Standards Board (“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 of 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. In October 2003, the FASB voted to defer for an indefinite period, the application of the SFAS 150 guidance to noncontrolling interests in limited-life subsidiaries. The FASB decided to defer this application of SFAS 150 to allow them the opportunity to consider possible implementation issues that would result from the proposed SFAS 150 guidance regarding measurement and recognition of noncontrolling interests. HCA will assess the impact of the FASB’s reconsiderations, if any, on the Company’s consolidated financial statements when they are finalized.

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NOTE 2 — INVESTIGATIONS AND SETTLEMENT OF CERTAIN GOVERNMENT CLAIMS

      Commencing in 1997, HCA became aware it was the subject of governmental investigations and litigation relating to its business practices. The investigations were concluded through a series of agreements executed in 2000 and 2003. In January 2001, HCA entered into an eight-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the Department of Health and Human Services.

      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 during the year ended December 31, 2001.

      During June 2003, HCA also announced that the Company and the Civil Division of the Department of Justice (the “DOJ”) had signed agreements, documenting the understanding announced in December 2002, 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. HCA 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. HCA also paid $33 million for legal fees of the private parties who had brought qui tam actions against the Company.

      If HCA were 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.

      During the nine months ended September 30, 2004, HCA sold one hospital, opened one hospital and closed one hospital. During the first nine months of 2003, HCA recognized a net pretax gain of $85 million ($49 million after-tax) on the sales of two leased hospitals and two consolidating hospitals and a working capital settlement related to a sale completed in 2002. Proceeds from the sales were used to repay bank borrowings.

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      The following is a summary of acquisitions consummated during the nine months ended September 30, 2003 (dollars in millions):

      The purchase price paid in excess of the fair value of identifiable net assets of acquired entities aggregated $506 million in 2003. 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 the third quarter of 2004, HCA announced plans to close a hospital. The carrying value for the hospital was reduced to fair value of $39 million, based upon estimates of sales value, resulting in a pretax charge of $12 million ($7 million after-tax). The impairment charge affected HCA’s Western Group and affected HCA’s “property and equipment” asset category.

      Management’s estimates of sales values are generally based upon internal evaluations that include quantitative analyses of net revenues and cash flows, reviews of recent sales of similar facilities and market responses based upon discussions with and offers received from potential buyers. The market responses are usually considered to provide the most reliable estimates of fair value.

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

      HCA is currently contesting before the Appeals Division of the Internal Revenue Service (the “IRS”), the United States Tax Court (the “Tax Court”), and the United States Court of Federal Claims certain claimed deficiencies and adjustments proposed by the IRS in conjunction with its examinations of HCA’s 1994-2000 Federal income tax returns, Columbia Healthcare Corporation’s (“CHC”) 1993 and 1994 Federal income tax returns, HCA-Hospital Corporation of America’s (“Hospital Corporation of America”) 1991 through 1993 Federal income tax returns and Healthtrust, Inc. — The Hospital Company’s (“Healthtrust”) 1990 through 1994 Federal income tax returns.

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      During 2003, the United States Court of Appeals for the Sixth Circuit affirmed a Tax Court decision received in 1996 related to the IRS examination of Hospital Corporation of America’s 1987 through 1988 Federal income tax returns, in which the IRS contested the method that Hospital Corporation of America used to calculate its tax allowance for doubtful accounts. HCA filed a request for review by the United States Supreme Court, which was denied in October 2004. Due to the volume and complexity of calculating the tax allowance for doubtful accounts, the IRS has not determined the amount of additional tax and interest that it may claim for subsequent taxable years.

      Other disputed items include the timing of recognition of certain patient service revenues in 2000, the amount of insurance expense deducted in 1999 and 2000, and the amount of gain or loss recognized on the divestiture of certain noncore business units in 1998. The IRS is claiming an additional $397 million in income taxes and interest, through September 30, 2004, with respect to these issues.

      During 2004, the IRS began an examination of HCA’s 2001 through 2002 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 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, computed using the treasury stock method.

      The following table sets forth the computation of basic and diluted earnings per share for the quarters and nine months ended September 30, 2004 and 2003 (dollars in millions, except per share amounts, and shares in thousands):

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NOTE 7 — INVESTMENTS OF INSURANCE SUBSIDIARY

      A summary of the insurance subsidiary’s investments at September 30, 2004 and December 31, 2003 follows (dollars in millions):

      The fair value of investment securities is generally based on quoted market prices. At September 30, 2004 and December 31, 2003, the investments of HCA’s insurance subsidiary were classified as “available for sale.”

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The aggregate common stock investment is comprised of 516 equity positions at September 30, 2004, with 406 positions reflecting unrealized gains and 110 positions reflecting unrealized losses (none of the individual unrealized loss positions exceed $2 million). No equity positions had experienced a continuous decline from cost for more than one year at September 30, 2004. The equity positions (including those with unrealized losses) at September 30, 2004, are not concentrated in any particular industries.

NOTE 8 — LONG-TERM DEBT

      HCA’s revolving credit facility (the “Credit Facility”) is a $1.750 billion agreement expiring April 2006. As of September 30, 2004, HCA had $1.692 billion available under the Credit Facility.

      As of September 30, 2004, 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 September 30, 2004, HCA was in compliance with all such covenants.

NOTE 9 — STOCK REPURCHASE PROGRAMS

      In April 2003, HCA announced an authorization to repurchase up to $1.5 billion of its common stock. During the first nine months of 2004, HCA repurchased 14.5 million shares of its common stock for $600 million, which completed this authorization. During the first nine months of 2003, HCA repurchased 16.2 million shares of its common stock for $537 million under this authorization.

      In July 2002, HCA announced an authorization to repurchase up to 12 million shares of its common stock. During the first nine months of 2003, HCA repurchased 5.8 million shares for $214 million, which completed the repurchases under this authorization.

NOTE 10 — CONTINGENCIES

      HCA 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 (see Note 2 — Investigations and Settlement of Certain Government Claims). The resolution of any such lawsuits, claims or legal and regulatory proceedings could have a material, adverse affect on HCA’s results of operations and financial position in a given period.

      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.

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NOTE 11 — COMPREHENSIVE INCOME

      The components of comprehensive income, net of related taxes, for the quarters and nine months ended September 30, 2004 and 2003 are as follows (in millions):

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