UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended March 31, 2012; or
For the fiscal year ended March 31, 2013; or
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 0-23511

~~INTEGRATED HEALTHCARE HOLDINGS, INC.~~________________

Integrated Healthcare Holdings, Inc.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Nevada	87-0573331
(STATE OF INCORPORATION)	(I.R.S. EMPLOYER IDENTIFICATION NO.)

1301 North Tustin Avenue, Santa Ana, California	92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	(ZIP CODE)

Registrant's telephone number, including area code: (714) 953-~~3503~~3652

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

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

Common Stock, $.001 par value

(TITLE OF CLASS)

______________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer, accelerated filer or smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

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

The aggregate market value of voting stock held by non-affiliates of the registrant was $1,~~167~~867,~~350~~760 as of September 30, ~~2011~~2012 (computed by reference to the last sale price of a share of the registrant's common stock on that date as reported by the ~~Over~~OTCQB ~~the Counter Bulletin Board)~~marketplace. For purposes of this computation, it has been assumed that the shares beneficially held by directors and officers of registrant were "held by affiliates"; this assumption is not to be deemed to be an admission by such persons that they are affiliates of registrant.

There were 255,307,262 shares outstanding of the registrant's common stock as of June 18, ~~2012~~2013.

DOCUMENTS INCORPORATED BY REFERENCE:

No portions of other documents are incorporated by reference into this Annual Report.

INTEGRATED HEALTHCARE HOLDINGS, INC.

FORM 10-K

ANNUAL REPORT FOR THE YEAR ENDED MARCH 31, ~~2012~~ 2013

TABLE OF CONTENTS

PART I			1
	ITEM 1.	BUSINESS	1
	ITEM 1A.	RISK FACTORS	1415
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	1920
	ITEM 2.	PROPERTIES	2021
	ITEM 3.	LEGAL PROCEEDINGS	2122
	ITEM 4.	MINE SAFETY DISCLOSURES	2122
PART II			22
	ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	2223
	ITEM 6.	SELECTED FINANCIAL DATA	2324
	ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2324
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	34
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	34
	ITEM 9A.	CONTROLS AND PROCEDURES	34
	ITEM 9B.	OTHER INFORMATION	35
PART III			36
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	36
	ITEM 11.	EXECUTIVE COMPENSATION	40
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	42
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	44
	ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	45
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	46
		SIGNATURES	4849

PART I

FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K contains forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks discussed under the caption "Risk Factors" herein that may cause our Company's or our industry's actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as may be required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

As used in this report, the terms "we," "us," "our," "the Company," "Integrated Healthcare Holdings" or "IHHI" mean Integrated Healthcare Holdings, Inc., a Nevada corporation, unless otherwise indicated.

ITEM 1. BUSINESS

BACKGROUND

Integrated Healthcare Holdings, Inc. is a predominantly physician owned company that, on March 8, 2005, acquired and began operating the following four hospital facilities in Orange County, California ~~(referred to as the "Hospitals")~~:

●• 282-bed Western Medical Center in Santa Ana ●• 188-bed Western Medical Center in Anaheim ●• 178-bed Coastal Communities Hospital in Santa Ana ●• 114-bed Chapman Medical Center in Orange

Together we believe that ~~the~~our ~~Hospitals~~hospitals currently represent approximately 11.62% of all hospital beds in Orange County, California (based on the most recent data, as of ~~June~~December 3031, ~~2011~~2012, on the website of the Office of Statewide Health Planning and Development for California).

Prior to March 8, 2005, we were primarily a development stage company with no material operations. On September 29, 2004, the Company entered into a definitive agreement to acquire the four ~~Hospitals~~hospitals from subsidiaries of Tenet Healthcare Corporation ("Tenet"), and the transaction closed on March 8, 2005.

The transaction included operations of four licensed general acute care hospitals with a total of 762 beds. All four hospitals are accredited by the Joint Commission on Accreditation of Healthcare Organizations and other appropriate accreditation agencies that accredit specific programs. All properties are in Orange County, California, and operate as described below.

WESTERN MEDICAL CENTER – - SANTA ANA. Western Medical Center - Santa Ana, located at 1001 North Tustin Avenue, Santa Ana, CA 92705, is Orange County's first hospital, founded over 100 years ago. The hospital is one of IHHI's two hospitals in Santa Ana, which are the only two general acute care hospitals in this city of 325,000 people. The hospital has 282 beds and provides quaternary, tertiary and secondary services. It serves the entire county as one of only three designated trauma centers in Orange County along with other tertiary services such as burn center, emergency and scheduled neurosurgical care, cardiac surgical services, a paramedic base station and receiving center. The hospital also maintains Intensive Care Units for adults and pediatrics, and a Neonatal Intensive Care Unit. Additionally, the hospital offers telemetry, neurosurgical definitive observation, medical, surgical, pediatric and obstetric inpatient services. Supporting these services the hospital offers operating and recovery rooms, radiology services, respiratory therapy services, clinical laboratories, pharmacy, physical and occupational therapy services on an inpatient and most on an outpatient basis. The hospital has approximately ~~258~~115 active physicians and ~~436~~415 employee nurses, and hospital staff.

WESTERN MEDICAL CENTER – - ANAHEIM. Western Medical Center - Anaheim, located at 1025 South Anaheim Boulevard, Anaheim, CA 92805, has 188 beds and offers a full range of acute medical and psychiatric care services serving northern Orange County and providing tertiary services to Riverside County residents. The hospital offers special expertise in the tertiary services of The Heart and Vascular Institute, and Behavioral Health Services. Additionally, the hospital provides the Women and Children Health Services, and 24-hour Emergency Services. Supporting these services the hospital offers critical care, medical, surgical and psychiatric services supported by operating and recovery rooms, radiology services, respiratory therapy services, clinical laboratories, pharmacy, physical and occupational therapy services on an inpatient and outpatient basis. The hospital has approximately 7388 active physicians and ~~222~~221 employee nurses, and hospital staff.

COASTAL COMMUNITIES HOSPITAL – - SANTA ANA. Coastal Communities Hospital, located in Santa Ana at 2701 South Bristol Street, Santa Ana, CA 92704, has served the community for more than 30 years, providing comprehensive medical and surgical services ~~in a caring and compassionate environment~~. The hospital is one of IHHI's two hospitals in Santa Ana, which are the only two general acute care hospitals in this city of 325,000 people. The hospital has tailored its services to meet the changing needs of the community. The hospital's staff reflects the cultural diversity of the community and is particularly responsive and sensitive to diverse healthcare needs. The 178-bed hospital offers critical care, medical, surgical obstetric, psychiatric and sub-acute services supported by operating and recovery rooms, radiology services, respiratory therapy services, clinical laboratories, pharmacy, physical and occupational therapy services on an inpatient and most on an outpatient basis. The hospital has approximately 62 active physicians and ~~183~~182 employee nurses, and hospital staff.

CHAPMAN MEDICAL CENTER – - ORANGE. Founded in 1969, Chapman Medical Center is a 114-bed acute care facility located at 2601 East Chapman Avenue, Orange, CA 92869. The hospital's ~~advanced~~is ~~capabilities position the facility as~~ a leader in specialty niche programs, including the following ~~centers~~: Chapman Center for Obesity (surgical weight loss program); ~~Center for Heartburn and Swallowing;~~ Neuro-spine Center; Center for Senior Mental Health; and Positive ~~Action~~Achievement Center (Adult and Adolescent Chemical Dependency Program). Supporting these services the hospital offers critical care, medical, surgical and geriatric psychiatric services supported by operating and recovery rooms, radiology services, respiratory therapy services, clinical laboratories, pharmacy, physical and occupational therapy services ~~on an inpatient and most on an outpatient basis~~. The hospital has approximately 2834 active physicians and ~~108~~113 employee nurses, and hospital staff.

EMPLOYEES AND MEDICAL STAFF

At March 31, ~~2012~~2013, the Company had approximately 3,~~030~~012 employees. Of these employees, approximately 1,~~303~~113 are represented by two labor unions, the California Nurses Association ("CNA") and Service Employee International Union -– United Healthcare Workers ("SEIU"), who are covered by collective bargaining agreements. We believe that our relations with our employees are good. The Company also had approximately ~~104~~134 individuals from contracting agencies at March 31, ~~2012~~2013, consisting primarily of ~~housekeeping~~outsourced housekeeping staff.

Our hospitals are fully staffed by physicians and other independently practicing medical professionals licensed by the State, who have been admitted to the medical staff of the individual hospital. Under state laws and licensing standards, hospitals' medical staffs are self-governing organizations subject to ultimate oversight by the hospital's local governing board. None of these physicians are employees of the hospitals. Physicians are not limited to medical staff membership at our hospitals, and many are on staff at our other hospitals, or hospitals not owned or operated by us. Physicians on our medical staffs are free to terminate their membership on our medical staffs and admit their patients to other hospitals, owned, or not owned by us. Non-physician staff, including nurses, therapists, technicians, finance, registration, maintenance, clerical, housekeeping, and administrative staff are generally employees of the hospital, unless the service is provided by a third party contracted entity. We are subject to federal and state minimum wage and hour laws and various state labor laws and maintain an employee benefit plan.

Our hospitals' operations depend on the abilities, efforts, experience and loyalty of our employees and physicians, most of who have noa long-term ~~contractual~~ relationship with our hospitals. Our ongoing business relies on our attraction of skilled, quality employees, physicians and other healthcare professionals in all disciplines.

We strive to successfully attract and retain key employees, physicians and healthcare professionals. Our operations, financial position and cash flows could be materially adversely affected by the loss of key employees or sufficient numbers of qualified physicians and other healthcare professionals. The relations we have with our employees, physicians, and other healthcare professionals are key to our success and they are a priority in our management philosophy.

NURSING CAN HAVE A SIGNIFICANT EFFECT ON OUR LABOR COSTS. THE NATIONAL NURSING SHORTAGE CONTINUES AND IS SERIOUS IN CALIFORNIA. THE RESULT HAS BEEN AN INCREASE IN THE COST OF NURSING PERSONNEL, THUS AFFECTING OUR LABOR EXPENSES. RECENTLY, THERE HAS BEEN SOME LESSENING IN THE NEED FOR CONTRACT AGENCY NURSES FOLLOWING THE RECESSION AS NURSES RETURN TO THE WORK FORCE. THERE IS STILL NO BASIS TO PREDICT THE LONGEVITY OF THIS EFFECT. ADDITIONALLY, CALIFORNIA INSTITUTED MANDATORY NURSE STAFFING RATIOS, THUS SETTING A HIGH LEVEL OF NURSES TO PATIENTS, BUT ALSO REQUIRING NURSING STAFF RATIOS BE MAINTAINED AT ALL TIMES EVEN WHEN ON BREAKS OR LUNCH. THESE REQUIREMENTS IN THE ENVIRONMENT OF A SEVERE NURSING SHORTAGE MAY CAUSE THE LIMITING OF PATIENT ADMISSIONS WITH AN ADVERSE EFFECT ON OUR REVENUES. OUR PLAN IS TO IMPROVE COMPLIANCE AND REDUCE THE COST OF CONTRACT LABOR NEEDED TO ACHIEVE THE NURSE STAFFING RATIOS.COMPETITION

~~COMPETITION~~Hospital competition is unique to each facility and the community in which it operates. A hospital’s competitive position within its geographic area is affected by several factors, including, but not limited to the following:

~~Hospital~~A ~~competition~~hospital’s competitive position is ~~unique~~affected by the services the hospital offers and whether other hospitals in the area offer the same or similar services. Hospitals are dependent on physicians to ~~each~~admit ~~facility~~patients to the hospital. Thus, the number of physicians around the hospital, their specialties, and the ~~community~~quality of medicine they practice will have a major impact on hospital competition. The ability of the hospital to employ and retain qualified nurses, other health care professionals, and administrative staff will also affect the hospitals’ competitiveness in ~~which~~the itmarket ~~operates~~place. AFurther, a hospital’s reputation with patients, physicians, employees, and contracting health plans can influence the hospital’s competitive position. Southern California ~~within~~is ~~its~~a ~~geographic~~highly ~~area~~competitive ismanaged ~~affected~~health bycare ~~several~~market; ~~factors~~therefore, ~~including~~the relationship a hospital has with managed care organizations is also a key factor in its competitiveness. The hospital’s location, ~~but~~the ~~not~~community ~~limited~~immediately surrounding it and access to the ~~following:~~hospital will also affect the hospital’s competitiveness. Other hospitals or health care organizations serving the same locations determine the intensity of the competition. The condition of the physical plant and the ability to invest in new equipment and technology can affect the community’s and physicians’ desire to use a particular hospital. The amount the hospital charges for services is another factor in the hospital’s competitiveness. The funding sources of the competition may also be a factor if a competitor is tax exempt. Tax-exempt institutions have advantages not available to for-profit hospitals, such as endowments, charitable contributions, tax-exempt financing, and exemptions from certain taxes.

AEfforts ~~hospital’s~~to ~~competitive~~control health ~~position~~care iscosts ~~affected~~are byencouraging ~~the~~vertical ~~services~~integration ~~the hospital offers and whether other hospitals~~ in the ~~area~~health ~~offer~~care ~~the same or similar~~ services~~. Hospitals~~ ~~are dependent on physicians to admit patients to the hospital~~industry. ~~Thus,~~ ~~the~~Hospital ~~number~~systems ofare ~~physicians~~acquiring ~~around~~physician practices ~~the hospital, their specialties,~~ and ~~the quality of medicine they practice will have a major impact on hospital competition. The ability of the hospital to employ and retain qualified nurses,~~ other ~~health~~outpatient ~~care professionals~~ and ~~administrative~~sub-acute ~~staff~~providers ~~will~~to ~~also~~position ~~affect~~themselves ~~the~~for ~~hospitals’ competitiveness in the market place. Further~~readmission, ~~a hospital’s reputation with patients~~bundling, ~~physicians, employees,~~ and ~~contracting~~other ~~health~~payment ~~plans~~restructuring. Nonprofessional ~~can~~corporations ~~influence~~in the ~~hospital’s~~State ~~competitive~~of ~~position. Southern~~ California isare aprohibited ~~highly~~from ~~competitive~~employment ~~managed~~of ~~health~~physicians ~~care~~to ~~market;~~provide ~~therefore~~patient services. Similarly, ~~the~~payers ~~relationship~~are aconsolidating ~~hospital~~and ~~has~~acquiring ~~with~~disease ~~managed~~management ~~care~~service ~~organizations~~providers ~~is also a key factor~~ in ~~its~~an ~~competitiveness. The~~effort ~~hospital’s location, the community immediately surrounding it and access~~ to ~~the~~offer ~~hospital~~more ~~will~~competitive ~~also affect the hospital’s competitiveness~~programs. ~~Other~~ As ~~hospitals~~integrated or health ~~care~~systems ~~organizations~~come ~~serving~~to ~~the~~dominate ~~same locations determine~~ the ~~intensity~~markets of ~~the~~health ~~competition. The~~insurance ~~condition of the physical plant~~ and ~~the~~medical ~~ability to invest in new equipment and technology can affect the community’s and physicians’ desire to use a particular hospital. The amount the hospital charges for~~ services, ~~is also a factor in~~ the hospital’s ~~competitiveness. The~~industry ~~funding sources of the competition can also~~ will be adramatically ~~factor if a competitor is tax exempt~~affected. ~~Tax-exempt institutions have advantages not available to for-profit hospitals, such as endowments, charitable contributions, tax-exempt financing, and exemptions from certain taxes.~~

~~Efforts~~Finally, tolaws ~~control~~and ~~health~~regulations governing ~~care~~antitrust, ~~costs~~anti-kickback, ~~are encouraging vertical integration in the health care services industry. Hospital systems are acquiring~~ physician ~~practices~~referrals and other ~~outpatient~~applicable ~~and~~regulations, ~~sub-acute~~such ~~providers~~as torequirements ~~position~~imposed ~~themselves~~on ~~for readmission~~physician-owned hospitals, ~~bundling~~impact ~~and~~a ~~other~~hospital’s ~~payment~~ability ~~restructuring~~to compete. Since ~~Similarly,~~these ~~payers~~factors are ~~consolidating~~individual ~~and~~to ~~acquiring~~each ~~disease~~hospital, ~~management~~and ~~service~~are subject ~~providers in an effort~~ to ~~offer~~change, ~~more~~each ~~competitive~~hospital ~~programs. As~~must ~~integrated~~develop ~~health~~its ~~systems~~own ~~come~~strategies, to ~~dominate~~address the ~~markets~~competitive offactors ~~health~~in ~~insurance~~its ~~and~~local ~~medical~~service ~~services, the hospital industry will be dramatically affected~~area.

~~Finally~~We endeavor to ensure our hospitals remain competitive. We believe our hospitals compete within local communities on the basis of many factors, ~~laws~~including providing ~~and~~high ~~regulations~~quality ~~governing~~of ~~antitrust~~care, ~~anti-kickback~~attracting and retaining quality physicians, ~~physician~~and ~~referrals~~attracting and retaining skilled clinical personnel and other ~~applicable~~health ~~regulations,~~care ~~such~~professionals. asWe ~~requirements~~also ~~imposed~~believe onthat ~~physician-owned~~the location of our hospitals, ~~impact~~the ascope ~~hospital’s~~of ~~ability~~services towe ~~compete. Since~~offer, ~~these~~and ~~factors~~our prices ~~are~~for ~~individual~~services tohelp ~~each~~maintain ~~hospital,~~our ~~and~~competitive ~~are~~position. ~~subject~~We continue to ~~change,~~focus ~~each~~our ~~hospital~~efforts ~~must~~and ~~develop~~resources ~~its~~on ~~own~~these ~~strategies,~~areas to ~~address~~maintain a ~~the~~ competitive ~~factors~~position in ~~its~~the ~~local~~communities ~~service~~we ~~area~~serve.

WeHEALTH ~~endeavor~~CARE toREGULATION ~~ensure~~AND our Hospitals remain competitive. We believe our Hospitals compete within local communities on the basis of many factors, including providing high quality of care, attracting and retaining quality physicians, and attracting and retaining skilled clinical personnel and other health care professionals. We also believe that the location of our Hospitals, the scope of services we offer, and our prices for services help maintain our competitive position. We continue to focus our efforts and resources on these areas to maintain a competitive position in the communities we serve.LICENSING

~~HEALTH~~Health ~~CARE~~care, ~~REGULATION~~as ~~AND~~one of ~~LICENSING~~the largest industries in the United States, continues to attract much legislative interest and public attention. Changes in the Medicare and Medicaid programs and other government health care programs, as well as hospital cost-containment initiatives by public and private payers, proposals to limit payments and health care spending, and industry-wide competitive factors greatly affect the health care industry. The industry is also subject to extensive federal, state, and local regulations relating to licensure, operations, ownership of facilities, physician relationships, expansion of facilities and services, and charges and effective reimbursement rates for services. The laws, rules, and regulations governing the health care industry are extremely complex, and the industry often has little or no regulatory or judicial interpretation for guidance. Compliance with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Failure to comply with current or future regulatory requirements could also result in the imposition of various civil and criminal sanctions including fines, restrictions on admission, denial of payment for services rendered, revocation of licensure, decertification, imposition of temporary management or the closure of a facility.

Health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. Changes in the Medicare and Medicaid programs and other government health care programs, as well as hospital cost-containment initiatives by public and private payers, proposals to limit payments and health care spending, and industry wide competitive factors greatly affect the health care industry. The ~~industry~~Patient isProtection ~~also subject to extensive federal, state~~ and ~~local~~Affordable Care regulations relating to licensure, operations, ownership of facilities, physician relationships, expansion of facilities and services, and charges and effective reimbursement rates for services. The laws, rules and regulations governing the health care industry are extremely complex, and the industry often has little or no regulatory or judicial interpretation for guidance. Compliance with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Failure to comply with current or future regulatory requirements could also result in the imposition of various civil and criminal sanctions including fines, restrictions on admission, denial of payment for services rendered, revocation of licensure, decertification, imposition of temporary management or the closure of a facility.Act

~~The~~In 2010, the U.S. Congress adopted and President Obama signed into law comprehensive reform legislation through the passage of the Patient Protection and Affordable Care Act (H.R. 3590) and the Health Care and Education Reconciliation Act (H.R. 4872) (collectively, “PPACA”). The primary goal of this comprehensive legislation is to extend health coverage to millions of uninsured legal residents through a combination of public program expansion and private sector health insurance reforms. To fund the expansion of insurance coverage, the legislation contains measures designed to promote quality and cost efficiency in health care delivery and to generate budgetary savings in the Medicare and Medicaid programs. On June 23, 2012, the United States Supreme Court issued an opinion in National Federation of Independent Businesses v. Sebelius which upheld the constitutionality of the PPACA’s individual mandate. The Supreme Court also held that Congress is prohibited from penalizing states that choose not to expand their Medicaid programs by taking away their existing Medicaid funding.

InBecause ~~2010,~~of the ~~U.S.~~many variables ~~Congress~~involved, ~~adopted~~the ~~and President Obama signed into~~ law’s ~~comprehensive~~complexity, ~~reform legislation through the passage of the Patient Protection~~ and ~~Affordable Care Act (H.R. 3590) and~~ the ~~Health~~limited ~~Care~~amount ~~and Education Reconciliation Act (H.R. 4872) (collectively, “PPACA”). The primary goal~~ of ~~this~~implementing ~~comprehensive~~regulations ~~legislation is to extend health coverage to millions of uninsured legal residents through a combination of public program expansion~~ and ~~private~~interpretive ~~sector health insurance reforms. To fund the expansion of insurance coverage~~guidance, ~~the~~we are ~~legislation~~unable ~~contains measures designed~~ to ~~promote~~predict ~~quality~~with ~~and~~certainty ~~cost efficiency in health care delivery and to generate budgetary savings in~~ the ~~Medicare~~full ~~and~~impact ~~Medicaid~~of ~~programs. Although~~ the ~~law~~PPACA ~~became effective~~ on ~~March~~our ~~23,~~future ~~2010,~~revenues ~~many~~and ~~provisions~~operations. ~~of PPACA~~However, ~~including~~we ~~the~~expect ~~controversial~~that several ~~mandated minimum coverage~~ provisions, doof ~~not take effect until 2014. In March 2012,~~ the ~~United States Supreme Court heard arguments in cases challenging~~ PPACA ~~on several grounds~~, including ~~the constitutionality of the minimum coverage provisions and the severability of~~ those ~~provisions~~described ~~from~~below, ~~the~~will ~~other~~have ~~parts~~a ofmaterial ~~the~~effect ~~law.~~on ~~The~~our ~~Court is expected to publish its decision this summer~~business.

~~Because~~Health Benefit ofExchanges. ~~the~~The ~~many~~health ~~variables~~insurance ~~involved,~~marketplace wewill ~~are~~be ~~unable~~undergoing dramatic toand ~~predict~~rapid ~~with~~changes. ~~certainty~~Some of the ~~full~~core ~~impact~~provisions of the PPACA onhave ~~our~~already ~~future~~been ~~revenues~~implemented. ~~and~~Still, ~~operations~~many atprovisions ~~this~~of ~~time~~the PPACA, ~~due~~including to the ~~law’s~~mandated ~~complexity~~minimum coverage provisions, ~~the~~do ~~limited~~not ~~amount~~take ofeffect ~~implementing~~until ~~regulations~~2014. ~~and~~Under ~~interpretive~~the ~~guidance~~PPACA, ~~gradual~~beginning orin 2014, ~~potentially~~individuals ~~delayed~~and ~~implementation,~~small ~~pending~~businesses ~~Supreme~~will ~~Court~~be ~~challenges~~able ~~and~~to ~~possible~~purchase ~~amendment. However,~~insurance wethrough ~~expect~~health ~~that~~benefit ~~several~~exchanges. ~~provisions~~California’s health ofbenefit ~~PPACA~~exchange, ~~including~~Covered ~~those~~California ~~described below~~(“Exchange”), ~~will~~plans to ~~have~~begin aenrollment ~~material~~in ~~effect~~the onfall ~~our~~of ~~business~~2013.

3We cannot predict the effect the Exchange will have on our reimbursement, because the utilization profile among enrollees of health plans offered through the Exchange is uncertain. The guaranteed issue provision will remove a barrier preventing those with pre-existing conditions from obtaining individual coverage. Therefore, there is a potential for higher utilization rates among Exchange enrollees. Also, Exchange plans will employ high cost-sharing for a population that may not have experience with significant out-of-pocket medical costs and may not always have the means to pay. Measurement and reporting will be critically important to the Exchange, so our hospitals may experience greater administrative burdens as a result of contracting with insurers and health benefit plans offering products through the Exchange.

● Decreases in Annual Market Basket Updates. With varying effective dates, the annual Medicare market basket updates for many providers will be reduced, and adjustments to payment for expected productivity gains will be implemented. PPACA reduces the market basket update for hospitals beginning in 2012 by a productivity adjustment equal to the 10-year moving average of changes in annual economy-wide private non-farm business multifactor productivity. In addition to the productivity adjustment, the market basket will be reduced by 0.1% in 2012 and 2013, by 0.3% in 2014, by 0.2% in 2015 and 2016, and by 0.75% in 2017, 2018 and 2019. These reductions to the Hospitals’ reimbursements for inpatient services under Medicare by PPACA will adversely affect our business. ● Decreases in Medicare and Medicaid DSH Payments. Commencing in federal fiscal year 2014, Medicare Disproportionate Share Hospital (“DSH”) payments will be reduced initially by 75% and replaced by an increase to account for the national rate of consumers who do not have health care insurance and are provided uncompensated care. The rules for this uncompensated care adjustment have not yet been published. Commencing in 2014, a state’s Medicaid DSH allotment from federal funds will also be reduced. PPACA mandates reductions in Medicaid DSH allotment to states for the years 2014 through 2020. Any reductions to our reimbursement under Medicare and Medicaid programs by PPACA could adversely affect our business. Likewise, any reductions in Medicare and Medicaid DSH payments could adversely affect our business. ● Medicaid Expansion. Medicaid programs will be expanded to a broader population with incomes up to 133% of federal poverty levels. Further, the law permits states to create federally funded, non-Medicaid plans for low-income residents not eligible for Medicaid. To a lesser extent, PPACA also expands the Children’s Health Insurance Program (“CHIP”). Our Hospitals may achieve increased revenues from providing care to individuals who, prior to PPACA, were previously uninsured.

~~PPACA~~Individual ~~also~~and ~~contains~~Employer Mandates. ~~several~~The ~~provisions~~PPACA ~~intended~~seeks to ~~improve~~decrease the ~~quality~~number of uninsured individuals through employer mandates and ~~efficiency~~individual ofrequirements, which ~~medical~~may ~~care~~have ~~provided~~a topositive ~~Medicare~~effect ~~and~~on ~~Medicaid~~our ~~beneficiaries~~accounts receivable. We ~~anticipate~~However, ~~these~~due ~~provisions,~~to ~~including~~the ~~those~~lack ~~described~~of ~~below~~implementing regulations and clear guidance, it ~~may~~is ~~have~~difficult ato ~~material~~predict ~~effect~~the full impact the PPACA will have on our ~~business:~~results of operations.

●By ~~Hospital Readmissions Reduction Program. Commencing in federal fiscal year 2012~~law, ~~Medicare payments that would otherwise be made to hospitals~~ individuals will be ~~reduced~~required ~~by specified percentages~~ to ~~account~~carry ~~for~~insurance ~~excess~~after ~~and~~January ~~“preventable”~~1, ~~hospital~~2014 ~~readmissions.~~or ●face ~~Medicare and Medicaid Payment Reductions for Hospital-Acquired Conditions. A Hospital-Acquired Condition (“HAC”) is~~ a ~~condition~~tax ~~that is acquired by a patient while admitted as an inpatient to a hospital~~penalty. ~~Beginning~~Large ~~in 2015~~corporations, ~~the~~those ~~25% of hospitals~~ with ~~the~~50 highest national HAC rates will receive a 1% reduction in their Medicare payments for inpatient services. Similarly, under the Medicaid program, PPACA prohibits the use of federal funds to reimburse providers for medical services furnished to treat HACs. To the extent that Medicare or ~~Medicaid~~more ~~patients are admitted to the Hospitals to treat HACs, the Hospitals’ reimbursements could be reduced. ● Value~~full-~~Based~~time equivalent ~~Purchasing. Effective in 2012~~employees, ~~a value-based purchasing program~~ will be ~~established~~required ~~under~~to ~~the~~provide ~~Medicare~~insurance ~~program designed~~ to ~~pay~~full-time ~~hospitals~~employees ~~based on performance of quality measures for services rendered. Where a hospital meets~~ or ~~exceeds~~pay ~~the quality measures for the given time period, the base operating Diagnosis Related Group (“DRG”) payment amount is increased by~~ a ~~percentage for the following fiscal year~~penalty. ~~Where~~If aemployers ~~hospital~~shift ~~does~~from ~~not meet the quality measures for a given~~ full-time ~~period, the base operating DRG payment amount is decreased by a percentage for the following fiscal year. To the extent that the Hospitals meet or fail~~ to ~~meet the quality metrics under the value~~part-~~based~~time ~~purchasing program~~workforces, ~~their~~this ~~reimbursements~~could ~~for~~reduce ~~services furnished to Medicare patients may be affected. ● Accountable Care Organizations. PPACA required~~ the ~~Secretary~~impact ~~to establish a Medicare Shared Savings Program that promotes accountability and coordination~~ of ~~care through~~ the ~~creation~~PPACA ofwith ~~Accountable~~respect Care Organizations (“ACOs”). The first participation period for those ACOs accepted into the Medicare Shared Savings Program began on January 1, 2012. The second participation period began on April 1, 2012, and a third participation period will begin on July 1, 2012. If the Hospitals choose to ~~participate~~increasing in the ~~Shared~~number ~~Savings~~of ~~program,~~individuals ~~reimbursements~~who ~~for~~obtain health ~~inpatient~~insurance ~~and~~coverage outpatient services may be affected. ● Bundled Payment Pilot Program. In addition to the Medicare Shared Savings Program, PPACA requires the Secretary to establish a five-year, voluntary national bundled payment pilot program for Medicare services beginning no later than January 1, 2013. If the Hospitals receive approval to participate in ~~the pilot program, their reimbursements for inpatient and outpatient services may be affected~~2014.

AsChanges ~~a result of PPACA’s passage, the health care industry will be subjected~~ to significant new statutory and regulatory requirements and consequently to structural and operational changes and challenges for a substantial period of time. We will continue to assess the effect of PPACA and additional legislation on current and projected operations, financial performance and general financial condition.Reimbursement

4• Decreases in Annual Market Basket Updates. With varying effective dates, the annual Medicare market basket updates for many providers will be reduced, and adjustments to payment for expected productivity gains will be implemented. Beginning in fiscal year 2012 (and for each following fiscal year), the PPACA reduces the market basket update for hospitals by a productivity adjustment equal to the 10-year moving average of changes in annual economy-wide private non-farm business multifactor productivity. In addition to the productivity adjustment, the market basket will be reduced by 0.1% in 2013, by 0.3% in 2014, by 0.2% in 2015 and 2016, and by 0.75% in 2017, 2018 and 2019. These reductions to the hospitals’ reimbursements for inpatient services under Medicare by the PPACA will adversely affect our business. • Decreases in Medicare and Medicaid DSH Payments. Commencing in federal fiscal year 2014, Medicare Disproportionate Share Hospital (“DSH”) payments will be reduced initially by 75% and increased thereafter to account for the national rate of consumers who do not have health care insurance and are provided uncompensated care. The PPACA also mandates reductions in Medicaid DSH allotment to states for the years 2014 through 2020. The reduction of DSH payments is intended as a means of equalizing the benefit to providers of the increase in payments resulting from patients with newly-issued insurance coverage. Any reductions to our reimbursement under Medicare and Medicaid programs by the PPACA could adversely affect our business. Likewise, any reductions in Medicare and Medicaid DSH payments could adversely affect our business. • Medicaid Expansion. States have the option to decide whether their state Medicaid programs will be expanded to a broader population with incomes up to 133% of federal poverty levels. Further, the law permits states to create federally funded, non-Medicaid plans for low-income residents not eligible for Medicaid. To a lesser extent, the PPACA also expands the Children’s Health Insurance Program (“CHIP”). When California expands the Medi-Cal program, our hospitals may achieve increased revenues from providing care to individuals who, prior to the PPACA, were previously uninsured.

~~Medicare~~Quality Improvement and Cost-Saving Initiatives

~~Each~~The ofPPACA also ~~our~~contains ~~Hospitals~~several ~~participates~~provisions inintended ~~the~~to ~~Medicare~~improve ~~program. Medicare~~the isquality aand ~~federal~~efficiency ~~program~~of ~~that provides~~ medical ~~insurance~~care ~~benefits~~provided to ~~persons~~Medicare ~~age 65~~ and ~~over, some disabled persons, and persons with end-stage renal disease~~Medicaid beneficiaries. ~~Under~~We ~~the~~anticipate ~~Medicare~~these ~~program~~provisions, weincluding ~~are~~those ~~paid~~described ~~for inpatient and outpatient services performed by the Hospitals. Our Hospitals continue to be affected by changes in laws and regulations pertaining to Medicare~~below, ~~which~~can ~~are~~have ~~often~~a ~~designed~~material toeffect ~~reduce~~on ~~reimbursement~~our ~~rates.~~business:

~~Inpatient~~• ~~Acute~~Hospital ~~Care~~Readmissions ~~Services. Medicare~~Reduction ~~pays most hospitals for services furnished to inpatients under a system known as the Prospective Payment System (“PPS”) where hospitals are paid for services based on predetermined rates~~Program. ~~Medicare~~ ~~payments~~Commencing under PPS are based on the DRG to which each Medicare patient is assigned. The DRG is determined by the patient’s primary diagnosis and other factors for each particular Medicare inpatient stay. The amount to be paid for each DRG is established prospectively by the Center for Medicare and Medicaid Services (“CMS”). The DRG amounts are not directly related to a hospital’s actual costs or variations in ~~service~~federal orfiscal ~~length~~year ~~of stay. Therefore~~2012, ~~if a hospital incurs costs in treating~~ Medicare ~~inpatients that exceed the DRG level of reimbursement plus any outlier~~ payments, ~~then~~ that ~~hospital~~would ~~will~~otherwise ~~experience a loss from such services, which will have to~~ be made upto ~~from~~hospitals ~~other~~are ~~revenue~~reduced ~~sources. Payment limitations implemented~~ by ~~other~~specified ~~third-party~~percentages ~~payers may restrict the ability of a hospital~~ to ~~engage~~account infor ~~such~~excess ~~“cost-shifting.” In~~and ~~2008, CMS replaced the existing 538 DRGs with 745 new severity-adjusted diagnosis related groups (~~“~~Medicare Severity DRGs~~preventable” orhospital ~~“MS-DRGs”)~~readmissions. The new MS-DRGs are intended to more accurately reflect the cost of providing inpatient services and eliminate any incentives that hospitals may have to only treat the healthiest and most profitable patients.

The DRG rates are adjusted by an update factor on October 1 of each year. The index used to adjust the DRG rates, known as the “market basket index,” takes into consideration the increase of costs experienced by hospitals in purchasing goods and services. Generally, however, the percentage increases in the DRG payments have been lower than the projected increase in the cost of goods and services purchased by hospitals. Also, as discussed above, PPACA provides for annual percentage decreases to the market basket index. Therefore, we cannot assure that in the future our Hospitals will be paid amounts that will adequately reflect changes in the cost of providing health care services. On August 1, 2011, CMS issued the “Changes to the Hospital Inpatient Prospective Payment systems for Acute Care Hospitals and Fiscal Year 2012 Rates” (“IPPS 2012 Final Rule”). The IPPS 2012 Final Rule provides for a 3.0% market basket increase for federal fiscal year 2012, reduced by 2.0% consisting of a 0.1% pre-determined reduction mandated by PPACA, a 1.0% productivity reduction mandated by PPACA, a 2.0% prospective coding adjustment reduction, and an increase of 1.1% for prospective rural floor budget neutrality correction.4

Because of the uncertainty of factors that may influence the inpatient PPS payments to our Hospitals, including admission volumes, length of stay and case mix, we cannot estimate the impact of the payment changes to the IPPS 2012 Final Rule will have on our annual Medicare inpatient net revenues.

	•	Accountable Care Organizations. The PPACA required the Secretary of the U.S. Department of Health and Human Services (“HHS”) to establish a Medicare Shared Savings Program that promotes accountability and coordination of care through the creation of Accountable Care Organizations (“ACOs”). The first participation period for those ACOs accepted into the Medicare Shared Savings Program began on January 1, 2012. If our hospitals choose to participate in the Shared Savings program, reimbursements for inpatient and outpatient services may be affected.
	•	Bundled Payment Pilot and Duals Demonstration Project. In addition to the Medicare Shared Savings Program, the PPACA requires the Secretary to establish a five-year, voluntary national bundled payment pilot program for Medicare services beginning no later than January 1, 2013. If the hospitals participate in the pilot program, their reimbursements for inpatient and outpatient services may be affected.

~~Outpatient~~As ~~Services. Hospital outpatient services, including hospital operating and capital costs, are reimbursed on~~ a ~~PPS~~result ~~basis. All services paid under the outpatient PPS are classified into groups called Ambulatory Payment Classifications (“APCs”). Services in each APC are similar clinically and in terms~~ of the PPACA’s ~~resources~~passage, ~~they require. Using hospital outpatient claims data from~~ the ~~most~~health ~~recent~~care ~~available~~industry ~~hospital~~will ~~cost~~be ~~reports,~~subjected ~~CMS~~to ~~determines~~significant ~~the~~new ~~median~~statutory ~~costs~~and ~~for~~regulatory ~~the~~requirements ~~services~~ and consequently ~~procedures~~to instructural ~~each~~and ~~APC~~operational ~~group,~~changes and achallenges ~~payment rate is established~~ for ~~each~~a ~~APC. Depending~~substantial onperiod ~~the~~of ~~services provided, hospitals may be paid for more than one APC per patient encounter~~time. ~~CMS~~We will ~~make~~continue to ~~additional~~assess ~~payment adjustments under outpatient PPS including “outlier” payments for services where~~ the ~~hospital’s~~effect ~~cost~~of ~~exceeds 2.5 times~~ the ~~APC~~PPACA rate for that service. In addition, certain other changes have reduced coinsurance payments below what they would have originally been under outpatient PPS. Several Medicare Part B services are specifically excluded from this rule, including certain physician and ~~non-physician~~additional ~~practitioner~~legislation ~~services,~~on ~~ambulance,~~current ~~clinical diagnostic laboratory services~~ and ~~non-implantable~~projected ~~orthotics and prosthetics~~operations, ~~physical~~financial ~~and~~performance ~~occupational therapy,~~ and ~~speech~~general financial ~~language pathology services~~condition.

For calendar year 2012 and each subsequent calendar year, PPACA requires that the annual market basket update for outpatient services also be reduced by a productivity adjustment. The amount of that reduction will be the projected according to nationwide productivity gains over the preceding 10 years. To determine the projection, the U.S. Department of Health and Human Services (“HHS”) will use the Bureau of Labor Statistics’ (“BLS”) 10-year moving average of changes in specified economy-wide productivity. PPACA does not contain guidelines for projecting the productivity figure. However, CMS estimates that the combined market basket and productivity adjustments will reduce Medicare ~~payments under the outpatient PPS by approximately $26.3 billion from 2010 to 2019.~~

~~Value~~Each ~~Based~~of ~~Purchasing.~~our ~~Under~~hospitals participates ~~CMS’s~~in ~~Hospital~~the ~~Value-Based~~Medicare ~~Purchasing~~program. Medicare ~~Program,~~is ~~CMS~~a ~~will~~federal ~~make~~program ~~value-based~~that ~~incentive~~provides ~~payments~~medical toinsurance ~~acute~~benefits ~~care~~to ~~hospitals~~persons age ~~based~~65 ~~upon~~and ~~the~~over, ~~hospital’s~~some ~~quality~~disabled ~~measure~~persons, ~~performance~~and aspersons ~~well~~with asend-stage ~~overall~~renal ~~improvements to quality of care~~disease. ~~This~~Under ~~program~~the ~~will~~Medicare ~~commence~~program, inwe ~~federal~~are paid ~~fiscal~~for ~~year~~inpatient ~~2013~~ and ~~apply~~outpatient toservices ~~payments~~performed ~~for~~by ~~discharges~~our ~~occurring on or after October 1, 2012~~hospitals. Our ~~Hospitals~~hospitals ~~that~~continue doto ~~not~~be ~~take~~affected ~~party~~by changes in ~~the~~laws ~~quality~~and ~~reporting~~regulations ~~program~~pertaining orto ~~that~~Medicare, ~~did~~which ~~not~~are ~~successfully~~often ~~report~~designed ~~their~~to ~~quality~~reduce ~~measures~~reimbursement ~~will have their market basket update reduced by two percentage points~~rates.

~~Medicare~~Inpatient ~~Managed~~Acute Care Services. ~~The~~ Medicare ~~program~~pays ~~allows~~most ~~various~~hospitals ~~managed~~for ~~care~~services ~~plans,~~furnished to inpatients under a system known as ~~Medicare~~the ~~Advantage~~Prospective Payment ~~Plans,~~System ~~offered~~(“PPS”) bywhere ~~private~~hospitals ~~companies~~are topaid ~~engage~~for inservices ~~direct~~based ~~managed~~on ~~care~~predetermined ~~risk~~rates. Medicare ~~contracting~~payments under ~~with~~PPS are based on the DRG to which each Medicare ~~program~~patient is assigned. ~~Under~~The DRG is determined by the ~~Medicare~~patient’s primary ~~Advantage~~diagnosis ~~program,~~and ~~these~~other ~~private~~factors ~~companies~~for ~~agree~~each particular Medicare inpatient stay. The amount to ~~accept~~be apaid ~~fixed,~~for ~~per-beneficiary~~each ~~payment~~DRG is ~~from~~established prospectively by the Center for Medicare ~~program~~and Medicaid Services (“CMS”). The DRG amounts are not directly related to ~~cover~~a ~~all~~hospital’s ~~care~~actual ~~that~~costs ~~the~~or ~~beneficiary~~variations ~~may~~in ~~require~~service or length of stay. ~~Health~~Therefore, if ~~care~~a ~~providers~~hospital ~~must~~incurs ~~contract~~costs ~~with~~in treating Medicare ~~Advantage~~inpatients ~~plans~~that toexceed ~~treat~~the ~~Medicare~~DRG ~~Advantage~~level ~~enrollees~~of atreimbursement ~~agreed-upon~~plus ~~rates. Covered~~any ~~inpatient~~outlier ~~and~~payments, then ~~emergency~~that hospital will experience a loss from such services, ~~rendered~~which will have to abe ~~Medicare~~made ~~Advantage~~up ~~beneficiary~~from other revenue sources. Payment limitations implemented by other third-party payers may restrict the ability of a hospital ~~that~~to isengage anin ~~out~~such “cost-ofshifting.” In 2008, CMS replaced the existing 538 DRGs with 745 new severity-~~plan~~adjusted ~~provider~~diagnosis related groups (i“Medicare Severity DRGs” or “MS-DRGs”).~~e.,~~ The ~~that~~new ~~has~~MS-DRGs ~~not~~are ~~entered~~intended ~~into~~to amore ~~contract~~accurately ~~with~~reflect athe ~~Medicare~~cost ~~Advantage~~of ~~plan)~~providing ~~will~~inpatient services beand ~~paid~~eliminate atany ~~Medicare~~incentives ~~fee-for-service~~that ~~payment~~hospitals ~~rates~~may have to only treat the healthiest and most profitable patients.

5The DRG rates are adjusted by an update factor on October 1 of each year. The index used to adjust the DRG rates, known as the “market basket index,” takes into consideration the increase of costs experienced by hospitals in purchasing goods and services. Generally, however, the percentage increases in the DRG payments have been lower than the projected increase in the cost of goods and services purchased by hospitals. Also, as discussed above, the PPACA provides for annual percentage decreases to the market basket index. Therefore, we cannot assure that in the future our hospitals will be paid amounts that will adequately reflect changes in the cost of providing health care services. On August 31, 2012, CMS issued the “Changes to the Hospital Inpatient Prospective Payment systems for Acute Care Hospitals and Fiscal Year 2013 Rates” (“IPPS 2013 Final Rule”). The IPPS 2013 Final Rule provides for a 2.6% market basket increase for federal fiscal year 2013, reduced by a 0.8% reduction mandated by the PPACA as well as an increase of 1.0% related to the claims coding adjustments. The net increase in the DRG rates is 2.8%.

~~PPACA~~Because ~~reduces,~~of ~~over~~the auncertainty of ~~three~~factors ~~year period, premium payments to managed Medicare plans such~~ that ~~CMS’s~~may ~~managed~~influence ~~care~~the ~~per~~inpatient ~~capita~~PPS ~~premium~~ payments ~~are,~~to onour ~~average~~hospitals, ~~equal~~including toadmission ~~traditional Medicare. PPACA also implements fee payment adjustments based on service benchmarks and quality ratings. The Congressional Budget Office (“CBO”) has estimated that~~volumes, aslength ~~a result~~ of ~~these~~stay ~~changes, payments to plans will be reduced by $138 billion between 2010~~ and ~~2019~~case mix, ~~while~~we ~~CMS~~cannot ~~has~~estimate ~~estimated~~ the ~~reductions~~impact ~~will~~of ~~total $145 billion. In addition, PPACA expands~~ the ~~RAC~~payment ~~program~~changes to ~~include Medicare managed care plans. In light of~~ the ~~current~~IPPS ~~economic~~2013 ~~downturn~~Final ~~and~~Rule ~~PPACA,~~will ~~managed Medicare plans may experience reduced premium payments, which may lead to decreased enrollment in such plans. All or any of these outcomes may~~ have aon ~~disproportionately~~our ~~negative~~annual ~~effect upon those providers with relatively high dependence upon~~ Medicare ~~managed~~inpatient net ~~care~~ revenues.

~~Medicaid~~Outpatient Services. Hospital outpatient services, including hospital operating and ~~Medi-Cal~~capital costs, are reimbursed on a PPS basis. All services paid under the outpatient PPS are classified into groups called Ambulatory Payment Classifications (~~California~~“APCs”). Services in each APC are similar clinically and in terms of the resources they require. Using hospital outpatient claims data from the most recent available hospital cost reports, CMS determines the median costs for the services and procedures in each APC group, and a payment rate is established for each APC. Depending on the services provided, hospitals may be paid for more than one APC per patient encounter. CMS will make additional payment adjustments under outpatient PPS including “outlier” payments for services where the hospital’s ~~Medicaid~~cost ~~Program)~~exceeds 2.5 times the APC rate for that service. In addition, certain other changes have reduced coinsurance payments below what they would have originally been under outpatient PPS. Several Medicare Part B services are specifically excluded from this rule, including certain physician and non-physician practitioner services, ambulance, clinical diagnostic laboratory services and non-implantable orthotics and prosthetics, physical and occupational therapy, and speech language pathology services.

Generally. Medicaid programs are funded jointly by the federal government and the states and are administered by statutes under approved plans. Medicaid reimbursement is often less than a hospital’s cost of services. California’s Medicaid program, known as “Medi-Cal”, is a joint federal/state program that provides health care services to certain persons who are financially needy. Each of our Hospitals participates in the Medi-Cal program. The Medi-Cal program includes both a fee-for-service component and a managed care component.5

AsFor ~~referenced~~calendar ~~above~~year 2012 and each subsequent calendar year, the PPACA requires ~~states~~that tothe ~~expand~~annual ~~Medicaid~~market ~~coverage~~basket toupdate ~~all~~for ~~individuals~~outpatient ~~under~~services ~~age~~also 65be ~~with~~reduced by ~~incomes~~a upproductivity toadjustment. ~~133%~~The amount of that reduction will be the ~~federal~~projected ~~poverty~~nationwide ~~level~~productivity bygains ~~2014~~over the preceding 10 years. ~~However~~ To determine the projection, ~~PPACA~~the ~~also~~HHS ~~requires~~will ~~states~~use tothe ~~apply~~Bureau aof 5%Labor ~~income~~Statistics’ ~~disregard~~(“BLS”) to10-year ~~the~~moving average ~~Medicaid~~of ~~eligibility~~changes ~~standard~~in specified economy-wide productivity. The PPACA does not contain guidelines for projecting the productivity figure. However, soCMS estimates that ~~Medicaid~~the ~~eligibility~~combined market basket and productivity adjustments will ~~effectively~~reduce beMedicare ~~extended~~payments under tothe ~~those~~outpatient ~~with~~PPS ~~incomes~~by upapproximately to$26.3 ~~138%~~billion offrom ~~the~~2010 ~~poverty~~to ~~level~~2019.

~~Many~~Value ~~states,~~Based ~~including~~Purchasing. Under ~~California,~~CMS’s ~~are~~Hospital ~~adopting~~Value-Based ~~budgets~~Purchasing ~~that~~Program, ~~reduce~~CMS ~~their~~will ~~Medicaid~~make ~~expenditures. The~~value-based ~~current~~incentive ~~economic~~payments ~~downturn~~to ~~has~~acute ~~increased~~care hospitals based upon the ~~budgetary~~hospital’s ~~pressures~~quality onmeasure ~~California,~~performance ~~and~~as ~~these~~well ~~pressures~~as ~~have~~overall ~~resulted~~improvements into ~~decreased~~quality ~~Medi-Cal~~of ~~spending~~care. ~~Additionally,~~This ~~due~~program will commence in federal fiscal year 2013 and apply to ~~the~~payments ~~estimated~~for ~~$16~~discharges ~~billion~~occurring ~~California~~on ~~budget~~or ~~deficit,~~after ~~Governor~~October ~~Brown~~1, ~~has~~2012. ~~recently~~Hospitals ~~proposed~~that do ~~additional~~not ~~cuts~~take part in ~~health~~the ~~care~~quality ~~reimbursement~~reporting program or that did not successfully report their quality measures will have their market basket update reduced by ~~the~~two ~~state~~percentage points.

~~Medi-Cal~~Medicare ~~Fee-for-Service~~Managed ~~Program~~Care. ~~Inpatient~~The Medicare ~~hospital~~program ~~services~~allows ~~under~~various ~~the~~managed ~~Medi-Cal~~care ~~fee-for-service~~plans, ~~component~~known ~~are~~as ~~reimbursed~~Medicare ~~primarily~~Advantage ~~under~~Plans, ~~the~~offered ~~Selective~~by ~~Provider~~private ~~Contracting~~companies ~~Program~~to ~~(“SPCP”). Provider~~engage ~~agreements~~in direct ~~under~~managed ~~the~~care ~~SPCP~~risk ~~are~~contracting ~~negotiated~~with by the ~~California~~Medicare ~~Medical Assistance Commission (“CMAC”)~~program. ~~Our~~Under ~~Hospitals are located in areas which are currently “closed areas” under~~ the ~~SPCP. In~~Medicare ~~SPCP~~Advantage ~~closed areas~~program, these private companies ~~hospitals~~agree ~~must~~to ~~hold~~accept a ~~contract~~fixed, ~~with~~per-beneficiary payment from the ~~Medi-Cal~~Medicare program into ~~order~~cover toall becare ~~paid~~that ~~for~~the ~~their~~beneficiary ~~inpatient~~may require. Health ~~services~~care ~~(other~~providers ~~than~~must ~~services~~contract ~~performed~~with inMedicare anAdvantage ~~emergency~~plans to ~~stabilize~~treat aMedicare ~~patient~~Advantage soenrollees ~~that~~at agreed-upon ~~they~~rates. Covered ~~can~~inpatient ~~be transferred to a contracting hospital,~~ and ~~additional~~emergency ~~care~~services rendered to ~~emergency~~a ~~patients~~Medicare ~~who~~Advantage ~~cannot~~beneficiary beby soa ~~stabilized~~hospital that ~~for~~is ~~transfer~~an orout-of-plan ~~where~~provider no(i.e., ~~contracting~~that ~~hospital~~has ~~accepts~~not ~~the~~entered ~~patient). Contracting~~into ~~hospitals~~a ~~are~~contract ~~generally~~with ~~paid~~a ~~for~~Medicare ~~these~~Advantage ~~services~~plan) onwill ~~the~~be ~~basis~~paid ofat ~~all~~Medicare fee-~~inclusive~~for-service ~~per~~payment ~~diem~~ rates ~~they negotiate under their SPCP/CMAC contracts~~.

~~Outpatient~~The ~~hospital~~PPACA ~~services~~reduces, over ~~under~~a ~~the~~three ~~fee-for~~year ~~service-component~~period, ~~are~~premium ~~paid~~payments ~~for~~to onmanaged ~~the~~Medicare ~~basis~~plans ofsuch athat ~~fee~~CMS’s ~~schedule,~~managed ~~and~~care itper iscapita ~~not~~premium ~~necessary~~payments are, ~~for~~on ~~hospitals~~average, equal to ~~hold~~traditional ~~SPCP/CMAC~~Medicare. The ~~contracts~~PPACA inalso ~~order~~implements tofee bepayment ~~paid~~adjustments ~~for~~based ~~their~~on ~~outpatient~~service ~~services~~benchmarks and quality ratings. ~~Each~~The ~~Hospital~~Congressional ~~currently~~Budget ~~has~~Office an(“CBO”) ~~SPCP/CMAC~~has ~~contract~~estimated inthat, ~~which~~as ita isresult ~~contractually~~of ~~bound~~these changes, payments to ~~continue~~plans ~~until~~will ~~either~~be ~~party~~reduced ~~terminates~~by ~~the~~$138 ~~contract. There~~billion ~~can~~between be2010 noand ~~assurance~~2019, ~~that~~while ~~each~~CMS ~~Hospital~~has estimated the reductions will ~~maintain~~total ~~SPCP~~$145 billion. In ~~status~~addition, orthe ~~that~~PPACA expands the ~~current~~Recovery ~~Medi-Cal~~Audit ~~payment~~Contractors ~~arrangements~~(“RAC”) ~~will~~program ~~continue~~to include Medicare managed care plans. ~~Also,~~In ~~there~~light ~~can~~of bethe norecent ~~assurance~~economic ~~that~~downturn and the ~~SPCP/CMAC~~PPACA, ~~contract~~managed ~~rates~~Medicare ~~paid~~plans tomay ~~our~~experience ~~Hospitals~~reduced premium ~~will~~payments, ~~cover~~which ~~each~~may ~~Hospital’s~~lead ~~cost~~to ofdecreased ~~providing~~enrollment ~~care~~in such plans. ~~The~~All ~~Medi-Cal~~or ~~payment~~any ~~rates~~of ~~for~~these ~~outpatient~~outcomes ~~services~~may ~~generally~~have ~~cover~~a ~~only~~disproportionately negative aeffect ~~small~~upon ~~portion~~those ofproviders awith ~~Hospital’s~~relatively ~~cost~~high ofdependence ~~providing~~upon Medicare managed care revenues.

~~Medi-Cal~~On ~~Managed Care~~Oct. In ~~addition~~1, to2014, ~~the~~health care ~~fee-for-service~~organizations ~~component~~will ofbe ~~Medi-Cal,~~required ~~Orange~~to ~~County,~~transition ~~California~~from ~~(where~~ICD-9 ~~our~~to ~~Hospitals~~ICD-10 ~~are~~for ~~located)~~diagnosis ~~participates~~and ininpatient ~~the~~procedure ~~Medi-Cal~~coding. ~~managed~~The ~~care~~mandate is ~~program. Many~~expected ~~Medi-Cal~~to ~~beneficiaries~~deliver inbetter ~~Orange~~precision ~~County~~in ~~are~~reporting ~~covered~~for ~~under~~episodes ~~Medi-Cal~~of ~~managed~~ care, and ~~not~~morbidity, ~~under~~as ~~fee-for-service~~well ~~Medi-Cal. Medi-Cal~~as ~~managed~~more ~~care~~accurate inreimbursement payments ~~Orange~~and ~~County~~reduced isdenial ~~provided~~claims. ~~through~~This achange ~~County~~may ~~Organized~~increase ~~Health~~the ~~System~~administrative ~~known~~burden ason ~~CalOptima~~our hospitals.

InMedicaid ~~2006, CalOptima focused on entering into contracts with hospitals on a fee-for-services basis for managed care Medi-Cal enrollees managed directly by CalOptima~~ and CalOptima’s capitated hospitals. The rates in these contracts are based on the greater of a county-wide rate established by CalOptima based on past average SPCP/CMAC rates or the individual hospital’s SPCP/CMAC rate. Our Hospitals entered into these CalOptima fee for service contracts effective June 2006, and all four Hospitals maintained their Medi-Cal managed care contract at the end of the fourth quarter. There can be no assurance that the amounts paid to our Hospitals for services which are covered or not covered under the contracts between CalOptima and each Hospital will be adequate to reimburse the Hospital(California’s Medicaid ~~costs of providing care.~~Program)

6Generally, Medicaid programs are funded jointly by the federal government and the states and are administered by statutes under approved plans. Medicaid reimbursement is often less than a hospital’s cost of services. California’s Medicaid program, known as “Medi-Cal,” is a joint federal/state program that provides health care services to certain persons who are financially needy. Each of our hospitals participates in the Medi-Cal program. The Medi-Cal program includes both a fee-for-service component and a managed care component.

~~Medi-Cal~~As ~~DSH~~referenced ~~Payments. Some of our Hospitals receive substantial additional Medi-Cal reimbursement as a DSH hospital from~~ above, the ~~DSH~~PPACA ~~Replacement~~permits ~~Fund~~states ~~and the Private Hospital Supplemental Fund. Hospitals qualify for additional funding based on the proportion of services they provide~~ to ~~Medi-Cal~~expand ~~beneficiaries~~Medicaid ~~and~~coverage ~~other low-income patients. Payments~~ to aall ~~hospital~~individuals ~~are~~under ~~determined~~age on65 awith ~~formula~~incomes ~~basis~~up ~~set~~to ~~forth~~133% byof ~~state law and~~ the ~~Medi-Cal~~federal ~~State~~poverty level ~~Plan~~by 2014. ~~Hospitals~~However, ~~receive funds from~~ the ~~Private~~PPACA ~~Hospital~~also ~~Supplemental~~permits ~~Fund~~states ~~pursuant~~ to ~~amendments~~apply toa ~~their~~5% ~~SPCP~~income ~~contracts~~disregard ~~negotiated~~to ~~with~~ the ~~CMAC. The~~Medicaid ~~Medi-Cal~~eligibility ~~funding for DSH hospitals~~standard, so ~~however, is dependent on state general funding appropriations, and there can be no assurance~~ that ~~the state will fully fund the Medi-Cal DSH payment programs. As referenced above, under PPACA, beginning on October 1, 2013, in fiscal years 2014 through 2020 a state’s~~ Medicaid ~~DSH~~eligibility ~~allotment from federal funds~~ will effectively be ~~substantially~~extended ~~reduced. Further, California Senate Bill 90, which was approved by the Governor on April 13, 2011, mandated reductions~~ to ~~state~~those ~~disproportionate~~with ~~share~~incomes ~~funding~~up to ~~private~~138% ~~hospitals~~of ~~by $30 million for~~ the ~~2010-11~~poverty ~~fiscal year and by an additional $75 million for the 2011-12 fiscal year, including the corresponding federal participation therewith~~level.

~~Medicare~~Many ~~and~~states, including California, are adopting budgets that reduce their Medicaid ~~Recovery~~expenditures. The ~~Audit~~recent ~~Contractor~~economic ~~Initiatives~~downturn has increased the budgetary pressures on California, and these pressures have resulted in decreased Medi-Cal spending. A 10 percent rate cut to Medi-Cal providers that was approved in 2011 as a budget-cutting move has been delayed by court challenge. The Ninth Circuit Court of Appeals panel denied rehearing of its decision upholding the cuts.

~~Section~~Medi-Cal ~~302~~Fee-for-Service Program. Inpatient ofhospital services under the ~~Tax~~Medi-Cal ~~Relief~~fee-for-service ~~and~~component ~~Health~~are ~~Care~~reimbursed ~~Act~~primarily ofunder ~~2006~~the Selective ~~authorized~~Provider aContracting ~~permanent~~Program ~~program~~(“SPCP”). Provider ~~involving~~agreements under the ~~use~~SPCP ofare ~~third-party~~negotiated ~~recovery~~by ~~audit~~the California ~~contractors~~Medical Assistance Commission (“~~RACs~~CMAC”). Our tohospitals ~~identify~~are ~~Medicare~~located ~~overpayments~~in ~~and~~areas ~~underpayments~~which ~~made~~are tocurrently “closed ~~health~~areas” ~~care~~under ~~providers~~the SPCP. ~~RACs~~In ~~are~~SPCP ~~compensated~~closed ~~based~~areas, onprivate hospitals must hold a contract with the ~~amount~~Medi-Cal program ofin ~~both~~order ~~overpayments~~to ~~and~~be ~~underpayments~~paid for their inpatient services (other than services performed in an emergency to stabilize a patient so that they ~~identify~~can bybe ~~reviewing~~transferred ~~claims~~to ~~submitted~~a contracting hospital, and additional care rendered to ~~Medicare~~emergency patients who cannot be so stabilized for ~~correct~~transfer ~~coding~~or ~~and~~where ~~medical~~no ~~necessity~~contracting hospital accepts the patient). ~~Payment~~Contracting ~~recoveries~~hospitals ~~resulting~~are ~~from~~generally paid ~~RAC~~for ~~audits~~these ~~are~~services ~~appealable~~on ~~through~~the ~~administrative~~basis ~~and~~of ~~judicial~~all-inclusive ~~processes~~per diem rates they negotiate under their SPCP/CMAC contracts.

PPACA expanded the RAC program’s scope by requiring all states to enter into contracts with RACs by December 31, 2010 to audit payments to Medicaid providers. CMS issued a letter to state Medicaid directors on October 1, 2010 that (1) provided preliminary guidance to states on the implementation of Medicaid RAC programs, (2) created a deadline of December 31, 2010 for states to establish RAC programs, and (3) established a deadline of April 1, 2011 for states to fully implement their Medicaid RAC programs. On February 1, 2011, CMS issued a notice temporarily suspending the requirement that states implement their RAC programs until the final Medicaid RAC rule is issued. CMS issued the final Medicaid RAC rule on September 16, 2011. Among other things, the final Medicaid RAC rule clarifies the permissible scope of RAC audits, including a maximum three-year look-back period and limits on the number of medical records that may be audited. The Final Rule also requires each RAC to hire certified coders and at least one licensed medical director, subject to limited exceptions. We cannot predict with certainty the impact of the Medicare and Medicaid RAC programs will have on our future results of operations or business.6

~~Workers~~Outpatient hospital services under the fee-for service-component are paid for on the basis of a fee schedule, and it is not necessary for hospitals to hold SPCP/CMAC contracts in order to be paid for their outpatient services. Each of our hospitals currently has an SPCP/CMAC contract in which it is contractually bound to continue until either party terminates the contract. There can be no assurance that each of our hospitals will maintain SPCP status or that the current Medi-Cal payment arrangements will continue. Also, the SPCP/CMAC contract rates paid to our hospitals do not cover each hospital’s ~~Compensation~~cost ~~Reimbursement~~of providing care. The Medi-Cal payment rates for outpatient services generally cover only a small portion of a Hospital’s cost of providing care.

~~Fee~~Medi-Cal ~~Schedules. A~~Managed ~~portion of the Hospitals’ revenues is expected to come from Workers’ Compensation program reimbursements~~Care. AsIn addition ~~part of an effort in 2003~~ to ~~control costs under~~ the ~~Workers’ Compensation program, the California legislature enacted Labor Code Section 5307.1, which sets reimbursement~~ fee-for-service ~~hospital~~component ~~inpatient~~of ~~and outpatient services~~Medi-Cal, ~~including~~Orange ~~outpatient surgery services~~County, atCalifornia a(where ~~maximum~~our ofhospitals ~~120%~~are oflocated) participates in the ~~current~~Medi-Cal ~~Medicare~~managed ~~fee~~care ~~schedule for hospitals~~program. ~~The~~Many ~~Administrative~~Medi-Cal ~~Director~~beneficiaries ofin ~~the~~Orange ~~Division~~County ofare ~~Workers’~~covered ~~Compensation~~under isMedi-Cal ~~authorized~~managed care, ~~to develop~~ and, ~~after public hearings, to adopt a fee schedule for outpatient surgery services, but this schedule may~~ not beunder ~~more than 120% of current Medicare payment rates for hospitals. This~~ fee ~~limitation caps the amount that our Hospitals can be paid~~ -for-service ~~their services provided to Workers’ Compensation patients~~Medi-Cal. We ~~can~~Medi-Cal ~~provide~~managed nocare ~~assurance that the amount of revenues attributable to these payments will not be reduced~~ in ~~the~~Orange ~~future,~~County ~~which~~is ~~would~~provided ~~have~~through ana ~~adverse~~County ~~financial~~Organized ~~impact~~Health System onknown ~~the~~as ~~Company~~CalOptima.

~~Provider~~In ~~Networks. Under California law~~2006, ~~employers~~CalOptima focused ~~may~~on ~~establish~~entering ~~medical~~into ~~provider~~contracts ~~networks~~with ~~for~~hospitals ~~Workers’~~on ~~Compensation~~a ~~patients~~fee-for-services ~~and~~basis ~~may~~for ~~restrict~~managed ~~their~~care ~~employees’~~Medi-Cal ~~access~~enrollees tomanaged ~~medical~~directly by ~~services~~CalOptima toand ~~providers~~CalOptima’s ~~that~~capitated ~~are participants in those networks~~hospitals. ~~Employers~~The ~~are~~rates ~~free to choose which providers will and will not participate~~ in ~~their~~these ~~networks,~~contracts ~~and~~are ~~employers~~based ~~pay participating providers~~ on the ~~basis~~greater of ~~negotiated~~a county-wide ~~rates~~rate ~~that~~established ~~may~~by beCalOptima ~~lower~~based ~~than~~on ~~those~~past ~~that~~average ~~would~~SPCP/CMAC ~~otherwise~~rates beor ~~provided for by~~ the ~~Workers~~individual hospital’s ~~Compensation~~SPCP/CMAC ~~fee schedules~~rate. ~~Employers~~Our hospitals ~~may~~entered ~~also~~into ~~choose~~these toCalOptima ~~contract~~fee ~~with~~for ~~licensed~~service ~~Health~~contracts ~~Maintenance~~effective ~~Organizations~~June ~~(“HMO”)~~2006, and ~~restrict~~all ~~access~~four byhospitals maintained their Medi-Cal ~~employees~~managed tocare ~~participating~~contract ~~providers~~at the end of ~~these~~the ~~HMOs~~fourth quarter. ~~Our~~There ~~Hospitals~~can ~~are~~be ~~participating~~no ~~providers~~assurance ~~in Workers’ Compensation networks, and to the extent~~ that the ~~Hospitals~~amounts ~~are~~paid ~~required~~ to our ~~negotiate~~hospitals ~~and~~for ~~accept~~services ~~lower~~which ~~reimbursement~~are ~~rates~~covered toor ~~participate~~not incovered ~~these~~under ~~networks, there may be an adverse financial impact on~~ the ~~Company. Also,~~contracts ~~network~~between ~~providers~~CalOptima ~~are~~and ~~required~~each toof ~~provide~~our ~~treatment~~hospitals inwill be ~~accordance~~adequate ~~with utilization controls~~ to bereimburse ~~established by~~ the ~~Department of Workers~~hospital’s ~~Compensation. Therefore,~~costs asof ~~network~~providing ~~participants, such utilization controls may limit the services for which our Hospitals are reimbursed, which could have an adverse financial impact on the Company~~care.

~~Commercial~~Medi-Cal ~~Insurance~~DSH Payments. Some of our hospitals receive substantial additional Medi-Cal reimbursement as a DSH hospital from the DSH Replacement Fund and the Private Hospital Supplemental Fund. Hospitals qualify for additional funding based on the proportion of services they provide to Medi-Cal beneficiaries and other low-income patients. Payments to a hospital are determined on a formula basis set forth by state law and the Medi-Cal State Plan. Hospitals receive funds from the Private Hospital Supplemental Fund pursuant to amendments to their SPCP contracts negotiated with the CMAC. The Medi-Cal funding for DSH hospitals, however, is dependent on state general funding appropriations, and there can be no assurance that the state will fully fund the Medi-Cal DSH payment programs. As referenced above, under the PPACA

~~Many~~Dual Eligible ~~private~~Demonstration ~~insurance~~Project. ~~companies~~California's ~~contract~~Medi-Cal ~~with~~program ~~hospitals~~and onthe federal Medicare program are partnering to launch a ~~“preferred”~~three-year demonstration ~~provider~~that ~~basis,~~would ~~and~~promote ~~many~~coordinated ~~insurers~~health ~~have~~care ~~introduced~~delivery ~~plans~~to ~~known~~seniors asand ~~Preferred~~people ~~Provider~~with ~~Organizations~~disabilities ~~(“PPO”)~~who are dually eligible for both programs. ~~Under~~ ~~PPO~~The ~~plans,~~duals ~~patients~~demonstration ~~who~~-- ~~use~~now called the ~~services~~Cal ofMediConnect ~~contracted~~Program ~~providers~~-- ~~are~~aims ~~subject~~ to ~~more~~create ~~favorable~~a ~~copayments,~~seamless ~~coinsurance~~service ~~and~~delivery experience ~~deductibles~~for ~~than~~individuals ~~apply~~eligible ~~when~~for ~~they~~both ~~use~~Medicare ~~non~~and Medi-~~contracted~~Cal ~~providers~~coverage. In ~~addition,~~On ~~under~~March ~~most~~27, ~~HMOs~~2013, ~~private~~the ~~payers~~State ~~limit~~of ~~coverage~~California received federal approval to ~~those~~move ~~services~~forward ~~provided~~with bythe ~~selected~~demonstration, ~~hospitals. With~~following ~~this~~the ~~contracting~~release ~~authority,~~of ~~private~~a ~~payers~~Memorandum ~~can~~of ~~direct~~Understanding ~~patients~~between ~~away~~the ~~from~~Department of ~~non-selected~~Health ~~hospitals~~Care byServices ~~denying~~and ~~coverage~~the Centers for ~~their~~Medicare ~~services~~& Medicaid Services. The Cal MediConnect program will be implemented no sooner than January 2014. In April 2012, the State of California chose Orange County to participate in the demonstration project.

7Medicare and Medicaid Recovery Audit Contractor Initiatives

~~Our~~Section ~~Hospitals~~302 ~~currently~~of ~~have~~the Tax ~~several~~Relief ~~contracts~~and ~~with~~Health ~~managed~~Care Act of 2006 authorized a permanent program involving the use of third-party RACs to identify Medicare overpayments and underpayments made to health care ~~organizations~~providers. ~~However,~~RACs ifare compensated based on the ~~Company’s~~amount ~~managed~~of ~~care~~both ~~rates~~overpayments and ~~become~~underpayments ~~less~~they ~~favorable,~~identify orby ifreviewing ~~the~~claims ~~Company~~submitted ~~loses~~to ~~contracts~~Medicare for correct coding and ~~becomes~~medical ~~out-of-network~~necessity. Payment recoveries ~~for~~resulting ~~more~~from ~~patients,~~RAC ~~the~~audits ~~Company’s~~are ~~profitability~~appealable ~~may~~through beadministrative ~~unfavorably~~and ~~affected~~judicial processes.

~~Electronic~~The ~~Health~~PPACA ~~Records~~expanded the RAC program’s scope by requiring all states to enter into contracts with RACs by December 31, 2010 to audit payments to Medicaid providers. CMS issued a letter to state Medicaid directors on October 1, 2010 that (1) provided preliminary guidance to states on the implementation of Medicaid RAC programs, (2) created a deadline of December 31, 2010 for states to establish RAC programs, and (3) established a deadline of April 1, 2011 for states to fully implement their Medicaid RAC programs. On February 1, 2011, CMS issued a notice temporarily suspending the requirement that states implement their RAC programs until the final Medicaid RAC rule was issued. CMS issued the final Medicaid RAC rule on September 16, 2011. Among other things, the final Medicaid RAC rule clarifies the permissible scope of RAC audits, including a maximum three-year look-back period and limits on the number of medical records that may be audited. The Final Rule also requires each RAC to hire certified coders and at least one licensed medical director, subject to limited exceptions. We cannot predict with certainty the impact of the Medicare and Medicaid RAC programs will have on our future results of operations or business.

The 2009 American Recovery and Reinvestment Act (“ARRA”) provides stimulus monies for hospitals and physicians that are meaningful users of electronic health records (“EHR”) and imposes penalties on providers who are not meaningful users by the end of 2015. The intent of ARRA is to promote the use of technology to improve health outcomes and reduce health care costs. To become a meaningful EHR user, a provider must adopt a “certified EHR system” according to HHS standards. Also, the health care provider must demonstrate that it engages in the exchange of health information to promote quality of care and coordination, and reports on clinical quality measures.7

OnWorkers’ July 13, 2010, CMS issued two final rules related to the adoption and dissemination of EHRs (“Phase I Rules”). The Phase I Rules define the “meaningful use” requirements that hospitals and other providers must meet to qualify for federal incentive payments for adopting EHRs under ARRA. Also, to demonstrate that they are meaningful EHR users, hospitals must meet 14 clinical quality measures and five of 10 optional quality objectives. In addition, the Phase I Rules describe the technical capabilities required for certified EHR technology. Hospitals and other providers must adopt certified EHR technology, as well as demonstrate their meaningful use thereof, to qualify for the federal incentive payments.Compensation Reimbursement

OnFee ~~March~~Schedules. A portion 2of our hospitals’ revenues is expected to come from Workers’ Compensation program reimbursements. As part of an effort in 2003 to control costs under the Workers’ Compensation program, ~~2012~~the California legislature enacted Labor Code Section 5307.1, ~~CMS~~which ~~issued~~sets ~~“Phase~~reimbursement 2”for hospital inpatient and outpatient services, including outpatient surgery services, at a maximum of ~~its~~120% ~~EHR~~of ~~incentive~~the ~~plan~~current ~~(“Phase~~Medicare IIfee ~~Proposed~~schedule ~~Rules”)~~for hospitals. ~~Under~~The Administrative Director of the ~~Phase~~Division of IIWorkers’ ~~Proposed~~Compensation ~~Rules~~is authorized to develop and, ~~hospitals~~after ~~must~~public ~~meet~~hearings, orto ~~qualify~~adopt ~~for~~a anfee ~~exemption~~schedule ~~from~~for outpatient surgery services, 16but ~~core~~this ~~objectives~~schedule ~~and~~may ~~two~~not be more than 120% of ~~four~~current ~~optional~~Medicare ~~quality~~payment ~~objectives~~rates for hospitals. ~~The~~This ~~Phase~~fee IIlimitation caps ~~Proposed~~the ~~Rules~~amount ~~also~~that ~~outline~~our ~~the~~hospitals ~~process~~can bybe ~~which~~paid ~~hospitals~~for ~~may~~their ~~submit~~services ~~quality~~provided ~~data~~to ~~electronically,~~Workers’ ~~with~~Compensation patients. We can provide no assurance that the ~~intent~~amount of ~~reducing~~revenues attributable to these payments will not be reduced in the ~~burden~~future, ~~associated~~which ~~with~~would have ~~quality~~an ~~reporting~~adverse financial impact on the Company.

~~The~~Provider ~~Company~~Networks. Under California ~~has~~law, ~~adopted~~employers ~~certified~~may ~~EHR~~establish ~~technology~~medical provider networks for Workers’ Compensation patients and may restrict their employees’ access to medical services to providers that are participants in those networks. Employers are free to choose which providers will and will not participate in their networks, ~~during~~and employers pay participating providers on the ~~year~~basis of ~~ended~~negotiated ~~March~~rates 31that may be lower than those that would otherwise be provided for by the Workers’ Compensation fee schedules. Employers may also choose to contract with licensed Health Maintenance Organizations (“HMO”) and restrict access by their employees to participating providers of these HMOs. Our hospitals are participating providers in Workers’ Compensation networks, ~~2012~~and to the extent that our hospitals are required to negotiate and accept lower reimbursement rates to participate in these networks, wethere ~~recognized~~may ~~other~~be ~~income~~an ofadverse $6financial impact on the Company.8 Also, ~~million~~network ~~relative~~providers are required to provide treatment in accordance with utilization controls to be established by the ~~first~~Department ~~year~~of ~~under~~Workers’ Compensation. Therefore, as network participants, such utilization controls may limit the ~~Medicaid~~services ~~EHR~~for ~~incentive~~which ~~program~~our hospitals are reimbursed, which could have an adverse financial impact on the Company.

~~Our~~Commercial Hospitals will continue to endeavor to qualify for available EHR stimulus monies and to avoid penalties associated with failure to implement meaningful use of EHR systems. However, the purchase and implementation of EHR systems can be expensive. Further, as use of electronic health information becomes more pervasive, we anticipate that additional regulations and costs related to the exchange of health information on a regional and national basis will be implemented.Insurance

~~The~~Many ~~Federal~~private ~~Emergency~~insurance companies ~~Medical~~contract ~~Treatment~~with hospitals on a “preferred” provider basis, and ~~Active~~many ~~Labor~~insurers ~~Act~~have introduced plans known as Preferred Provider Organizations (“PPO”). Under PPO plans, patients who use the services of contracted providers are subject to more favorable copayments, coinsurance and deductibles than apply when they use non-contracted providers. In addition, under most HMOs, private payers limit coverage to those services provided by selected hospitals. With this contracting authority, private payers can direct patients away from non-selected hospitals by denying coverage for their services.

InOur ~~response~~hospitals tocurrently have ~~concerns~~several ~~regarding~~contracts ~~inappropriate~~with ~~hospital~~managed ~~transfers~~care oforganizations. However, ~~emergency~~if ~~patients based on~~ the ~~patient~~Company’s ~~inability~~managed tocare ~~pay~~rates ~~for~~become ~~the services provided~~less favorable, ~~Congress~~or ~~enacted~~if the ~~Emergency~~Company ~~Medical~~loses ~~Treatment~~contracts and ~~Labor~~becomes ~~Act (“EMTALA”) in 1986. This so~~out-~~called “anti~~of-~~dumping”~~network ~~law imposes certain requirements on hospitals with Medicare provider agreements to (1) provide a medical screening examination~~ for ~~any~~more ~~individual who comes to the hospital’s emergency department~~patients, ~~(2) provide necessary stabilizing treatment for emergency medical conditions and labor, and (3) not transfer a patient until~~ the individual is stabilized, unless the benefits of transfer outweigh the risks or the patient gives informed consent to the transfer. Since the Hospitals must provide emergency services without regard to a patientCompany’s ~~ability to pay, complying with EMTALA could have an adverse impact on the~~ profitability ofmay be ~~the~~unfavorably ~~Hospitals, depending upon the number of such patients treated in or through our emergency rooms~~affected. Failure to comply with EMTALA can result in exclusion of the physician from the Medicare and/or Medicaid programs or termination of the hospital’s Medicare provider agreements, as well as civil penalties.

~~Anti-kickback,~~Electronic ~~Fraud~~Health ~~and Self-Referral Regulations~~Records

~~Federal~~The ~~Anti-kickback~~2009 ~~Law. The~~American ~~Social~~Recovery and ~~Security~~Reinvestment Act’s ~~illegal remuneration provisions~~ (~~the~~ “~~Anti-kickback Statute~~ARRA”) ~~prohibit~~provides ~~the~~stimulus ~~offer,~~monies ~~payment, solicitation or receipt of remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind,~~ for ~~(a)~~hospitals ~~the~~and ~~referral~~physicians ofthat ~~patients~~are ormeaningful ~~arranging~~users ~~for the referral~~ of ~~patients to receive services for which payment may be made in whole or in part under a government-sponsored federal~~ electronic health ~~care~~records ~~program, which includes Medicare, Medicaid and TRICARE~~ (~~formerly CHAMPUS, which provides benefits to dependents of members of the uniformed services~~“EHR”) and ~~any~~imposes ~~state~~penalties ~~healthcare~~on ~~program,~~providers orwho ~~(b)~~are ~~the~~not ~~purchase,~~meaningful ~~lease,~~users ~~order,~~by ~~or arranging for~~ the ~~purchase,~~end ~~lease or order~~ of ~~any good, facility, service or item for which payment may be made under a government-sponsored health care program~~2015. The intent ~~Anti-kickback~~of ~~Statute~~ARRA ~~contains~~is ~~both~~to ~~criminal~~promote ~~and civil sanctions, which are enforced by~~ the ~~Office~~use of ~~Inspector~~technology ~~General~~to ~~(“OIG”)~~improve ofhealth ~~HHS~~outcomes and ~~the~~reduce ~~United~~health ~~States~~care ~~Department of Justice~~costs. ~~The~~To ~~criminal sanctions for~~ become a ~~conviction~~meaningful ~~under~~EHR ~~the Anti-kickback Statute are imprisonment for not more than five years~~user, a ~~fine~~provider ofmust ~~not~~adopt ~~more~~a ~~than~~“certified ~~$50,000~~EHR ~~for~~system” ~~each~~according ~~offense,~~to orHHS ~~both, with higher penalties potentially being imposed under the federal Sentencing Guidelines~~standards. ~~In addition to the imposition of criminal sanctions~~Also, the ~~Secretary~~health ofcare ~~HHS~~provider ~~may~~must ~~exclude~~demonstrate ~~any person or entity~~ that ~~commits~~it anengages ~~act prohibited by the Anti-kickback Statute from participation~~ in the ~~Medicare~~exchange ~~program,~~of ~~and may also direct states to exclude that person from participation in state~~ health ~~care~~information ~~programs. Violators of the Anti-kickback Statute may be subject~~ to apromote ~~civil~~quality ~~money penalty~~ of ~~$50,000~~care ~~for each prohibited act~~and coordination, and upreports toon ~~three~~clinical ~~times~~quality ~~the total amount of remuneration offered, paid, solicited, or received, without regard to whether a portion of such remuneration was offered, paid, solicited, or received for a lawful purpose~~measures.

8On July 13, 2010, CMS issued two final rules related to the adoption and dissemination of EHRs (“Phase I Rules”). The Phase I Rules define the “meaningful use” requirements that hospitals and other providers must meet to qualify for federal incentive payments for adopting EHRs under ARRA. Also, to demonstrate that they are meaningful EHR users, hospitals must meet 14 clinical quality measures and five of 10 optional quality objectives. In addition, the Phase I Rules describe the technical capabilities required for certified EHR technology. Hospitals and other providers must adopt certified EHR technology, as well as demonstrate their meaningful use thereof, to qualify for the federal incentive payments.

~~PPACA~~On ~~amended~~March ~~the~~2, ~~Anti-kickback~~2012, ~~Statute~~CMS issued to“Phase ~~provide~~2” ~~that~~of ~~actual~~its ~~knowledge~~EHR ofincentive ~~the~~plan ~~law~~(“Phase orII Proposed Rules”). Under the ~~specific~~Phase ~~intent~~II toProposed ~~violate~~Rules, hospitals itmust ismeet, ~~not~~or ~~required~~qualify for aan ~~violation~~exemption tofrom, ~~occur. In~~16 ~~addition,~~core ~~under~~objectives ~~PPACA,~~and ~~submission~~two of afour ~~claim~~optional ~~for~~quality ~~services~~objectives. orThe ~~items~~Phase II ~~generated~~Proposed inRules ~~violation~~also ofoutline the ~~Anti-kickback~~process ~~Statute~~by ~~constitutes~~which ahospitals ~~false~~may orsubmit ~~fraudulent~~quality ~~claim~~data ~~and~~electronically, ~~may~~with bethe ~~subject~~intent toof ~~additional penalties under~~ reducing the ~~federal~~burden ~~False~~associated ~~Claims~~with ~~Act~~quality reporting.

There is ever-increasing scrutiny by federal and state law enforcement authority scrutiny, OIG, HHS, the courts, and Congress of arrangements between health care providers and potential referral sources to ensure that the arrangements are not designed as an inappropriate mechanism to generate patient referrals. Enforcement actions have increased and courts have broadly interpreted the scope of the Anti-kickback Statute to the extent that if “one purpose” of a payment arrangement is to induce referrals, a violation has occurred.8

InIncentive ~~addition,~~payments made through the ~~OIG~~Medicare ~~has~~EHR ~~long~~Incentive ~~been~~Program onare ~~record~~subject ~~that~~to itthe ~~believes~~mandatory ~~that~~reductions ~~physician~~in ~~investments~~federal inspending ~~healthcare~~known ~~companies~~as ~~can~~sequestration, required ~~violate~~by the ~~Anti-kickback~~Budget ~~Statute~~Control Act of 2011. The American Taxpayer Relief Act of 2012 postponed sequestration for 2 months. As required by law, President Obama issued a sequestration order on March 1, 2013. Under these mandatory reductions, Medicare EHR incentive payments made to eligible professionals and ~~the~~eligible ~~OIG~~hospitals ~~has~~will ~~demonstrated~~be anreduced ~~aggressive~~by ~~attitude~~2%. ~~toward~~This ~~enforcement~~2% ofreduction ~~the~~will ~~Anti-kickback~~be ~~Statute~~applied into ~~the~~any Medicare ~~context~~EHR ofincentive ~~ownership~~payment ~~relationships~~for a reporting period that ends on or after April 1, 2013. These reductions will have a negative effect on our hospitals’ revenue.

The ~~OIG~~Company ~~has~~adopted certified ~~issued~~EHR ~~regulations~~technology ~~specifying certain payment practices that will not be treated as a criminal offense under the Anti-kickback Statute~~ and ~~that~~it ~~will~~recognized ~~not~~other ~~provide~~income a basis for exclusion from the Medicare or Medicaid programs (the “Safe Harbor Regulations”). These regulations include, among others, safe harbors for certain investments in both publicly traded and non-publicly traded companies. However, physician investments in the Company will not be protected by either of ~~these safe harbor regulations~~$6. ~~Nevertheless,~~8 ~~the~~million ~~fact~~relative that a specific transaction does not meet all of the criteria of a “safe harbor” does not mean that such transaction constitutes a violation of the Anti-kickback Statute, and the OIG has indicated that any arrangement that does not meet all of the elements of a safe harbor will be evaluated on its specific facts and circumstances to ~~determine whether~~ the ~~Anti-kickback~~first ~~Statute~~year ~~has~~under ~~been violated and, thus, if prosecution is warranted. Even in~~ the ~~absence~~Medicaid ofEHR anincentive program ~~enumerated~~during ~~safe~~fiscal ~~harbor~~year ~~for physician-investment in the Company, however, the Company believes that it is not in violation of the Anti-kickback Statute~~2012.

~~California~~Our ~~Anti-kickback~~hospitals ~~Prohibitions. California~~will continue ~~law~~to ~~prohibits~~endeavor ~~the~~to ~~offer,~~qualify ~~delivery, receipt or acceptance by a licensed person of any remuneration as compensation or an inducement~~ for ~~referring~~available ~~patients. The~~EHR ~~California~~stimulus ~~statute~~monies ~~applies~~and to ~~all~~avoid ~~patients,~~penalties ~~regardless~~associated ofwith ~~payer,~~failure ~~and therefore is not limited~~ to ~~referrals~~implement meaningful use of ~~Medicare~~EHR ~~or Medi-Cal beneficiaries~~systems. ~~There are no “safe harbors” under California’s Anti-kickback Statute; however~~However, ~~there~~the ~~are~~purchase ~~exceptions~~and ~~that~~implementation ~~are~~of ~~not~~EHR ~~similarly~~systems ~~reflected~~can inbe ~~the federal Anti-kickback statute~~expensive. ~~The~~Further, as ~~California~~use ~~statute~~of ~~specifically~~electronic ~~provides that a medically necessary referral is not illegal where the referring physician has an ownership interest in the~~ health ~~care~~information ~~facility~~becomes tomore ~~which the referral is made~~pervasive, ~~provided~~we anticipate that ~~the~~additional ~~physician’s~~regulations ~~return on investment is based upon the amount of the physician’s capital investment or proportional ownership~~ and ~~such~~costs ~~ownership~~related ~~is not based upon~~ to the ~~number~~exchange ~~or value~~ of ~~patients~~health ~~referred. The~~information ~~Company believes that the return~~ on ~~investment~~a ~~paid~~regional ~~to the physician-investors is relative to their proportional ownership interest,~~ and ~~therefore~~national ~~the~~basis ~~Company’s~~will ~~physician-investors~~be ~~are not in violation of California’s Anti-kickback Statute~~implemented.

~~California~~The ~~law~~Federal ~~contains~~Emergency aMedical Treatment ~~separate prohibition against kickbacks for the referral of Medi-Cal patients. California’s Medi-Cal fraud~~ and ~~abuse~~Active ~~statute~~Labor prohibits the solicitation or receipt of any remuneration including kickbacks, in return for the referral of any individual to a person for furnishing any services or merchandise which is paid for by Medi-Cal. A violation of this law can result in punishment upon a first conviction by imprisonment in the county jail for not longer than one year, or state prison, or by a fine not exceeding $10,000, or by both imprisonment and fine. California’s Attorney General has relied upon exceptions set forth in federal law when reviewing a physician’s ownership in a medical device company. Therefore, as the Company believes that its physician-investors are not in violation of the federal Anti-kickback Statute by virtue of their relationships with the Company, they should similarly be considered compliant with California’s Medi-Cal Anti-kickback Statute.Act

~~The~~In ~~Federal~~response ~~False~~to ~~Claims~~concerns regarding ~~Act. The~~inappropriate ~~federal~~hospital ~~government~~transfers isof ~~authorized~~emergency topatients ~~impose~~based ~~criminal, civil, and administrative penalties~~ on ~~any person or entity that files a false claim for payment from~~ the ~~Medicare~~patient’s orinability ~~Medi-Cal programs. In addition~~ to ~~other~~pay ~~federal~~for ~~criminal and civil laws to punish health care fraud,~~ the ~~federal government~~services provided, ~~over~~Congress enacted the ~~past~~Emergency ~~several~~Medical ~~years,~~Treatment ~~has~~and ~~accused~~Labor anAct ~~increasing~~(“EMTALA”) ~~number~~in ~~of health care providers of violating the federal civil False Claims Act~~1986. ~~The~~This ~~False~~so-called “anti-dumping” ~~Claims~~law ~~Act~~ imposes ~~civil~~certain ~~liability~~requirements ~~(including substantial monetary penalties and damages)~~ on ~~any~~hospitals ~~person~~with orMedicare ~~corporation~~provider ~~which~~agreements to (1) ~~knowingly~~provide ~~presents~~ a ~~false~~medical screening orexamination ~~fraudulent~~for ~~claim~~any ~~for~~individual ~~payment~~who comes to the ~~federal~~hospital’s ~~government~~emergency department, (2) ~~knowingly~~provide ~~uses~~necessary astabilizing treatment ~~false~~for ~~record~~emergency ormedical ~~statement~~conditions toand ~~obtain~~labor, ~~payment~~and or (3) ~~engages~~not intransfer a ~~conspiracy~~patient tountil ~~defraud~~ the ~~federal~~individual ~~government~~is ~~to obtain allowance for a false claim. Recently~~stabilized, ~~provisions of~~ unless the ~~False~~benefits ~~Claims~~of ~~Act~~transfer ~~were~~outweigh ~~clarified under~~ the ~~Fraud~~risks ~~Enforcement~~or ~~and~~the ~~Recovery~~patient ~~Act~~gives ofinformed ~~2009~~consent ~~(“FERA”)~~ to ~~eliminate~~ the ~~requirement that a false claim be presented to a federal official or that it directly involves federal funds~~transfer. ~~False~~Since ~~claims~~our ~~allegations~~hospitals must ~~could~~provide ~~arise,~~emergency ~~for~~services ~~example,~~without ~~with~~regard ~~respect~~ to ~~the~~a ~~Hospital~~patient’s ~~billings~~ability to ~~the~~pay, ~~Medicare~~complying ~~program~~with ~~for~~EMTALA ~~its~~could ~~services~~have oran ~~the~~adverse impact ~~submission~~on by the ~~Hospital~~profitability of ~~Medicare~~our ~~cost reports. Also~~hospitals, ~~under~~depending ~~PPACA,~~upon the ~~False~~number ~~Claims~~of ~~Act~~such ispatients ~~now~~treated ~~implicated~~in byor ~~the~~through ~~knowing~~our ~~failure~~emergency rooms. Failure to ~~report~~comply ~~and~~with ~~return~~EMTALA ancan ~~overpayment~~result ~~within~~in 60exclusion ~~days~~ of ~~identifying~~ the ~~overpayment~~physician orfrom by the ~~date~~Medicare ~~a corresponding cost report is due, whichever is later. The False Claims Act defines “knowingly” to include not only actual knowledge of a claim’s falsity, but also reckless disregard for,~~ and/or ~~intentional~~Medicaid ~~ignorance~~programs ~~of, the truth~~ or ~~falsity~~termination of ~~a claim. A party that does not “knowingly” submit false claims is not liable under~~ the hospital’s ~~False Claims Act. Because our Hospitals perform hundreds of procedures a year for which they submit claims to~~ Medicare, ~~submission~~provider ~~of claims known to be erroneous~~agreements, oras ~~submission~~well ofas ~~claims in reckless disregard of their truth or falsity, could result in significant~~ civil penalties ~~under the False Claims Act~~. ~~Our Hospitals, however, have significant quality control measures in place to identify and correct any errors in coding and claim submission that could lead to False Claims Act violations.~~

9Anti-kickback, Fraud and Self-Referral Regulations

~~Under~~Federal Anti-kickback Law. The Social Security Act’s illegal remuneration provisions (the ~~qui~~“Anti-kickback ~~tam~~Statute”) prohibit the offer, payment, solicitation or ~~whistleblower~~receipt of remuneration (including any kickback, ~~provisions~~bribe ofor ~~the~~rebate), ~~False~~directly ~~Claims~~or ~~Act~~indirectly, overtly ~~private~~or ~~parties~~covertly, ~~may~~in ~~bring~~cash ~~actions~~or onin ~~behalf~~kind, for (a) the referral of patients or arranging for the ~~federal~~referral of patients to receive services for which payment may be made in whole or in part under a government~~. These~~-sponsored ~~private~~federal ~~parties~~health care program, ~~often~~which ~~referred~~includes Medicare, toMedicaid asand ~~relators~~TRICARE (formerly CHAMPUS, ~~are~~which ~~entitled~~provides benefits to ~~share~~dependents inof members of the uniformed services) and any ~~amounts~~state ~~recovered~~healthcare byprogram, or (b) the ~~government~~purchase, ~~through~~lease, ~~trial~~order, or ~~settlement~~arranging for the purchase, lease or order of any good, facility, service or item for which payment may be made under a government-sponsored health care program. ~~Both~~The ~~direct~~Anti-kickback ~~enforcement~~Statute contains ~~activity~~both criminal and civil sanctions, which are enforced by the ~~government~~Office ~~and~~of ~~whistleblower~~Inspector ~~lawsuits~~General ~~have~~(“OIG”) ~~increased~~of ~~significantly~~HHS inand the ~~recent~~United ~~years~~States ~~and~~Department ~~have~~of ~~increased~~Justice. The ~~the~~criminal ~~risk~~sanctions ~~that~~for a ~~health~~conviction ~~care~~under ~~company,~~the ~~like~~Anti-kickback ~~us,~~Statute ~~will~~are imprisonment ~~have~~for tonot ~~defend~~more than five years, a ~~false~~fine ~~claims~~of ~~action~~not more than $50,000 ~~pay~~for ~~fines~~each offense, or beboth, ~~excluded~~with ~~from~~higher penalties potentially being imposed under the ~~Medicare~~federal ~~and~~Sentencing ~~Medicaid~~Guidelines. In ~~programs~~addition asto athe ~~result~~imposition of criminal sanctions, the Secretary of HHS may exclude any person or entity that commits an ~~investigation~~act ~~resulting~~prohibited ~~from~~by athe ~~whistleblower~~Anti-kickback ~~case. Although~~Statute from participation in the ~~Company~~Medicare program, ~~intends~~and ~~for~~may ~~its~~also ~~Hospitals~~direct states to ~~comply~~exclude ~~with~~that ~~both~~person ~~federal~~from ~~and~~participation in state ~~laws~~health ~~related~~care toprograms. Violators of the ~~submission~~Anti-kickback Statute may be subject to a civil money penalty of ~~claims~~$50,000 ~~there~~for ~~can~~each beprohibited noact, ~~assurance~~and ~~that~~up ato ~~determination~~three ~~that~~times the wetotal ~~have~~amount ~~violated~~of ~~these~~remuneration ~~claims-related~~offered, ~~laws~~paid, ~~will~~solicited, ~~not~~or ~~be made~~received, ~~and~~without ~~any~~regard to whether a portion of such ~~determination~~remuneration was ~~would~~offered, ~~have~~paid, asolicited, ~~material~~or ~~adverse~~received ~~effect~~for ona ~~the~~lawful ~~Company~~purpose.

InThe ~~addition~~PPACA toamended the Anti-kickback ~~False~~Statute ~~Claims~~to ~~Act,~~provide ~~federal~~that ~~civil~~actual ~~monetary~~knowledge ~~penalties~~of ~~(“CMP”)~~the ~~provisions~~law ~~authorize~~or the ~~imposition~~specific ofintent ~~substantial~~to ~~civil~~violate ~~money~~it ~~penalties~~is ~~against~~not anrequired ~~entity~~for ~~that~~a ~~engages~~violation to inoccur. ~~activities~~In ~~including~~addition, ~~but~~under ~~not~~the ~~limited to~~PPACA, ~~(1)~~submission ~~knowingly~~of ~~presenting or causing to be presented~~ a claim for services ~~not provided as claimed~~ or ~~which~~items isgenerated ~~otherwise false or fraudulent~~ in ~~any~~violation ~~way,~~of ~~(2) knowingly giving or causing to be given false or misleading information reasonably expected to influence~~ the ~~decision~~Anti-kickback Statute toconstitutes ~~discharge~~ a ~~patient,~~false ~~(3) offering~~ or ~~giving~~fraudulent ~~remuneration~~claim toand ~~any~~may ~~beneficiary~~be ofsubject ~~a federal health care program likely~~ to ~~influence~~additional ~~the~~penalties ~~selection~~under ~~of a particular provider, practitioner or supplier for~~ the ~~ordering or receipt of reimbursable items or services, (4) arranging for reimbursable services with an entity which is excluded from participation from a~~ federal ~~health~~False ~~care~~Claims program, (5) knowingly or willfully soliciting or receiving remuneration for a referral of a federal health care program beneficiary or (6) using a payment intended for a federal health care program beneficiary for another useAct.

~~The~~There ~~Secretary~~is ofincreasing scrutiny ~~HHS,~~by ~~acting~~federal ~~through the OIG, has both mandatory~~ and ~~permissive~~state ~~authority~~law toenforcement ~~exclude~~authorities, ~~individuals~~OIG, ~~and~~HHS, ~~entities from participation in federal programs pursuant to~~ the ~~CMP statute. Also~~courts, ~~it is a federal offense to: (1) knowingly~~ and ~~willfully~~Congress ~~execute~~of orarrangements ~~attempt~~between ~~to execute any scheme to defraud any~~ health care providers ~~benefit~~and ~~program,~~potential ~~including~~referral ~~any~~sources ~~private or governmental program or (2)~~ to ~~obtain,~~ensure bythat ~~means~~the ofarrangements ~~false~~are ornot ~~fraudulent~~designed ~~pretenses,~~as ~~any~~an ~~property~~inappropriate ~~owned~~mechanism orto ~~controlled~~generate patient ~~by any health care benefit program~~referrals. ~~Penalties~~ Enforcement ~~for~~actions ahave ~~violation~~increased ofand ~~this~~courts ~~federal~~have ~~law~~broadly ~~include~~interpreted ~~fines~~the ~~and/or~~scope ~~imprisonment, and a forfeiture~~ of ~~any~~the ~~property~~Anti-kickback Statute ~~derived from proceeds traceable~~ to the ~~offense. In~~extent ~~addition,~~that if an“one ~~individual~~purpose” ~~is convicted~~ of a ~~criminal~~payment ~~offense~~arrangement ~~related~~is to ~~participation~~induce ~~in the Medicare program or any state health care program~~referrals, ~~or is convicted of~~ a ~~felony~~violation ~~relating~~has to health care fraud, the Secretary of HHS is required to bar the individual from participation in federal health care programs and to notify the appropriate state agencies to bar the individuals from participation in state health care programsoccurred.

~~While~~In ~~the criminal statutes are generally reserved for instances of fraudulent intent~~addition, the ~~federal government is applying its criminal, civil, and administrative penalty statutes in an ever-expanding range of circumstances. For example, the government~~ OIG has ~~taken~~long ~~the~~been ~~position~~on ~~that~~record a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant merely should have known the services were unnecessary, even if the government cannot demonstrate actual knowledge. The government has also taken the position that ~~claiming~~it ~~payment~~believes ~~for low-quality services is a violation of these statutes if the claimant should have known~~ that ~~the~~physician ~~care~~investments ~~was~~in ~~substandard. In~~healthcare ~~addition,~~companies ~~some~~can ~~courts~~violate ~~have held that a violation of~~ the ~~Stark Law or the~~ Anti-kickback Statute and ~~can result in liability under~~ the ~~federal~~OIG ~~False~~has ~~Claims~~demonstrated ~~Act. PPACA~~an ~~clarified~~aggressive ~~this~~attitude ~~issue~~toward ~~with~~enforcement ~~respect~~of to the Anti-kickback Statute ~~by providing that submission of claims for services or items generated~~ in ~~violation of~~ the ~~Anti-kickback~~context ~~Statute~~of ~~constitutes a false or fraudulent claim under the False Claims Act~~ownership relationships. Noncompliance with other regulatory requirements can also lead to liability under the False Claims Act if it can be established that compliance with those requirements are necessary in order for a hospital to be paid for its services.

Claims filed with private insurers can also lead to criminal and civil penalties under federal law, including, but not limited to penalties relating to federal mail and wire fraud statutes and the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) provisions which made the defrauding of any health care insurer, public or private, a crime. Our Hospitals are also subject to various state insurance statutes and regulations that prohibit the Hospitals from submitting inaccurate, incorrect or misleading claims. The Company intends for its Hospitals to comply with all state insurance laws and regulations regarding the submission of claims. However, the Company cannot guarantee that the Hospitals’ insurance claims will not be challenged. If a Hospital is found to be in violation of a state insurance law or regulation, it could be subject to fines and criminal penalties which would have an adverse effect on the Company’s business and operating results.9

~~Federal~~The ~~Physician~~OIG ~~Self-Referral~~has ~~Law. Provisions~~issued regulations ofspecifying ~~the~~certain ~~Social~~payment ~~Security~~practices ~~Act~~that ~~commonly~~will ~~referred~~not tobe treated as ~~the~~a ~~Stark~~criminal ~~Law~~offense ~~prohibit~~under ~~referrals~~the byAnti-kickback ~~a physician of Medicare~~ Statute and ~~Medicaid~~that ~~beneficiaries~~will tonot ~~providers~~provide ~~for~~ a ~~broad~~basis ~~range~~for ofexclusion ~~health~~from ~~services if~~ the ~~physician~~Medicare (or ~~his~~Medicaid orprograms ~~her~~(the ~~immediate~~“Safe ~~family~~Harbor ~~member~~Regulations”). These regulations ~~has~~include, anamong ~~ownership~~others, orsafe ~~other~~harbors ~~financial~~for ~~arrangement~~certain ~~with~~investments ~~the~~in ~~provider,~~both ~~unless~~publicly antraded ~~exception~~and ~~applies~~non-publicly traded companies. ~~The~~ However, ~~“designated~~physician ~~health~~investments ~~services”~~in ~~to which~~ the ~~Stark~~Company ~~Law~~will ~~applies~~not ~~include~~be ~~all~~protected ~~inpatient~~by ~~and~~either ~~outpatient~~of ~~services~~these ~~provided~~safe byharbor ~~hospitals~~regulations. ~~Hospitals~~Nevertheless, the ~~cannot~~fact ~~bill~~that ~~for~~a ~~services~~specific ~~they~~transaction ~~provide~~does asnot ameet ~~result~~all of ~~referrals~~the ~~that~~criteria ~~are~~of ~~made~~a in“safe ~~violation~~harbor” ofdoes ~~the~~not ~~Stark~~mean ~~Law. In~~that ~~addition,~~such transaction constitutes a violation of the ~~Stark~~Anti-kickback ~~Law~~Statute, ~~may~~and ~~result~~the inOIG ahas ~~denial~~indicated ofthat ~~payment,~~any ~~require~~arrangement ~~refunds~~that todoes ~~the~~not ~~Medicare~~meet ~~program~~all ~~and~~of the ~~its~~elements ~~beneficiaries,~~of ~~civil~~a ~~monetary~~safe ~~penalties~~harbor ofwill upbe toevaluated ~~$15,000~~on ~~for~~its ~~each~~specific ~~violation,~~facts ~~civil~~and ~~monetary~~circumstances ~~penalties~~to ofdetermine upwhether tothe ~~$100,000~~Anti-kickback Statute ~~for~~has ~~certain~~been ~~“circumvention~~violated ~~schemes~~and,” ~~and~~thus, ~~exclusion~~if ~~from~~prosecution ~~participation~~is warranted. Even in ~~Medicare,~~the ~~Medicaid,~~absence ~~and~~of ~~other~~an ~~federal~~enumerated ~~programs. Violations~~safe ofharbor for physician-investment in the ~~Stark~~Company, ~~Law~~however, ~~may~~the ~~also~~Company bebelieves ~~actionable~~that asit ~~violations~~is ofnot ~~the~~in ~~federal~~violation ~~False~~of ~~Claims~~the ~~Act~~Anti-kickback Statute.

10California Anti-kickback Prohibitions. California law prohibits the offer, delivery, receipt or acceptance by a licensed person of any remuneration as compensation or an inducement for referring patients. The California statute applies to all patients, regardless of payer, and therefore is not limited to referrals of Medicare or Medi-Cal beneficiaries. There are no “safe harbors” under California’s Anti-kickback Statute; however, there are exceptions that are not similarly reflected in the federal Anti-kickback Statute. The California statute specifically provides that a medically necessary referral is not illegal where the referring physician has an ownership interest in the health care facility to which the referral is made, provided that the physician’s return on investment is based upon the amount of the physician’s capital investment or proportional ownership and such ownership is not based upon the number or value of patients referred. The Company believes that the return on investment paid to the physician-investors is relative to their proportional ownership interest, and therefore the Company’s physician-investors are not in violation of California’s Anti-kickback Statute.

~~Notwithstanding~~California ~~the breadth of the Stark Law’s general prohibition, the~~ law contains a anseparate ~~exception~~prohibition ~~which~~against ~~protects~~kickbacks ~~ownership~~for ~~interests held by physicians in hospitals where~~ the ~~referring~~referral ~~physician~~of isMedi-Cal ~~authorized~~patients. California’s toMedi-Cal ~~perform~~fraud ~~services~~and abuse atstatute ~~the~~prohibits ~~hospital and~~ the ~~physician’s~~solicitation ~~ownership~~or isreceipt inof ~~the~~any ~~hospital~~remuneration ~~itself~~including kickbacks, ~~and not merely~~ in areturn ~~subdivision~~for of the ~~hospital. The~~referral ~~Hospitals~~of ~~intend~~any individual to ~~rely~~a ~~upon~~person ~~this~~for ~~exception~~furnishing toany ~~protect~~services ~~the~~or ~~ownership~~merchandise ~~interests~~which ~~that~~is ~~physicians~~paid ~~hold~~for inby ~~them~~Medi-Cal. ~~PPACA~~A ~~made~~violation ~~changes~~of to this law ~~exception~~can byresult ~~effectively~~in ~~preventing~~punishment ~~new~~upon ~~physician-owned~~a ~~hospitals~~first ~~after~~conviction ~~March~~by ~~23,~~imprisonment ~~2010~~in ~~and limiting~~ the ~~capacity~~county ~~and~~jail ~~amount~~for ofnot ~~physician~~longer ~~ownership~~than inone ~~existing~~year, ~~physician-owned~~or ~~hospitals. As revised~~state prison, ~~the~~or ~~Stark~~by ~~law prohibits physicians from referring Medicare patients to~~ a ~~hospital~~fine innot ~~which~~exceeding ~~they~~$10,000, ~~have an ownership~~ or ~~investment~~by ~~interest~~both ~~unless~~imprisonment ~~the hospital has physician ownership~~ and afine. California’s ~~Medicare~~Attorney ~~provider~~General ~~agreement~~has relied asupon ofexceptions ~~March~~set ~~23,~~forth ~~2010~~in ~~(or,~~federal ~~for~~law ~~those~~when ~~hospitals~~reviewing ~~under~~a ~~development at the time of the PPACA~~physician’s ~~enactment,~~ownership asin ofa ~~December~~medical ~~31,~~device ~~2010)~~company. ATherefore, as ~~physician-owned~~the ~~hospital~~Company ~~that~~believes ~~meets these requirements will still be subject to restrictions~~ that ~~limit~~its ~~the~~physician-investors ~~hospital’s~~are ~~aggregate~~not ~~physician~~in ~~ownership~~violation toof the ~~level~~federal ~~that~~Anti-kickback ~~existed~~Statute onby ~~March~~virtue ~~23,~~of ~~2010~~their relationships ~~and,~~ with ~~certain narrow exceptions for hospitals with a high percentage of Medicaid patients, prohibit expansion of~~ the ~~number of operating rooms~~Company, ~~procedure~~they ~~rooms~~should orsimilarly ~~beds.~~be ~~The~~considered ~~legislation~~compliant ~~also~~with ~~subjects a physician-owned hospital to reporting requirements and extensive disclosure requirements on the hospital~~California’s ~~website~~Medi-Cal ~~and~~Anti-kickback ~~in any public advertisements~~Statute.

The Federal False Claims Act. The federal government is authorized to impose criminal, civil, and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medi-Cal programs. In addition to ~~physician~~other ~~ownership~~federal criminal and civil laws to punish health care fraud, the ~~Hospitals~~federal ~~have~~government, ~~various~~over ~~arrangements~~the bypast ~~which~~several ~~they~~years, ~~compensate~~has ~~physicians~~accused ~~for~~an ~~services~~increasing number of health care providers of violating the federal civil False Claims Act. ~~Payments~~The byFalse Claims Act imposes civil liability (including substantial monetary penalties and damages) on any person or corporation which (1) knowingly presents a false or fraudulent claim for payment to the ~~Company~~federal government, (2) knowingly uses a false record or statement to ~~such~~obtain ~~physicians~~payment ~~who~~or (3) ~~refer~~engages ~~patients~~in a conspiracy to ~~our~~defraud ~~Hospitals~~the ~~will~~federal ~~constitute~~government ~~financial~~to ~~relationships~~obtain allowance for ~~purposes~~a false claim. Recently, provisions of the ~~Stark~~False ~~Law. Exceptions~~Claims ~~exist~~Act were clarified under the ~~Stark~~Fraud ~~Law~~Enforcement and ~~its~~Recovery ~~implementing~~Act ~~regulations~~of ~~for~~2009 ~~various~~to ~~types~~eliminate ofthe ~~compensation~~requirement ~~relationships. The~~that a ~~Company~~false ~~strives~~claim be presented to ~~ensure~~a federal official or that ~~all~~it ofdirectly ~~its~~involves ~~financial~~federal ~~relationships~~funds. False ~~qualify~~claims allegations could arise, for example, with respect to one orof more ~~exceptions~~of our hospital’s billings to the ~~Stark~~Medicare ~~Law~~program for its services or the submission by the hospital of Medicare cost reports. ~~However~~Also, ~~there~~under ~~can~~the bePPACA, nothe ~~assurance~~False ~~that~~Claims Act is now implicated by the ~~Company~~knowing ~~will~~failure beto ~~successful~~report inand ~~structuring~~return ~~all~~an overpayment within 60 days of ~~its~~identifying ~~relationships~~the ~~with~~overpayment ~~physicians~~or soby asthe date a corresponding cost report is due, whichever is later. The False Claims Act defines “knowingly” to ~~qualify~~include not only actual knowledge of a claim’s falsity, but also reckless disregard for, ~~protection~~or intentional ignorance of, the truth or falsity of a claim. A party that does not “knowingly” submit false claims is not liable under ~~one~~the False Claims Act. Because our hospitals perform hundreds of procedures a year for which they submit claims to Medicare, submission of claims known to be erroneous, or ~~more~~submission of claims in reckless disregard of their truth or falsity, could result in significant civil penalties under the False ~~Stark~~Claims ~~Law’s~~Act. Our ~~exceptions~~hospitals, however, have significant quality control measures in place to identify and correct any errors in coding and claim submission that could lead to False Claims Act violations.

~~California~~Under ~~Physician~~the ~~Self-Referral~~qui ~~Law. In~~tam, or ~~California~~whistleblower, provisions of the ~~legislature~~False ~~has~~Claims ~~enacted~~Act, ~~two~~private ~~laws~~parties ~~which~~may ~~broadly~~bring ~~prohibit~~actions ~~physician~~on ~~self-referral~~behalf of ~~patients~~the federal government. These private ~~The~~parties, ~~first~~often ~~law~~referred to as relators, ~~codified~~are entitled to share in ~~the~~any ~~California~~amounts ~~Labor~~recovered ~~Code,~~by ~~applies~~the togovernment ~~workers’~~through ~~compensation~~trial or ~~patients,~~settlement. Both ~~while~~direct enforcement activity by the ~~second~~government ~~law,~~and ~~codified~~whistleblower lawsuits have increased significantly in recent years and have increased the ~~California~~risk ~~Business~~that ~~and~~a ~~Professions~~health ~~Code~~care company, ~~applies~~like us, will have to ~~all~~defend ~~patient~~a ~~referrals~~false claims action, ~~regardless~~pay fines ofor be excluded from the ~~payer~~Medicare ~~source. The~~and ~~first~~Medicaid ~~law~~programs ~~has~~as ~~applied~~a toresult ~~workers~~of ~~injured~~an oninvestigation orresulting ~~after~~from ~~January~~a 1,whistleblower ~~1994~~case. ~~The~~Although the ~~other~~Company ~~became~~intends ~~operative~~for onits ~~January~~hospitals 1,to ~~1995,~~comply with both federal and ~~applies~~state laws related to ~~all~~the ~~patient~~submission ~~referrals~~of claims, ~~regardless~~there ofcan be ~~the~~no ~~patient’s~~assurance ~~payer. Generally,~~that ~~these~~a ~~laws~~determination ~~prohibit~~that ~~physicians~~we ~~from~~have ~~referring~~violated ~~patients~~these toclaims-related ~~healthcare~~laws ~~facilities~~will innot ~~which~~be ~~they~~made, and any such determination would have ana ~~ownership~~material ~~interest,~~adverse ~~except~~effect inon ~~limited~~the ~~circumstances~~Company.

Both laws contain broad exceptions permitting physicians to refer patients to hospitals, so long as the referring physician is not compensated by the hospital for the referral, and any so long as equipment leases between the hospital and the physician satisfies certain requirements. Based on the enumerated exceptions, the Company believes that referrals to its Hospitals received from physician-owners are in compliance with both laws.10

~~Disclosure~~In addition to the False Claims Act, federal civil monetary penalties (“CMP”) provisions authorize the imposition of ~~Financial~~substantial ~~Interests~~civil money penalties against an entity that engages in activities including, but not limited to, (1) knowingly presenting or causing to be presented a claim for services not provided as claimed or which is otherwise false or fraudulent in any way, (2) knowingly giving or causing to be given false or misleading information reasonably expected to influence the decision to discharge a patient, (3) offering or giving remuneration to any beneficiary of a federal health care program likely to influence the selection of a particular provider, practitioner or supplier for the ordering or receipt of reimbursable items or services, (4) arranging for reimbursable services with an entity which is excluded from participation from a federal health care program, (5) knowingly or willfully soliciting or receiving remuneration for a referral of a federal health care program beneficiary or (6) using a payment intended for a federal health care program beneficiary for another use.

~~California~~The ~~law~~Secretary ~~provides~~of ~~that~~HHS, acting itthrough isthe ~~unlawful~~OIG, ~~for~~has aboth ~~physician~~mandatory toand ~~refer~~permissive aauthority ~~patient~~ to anexclude ~~organization~~individuals inand ~~which~~entities ~~the~~from ~~physician~~participation orin afederal programs ~~member~~pursuant ofto the ~~physician’s~~CMP ~~immediate~~statute. Also, ~~family~~it ~~has~~is a ~~significant~~federal ~~beneficial~~offense ~~interest,~~to: ~~unless~~(1) ~~the~~knowingly ~~physician~~and ~~first~~willfully ~~discloses~~execute ~~the~~or ~~interest~~ attempt to ~~the~~execute ~~patient~~any inscheme ~~writing~~to ~~and~~defraud ~~advises~~any ~~the~~health ~~patient~~care ~~regarding~~benefit ~~alternative services~~program, ifincluding ~~such services are available. A “significant beneficial interest” means~~ any ~~financial~~private ~~interest~~or ~~equal~~governmental toprogram or ~~greater~~(2) ~~than~~to ~~the~~obtain, by ~~lesser~~means of ~~five~~false ~~percent~~or offraudulent ~~the~~pretenses, ~~total~~any ~~beneficial~~property ~~interest,~~owned or ~~$5,000. This~~controlled ~~disclosure~~by ~~requirement~~any ~~may~~health becare ~~satisfied~~benefit byprogram. Penalties for ~~the~~a ~~posting~~violation of athis ~~conspicuous~~federal ~~sign~~law ~~likely~~include tofines beand/or ~~seen~~imprisonment, byand ~~all~~a ~~patients~~forfeiture ~~who~~of ~~use~~any ~~the~~property ~~facility~~derived orfrom byproceeds ~~providing~~traceable to ~~patients~~the ~~with written disclosure statements~~offense. ~~Physicians~~In ~~must~~addition, ~~disclose~~if ~~the~~an ~~names~~individual ofis ~~entities~~convicted inof ~~which~~a ~~they~~criminal ~~hold~~offense ~~significant~~related ~~financial interests~~ to aparticipation ~~patient’s~~in ~~payer upon~~ the ~~request~~Medicare program ofor ~~the~~any ~~payer~~state ~~(not~~health tocare beprogram, ~~made~~or ~~more~~is ~~than~~convicted ~~once~~of a ~~year). A~~felony ~~violation~~relating ofto ~~this~~health ~~disclosure~~care ~~requirement~~fraud, ~~constitutes~~the ~~“unprofessional~~Secretary ~~conduct,”~~of ~~and~~HHS is ~~grounds~~required to ~~for~~bar the ~~suspension~~individual orfrom ~~revocation~~participation ofin ~~the~~federal ~~physician’s~~health ~~license. Further,~~care itprograms isand ~~deemed~~to anotify ~~misdemeanor~~the ~~punishable~~appropriate bystate ~~imprisonment~~agencies ~~not~~ to ~~exceed~~bar ~~six~~the individuals ~~months,~~from orparticipation byin astate ~~fine~~health ~~not~~care ~~to exceed $2,500~~programs.

InWhile ~~addition,~~the ~~California’s~~criminal statutes ~~general~~are ~~self-referral~~generally ~~laws~~reserved ~~require~~for ~~that~~instances ~~any~~of ~~physician~~fraudulent ~~who~~intent, ~~refers~~the afederal ~~person~~government tois applying its criminal, orcivil, ~~seeks~~and administrative ~~consultation~~penalty ~~from~~statutes in an ~~organization~~ever-expanding inrange ~~which~~of circumstances. For example, the ~~physician~~government has taken the position that a ~~financial~~pattern ~~interest~~of ~~must~~claiming ~~disclose~~reimbursement ~~the~~for ~~financial~~unnecessary ~~interest~~services toviolates these statutes if the ~~patient~~claimant inmerely ~~writing~~should have atknown the ~~time~~services ofwere unnecessary, even if the ~~referral~~government cannot demonstrate actual knowledge. ~~This~~The ~~requirement~~government has ~~applies~~also ~~regardless~~taken ofthe ~~whether~~position ~~the~~that ~~financial~~claiming ~~interest~~payment isfor ~~otherwise~~low-quality ~~protected~~services byis ~~one~~a violation of ~~the~~these ~~exemptions~~statutes ~~under~~if the ~~self-referral~~claimant ~~law. There~~should have isknown nothat ~~minimum~~the ~~threshold~~care ofwas ~~ownership~~substandard. In ~~required~~addition, insome ~~order~~courts ~~for~~have ~~this~~held ~~disclosure~~that ~~requirement~~a toviolation beof ~~triggered,~~the ~~and~~Stark ~~this~~Law ~~disclosure~~or ~~requirement~~the Anti-kickback ~~cannot~~Statute becan ~~satisfied~~result byin liability under the ~~posting~~federal ofFalse aClaims ~~sign~~Act. AThe ~~violation~~PPACA ofclarified this ~~disclosure~~issue ~~requirement~~with respect ~~may~~to bethe ~~subject~~Anti-kickback toStatute ~~civil~~by ~~penalties~~providing ofthat upsubmission toof ~~$5,000~~claims for ~~each~~services ~~offense. Physician~~or ~~investors~~items generated in violation of the Anti-kickback ~~Company~~Statute ~~are~~constitutes ~~individually~~a ~~responsible~~false ~~for~~or ~~complying~~fraudulent ~~with~~claim ~~these~~under ~~disclosure~~the ~~requirements~~False Claims Act. Noncompliance with ~~respect~~other toregulatory requirements ~~their~~can ~~referrals~~also lead to ~~the~~liability ~~Hospital. A~~under ~~failure~~the toFalse ~~make~~Claims ~~the~~Act ~~required~~if ~~disclosure~~it bycan ~~any~~be ~~physician~~established ~~who~~that ~~holds~~compliance awith ~~financial~~those ~~interest~~requirements are necessary in ~~the~~order ~~Company~~for ~~could~~a ~~have~~hospital anto ~~adverse~~be ~~impact~~paid onfor ~~the~~its ~~Company~~services.

Claims filed with private insurers can also lead to criminal and civil penalties under federal law, including, but not limited to penalties relating to federal mail and wire fraud statutes and the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) provisions which made the defrauding of any health care insurer, public or private, a crime. Our hospitals are also subject to various state insurance statutes and regulations that prohibit the hospitals from submitting inaccurate, incorrect or misleading claims. The Company intends for its hospitals to comply with all state insurance laws and regulations regarding the submission of claims. However, the Company cannot guarantee that the hospitals’ insurance claims will not be challenged. If a hospital is found to be in violation of a state insurance law or regulation, it could be subject to fines and criminal penalties which would have an adverse effect on the Company’s business and operating results.

~~The~~Federal ~~HIPAA~~Physician ~~law~~Self-Referral Law. Provisions ~~mandates~~of the ~~adoption~~Social ofSecurity ~~uniform~~Act ~~standards~~commonly ~~for~~referred to as the ~~exchange~~Stark ofLaw ~~health~~prohibit ~~information~~referrals inby ana ~~effort~~physician of Medicare and Medicaid beneficiaries to ~~encourage~~providers ~~overall~~for ~~administrative~~a ~~simplification,~~broad ~~protect~~range of health services if the ~~confidentiality~~physician of(or ahis ~~patient’s~~or ~~confidential~~her ~~health~~immediate family ~~information,~~member) ~~and~~has ~~enhance~~an ~~the~~ownership ~~overall~~or ~~effectiveness~~other ~~and~~financial ~~efficiency~~arrangement ofwith the ~~health~~provider, ~~care~~unless ~~industry~~an exception applies. ~~Under~~The ~~HIPAA,~~ “designated health ~~care~~services” ~~providers~~to ~~and~~which ~~other~~the ~~“covered~~Stark ~~entities,”~~Law ~~such~~applies asinclude ~~health~~all ~~insurance~~inpatient ~~companies~~ and ~~other~~outpatient ~~third-party~~services ~~payers,~~provided ~~must~~by ~~adopt~~hospitals. Hospitals cannot ~~uniform~~bill ~~standards~~ for ~~the~~services ~~electronic~~they ~~transmission~~provide as a result of ~~billing~~referrals ~~statements~~that ~~and~~are ~~insurance~~made ~~claims~~in ~~forms~~violation of the Stark Law. ~~These~~In ~~standards~~addition, a ~~require~~violation of the ~~use~~Stark ofLaw ~~standard~~may ~~data~~result ~~formats~~in ~~and~~a ~~code~~denial ~~sets~~of ~~when~~payment, ~~electronically~~require ~~transmitting~~refunds ~~information~~to inthe ~~connection~~Medicare ~~with~~program ~~health~~and ~~claims~~its ~~and~~beneficiaries, civil ~~equivalent~~monetary ~~encounter~~penalties ~~information,~~of ~~healthcare~~up ~~payment~~to ~~and~~$15,000 ~~remittance~~for ~~advice~~each ~~and~~violation, ~~health~~civil ~~claim~~monetary ~~status. PPACA~~penalties ~~requires~~of ~~HHS~~up to ~~adopt~~$100,000 ~~standards~~ for ~~additional~~certain ~~electronic~~“circumvention schemes,” ~~transactions~~ and toexclusion ~~establish~~from ~~operating~~participation ~~rules~~in toMedicare, ~~promote~~Medicaid, ~~uniformity~~and inother federal programs. Violations of the Stark ~~implementation~~Law may also be actionable as violations of ~~each~~the ~~standardized~~federal ~~electronic~~False ~~transmission~~Claims Act.

11Notwithstanding the breadth of the Stark Law’s general prohibition, the law contains an exception which protects ownership interests held by physicians in hospitals where the referring physician is authorized to perform services at the hospital and the physician’s ownership is in the hospital itself, and not merely in a subdivision of the hospital. The Hospitals intend to rely upon this exception to protect the ownership interests that physicians hold in them. The PPACA made changes to this exception by effectively preventing new physician-owned hospitals after March 23, 2010 and limiting the capacity and amount of physician ownership in existing physician-owned hospitals. As revised, the Stark Law prohibits physicians from referring Medicare patients to a hospital in which they have an ownership or investment interest unless the hospital has physician ownership and a Medicare provider agreement as of March 23, 2010 (or, for those hospitals under development at the time of the PPACA’s enactment, as of December 31, 2010). A physician-owned hospital that meets these requirements will still be subject to restrictions that limit the hospital’s aggregate physician ownership to the level that existed on March 23, 2010 and, with certain narrow exceptions for hospitals with a high percentage of Medicaid patients, prohibit expansion of the number of operating rooms, procedure rooms or beds. The legislation also subjects a physician-owned hospital to reporting requirements and extensive disclosure requirements on the hospital’s website and in any public advertisements.

HHS also has promulgated security standards and privacy standards which are aimed, in part, at protecting the confidentiality, availability and integrity of health information by “covered entities,” including health plans, healthcare clearinghouses and healthcare providers, that receive, store, maintain or transmit health and related financial information in electronic form. In addition, ARRA amended HIPAA to include “business associates,” i.e., those entities that perform business functions for health plans, health care clearinghouses and providers. The privacy standards require compliance with rules governing the use and disclosure of patient health and billing information. ARRA also created rights for patients in their health information, such as the right to amend their health information, and they require us to impose these rules, by contract, on any business associate to which we disclose such information to perform functions on our behalf. These provisions required us to implement expensive computer systems, employee training programs and business procedures to protect the privacy and security of each patient’s health information and enable electronic billing and claims submissions consistent with HIPAA. On July 14, 2010, HHS issued a proposed rule that would implement many of these ARRA provisions. If finalized, these changes may require amendments to existing agreements with business associates and would subject business associates and their subcontractors to direct liability under the HIPAA privacy and security regulations.11

~~The~~In ~~HIPAA~~addition ~~security~~to ~~standards~~physician ownership, ~~require~~our ushospitals tohave ~~maintain~~various ~~reasonable~~arrangements ~~and~~by ~~appropriate~~which ~~administrative,~~they ~~technical,~~compensate ~~and~~physicians ~~physical~~for ~~safeguards~~services. Payments toby ~~ensure~~ the Company ~~integrity,~~to ~~confidentiality~~such ~~and~~physicians ~~the~~who ~~availability~~refer ofpatients ~~electronic~~to ~~health~~our ~~and~~hospitals ~~related~~will constitute financial ~~information~~relationships for purposes of the Stark Law. ~~The~~Exceptions ~~security~~exist ~~standards~~under ~~were~~the ~~designed~~Stark toLaw ~~protect~~and ~~electronic~~its ~~information~~implementing ~~against~~regulations ~~reasonably~~for ~~anticipated~~various ~~threats~~types orof ~~hazards~~compensation torelationships. The Company ~~the~~strives ~~security~~to orensure ~~integrity~~that all of ~~the~~its ~~information~~financial ~~and~~relationships toqualify ~~protect~~for ~~the~~one ~~information~~or ~~against~~more ~~unauthorized~~exceptions ~~use~~to orthe ~~disclosure~~Stark Law. ~~Under ARRA~~However, there ~~covered~~can ~~entities,~~be ~~including~~no assurance that the ~~Hospitals,~~Company ~~must~~will ~~notify~~be ~~patients~~successful in structuring all of ~~most~~its ~~security~~relationships ~~breaches~~with ~~pursuant~~physicians so as to qualify ~~HHS~~for ~~regulations~~protection under one or more of the Stark Law’s exceptions.

~~HIPAA~~California ~~provides~~Physician Self-Referral ~~both~~Law. In ~~criminal~~California, ~~and~~the ~~civil~~legislature ~~fines~~has ~~and~~enacted ~~penalties~~two ~~for~~laws ~~covered~~which ~~entities~~broadly ~~that~~prohibit ~~fail~~physician toself-referral of ~~comply~~patients. ~~These~~ ~~fines~~The ~~and~~first ~~penalties~~law, ~~were~~codified ~~strengthened~~in ~~under~~the ~~ARRA~~California toLabor ~~provide~~Code, ~~for~~applies ~~penalties~~to ofworkers’ ~~(1)~~compensation inpatients, while the second ~~amount of $1~~law,~~000~~ ~~per~~codified ~~violation~~in ~~due~~the toCalifornia ~~“reasonable~~Business ~~cause~~ and ~~not~~Professions toCode, ~~willful~~applies ~~neglect”~~to ~~(with~~all apatient ~~maximum~~referrals, ~~penalty~~regardless of ~~$100,000),~~the ~~(2)~~payer source. upThe tofirst ~~$10,000~~law ~~for~~has ~~each~~applied ~~violation~~to ~~due~~workers toinjured ~~willful~~on ~~neglect~~or ~~that~~after isJanuary ~~corrected~~1, ~~(subject~~1994. The toother abecame ~~$250~~operative on January 1,~~000~~ ~~maximum)~~1995, and ~~(3)~~applies up to ~~$50~~all patient referrals,~~000~~ ~~for~~regardless ~~each~~of ~~willful~~the ~~violation~~patient’s ~~that~~payer. Generally, isthese ~~not~~laws ~~corrected~~prohibit physicians ~~properly~~from ~~(subject~~referring patients to ahealthcare ~~maximum~~facilities ~~penalty~~in ofwhich ~~$1.5~~they ~~million~~have ~~dollars~~an ~~during~~ownership ainterest, ~~calendar~~except ~~year)~~in limited circumstances.

~~California~~Both ~~Confidentiality~~laws ofcontain broad ~~Medical~~exceptions ~~Information~~permitting ~~Act~~physicians to refer patients to hospitals, so long as the referring physician is not compensated by the hospital for the referral, and any so long as equipment leases between the hospital and the physician satisfies certain requirements. Based on the enumerated exceptions, the Company believes that referrals to its hospitals received from physician-owners are in compliance with both laws.

~~The~~Disclosure ~~Confidentiality~~ of ~~Medical~~Financial Information Act (“CMIA”), California’s general health information privacy law, applies to California health care providers, including hospitals, and several other types of entities. The CMIA prohibits the disclosure of an individual’s confidential health information “for any purpose not necessary to provide health care services to the patient,” unless the individual authorizes it, or it is otherwise permitted by the CMIA.Interests

~~The~~California ~~CMIA~~law ~~allows~~provides that ait ~~person~~is ~~whose~~unlawful ~~medical~~for ~~information~~a ~~has~~physician ~~been~~to ~~used~~refer ora ~~disclosed~~patient to an organization in ~~violation~~which the physician or a member of the ~~CMIA~~physician’s immediate tofamily ~~recover~~has ~~(1)~~a ~~compensatory~~significant ~~damages~~beneficial ~~for~~interest, ~~resulting~~unless ~~economic~~the ~~loss~~physician orfirst ~~personal~~discloses ~~injury,~~the ~~(2)~~interest ~~nominal~~to ~~damages~~the patient in writing and advises the ~~amount~~patient ofregarding $1alternative services,~~000~~ ~~(whether~~if orsuch ~~not~~services ~~actual~~are ~~damages~~available. A ~~were~~“significant ~~sustained),~~beneficial interest” ~~(3)~~means ~~punitive~~any ~~damages~~financial ofinterest upequal to ~~$3,000,~~or ~~(4)~~greater ~~attorneys’~~than ~~fees~~the lesser of upfive topercent ~~$1,000~~of ~~and~~ the ~~(5)~~total ~~costs~~beneficial ofinterest, or ~~litigation~~$5,000. AThis ~~violation~~disclosure ofrequirement ~~the~~may ~~CMIA~~be ~~that~~satisfied ~~results~~by inthe ~~economic~~posting ~~loss~~of ora ~~personal~~conspicuous ~~injury~~sign likely to abe ~~patient~~seen isby ~~also~~all patients awho ~~misdemeanor. The~~use ~~CMIA~~the ~~further~~facility ~~provides~~or ~~for~~by ~~civil~~providing ~~penalties,~~patients ~~ranging~~with ~~from~~written ~~$2,500~~disclosure ~~for~~statements. Physicians ~~negligent~~must ~~disclosures~~disclose the names of ~~medical~~entities ~~information~~ in ~~violation~~which ofthey ~~the~~hold ~~CMIA~~significant financial interests to ~~$250,000~~a ~~for~~patient’s ~~knowing~~payer ~~and~~upon ~~willful~~the ~~disclosures~~request ~~for~~of the ~~purposes~~payer (not ofto ~~financial~~be ~~gain~~made more than once a year). ~~Any~~A ~~wrongful~~violation ~~disclosure~~ of ~~patient~~this ~~medical~~disclosure ~~information~~requirement byconstitutes ~~the~~“unprofessional conduct,” ~~Hospitals~~and ~~may~~is ~~result~~grounds infor ~~significant~~the ~~financial~~suspension ~~penalties~~or torevocation of the ~~Hospitals~~physician’s license. Further, ~~and~~it ~~would~~is ~~have~~deemed a anmisdemeanor ~~adverse~~punishable ~~effect~~by onimprisonment ~~the~~not ~~Company’s~~to ~~business~~exceed six months, or by a fine not to exceed $2,500.

In addition, California’s general ~~Security~~self-referral ~~Breach~~laws ~~Information~~require ~~Act~~that any physician who refers a person to, or seeks consultation from an organization in which the physician has a financial interest must disclose the financial interest to the patient in writing at the time of the referral. This requirement applies regardless of whether the financial interest is otherwise protected by one of the exemptions under the self-referral law. There is no minimum threshold of ownership required in order for this disclosure requirement to be triggered, and this disclosure requirement cannot be satisfied by the posting of a sign. A violation of this disclosure requirement may be subject to civil penalties of up to $5,000 for each offense. Physician investors in the Company are individually responsible for complying with these disclosure requirements with respect to their referrals to the hospital. A failure to make the required disclosure by any physician who holds a financial interest in the Company could have an adverse impact on the Company.

~~The~~Health ~~California~~Insurance Security Breach Information Act, effective July 1, 2003, requires those businesses that own or license personal information about Californians to provide reasonable security measures to protect the confidentiality of such information Portability and toAccountability inform those individuals if the security of their information is compromised. The disclosure must be made in the “most expedient time possible” and without unreasonable delay, consistent with the legitimate needs of law enforcement or any measures necessary to determine the extent of the breach.Act

OnThe ~~August~~HIPAA ~~31,~~law ~~2011,~~mandates the ~~Governor~~adoption ~~Brown~~of ~~signed~~uniform ~~Senate~~standards ~~Bill~~for ~~24,~~the ~~which~~exchange ~~amended~~of ~~California’s~~health ~~security~~information ~~breach~~in ~~notification~~an ~~law. Senate~~effort ~~Bill~~to 24encourage ~~applies~~overall toadministrative ~~breaches~~simplification, protect ~~occurring~~the onconfidentiality orof ~~after~~a ~~January~~patient’s 1,confidential ~~2012~~health information, and ~~makes~~enhance ~~several~~the ~~important~~overall ~~changes~~effectiveness toand ~~disclosure~~efficiency of ~~requirements~~the ~~required~~health ~~under~~care ~~the law~~industry. AsUnder ~~required by Senate Bill 24~~HIPAA, ~~notices~~health tocare ~~affected~~providers ~~individuals~~and ~~must~~other ~~now~~“covered ~~also~~entities,” ~~contain~~such ~~(1)~~as ~~the~~health insurance ~~name~~companies and ~~contact~~other ~~information~~third-party ofpayers, ~~the~~must ~~reporting~~adopt ~~person~~uniform orstandards ~~business,~~for ~~(2)~~ the ~~types~~electronic transmission of ~~personal~~billing ~~information~~statements and ~~subject~~insurance toclaims ~~the~~forms. These ~~breach,~~standards ~~(3)~~require the ~~date~~use ~~or date range~~ of ~~the~~standard ~~breach,~~data ~~and~~formats ~~(4) the toll-free telephone numbers~~ and ~~addresses~~code ofsets ~~the~~when ~~three~~electronically transmitting ~~major~~information ~~credit~~in ~~bureaus~~connection ifwith ~~the~~health ~~breach~~claims ~~exposed~~and anequivalent ~~individual’s~~encounter ~~social~~information, ~~security~~healthcare ~~number~~payment and ~~driver’s~~remittance advice ~~license~~and orhealth ~~state~~claim ~~identification card number~~status. The ~~bill~~PPACA ~~also~~ requires ~~notification~~HHS ofto ~~California’s~~adopt ~~attorney~~standards ~~general~~for ~~regarding~~additional ~~the~~electronic ~~breach~~transactions ~~if more than 500 California residents are affected~~ and to ~~amends~~establish ~~the~~operating ~~law’s~~rules ~~substitute notice provisions. Also, a covered entity under HIPAA will be deemed~~ to ~~have~~promote ~~complied~~uniformity ~~with~~in the ~~notice~~implementation ~~requirements~~ of ~~California’s~~each ~~Security~~standardized ~~Breach~~electronic ~~Information Act if it has complied completely with Section 13402(f) of the federal Health Information Technology for Economic and Clinical Health Act (“HITECH”)~~transmission.

12HHS also has promulgated security standards and privacy standards which are aimed, in part, at protecting the confidentiality, availability and integrity of health information by “covered entities,” including health plans, healthcare clearinghouses and healthcare providers, that receive, store, maintain or transmit health and related financial information in electronic form. In addition, ARRA amended HIPAA to include “business associates,” i.e., those entities that perform business functions for health plans, health care clearinghouses and providers. The privacy standards require compliance with rules governing the use and disclosure of patient health and billing information. ARRA also created rights for patients in their health information, such as the right to amend their health information, and they require us to impose these rules, by contract, on any business associate to which we disclose such information to perform functions on our behalf. These provisions required us to implement expensive computer systems, employee training programs and business procedures to protect the privacy and security of each patient’s health information and enable electronic billing and claims submissions consistent with HIPAA. On January 25, 2013, HHS published a final rule to modify the HIPAA privacy, security, and enforcement rules and the breach notification requirements under the federal Health Information Technology for Economic and Clinical Health Act (“HITECH Act”).

~~Corporate Practice of Medicine~~12

~~California~~The ~~has~~HIPAA asecurity standards ~~body~~require ofus ~~law,~~to ~~known~~maintain asreasonable ~~the~~and ~~corporate~~appropriate ~~practice~~administrative, ~~of medicine prohibition~~technical, ~~which prohibits non-professional corporations~~ and ~~other~~physical ~~entities~~safeguards ~~from~~to ~~employing~~ensure orthe ~~otherwise~~integrity, confidentiality ~~controlling~~and the ~~professional~~availability ~~medical judgment~~ of ~~physicians. Although~~electronic wehealth ~~exercise~~and ~~care~~related infinancial ~~structuring~~information. The ~~our~~security ~~arrangements~~standards were ~~with~~designed ~~physicians~~ to ~~comply~~protect ~~with~~electronic ~~California~~information ~~law~~against ~~and~~reasonably weanticipated ~~believe~~threats ~~that~~or ~~such~~hazards ~~arrangements~~to ~~will~~the ~~comply~~security ~~with~~or ~~applicable~~integrity of ~~laws~~the ininformation ~~all~~and ~~material~~to ~~respects,~~protect wethe ~~cannot~~information ~~provide~~against ~~any~~unauthorized ~~assurance~~use ~~that~~or ~~governmental~~disclosure. Under ~~officials~~ARRA, ~~charged~~covered ~~with responsibility for enforcing these laws will not assert that the Company~~entities, including orour ~~certain transactions that we are involved in~~hospitals, ~~are~~must innotify ~~violation~~patients of ~~such~~most ~~laws,~~security orbreaches ~~that~~pursuant ~~the~~to ~~courts~~HHS ~~will ultimately interpret such laws in a manner consistent with our interpretations~~regulations.

~~Certain~~HIPAA ~~Antitrust~~provides ~~Considerations~~both criminal and civil fines and penalties for covered entities that fail to comply. These fines and penalties were strengthened under ARRA to provide for penalties of (1) in the amount of $1,000 per violation due to “reasonable cause and not to willful neglect” (with a maximum penalty of $100,000), (2) up to $10,000 for each violation due to willful neglect that is corrected (subject to a $250,000 maximum) and (3) up to $50,000 for each willful violation that is not corrected properly (subject to a maximum penalty of $1.5 million dollars during a calendar year).

~~The~~California ~~addition~~ Confidentiality of ~~physician-investors~~Medical inInformation the Company could affect competition in the geographic areas in which its Hospitals operate. Such effects on competition could give rise to claims that the Hospitals and physician-investors violate federal and state antitrust and unfair competition laws under a variety of theories. There can be no assurance that the Federal Trade Commission, the Antitrust Division of the Department of Justice, or any other party, including a physician participating in the Company’s business, or a physician denied participation in the Company’s business, will not challenge or seek to delay or enjoin the activities of the Company on antitrust grounds. If such a challenge is made, there can be no assurance that such challenge would be unsuccessful. We have not obtained an analysis of any possible antitrust implications of the activities of the Company or of the continuing arrangements and anticipated operations of the Hospitals.Act

~~Licensing,~~The ~~Certification~~Confidentiality of Medical Information Act (“CMIA”), ~~Accreditation~~California’s general health information privacy law, ~~Surveys~~applies to California health care providers, ~~Investigations~~including hospitals, and ~~Audits~~several other types of entities. The CMIA prohibits the disclosure of an individual’s confidential health information “for any purpose not necessary to provide health care services to the patient,” unless the individual authorizes it, or it is otherwise permitted by the CMIA.

~~Health~~The ~~facilities,~~CMIA ~~including~~allows ~~the~~a person ~~Hospitals,~~whose ~~are~~medical ~~subject~~information tohas ~~numerous~~been ~~legal,~~used ~~regulatory,~~or ~~professional~~disclosed ~~and~~in ~~private~~violation ~~licensing,~~of ~~certification~~the ~~and~~CMIA ~~accreditation~~to ~~requirements. These~~recover ~~include~~(1) ~~requirements~~compensatory ~~relating~~damages tofor ~~Medicare~~resulting economic ~~and~~loss ~~Medi-Cal~~or ~~participation~~personal ~~and payment~~injury, ~~state~~(2) ~~licensing~~nominal ~~agencies,~~damages ~~private~~in ~~payers and~~ the ~~Joint~~amount ~~Commission. Renewal and continuance~~ of ~~these licenses~~$1,000 ~~certifications~~(whether ~~and~~or ~~accreditations~~not ~~are~~actual ~~based~~damages onwere ~~inspections~~sustained), (3) ~~surveys,~~punitive ~~audits,~~damages ~~investigations~~of orup ~~other~~to ~~reviews~~$3,000, ~~some~~(4) ofattorneys’ ~~which~~fees ~~may~~of ~~require~~up orto ~~include~~$1,000 ~~affirmative~~and ~~action~~the or(5) ~~response~~costs byof ~~the Company~~litigation. ~~Some~~A violation ~~investigations~~of bythe ~~licensing~~CMIA ~~bodies~~that ~~may~~results ~~result~~ in ~~financial~~economic ~~penalties~~loss toor ~~the~~personal ~~Hospitals. These~~injury ~~activities~~to ~~are~~a ~~generally~~patient ~~conducted~~is inalso ~~the~~a ~~normal~~misdemeanor. The ~~course~~CMIA further ofprovides ~~business~~for ofcivil ~~health care facilities. Nevertheless~~penalties, anranging ~~adverse~~from ~~determination~~$2,500 ~~could~~for ~~result~~negligent indisclosures aof ~~loss~~medical orinformation ~~reduction~~ in aviolation ~~Hospital’s~~of ~~scope~~the CMIA ofto ~~licensure~~$250,000 ~~certification~~for orknowing ~~accreditation,~~and orwillful ~~could~~disclosures ~~reduce~~for the ~~payment~~purposes ~~received or require repayment~~ of ~~amounts~~financial ~~previously remitted~~gain. Any ~~failure~~wrongful todisclosure ~~obtain,~~of patient ~~renew~~medical orinformation ~~continue~~by aour ~~license,~~hospitals ~~certification~~may ~~or accreditation required for operation of a Hospital could~~ result in ~~the~~significant ~~loss~~financial ofpenalties ~~utilization or revenues or the loss of the Company’s ability~~ to ~~operate~~our ~~all or a portion of a Hospital~~hospitals, and, ~~consequently,~~would ~~could~~ have ~~a material and~~ an adverse effect on the Company’s business.

~~The~~California ~~hospital~~Security ~~industry~~Breach has seen a number of ongoing investigations related to referrals, physician recruiting practices, cost reporting and billing practices, laboratory and home health care services and physician ownership and joint ventures involving hospitals. Federal and state government agencies have announced heightened and coordinated civil and criminal enforcement efforts. PPACA includes additional federal funding to fight health care fraud, waste and abuse, increasing incrementally through federal fiscal year 2020. The operational mission of the OIG is to protect the integrity of the Medicare and Medicaid programs and the well-being of program beneficiaries by: detecting and preventing waste, fraud and abuse; identifying opportunities to improve program economy, efficiency and effectiveness; and holding accountable those who do not meet program requirements or who violate federal laws. The OIG carries out its mission by conducting audits, evaluations and investigations and, when appropriate, imposing civil monetary penalties, assessments and administrative sanctions. Although we have policies and procedures in place to facilitate compliance with the laws, rules and regulations affecting the health care industry, if a determination is made that we were in material violation of such laws, rules or regulations, our business, financial condition, results of operations or cash flows could be materially adversely affected.Information Act

The ~~laws~~California ~~and~~Security Breach ~~regulations~~Information ~~with~~Act, ~~which~~effective weJuly ~~must~~1, ~~comply~~2003, ~~are~~requires ~~complex~~those ~~and~~businesses ~~subject~~that toown ~~change. In the future, different interpretations~~ or ~~enforcement~~license ofpersonal ~~these~~information ~~laws~~about ~~and~~Californians to ~~regulations~~provide ~~could~~reasonable ~~subject~~security ~~our~~measures ~~operations~~ to ~~allegations~~protect ofthe ~~impropriety~~confidentiality orof ~~illegality~~such orinformation ~~could~~and ~~require us~~ to ~~make~~inform ~~changes~~those inindividuals ~~our~~if ~~facilities,~~the security ~~equipment,~~of ~~personnel,~~their ~~services,~~information ~~capital~~is ~~expenditure~~compromised. ~~programs~~The ~~and~~disclosure ~~operating~~must ~~expenses. If~~be wemade ~~fail~~in tothe ~~comply~~“most ~~with~~expedient ~~applicable~~time ~~laws~~possible” and without ~~regulations,~~unreasonable ~~we could suffer civil or criminal penalties~~delay, ~~including~~consistent with the ~~loss~~legitimate needs of ~~our~~law ~~licenses~~enforcement toor ~~operate~~any ~~our~~measures ~~hospitals~~necessary ~~and our ability~~ to ~~participate~~determine in the extent ~~Medicare,~~of ~~Medicaid~~the ~~and other federal and state health care programs~~breach.

~~Earthquake~~On ~~Safety~~August ~~Compliance~~31, 2011, Governor Jerry Brown signed Senate Bill 24, which amended California’s security breach notification law. Senate Bill 24 applies to breaches occurring on or after January 1, 2012, and makes several important changes to disclosure requirements required under the law. As required by Senate Bill 24, notices to affected individuals must now also contain (1) the name and contact information of the reporting person or business, (2) the types of personal information subject to the breach, (3) the date or date range of the breach, and (4) the toll-free telephone numbers and addresses of the three major credit bureaus if the breach exposed an individual’s social security number and driver’s license or state identification card number. The bill also requires notification of California’s attorney general regarding the breach if more than 500 California residents are affected and amends the law’s substitute notice provisions. Also, a covered entity under HIPAA will be deemed to have complied with the notice requirements of California’s Security Breach Information Act if it has complied completely with Section 13402(f) of the HITECH Act.

~~The~~Corporate ~~Hospitals~~Practice ~~are located in an area near active and substantial earthquake faults. The Hospitals carry earthquake insurance with a policy limit~~ of ~~$50.0 million. A significant earthquake could result in material damage and temporary or permanent cessation of operations at one or more of the Hospitals.~~Medicine

~~The~~California ~~State~~has a body of ~~California~~law, ~~has~~known ~~imposed~~as ~~new~~the ~~hospital~~corporate ~~seismic~~practice ~~safety~~of ~~requirements~~medicine prohibition, which prohibits non-professional corporations and other entities from employing or otherwise controlling the professional medical judgment of physicians. ~~Under~~Although ~~these~~we ~~new~~exercise ~~requirements~~care in structuring our arrangements with physicians to comply with California law and we believe that such arrangements will comply with applicable laws in all material respects, we cannot provide any assurance that governmental officials charged with responsibility for enforcing these laws will not assert that the ~~Hospitals~~Company, ~~must~~or ~~meet~~certain ~~stringent~~transactions ~~seismic~~that ~~safety~~we ~~criteria~~are involved in, ~~the~~are ~~future.~~in Inviolation ~~addition~~of such laws, ~~there~~or that ~~could~~the becourts ~~other~~will ~~remediation~~ultimately ~~costs~~interpret ~~pursuant~~such tolaws ~~this~~in ~~seismic~~a ~~retrofit~~manner consistent with our interpretations.

The ~~State~~addition of ~~California~~physician-investors in ~~has~~the ~~introduced~~Company acould ~~new~~affect ~~seismic~~competition ~~review~~in ~~methodology~~the ~~known~~geographic asareas ~~HAZUS~~in which its hospitals operate. Such ~~The~~effects ~~HAZUS~~on ~~methodology~~competition could ~~may~~give ~~preclude~~rise ~~the~~to ~~need~~claims ~~for~~that ~~some~~our ~~structural~~hospitals ~~modifications.~~and ~~All~~physician-investors ~~four~~violate ~~Hospitals~~federal ~~requested~~and ~~HAZUS~~state ~~review~~antitrust and ~~received~~unfair competition laws under a ~~favorable~~variety ~~notice~~of ~~pertaining~~theories. There tocan ~~structural~~be ~~reclassification.~~no ~~All~~assurance ~~Hospital~~that ~~buildings~~the Federal Trade Commission, ~~with~~the Antitrust Division of the ~~exception~~Department of ~~one~~Justice, ~~(an~~or ~~administrative~~any ~~building)~~other party, ~~have~~including ~~been~~a ~~deemed~~physician ~~compliant~~participating ~~until~~in ~~January~~the 1Company’s business, ~~2030~~or ~~for~~a ~~both~~physician denied ~~structural~~participation ~~and~~in ~~nonstructural~~the ~~retrofit~~Company’s business, will not challenge or seek to delay or enjoin the activities of the Company on antitrust grounds. WeIf dosuch ~~not~~a challenge is made, there can be no assurance that such challenge would be unsuccessful. We have not obtained an ~~estimate~~analysis of ~~the~~any ~~cost~~possible toantitrust ~~remediate~~implications of the ~~seismic~~activities ~~requirements~~of ~~for~~the Company or of the ~~administrative~~continuing ~~building~~arrangements and asanticipated operations of ~~March~~our ~~31, 2012~~hospitals.

~~There~~Licensing, are additional requirements that must be complied with by 2030. The costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on our cash flow. In additionCertification, ~~remediation could possibly result in certain environmental liabilities~~Accreditation, Surveys, ~~such~~Investigations asand ~~asbestos abatement.~~Audits

~~Environmental~~Health ~~Regulations~~facilities, including our hospitals, are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include requirements relating to Medicare and Medi-Cal participation and payment, state licensing agencies, private payers and the Joint Commission on Accreditation of Healthcare Organizations. Renewal and continuance of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require or include affirmative action or response by the Company. Some investigations by licensing bodies may result in financial penalties to our hospitals. These activities are generally conducted in the normal course of business of health care facilities. Nevertheless, an adverse determination could result in a loss or reduction in a hospital’s scope of licensure, certification or accreditation, or could reduce the payment received or require repayment of amounts previously remitted. Any failure to obtain, renew or continue a license, certification or accreditation required for operation of a hospital could result in the loss of utilization or revenues or the loss of the Company’s ability to operate all or a portion of a hospital, and, consequently, could have a material and adverse effect on the Company.

The ~~Hospitals~~hospital ~~are~~industry has ~~subject~~seen a number of ongoing investigations related to ~~various~~referrals, ~~federal~~physician recruiting practices, ~~state~~cost reporting and ~~local~~billing ~~statutes~~practices, laboratory and ~~ordinances~~home ~~regulating~~health ~~the~~care ~~discharge~~services ofand ~~materials~~physician ~~into~~ownership ~~the~~and ~~environment~~joint ventures involving hospitals. ~~Our~~Federal and state government agencies have announced heightened and coordinated civil and criminal enforcement efforts. The PPACA includes additional federal funding to fight health care ~~operations~~fraud, ~~generate~~waste ~~medical~~and abuse, increasing incrementally through federal fiscal year 2020. The operational mission of the OIG is to protect the integrity of the Medicare and Medicaid programs and the well-being of program beneficiaries by: detecting and preventing waste, ~~such~~fraud asand ~~pharmaceuticals~~abuse; identifying opportunities to improve program economy, ~~biological~~efficiency ~~materials~~and effectiveness; and ~~disposable~~holding ~~medical~~accountable ~~instruments~~those ~~that~~who ~~must~~do benot ~~disposed~~meet ofprogram inrequirements ~~compliance~~or ~~with~~who violate federal laws. The OIG carries out its mission by conducting audits, ~~state~~evaluations and ~~local~~investigations ~~environmental~~and, ~~laws~~when appropriate, ~~rules~~imposing civil monetary penalties, assessments and ~~regulations~~administrative sanctions. ~~Our~~ ~~operations~~Although ~~are~~we ~~also~~have ~~subject~~policies and procedures in place to ~~various~~facilitate compliance ~~other~~with ~~environmental~~the laws, rules and regulations~~. Environmental~~ ~~regulations~~affecting ~~also~~the ~~may~~health ~~apply~~care ~~when~~industry, weif ~~renovate~~a ordetermination ~~refurbish~~is ~~hospitals,~~made ~~particularly~~that ~~older~~we ~~facilities. Remediation~~were ~~costs~~in material ~~relating~~violation toof ~~toxic~~such ~~substances~~laws, ifrules ~~encountered~~or ~~during~~regulations, ~~construction~~our business, ~~could~~financial becondition, ~~material~~results toof ~~the~~operations ~~Company~~or cash flows could be materially adversely affected.

~~Corporate~~The ~~History~~laws and regulations with which we must comply are complex and subject to change. In the future, different interpretations or enforcement of these laws and regulations could subject our operations to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate our hospitals and our ability to participate in the Medicare, Medicaid and other federal and state health care programs.

~~The~~Earthquake ~~Company~~Safety was originally incorporated under the laws of the State of Utah on July 31, 1984 under the name “Aquachlor Marketing Inc.” On December 23, 1988, the Company reincorporated in the State of Nevada. From 1989 until 2003, the Company was a development stage company with no material assets, revenues or business operations. On November 18, 2003, a group of investors purchased a controlling interest in the Company (then known as First Deltavision) with the objective of transforming the Company into a leading provider of high quality, cost-effective healthcare through the acquisition and management of financially distressed and/or underperforming hospitals and other healthcare facilities. On September 29, 2004, the Company entered into a definitive agreement to acquire the four Hospitals from Tenet and the transaction closed on March 8, 2005.Compliance

InOur ~~the~~hospitals ~~first~~are located ~~quarter~~in ofan ~~2004,~~area ~~the~~near ~~Company~~active ~~changed~~and ~~its~~substantial ~~fiscal~~earthquake ~~year~~faults. ~~end~~Our ~~from~~hospitals ~~June~~carry 30earthquake toinsurance ~~December~~with ~~31,~~a ~~and~~policy ~~changed~~limit of ~~the~~$50.0 ~~Company’s name to “Integrated Healthcare Holdings, Inc~~million.~~” On~~ ~~December~~A ~~21,~~significant ~~2006,~~earthquake ~~the~~could ~~Company~~result ~~changed~~in ~~its~~material ~~fiscal~~damage ~~year~~and ~~end~~temporary ~~from~~or ~~December~~permanent 31cessation toof ~~March 31. Our principal executive offices are located~~ operations at ~~1301~~one ~~North~~or ~~Tustin~~more ~~Avenue,~~of ~~Santa Ana, California 92705, and~~ our ~~telephone number is (714) 953-3503~~hospitals.

~~ITEM~~The 1AState of California has imposed hospital seismic safety requirements. ~~RISK~~ ~~FACTORS~~Under these requirements, our hospitals must meet stringent seismic safety criteria in the future. In addition, there could be other remediation costs pursuant to this seismic retrofit.

AnThe ~~investment~~State inof ~~our~~California has ~~common~~a ~~stock~~seismic ~~involves~~review amethodology ~~high~~known ~~degree~~as ~~of risk~~HAZUS. ~~You~~ ~~should~~The ~~carefully~~HAZUS ~~consider~~methodology ~~the~~may ~~following~~preclude ~~information about these risks, together with~~ the ~~other~~need ~~information~~for ~~contained~~some instructural ~~this report~~modifications. ~~Our~~ All ~~business~~four ishospitals ~~subject~~requested toHAZUS areview ~~number of risks~~ and ~~uncertainties—many~~received ofa ~~which~~favorable ~~are~~notice ~~beyond~~pertaining ~~our control—that may cause our actual operating results or financial performance~~ to bestructural ~~materially different from our expectations~~reclassification. ~~You~~ ~~should~~All ~~carefully consider the following information about these risks~~hospital buildings, ~~together~~ with the ~~other~~exception ~~information~~of ~~contained~~one in(an ~~this~~administrative ~~report~~building), ~~before~~have ~~you~~been ~~decide~~deemed tocompliant ~~buy~~until ~~our~~January ~~common~~1, ~~stock. The~~2030 ~~risks~~for both structural and ~~uncertainties~~nonstructural ~~described below are not the only ones we face~~retrofit. ~~Additional~~ ~~risks~~We ~~and~~do ~~uncertainties~~ not ~~presently~~have ~~known~~an toestimate ~~us or that we currently deem immaterial may also harm our operations. If any~~ of the ~~following~~cost ~~risks~~to ~~actually~~remediate ~~occur,~~the ~~our~~seismic ~~business~~requirements ~~would~~for likely suffer and our results could differ materially from those expressed in any forward-looking statements contained in this Annual Report on Form 10-K including our consolidated financial statements and related notes. In such case, the ~~trading~~administrative building ~~price~~as of ~~our~~March ~~common stock could decline~~31, ~~and shareholders could lose all or part of their investment~~2013.

~~WE MUST OBTAIN ADDITIONAL CAPITAL WHICH, IF OBTAINED THROUGH THE ISSUANCE OF EQUITY SECURITIES, WILL LIKELY RESULT IN SUBSTANTIAL DILUTION TO OUR CURRENT SHAREHOLDERS~~14

WeThere ~~will~~are ~~require~~ additional requirements ~~capital~~that tomust ~~fund~~be ~~our~~complied ~~business. If~~with weby ~~raise~~2030. ~~additional~~The ~~funds~~costs ~~through the issuance~~ of ~~common~~meeting orthese ~~preferred~~requirements ~~equity,~~have ~~warrants~~not oryet ~~convertible~~been ~~debt~~determined. ~~securities,~~Compliance with ~~these~~seismic ~~securities~~ordinances will ~~likely~~be ~~substantially~~costly ~~dilute the equity interests~~ and ~~voting~~could ~~power of our current shareholders, and may~~ have ~~rights,~~a ~~preferences~~material oradverse ~~privileges~~effect ~~senior~~on ~~to those of the rights of~~ our ~~current~~cash ~~shareholders~~flow. WeIn ~~cannot~~addition, ~~predict~~remediation could ~~whether~~possibly ~~additional~~result ~~financing~~in ~~will~~certain beenvironmental ~~available~~liabilities, tosuch usas onasbestos ~~favorable terms or at all~~abatement.

WEEnvironmental ~~HAVE PREVIOUSLY EXPERIENCED SIGNIFICANT DIFFICULTIES WITH OUR LIQUIDITY AND MUST REFINANCE OUR OUTSTANDING INDEBTEDNESS WITH SILVER POINT BY NO LATER THAN APRIL 13, 2013~~Regulations

~~The~~Our ~~consolidated~~hospitals ~~financial~~are subject ~~statements~~to ~~have~~various ~~been~~federal, ~~prepared~~state onand alocal ~~going~~statutes ~~concern~~and ~~basis,~~ordinances ~~which~~regulating ~~assumes~~the adischarge ~~continuing~~ of ~~our~~materials ~~operations~~into ~~and~~ the ~~realization~~environment. Our health ofcare ~~assets~~operations ~~and~~generate ~~settlement~~medical ofwaste, ~~obligations~~such inas ~~the~~pharmaceuticals, ~~normal~~biological ~~course~~materials ofand ~~business. As~~disposable ofmedical ~~March~~instruments that ~~31,~~must ~~2012,~~be ~~the~~disposed ~~Company~~of ~~has~~in acompliance ~~total~~with ~~stockholders’~~federal, ~~deficiency~~state ~~of $11.6 million~~ and alocal ~~working~~environmental ~~capital~~laws, ~~deficit~~rules ofand ~~$14~~regulations.~~7 million.~~ ~~For~~Our operations ~~the~~are ~~year~~also ~~ended~~subject ~~March~~to ~~31,~~various ~~2012~~other environmental laws, ~~the~~rules ~~Company~~and ~~had~~regulations. Environmental ~~net~~regulations ~~income~~also may ofapply ~~$7.5~~when ~~million. The~~we ~~consolidated~~renovate ~~financial~~or ~~statements~~refurbish dohospitals, ~~not~~particularly ~~include~~older ~~any~~facilities. Remediation ~~adjustments~~costs ~~that~~relating ~~might~~to ~~result~~toxic substances, if weencountered ~~were~~during ~~forced~~construction, tocould ~~liquidate~~be ormaterial ~~discontinue~~to ~~operations~~the Company.

14CORPORATE HISTORY

AsThe ~~discussed~~Company ~~further~~was ~~below~~originally incorporated ~~in Item 6~~ under ~~“Liquidity~~the ~~and~~laws ~~Capital~~of ~~Resources,”~~ the ~~stated~~State ~~maturity date~~ of ~~our~~Utah ~~$45.0~~on ~~million~~July ~~Term~~31, ~~Note~~1984 under ~~our~~the ~~Credit~~name ~~Agreements~~“Aquachlor ~~with~~Marketing ~~Silver Point is April 13, 2013~~Inc.” IfOn December we23, ~~are unable to refinance~~1988, ~~restructure~~the orCompany ~~extend~~reincorporated ~~our~~in ~~obligation to repay~~ the ~~principal~~State ~~amount~~of byNevada. From ~~the~~1989 ~~maturity~~until ~~date~~2003, ~~such~~the ~~failure~~Company ~~would~~was ~~constitute~~ a ~~default~~development stage ~~under~~company ~~the~~with ~~Credit~~no ~~Agreement~~material ~~with~~assets, ~~Silver~~revenues ~~Point~~or ~~and~~business ~~our~~operations. On ~~other~~November ~~loan~~18, ~~facilities~~2003, ~~which~~a ~~would~~group ~~permit~~of ~~Silver~~investors purchased ~~Point~~a ~~and~~controlling ~~our~~interest ~~other~~in ~~lenders~~the toCompany ~~seize~~(then ~~our~~known ~~assets~~as ~~and~~First ~~those~~Deltavision) ofwith ~~our~~the ~~variable~~objective ~~interest~~of ~~entity,~~transforming ~~Pacific~~the ~~Coast~~Company into ~~Holdings~~a ~~Investment,~~leading ~~LLC~~provider ~~(“PCHI”). Any~~of ~~actions~~high byquality, ~~Silver~~cost-effective ~~Point~~healthcare orthrough ~~our~~the ~~other~~acquisition ~~lenders~~and tomanagement ~~enforce~~of ~~their~~financially ~~rights~~distressed and/or byunderperforming ~~seizing~~hospitals ~~our~~and ~~assets~~other ~~could~~healthcare ~~force~~facilities. On usSeptember ~~into~~29, ~~bankruptcy or liquidation~~2004, ~~which~~the ~~would~~Company ~~have~~entered into a definitive ~~material~~agreement ~~adverse~~to ~~effect~~acquire onthe ~~our~~four ~~liquidity~~hospitals ~~and~~from ~~financial~~Tenet ~~position~~ and the ~~value~~transaction ofclosed ~~our~~on ~~common~~March ~~stock~~8, 2005.

WEIn ~~HAVE~~the ~~INCURRED~~first ~~SIGNIFICANT~~quarter of ~~LOSSES~~2004, INthe ~~OPERATIONS~~Company TOchanged ~~DATE~~its fiscal year end from June 30 to December 31, and changed the Company’s name to Integrated Healthcare Holdings, Inc. IFOn ~~OUR~~December ~~SUBSTANTIAL~~21, ~~LOSSES CONTINUE~~2006, ~~THE~~the ~~MARKET~~Company ~~VALUE~~changed OFits ~~OUR~~fiscal ~~COMMON~~year ~~STOCK~~end ~~WILL~~from ~~LIKELY~~December ~~DECLINE~~31 ~~FURTHER~~to March 31. WEOur principal ~~HAVE~~executive Aoffices ~~HIGH~~are ~~DEGREE~~located OFat ~~LEVERAGE~~1301 ~~AND~~North ~~SIGNIFICANT~~Tustin ~~DEBT~~Avenue, ~~SERVICE~~Santa ~~OBLIGATIONS~~Ana, California 92705, and our telephone number is (714) 953-3652.

AsITEM ~~of March 31, 2012, we had an accumulated deficit of $71~~1A.8 ~~million. We~~RISK are attempting to improve our operating results and financial condition through a combination of contract negotiations, expense reductions, lowering the costs of borrowings through refinancing our debt, and new issues of equity. However, new issues of equity are encumbered by warrant anti-dilution provisions and there can be no assurance that we will achieve profitability in the future. If we are unable to achieve and maintain profitability, the market value of our common stock will likely decline further.FACTORS

AsAn ofinvestment ~~March~~in ~~31,~~our common ~~2012,~~stock ~~the~~involves ~~debt~~a ~~service~~high ~~requirements~~degree onof ~~our $59~~risk.0 ~~million~~Our ~~debt~~business ~~are~~is ~~approximately~~subject ~~$750,000~~to ~~per~~a ~~month. Our~~number ~~relatively high level~~ of ~~debt~~risks and ~~debt~~uncertainties—many ~~service~~of ~~requirements~~which are ~~have~~beyond ~~several~~our ~~effects~~control—that onmay cause our ~~current~~actual ~~and~~operating ~~future~~results ~~operations,~~or ~~including~~financial ~~the~~performance ~~following: (i)~~to webe ~~will~~materially ~~need~~different tofrom our ~~devote~~expectations. You ashould ~~significant~~carefully ~~portion~~consider ofthe ~~our~~following ~~cash~~information ~~flow~~about tothese ~~service debt~~risks, ~~reducing~~together ~~funds~~with ~~available~~the ~~for~~other information ~~operations~~contained ~~and~~in ~~future~~this ~~business~~report, ~~opportunities~~before ~~and~~you ~~increasing~~decide ~~our~~to ~~vulnerability~~buy toour ~~adverse~~common ~~economic~~stock. The risks and ~~industry~~uncertainties ~~conditions~~described below ~~and~~are ~~competition;~~not ~~(ii)~~the ~~our~~only ~~leveraged~~ones ~~position~~we ~~increases~~face. Additional ~~our~~risks ~~vulnerability~~and touncertainties ~~competitive~~not ~~pressures;~~presently ~~(iii)~~known ~~the~~to ~~covenants~~us ~~and~~or ~~restrictions~~that ~~contained~~we incurrently deem ~~agreements~~immaterial ~~relating~~may toalso harm our ~~indebtedness~~operations. If ~~restrict~~any ~~our~~of ~~ability~~the tofollowing ~~borrow~~risks ~~additional~~actually ~~funds~~occur, ~~dispose~~our ofbusiness ~~assets,~~would ~~issue~~likely suffer ~~additional~~and ~~equity~~our orresults ~~pay~~could ~~dividends~~differ onmaterially orfrom ~~repurchase~~those ~~common~~expressed ~~stock;~~in ~~and~~any ~~(iv)~~forward-looking ~~funds~~statements ~~available~~contained ~~for~~in ~~working~~this ~~capital,~~Annual Report ~~capital~~on ~~expenditures,~~Form ~~acquisitions~~10-K ~~and~~including ~~general~~our ~~corporate~~consolidated ~~purposes~~financial ~~are~~statements ~~limited~~and related notes. ~~Any~~In ~~default~~such ~~under~~case, the ~~documents~~trading ~~governing~~price of our ~~indebtedness~~common stock could ~~have~~decline, aand ~~significant~~shareholders ~~adverse~~could ~~effect~~lose onall ~~our~~or ~~business~~part ~~and the market value~~ of ~~our~~their ~~common stock~~investment.

~~THE~~WE ~~IMPACT~~HAVE OFPREVIOUSLY ~~PPACA~~EXPERIENCED ONSIGNIFICANT DIFFICULTIES WITH OUR ~~BUSINESS, FINANCIAL CONDITION, CASH FLOWS AND OPERATIONS IS UNCERTAIN~~LIQUIDITY

The ~~extent~~consolidated tofinancial statements ~~which~~have ~~PPACA~~been ~~will~~prepared ~~remain~~on ~~in effect will have~~ a ~~major~~going ~~impact~~concern ~~upon~~basis, ~~the manner in~~ which ~~health~~assumes ~~care~~a ~~services~~continuing ~~are~~of ~~covered,~~our ~~delivered~~operations and ~~reimbursed in~~ the ~~United~~realization ~~States.~~of ~~The~~assets and ~~expansion~~settlement of ~~health~~obligations ~~insurance coverage under the law may result~~ in ~~a material increase in~~ the ~~number~~normal course of ~~patients using our facilities who have either private or public program coverage~~business. ~~However,~~As ~~PPACA~~of ~~also~~March ~~provides~~31, ~~for~~2013, ~~significant~~the ~~reductions~~Company inhas ~~the~~a ~~growth~~total stockholders’ deficiency of ~~Medicare~~$29.9 ~~spending~~million and ~~reductions~~a inworking ~~Medicare~~capital ~~and~~deficit ~~Medicaid~~of ~~disproportionate~~$36.7 ~~share hospital payments~~million. For Athe ~~significant~~year ~~portion~~ended ofMarch ~~both our patient volumes and~~31, ~~as a result~~2013, ~~our~~the ~~revenues~~Company had isa ~~derived~~net ~~from~~loss ~~government~~of ~~health care programs, principally Medicare and Medicaid~~$15.5 ~~Reductions~~million ~~to our reimbursement under the Medicare~~ and ~~Medicaid~~negative ~~programs~~cash byflow ~~PPACA~~from ~~could~~operations ~~adversely~~of ~~affect~~$9.6 ~~our~~million. ~~business~~The ~~and~~consolidated ~~results~~financial ofstatements ~~operations~~do not toinclude ~~the~~any ~~extent~~adjustments ~~such~~that ~~reductions~~might ~~are~~result ~~not~~if ~~offset~~we bywere ~~increased~~forced ~~revenues from providing care~~ to ~~previously~~liquidate ~~uninsured~~or ~~individuals~~discontinue operations.

WeWE ~~are~~HAVE ~~unable~~INCURRED toSIGNIFICANT ~~predict~~LOSSES ~~with~~IN ~~certainty~~OPERATIONS ~~the~~TO full impact of PPACA on our future revenues and operations at this time due to the law’s complexity and the limited amount of implementing regulations and interpretive guidance, as well as our inability to foresee how individuals and businesses will respond to the choices available to them under the lawDATE. Furthermore, many of the provisions of PPACA that expand insurance coverage will not become effective until 2014 or later. In addition, PPACA will result in increased state legislative and regulatory changes in order for states to comply with new federal mandates, such as the requirement to establish health insurance exchanges and to participate in grants and other incentive opportunities. ~~Due~~IF toOUR ~~the~~SUBSTANTIAL ~~uncertainty~~LOSSES ~~of the outcome of cases challenging PPACA before the U.S. Supreme Court~~CONTINUE, THE weMARKET ~~are~~VALUE ~~unable~~OF toOUR ~~predict~~COMMON ~~the~~STOCK ~~timing~~WILL ~~and~~LIKELY ~~impact~~DECLINE ~~of such changes at this time~~FURTHER. ~~For~~WE aHAVE ~~further~~A ~~discussion~~HIGH ofDEGREE ~~PPACA,~~OF ~~see~~LEVERAGE ~~“ITEM~~AND 1.SIGNIFICANT DEBT ~~BUSINESS~~SERVICE ~~– HEALTH CARE REGULATION AND LICENSING~~OBLIGATIONS.”

IF WE ARE UNABLE TO ENTER INTO MANAGED CARE PROVIDER ARRANGEMENTS ON ACCEPTABLE TERMS, OR IF WE HAVE DIFFICULTY COLLECTING FROM MANAGED CARE PAYERS, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED15

ItAs ~~would~~of ~~harm~~March ~~our~~31, ~~business~~2013, we ifhad wean ~~were~~accumulated ~~unable~~deficit of $87.0 million. We are attempting to ~~enter~~improve ~~into~~our ~~managed~~operating ~~care~~results ~~provider~~and ~~arrangements~~financial oncondition through ~~acceptable~~a ~~terms. Any~~combination ~~material~~of contract negotiations, expense reductions, inlowering the ~~payments~~costs ~~that~~of weborrowings ~~receive~~through ~~for~~refinancing our ~~services~~debt, and ~~coupled~~new ~~with~~issues ~~any~~of ~~difficulties~~equity. However, innew ~~collecting~~issues ~~receivables~~of ~~from~~equity ~~managed~~are ~~care~~encumbered ~~payers,~~by ~~could~~warrant ~~have~~anti-dilution aprovisions ~~material~~and ~~adverse~~there can ~~effect~~be onno ~~our~~assurance ~~financial~~that ~~condition~~we will achieve profitability in the future. If we are unable to achieve and maintain profitability, the ~~results~~market value of ~~operations~~our orcommon ~~cash~~stock ~~flows~~will likely decline further.

15As of March 31, 2013, the debt service requirements on our $77.277 million debt were approximately $650,000 per month. Our relatively high level of debt and debt service requirements have several effects on our current and future operations, including the following: (i) we will need to devote a significant portion of our cash flow to service debt, reducing funds available for operations and future business opportunities and increasing our vulnerability to adverse economic and industry conditions and competition; (ii) our leveraged position increases our vulnerability to competitive pressures; (iii) the covenants and restrictions contained in agreements relating to our indebtedness restrict our ability to borrow additional funds, dispose of assets, issue additional equity or pay dividends on or repurchase common stock; and (iv) funds available for working capital, capital expenditures, acquisitions and general corporate purposes are limited. Any default under the documents governing our indebtedness could have a significant adverse effect on our business and the market value of our common stock.

~~FURTHER~~THE ~~CHANGES~~IMPACT INOF THE ~~MEDICARE~~PPACA ~~AND~~ON ~~MEDICAID~~OUR ~~PROGRAMS~~BUSINESS, FINANCIAL ORCONDITION, ~~OTHER~~CASH ~~GOVERNMENT~~FLOWS ~~HEALTH~~AND ~~CARE~~OPERATIONS ~~PROGRAMS~~IS ~~COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS~~UNCERTAIN

OnThe ~~August~~extent 2,to ~~2011,~~ which the ~~federal~~PPACA ~~Budget~~will ~~Control~~be ~~Act~~implemented ofthrough ~~2011~~regulation (and judicial interpretation will have a major impact upon the ~~“Budget~~manner ~~Control~~in ~~Act”)~~which health ~~was~~care ~~enacted~~services ~~into~~are ~~law~~covered, delivered and reimbursed in the United States. The expansion of health insurance coverage under the law ~~mandates~~may ~~more~~result ~~than~~in ~~$900~~a ~~billion~~material increase in ~~discretionary~~the ~~spending~~number ~~reductions~~of ~~over~~patients 10using ~~years~~our facilities who have either private or public program coverage. However, ~~and~~the PPACA also provides for ~~new~~significant ~~spending~~reductions ~~initiatives~~in ~~aimed~~the atgrowth ~~reducing~~of ~~fraud~~Medicare spending and ~~abuse~~ reductions in ~~the~~ Medicare ~~program. The~~and ~~Budget~~Medicaid ~~Control~~disproportionate ~~Act~~share ~~also~~hospital ~~establishes~~payments. ~~the~~A ~~Joint~~significant ~~Select~~portion ~~Committee~~of onboth ~~Deficit~~our ~~Reduction~~patient ~~(the~~volumes ~~“Joint Committee”)~~and, aas ~~bipartisan~~result, our ~~Congressional~~revenues ~~committee~~is ~~required~~derived tofrom ~~make~~government ~~recommendations~~health ~~regarding~~care ~~decreasing~~programs, ~~future~~principally ~~federal~~Medicare ~~budget~~and ~~deficits~~Medicaid. ~~Due~~ Reductions to our reimbursement under the ~~Joint~~Medicare ~~Committee’s~~and ~~failure~~Medicaid toprograms ~~meet~~by the ~~November~~PPACA ~~2011~~could ~~recommendation~~adversely ~~deadline~~affect ~~for~~our ~~recommendations,~~business and results of operations to the ~~Budget~~extent such ~~Control~~reductions ~~Act~~are ~~requires~~not ~~automatic~~offset ~~Medicare~~by ~~payment~~increased ~~reductions,~~revenues ~~beginning~~from inproviding ~~2013~~care to previously uninsured individuals.

~~Further,~~We are unable to predict with certainty the full impact of the PPACA on our future revenues and operations at this time due to athe ~~nearly~~law’s ~~$16~~complexity and ~~billion~~the ~~state~~limited ~~budget~~amount ~~deficit~~of implementing regulations and interpretive guidance, ~~Governor~~as ~~Brown~~well ~~has~~as ~~recently~~our ~~proposed~~inability anto ~~additional~~foresee ~~$8.3~~how ~~billion~~individuals and inbusinesses ~~cuts,~~will ~~which~~respond ~~include~~to ~~reductions~~the choices available to ~~state~~them ~~health~~under ~~care~~the ~~reimbursement~~law. On ~~May 13~~Furthermore, ~~2012,~~many of the ~~Governor~~provisions ~~released~~of anthe ~~updated~~PPACA ~~budget~~that expand ~~proposal~~insurance ~~which~~coverage ~~calls~~will not become effective until 2014 or later. In addition, PPACA will result in increased state legislative and regulatory changes in order for ~~reducing~~states ~~supplemental~~to ~~reimbursements~~comply with new federal mandates, such as the requirement to ~~private~~establish ~~hospitals~~health byinsurance exchanges ~~approximately~~and ~~$150~~to ~~million~~participate in ~~2012~~grants ~~through~~and ~~2013~~other incentive opportunities. For a further discussion of the PPACA, see “ITEM 1. BUSINESS – HEALTH CARE REGULATION AND LICENSING.”

~~California’s~~IF ~~continuing~~WE ~~fiscal~~ARE ~~crisis~~UNABLE ~~has~~TO ~~resulted~~ENTER inINTO aMANAGED CARE ~~reduction~~PROVIDER inARRANGEMENTS ~~Medi-Cal~~ON ~~payments~~ACCEPTABLE ~~to providers~~TERMS, ~~including~~OR ~~hospitals. State~~IF ~~lawmakers~~WE ~~recently~~HAVE ~~approved~~DIFFICULTY aCOLLECTING ~~final~~FROM ~~budget~~MANAGED ~~proposal~~CARE that reduces Medi-Cal program funding by $1.6 billion. The reduction includes a 10 percent reduction in some provider payments. It also increases Medi-Cal beneficiaries’ share of cost for service paymentPAYERS, ~~decreases~~OUR ~~annual~~RESULTS ~~dollar~~OF ~~caps~~OPERATIONS COULD onBE ~~services,~~ADVERSELY ~~and reduces funding for Adult Day Health Care. These reductions are only partially offset by federal stimulus spending, which is scheduled to expire.~~AFFECTED

IfIt ~~the~~would ~~rates~~harm ~~paid~~our bybusiness if ~~governmental~~we ~~payers~~were ~~are~~unable ~~further~~to ~~reduced,~~enter ifinto ~~the~~managed ~~scope~~care ofprovider ~~services~~arrangements ~~covered~~on byacceptable ~~governmental~~terms. Any ~~payers~~material isreductions ~~limited~~in orthe payments ifthat we, orreceive ~~one~~for ~~or more of~~ our ~~Hospitals~~services, ~~are~~coupled ~~excluded~~with ~~from~~any ~~participation~~difficulties in ~~the~~collecting ~~Medicare~~receivables orfrom ~~Medi-Cal~~managed ~~program~~care ~~or any other government healthcare program~~payers, ~~there~~ could have be a material adverse effect on our ~~business,~~ financial condition, results of operations or cash flows.

InFURTHER ~~addition~~CHANGES toIN ~~the~~THE ~~changes~~MEDICARE ~~implemented~~AND byMEDICAID PROGRAMS ~~PPACA,~~OR ~~the~~OTHER ~~Medicare~~GOVERNMENT ~~and~~HEALTH ~~Medicaid~~CARE ~~programs~~PROGRAMS ~~are~~COULD ~~subject~~HAVE toA ~~statutory~~MATERIAL ~~and~~ADVERSE ~~regulatory~~EFFECT ~~changes,~~ON ~~administrative~~OUR rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities. We are unable to predict the effect of future government healthcare funding policy changes on our operations.BUSINESS

~~OUR~~On ~~BUSINESS~~August ~~CONTINUES~~2, TO2011, the BEBudget ~~ADVERSELY~~Control ~~AFFECTED~~Act BYof 2011 (the “Budget Control Act”) was enacted into law. The law mandates more than $900 billion in discretionary spending reductions over 10 years, and also provides for new spending initiatives aimed at reducing fraud and abuse in the Medicare program. The Budget Control Act also established the Joint Select Committee on Deficit Reduction (the “Joint Committee”), a bipartisan Congressional committee required to make recommendations regarding decreasing future federal budget deficits. Due to the Joint Committee’s failure to meet the November 2011 recommendation deadline for recommendations, the Budget Control Act requires automatic Medicare payment reductions. As discussed above, beginning April 1, 2013, the budget reduction process — more commonly known as sequestration — requires a reduction of spending of two percent for Medicare programs for one year. As a result, individual payments for services furnished under Medicare Parts A ~~HIGH~~and ~~VOLUME~~B OFwill ~~UNINSURED~~be ~~AND~~reduced. ~~UNDERINSURED~~Monthly ~~PATIENTS~~payments under Part C (Medicare Advantage) and Part D (the Prescription Drug Benefit) will also be cut. This reduction in payments from Medicare will have an adverse effect on our hospitals.

The primary collection risks associated with our accounts receivable relate to uninsured patient accounts and those 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. The provision for doubtful accounts relates primarily to amounts due directly from patients. This risk has increased, and will likely continue to increase, if more individuals enroll in high deductible and co-payment insurance plans or forego health insurance coverage entirely. These trends will likely be exacerbated if general economic conditions remain challenging or if unemployment levels in the communities in which we operate rise. If unemployment rates increase, our business strategies to generate organic growth and to improve admissions and adjusted admissions at our hospitals may become more difficult to accomplish.16

~~The~~California ~~amount~~Governor Jerry ofBrown ~~our~~has ~~provision~~recently ~~for~~proposed ~~doubtful~~expanding ~~accounts~~Medi-Cal isin ~~based~~California onup ~~our~~to ~~assessments~~138 percent of ~~historical~~the ~~collection~~federal ~~trends~~poverty level, ~~business~~but ~~and~~his ~~economic~~proposed budget ~~conditions,~~has ~~trends~~not eliminated a cut in ~~federal~~Medi-Cal ~~and~~payments ~~state~~to ~~governmental~~certain ~~and~~providers ~~private~~that ~~employer~~would ~~health~~be ~~coverage~~applied ~~and~~retroactively ~~other~~to ~~collection~~July ~~indicators~~2012. AIf the ~~continuation~~rates inpaid ~~trends~~by ~~that~~governmental ~~results~~payers inare ~~increasing~~further reduced, if the ~~proportion~~scope of ~~accounts~~services ~~receivable~~covered ~~being~~by ~~comprised~~governmental payers is limited or if we, or one or more of ~~uninsured~~our hospitals, are excluded from participation in the Medicare or ~~under~~Medi-~~insured~~Cal ~~accounts~~program or any other government healthcare program, there could ~~adversely~~be ~~affect~~a ~~our~~material ~~collections~~adverse ofeffect ~~accounts~~on ~~receivable~~our business, financial condition, results of operations ~~and~~or cash flows.

~~PPACA~~In ~~seeks~~addition to ~~decrease~~the changes implemented by the ~~number~~PPACA, ofthe ~~uninsured~~Medicare ~~individuals~~and ~~through~~Medicaid ~~employer~~programs ~~mandates~~are ~~and~~subject ~~individual~~to ~~requirements,~~statutory ~~which~~and ~~may~~regulatory ~~have~~changes, aadministrative rulings, ~~positive~~interpretations ~~effect~~and ondeterminations ~~our~~concerning ~~accounts~~patient ~~receivable.~~eligibility ~~However~~requirements, ~~due~~funding tolevels and the ~~lack~~method of ~~implementing~~calculating payments ~~regulations~~or reimbursements, ~~delayed~~among ~~implementation~~other ~~timelines,~~things; requirements for utilization review; and ~~pending~~federal ~~Supreme~~and ~~Court~~state ~~action~~funding ~~seeking~~restrictions, all toof ~~invalidate~~which ~~several~~could ~~key~~materially ~~provisions~~increase ofor decrease payments from these government programs in the ~~law~~future, itas iswell ~~difficult~~as affect the cost of providing services to ~~predict~~our ~~the~~patients ~~full~~and ~~impact~~the ~~PPACA~~timing ~~will~~of ~~have~~payments onto our ~~results~~facilities. We are unable to predict the effect of future government healthcare funding policy changes on our operations.

~~COST~~OUR ~~CONTAINMENT,~~BUSINESS ~~PAY~~CONTINUES ~~FOR~~TO ~~PERFORMANCE,~~BE ~~AND~~ADVERSELY AFFECTED ~~OTHER PROGRAMS IMPOSED~~ BY ~~THIRD-PARTY~~A ~~PAYERS,~~HIGH ~~INCLUDING~~VOLUME ~~GOVERNMENT~~OF ~~HEALTH~~UNINSURED ~~CARE~~AND ~~PROGRAMS,~~UNDERINSURED ~~MAY DECREASE THE COMPANY’S REVENUE~~PATIENTS

The ~~health~~primary ~~care~~collection risks ~~industry~~associated iswith ~~currently~~our ~~undergoing~~accounts ~~significant~~receivable ~~changes~~relate ~~and~~to isuninsured ~~regularly~~patient ~~subject~~accounts ~~to regulatory~~ and ~~political~~those ~~intervention. We~~patient ~~expect~~accounts tofor ~~derive~~which ~~a considerable portion of~~ the ~~Company’s~~primary insurance ~~revenue~~carrier ~~through~~has ~~our~~paid ~~Hospitals~~the ~~from~~amounts ~~government-sponsored~~covered ~~health~~by ~~care~~the ~~programs~~applicable ~~and third-party payers (such as employers~~agreement, ~~private~~but ~~insurers,~~patient ~~HMOs~~responsibility oramounts ~~preferred~~(deductibles ~~provider organizations~~and co-payments)~~. It~~ isremain ~~possible~~outstanding. ~~that~~The ~~reimbursement~~provision ~~from government and private third-party payers~~ for ~~hospital~~doubtful ~~services~~accounts ~~may~~relates beprimarily ~~reduced~~to inamounts ~~the future~~ due todirectly afrom ~~deterioration~~patients. inThis risk ~~general~~has ~~economic~~increased, ~~conditions~~ and ~~fiscal~~will ~~pressures~~likely ~~placed~~continue ~~upon~~to ~~federal~~increase, ~~and~~if ~~state~~more ~~governments. Further~~individuals ~~reductions~~enroll in ~~payments~~high ordeductible ~~other~~and ~~changes~~co-payment ininsurance plans ~~reimbursement~~or ~~for~~forego health ~~care~~insurance ~~services~~coverage ~~could~~entirely. ~~have~~These atrends ~~material~~will ~~adverse~~likely ~~effect~~be onexacerbated ~~the~~if ~~Company’s~~general ~~business,~~economic ~~financial~~conditions ~~condition~~remain challenging ~~and/~~or ~~results~~if ofunemployment ~~operations. Also,~~levels ~~rates~~in ~~paid~~the bycommunities ~~private~~in ~~third-party~~which ~~payers~~we ~~are~~operate ~~generally~~rise. ~~higher~~If ~~than~~unemployment ~~Medicare, Medicaid and HMO payment~~ rates~~. Any~~ ~~decrease~~increase, inour ~~the~~business strategies ~~relative~~to ~~number~~generate oforganic ~~patients~~growth ~~covered~~and byto ~~private~~improve ~~insurance~~admissions ~~would~~and ~~have~~adjusted aadmissions ~~material~~at ~~adverse~~our ~~effect~~hospitals onmay ~~the~~become ~~Company’s~~more ~~revenues~~difficult to ~~and operations~~accomplish.

16The amount of our provision for doubtful accounts is based on our assessments of historical collection trends, business and economic conditions, trends in federal and state governmental and private employer health coverage and other collection indicators. A continuation in trends that results in increasing the proportion of accounts receivable being comprised of uninsured or under-insured accounts could adversely affect our collections of accounts receivable, results of operations and cash flows.

WECOST ~~ARE~~CONTAINMENT, ~~REQUIRED~~PAY TOFOR ~~TREAT~~PERFORMANCE, AND ~~PATIENTS~~OTHER ~~WITH~~PROGRAMS ~~EMERGENCY~~IMPOSED ~~MEDICAL~~BY ~~CONDITIONS~~THIRD-PARTY ~~REGARDLESS~~PAYERS, OFINCLUDING GOVERNMENT HEALTH CARE PROGRAMS, MAY DECREASE THE ~~PATIENT~~COMPANY’S ~~ABILITY TO PAY~~REVENUE

InThe ~~accordance~~health ~~with~~care ~~EMTALA,~~industry is wecurrently ~~are~~undergoing ~~required~~significant changes and is regularly subject to ~~provide~~regulatory ~~medical~~and ~~treatment~~political intervention. We expect to ~~stabilize~~derive ~~any~~a ~~patient~~considerable ~~who~~portion ~~arrives~~of atthe Company’s revenue through our ~~Hospitals~~hospitals ~~with~~from angovernment-sponsored ~~emergency~~health ~~medical~~care ~~condition~~programs and third-party payers (such as employers, ~~regardless~~private ofinsurers, HMOs or preferred provider organizations). It is possible that reimbursement from government and private third-party payers for hospital services may be reduced in the ~~patient’s~~future ~~ability~~due to ~~pay~~a deterioration in general economic conditions and fiscal pressures placed upon federal and state governments. ~~Accordingly~~Further reductions in payments or other changes in reimbursement for health care services could have a material adverse effect on the Company’s business, ~~our~~financial condition and/or results of operations. Also, ~~may~~rates bepaid ~~negatively~~by ~~impacted~~private bythird-party anpayers ~~increase~~are generally higher than Medicare, Medicaid and HMO payment rates. Any decrease in the relative number of ~~indigent~~patients orcovered ~~charity~~by ~~care~~private insurance ~~patients~~would ~~with~~have ~~emergency~~a ~~medical~~material ~~conditions~~adverse ~~treated~~effect aton ~~our~~the ~~Hospitals~~Company’s revenues and operations.

~~CONTINUING~~WE ARE REQUIRED TO ~~PROVIDE~~TREAT ~~QUALITY~~PATIENTS WITH EMERGENCY MEDICAL ~~SERVICES~~CONDITIONS ~~FROM~~REGARDLESS ~~TALENTED~~OF ~~PHYSICIANS~~THE ISPATIENT’S ~~CRITICAL~~ABILITY TO ~~OUR BUSINESS~~PAY

~~Generally,~~In ~~physicians~~accordance ~~are~~with EMTALA, ~~responsible~~we ~~for making patient admission decisions at our hospitals. Physicians~~ are ~~not~~required ~~employees~~to ~~and~~provide ~~may~~medical ~~terminate~~treatment ~~their~~to ~~affiliation~~stabilize ~~with our Hospitals at~~ any ~~time. Our~~patient ~~business~~who ~~depends,~~arrives inat ~~large~~our ~~part,~~hospitals ~~upon~~with ~~the~~an ~~number,~~emergency ~~quality~~medical condition, ~~and~~regardless ~~success~~ of the ~~physicians~~patient’s ~~who~~ability ~~perform~~to ~~services~~pay. ~~at our Hospitals~~Accordingly, ~~as well as the strength of~~ our ~~relationships~~results ~~with these physicians. Any failure~~ of ~~these~~operations ~~physicians~~may tobe ~~maintain~~negatively ~~the~~impacted by ~~quality~~an ofincrease ~~medical~~in ~~care provided or to otherwise adhere to professional guidelines at~~ the ~~Hospitals,~~number ~~or any damage to the reputation~~ of aindigent ~~key physician~~ or ~~group~~charity ofcare ~~physicians,~~patients ~~could~~with ~~damage~~emergency ~~the Company’s and the Hospitals’ reputations in the~~ medical ~~marketplace~~conditions ~~and~~treated ~~may~~at ~~subject us to liability and significantly reduce~~ our ~~revenue and increase our costs~~hospitals.

~~Also,~~CONTINUING ~~like~~TO ~~many~~PROVIDE ~~hospitals,~~QUALITY weMEDICAL SERVICES ~~face~~FROM aTALENTED ~~growing~~PHYSICIANS ~~shortage~~IS ofCRITICAL ~~primary~~TO ~~care~~OUR and specialty physicians. Should this shortage continue or worsen, the utilization of our hospitals may be adversely impacted. This could have a negative impact on our revenues and profitability.BUSINESS

WEGenerally, ~~MAY~~physicians are BEresponsible ~~INVOLVED~~for INmaking ~~LITIGATION~~patient ~~WITH~~admission ~~OUR~~decisions ~~MEDICAL~~at ~~STAFF~~our hospitals. Physicians are not employees and may terminate their affiliation with our hospitals at any time. Our business depends, in large part, upon the number, quality, and success of the physicians who perform services at our hospitals, as well as the strength of our relationships with these physicians. Any failure of these physicians to maintain the quality of medical care provided or to otherwise adhere to professional guidelines at our hospitals, or any damage to the reputation of a key physician or group of physicians, could damage the Company’s and our hospitals’ reputations in the medical marketplace and may subject us to liability and significantly reduce our revenue and increase our costs.

The primary relationship between a hospital and the physicians who practice in it is through the hospital's organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures at acute care hospitals by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges, or who have such membership or privileges curtailed, denied or revoked may file legal actions against hospitals. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, unanticipated failure of the governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties.17

WEAlso, ~~FACE~~like ~~COMPETITION~~many INhospitals, we ~~STAFFING~~face ~~QUALIFIED~~a ~~NURSES~~growing ~~AND~~shortage ~~MEDICAL~~of ~~SUPPORT~~primary ~~STAFF~~care ~~FOR~~and ~~OUR~~specialty ~~HOSPITALS~~physicians. Should this shortage continue or worsen, ~~WHICH~~the ~~COULD~~utilization of ~~INCREASE~~our ~~OUR~~hospitals ~~LABOR~~may ~~COSTS~~be adversely impacted. This could have a negative impact on our revenues and profitability.

~~Health~~WE ~~care~~MAY ~~providers~~BE ~~depend~~INVOLVED onIN ~~qualified~~LITIGATION WITH ~~nurses,~~OUR asMEDICAL well as other medical support staff, to provide quality health care services to patients. We must compete with other health care providers in attracting and retaining qualified nurses and medical support personnel, which may cause our labor expenses to rise. In addition, California has adopted legislation and regulations mandating a series of specific minimum patient-to-nurse ratios in all acute care hospital nursing units. Any failure to comply with nurse staff ratios could result in action by licensure authorities and/or subject the Hospitals to liability which could have a material adverse effect on the Company’s results of operations.STAFF

~~UNION~~The ~~CONTRACTS~~primary ~~HAVE~~relationship between ~~EXPIRED~~a ~~AND~~hospital ~~THERE~~and ~~CAN~~the BEphysicians NOwho ~~ASSURANCE~~practice ~~THAT~~in ~~THE~~it ~~CONTRACTS~~is ~~WILL~~through BEthe ~~RENEWED~~hospital's organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures at acute care hospitals by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges, or who have such membership or privileges curtailed, denied or revoked may file legal actions against hospitals. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, unanticipated failure of the governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties.

~~Approximately~~WE ~~43%~~FACE ofCOMPETITION ~~the~~IN ~~Company’s~~STAFFING ~~employees~~QUALIFIED NURSES ~~are~~AND ~~represented~~MEDICAL bySUPPORT ~~labor~~STAFF ~~unions~~AT asOUR ~~of March 31~~HOSPITALS, ~~2012. The~~WHICH ~~CNA~~COULD ~~Agreement~~INCREASE ~~expired~~OUR onLABOR February 28, 2011 and the SEIU Agreement expired on August 31, 2011. Both agreements are currently in negotiations. The agreements have “no strike” provisions and compensation caps which provide the Company with long term compensation and workforce stability.COSTS

~~For~~Health ~~both~~care ~~unions,~~providers depend ~~all~~on ~~prior~~qualified ~~grievances~~nurses, ~~regarding~~as ~~retiree~~well as other medical ~~benefits~~support staff, ~~the~~to ~~administration~~provide ofquality ~~pay~~health ~~adjustments~~care services to patients. We must compete with other health care providers in attracting and ~~pay~~retaining ~~practices~~qualified nurses and medical support personnel, ~~changes~~which may cause our labor expenses to rise. In addition, California has adopted legislation and regulations mandating a series of specific minimum patient-to-nurse ratios in ~~medical~~all ~~benefits~~acute care hospital nursing units. Any failure to comply with nurse staff ratios could result in action by licensure authorities and/or ~~several~~subject ~~wrongful~~our ~~terminations~~hospitals to liability which could have ~~been~~a ~~resolved~~material inadverse effect on the ~~form~~Company’s results of ~~settlement agreements~~operations.

17UNION CONTRACTS HAVE BEEN RENEWED BUT THERE CAN BE NO ASSURANCE THAT THE CONTRACTS WILL BE RENEWED IN THE FUTURE

IFApproximately ~~EITHER~~37% ~~THE~~of the ~~COMPANY~~Company’s ORemployees ~~THE~~are ~~HOSPITALS~~represented ~~FAIL~~by TOlabor ~~COMPLY~~unions ~~WITH~~as ~~APPLICABLE~~of ~~LAWS~~March ~~AND~~31, ~~REGULATIONS~~2013. The CNA Agreement and the SEIU Agreement both expire on August 31, WE2014, ~~MAY~~and ~~SUFFER~~there ~~PENALTIES~~can ORbe BEno ~~REQUIRED~~assurance TOthat ~~MAKE~~such ~~SIGNIFICANT~~agreements ~~CHANGES~~will TObe ~~OUR~~renewed ~~OPERATIONS~~on or prior to their scheduled expiration. The agreements have “no strike” provisions and compensation caps which provide the Company with long term compensation and workforce stability.

~~The~~For ~~Company~~both ~~and~~unions, ~~our~~all prior ~~Hospitals~~grievances ~~are~~regarding ~~subject~~retiree tomedical ~~many~~benefits, ~~laws~~the ~~and~~administration ~~regulations~~of atpay ~~the~~adjustments ~~federal,~~and ~~state~~pay ~~and~~practices, ~~local~~changes ~~levels. These~~in ~~laws~~medical benefits and ~~regulations~~several ~~require~~wrongful ~~our~~terminations ~~Hospitals~~have tobeen ~~meet~~resolved ~~various~~in ~~licensing,~~the ~~certification~~form ~~and~~of ~~other~~settlement ~~requirements, including those relating to:~~agreements.

●IF ~~billing~~EITHER ~~and~~THE ~~coding~~COMPANY ~~for~~OR ~~services~~THE ~~and~~HOSPITALS FAIL ~~properly~~TO ~~handling~~COMPLY ~~overpayments~~WITH ●APPLICABLE ~~licensure~~LAWS ~~and~~AND ~~certification issues ● physician ownership ● payments to specialty hospitals~~REGULATIONS, ~~should~~WE ~~any~~MAY ofSUFFER ~~the~~PENALTIES ~~Hospitals~~OR beBE ~~determined~~REQUIRED toTO beMAKE aSIGNIFICANT ~~specialty~~CHANGES ~~hospital~~TO ● prohibited inducements for patient referrals and restrictions on payments for marketing ● the adequacy of medical care, equipment, personnel, operating policies and procedures ● confidentiality, maintenance, data breach, identify theft and security issues associate with health-related and personal information and medical records ● activities regarding competitors ● reimbursement audits ● environmental protectionOUR OPERATIONS

IfThe ~~the~~ Company ~~fails to comply with applicable laws~~ and ~~regulations,~~our hospitals ~~it could suffer civil or criminal penalties. States~~ are ~~increasingly regulating the delivery of health care services. The hospital industry is~~ subject to ~~extensive~~many ~~state~~laws and ~~local~~regulations ~~regulation~~at ~~with respect to reimbursement, licensure, certification and health planning. This regulation relates, among other things, to~~ the ~~adequacy of physical plant and equipment~~federal, ~~qualifications~~state ~~of personnel, standards of medical care~~ and ~~operational~~local ~~requirements~~levels. ~~Compliance~~These with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of the company. In the future, different interpretations or enforcement of existing or new laws and regulations ~~could subject the current practices to allegations of impropriety or illegality, or could~~ require ~~the~~our ~~Company~~hospitals to ~~make~~meet ~~changes~~various ~~in its facilities~~licensing, ~~equipment,~~certification ~~personnel, services, capital expenditure programs~~ and ~~operating~~other ~~expenses. Current~~requirements, orincluding ~~future~~those ~~legislative~~relating ~~initiatives or government regulation may have a material adverse effect on the Hospitals’ operations or reduce the demand for their services.~~to:

~~THE~~● ~~COMPANY~~billing ~~CONDUCTS~~and ~~ON-GOING~~coding ~~REVIEWS~~for OFservices ~~ITS~~and ~~COMPLIANCE~~properly ~~WITH~~handling ~~VARIOUS~~overpayments; ~~LAWS~~● ~~RELATED~~licensure TOand ~~PHYSICIAN~~certification ~~ARRANGEMENTS~~issues; ● physician ownership; ● payments to specialty hospitals, ~~WHICH~~should ~~MAY~~any ~~REVEAL~~of ~~VIOLATIONS~~our ~~THAT~~hospitals ~~COULD~~be ~~SUBJECT~~determined ~~THE~~to ~~COMPANY~~be TOa ~~FINES~~specialty ORhospital; ~~PENALTIES~~● prohibited inducements for patient referrals and restrictions on payments for marketing; ● the adequacy of medical care, equipment, personnel, operating policies and procedures; ● confidentiality, maintenance, data breach, identify theft and security issues associate with health-related and personal information and medical records; ● activities regarding competitors; ● reimbursement audits; and ● environmental protection.

The Company and our Hospitals have entered into a variety of relationships with physicians. In an increasingly complex legal and regulatory environment, these relationships may pose a variety of legal or business risks. The Company conducts reviews of its compliance with the federal Anti-kickback Statute, Stark Law and other applicable laws as they relate to the Company’s relationships with potential referral sources.18

~~One~~If the Company fails to comply with applicable laws and regulations, it could suffer civil or criminal penalties. States are increasingly regulating the delivery of health care services. The hospital industry is subject to extensive state and local regulation with respect to reimbursement, licensure, certification and health planning. This regulation relates, among other things, to the ~~Company’s~~adequacy ~~largest~~of ~~shareholders~~physical plant and equipment, ~~OC-PIN~~qualifications of personnel, isstandards ~~owned~~of medical care and ~~controlled~~operational byrequirements. Compliance with ~~physicians~~such ~~who~~regulatory ~~also~~requirements, ~~refer~~as interpreted and amended from time to time, can increase operating costs and ~~practice~~thereby atadversely affect ~~our~~the ~~Hospitals~~financial viability of the company. ~~The~~ In ~~Hospitals~~the future, different interpretations or enforcement of existing or new laws and regulations could subject the current practices to allegations of impropriety or illegality, or could require the Company to make changes in its facilities, equipment, personnel, services, capital expenditure programs and operating expenses. Current or future legislative initiatives or government regulation may have ~~various~~a ~~contractual~~material ~~relationships~~adverse ~~with~~effect ~~OC-PIN~~on ~~physicians~~our ashospitals’ ~~well~~operations or asreduce ~~physicians~~the ~~who~~demand ~~are~~for ~~not~~their ~~owners~~services. For further discussion of laws and regulations applicable to the Company and our hospitals, see “ITEM 1. BUSINESS - HEALTH CARE REGULATION AND LICENSING.”

~~The~~THE ~~Company~~COMPANY ~~entered~~CONDUCTS ~~into~~ON-GOING aREVIEWS OF ~~sale~~ITS ~~leaseback~~COMPLIANCE ~~transaction~~WITH ~~for~~VARIOUS ~~substantially~~LAWS ~~all~~RELATED ofTO ~~the~~PHYSICIAN ~~real estate with Pacific Coast Holdings Investment~~ARRANGEMENTS, ~~LLC~~WHICH ~~(“PCHI”)~~MAY ~~whereby~~REVEAL ~~the~~VIOLATIONS ~~Company~~THAT ~~leases~~COULD ~~substantially~~SUBJECT ~~all~~THE ofCOMPANY TO ~~the~~FINES ~~real~~OR ~~property of our Hospitals from PCHI. PCHI is owned by Ganesha Realty, LLC, which is managed by Dr. Kali P. Chaudhuri and various physician investors.~~PENALTIES

The Company ~~has~~and aour hospitals ~~review~~have ~~process~~entered ininto ~~place~~a tovariety ~~ensure~~of ~~that~~relationships ~~its agreements~~ with ~~potential referral sources are in writing and comply with applicable laws~~physicians. ~~Additionally,~~In ~~the~~an ~~Company~~increasingly ~~has~~complex ~~reviewed~~legal ~~the~~and ~~terms of the purchase of ownership interests in the Company by OC-PIN~~regulatory environment, ~~as well as the real estate sale-leaseback agreement with PCHI, and has determined that~~ these ~~transactions~~relationships ~~should~~may bepose ~~determined~~a tovariety beof ~~permissible~~legal ~~under~~or ~~applicable~~business ~~law~~risks. The ~~However, if the~~ Company orconducts ~~any~~reviews of ~~our Hospitals are not in~~ its compliance with the federal ~~and state fraud and abuse laws and physician self~~Anti-~~referral~~kickback ~~laws~~Statute, ~~the~~Stark ~~Company~~Law ~~could be subject to repayment obligations, fines, penalties, exclusion from participation in federal health care programs,~~ and other ~~sanctions~~applicable ~~which~~laws ~~would~~as ~~have~~they arelate ~~material~~to ~~adverse effect on~~ the Company’s ~~profitability~~relationships with potential referral sources.

WEOne ~~FACE~~of ~~INTENSE~~the ~~COMPETITION~~Company’s largest INshareholders, ~~OUR~~OC-PIN, ~~BUSINESS~~is owned and controlled by physicians who also refer to and practice at our hospitals. Our hospitals have various contractual relationships with OC-PIN physicians as well as physicians who are not owners of the Company.

The ~~health~~Company ~~care~~entered into ~~industry is highly competitive. We compete with~~ a ~~variety~~sale ofleaseback ~~other~~transaction ~~organizations~~for insubstantially ~~providing~~all ~~medical services, which may have greater financial resources available to them. Some~~ of the ~~hospitals~~real ~~that~~estate ~~compete~~ with ~~our~~Pacific ~~hospitals~~Coast ~~are~~Holdings ~~owned by government agencies or are not-for-profit organizations. Tax-exempt competitors may have certain financial advantages not available to our facilities~~Investment, ~~such~~LLC as(“PCHI”) whereby ~~endowments,~~the ~~charitable~~Company ~~contributions,~~leases ~~tax-exempt~~substantially ~~financing,~~all ~~and~~of ~~exemptions~~the ~~from~~real ~~sales,~~ property ~~and~~of ~~income~~our ~~taxes. In certain states, including California, some not-for-profit~~ hospitals ~~are permitted by law to directly employ physicians while for-profit hospitals are generally prohibited~~ from ~~doing so~~PCHI. WePCHI ~~also~~is ~~face increasing competition from physician-~~owned ~~specialty~~by ~~hospitals~~Ganesha Realty, ~~and freestanding surgery~~LLC, ~~diagnostic~~which ~~and~~is ~~imaging~~managed ~~centers~~by ~~for~~Dr. ~~market~~Kali ~~share in high-margin services and for quality physicians and personnel~~P. If ~~competing~~Chaudhuri ~~health care providers are better able to attract more patients, recruit~~ and ~~retain~~various ~~physicians,~~physician ~~expand services or obtain favorable managed care contracts at their facilities, we may continue to experience a decline in patient volume levels~~investors.

18The Company has a review process in place to ensure that its agreements with potential referral sources are in writing and comply with applicable laws. Additionally, the Company has reviewed the terms of the purchase of ownership interests in the Company by OC-PIN, as well as the real estate sale-leaseback agreement with PCHI, and has determined that these transactions should be determined to be permissible under applicable law. However, if the Company or any of our hospitals are not in compliance with federal and state fraud and abuse laws and physician self-referral laws, the Company could be subject to repayment obligations, fines, penalties, exclusion from participation in federal health care programs, and other sanctions which would have a material adverse effect on the Company’s profitability.

AWE ~~SIGNIFICANT~~FACE ~~PORTION~~INTENSE OFCOMPETITION ~~OUR BUSINESS IS CONCENTRATED~~ IN ~~CERTAIN MARKETS AND THE RESPECTIVE ECONOMIC CONDITIONS OR CHANGES IN THE LAWS AFFECTING~~ OUR BUSINESS ~~IN THOSE MARKETS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY~~

The health care industry is highly competitive. We ~~receive~~compete ~~all~~with a variety of ~~our~~other ~~inpatient~~organizations in providing medical services, which ~~revenue~~may ~~from~~have ~~operations~~greater infinancial ~~Orange~~resources ~~County~~available to them. Some of the hospitals that compete with our hospitals are owned by government agencies or are not-for-profit organizations. Tax-exempt competitors may have certain financial advantages not available to our facilities, ~~California~~such as endowments, charitable contributions, tax-exempt financing, and exemptions from sales, property and income taxes. ~~The~~Under ~~economic~~certain ~~condition~~conditions some not-for-profit hospitals may form foundations with physician groups of ~~this~~a ~~market~~certain ~~could~~size ~~affect~~for the ~~ability~~purpose of ~~our~~delivering ~~patients~~the full range of hospital and ~~third-party~~physician ~~payers~~services to ~~reimburse~~consumers. usSince ~~for~~the physician ~~our~~group ~~services,~~can ~~through~~directly employ its ~~effect~~own onphysicians ~~disposable~~and ~~household~~typically ~~income~~co-manages ~~and~~the foundation with the ~~tax~~hospital, ~~base~~this ~~used~~foundation delivery model can be seen as very similar to ~~generate~~the ~~state~~direct ~~funding~~employment ~~for~~of ~~Medicaid~~physicians ~~programs~~by hospitals. For-profit hospitals cannot form and operate such foundations. AnWe ~~economic~~also ~~downturn~~face increasing competition from physician-owned specialty hospitals and freestanding surgery, ordiagnostic ~~changes~~and imaging centers for market share in ~~the~~high-margin ~~laws~~services ~~affecting~~and ~~our~~for ~~business~~quality inphysicians and ~~our~~personnel. If ~~market~~competing health care providers are better able to attract more patients, recruit and inretain ~~surrounding~~physicians, expand ~~markets~~services or obtain favorable managed care contracts at their facilities, ~~could~~we ~~have~~may acontinue ~~material~~to ~~adverse~~experience ~~effect~~a ondecline ~~the~~in ~~Company~~patient volume levels.

~~Further,~~A ~~many~~SIGNIFICANT ~~individuals~~PORTION ~~receive~~OF ~~health~~OUR ~~insurance~~BUSINESS ~~coverage~~IS CONCENTRATED ~~through~~IN ~~their~~CERTAIN ~~employers. If~~MARKETS ~~unemployment~~AND ~~levels~~THE ~~continue~~RESPECTIVE toECONOMIC ~~increase,~~CONDITIONS ~~the~~OR ~~number~~CHANGES ofIN ~~individuals~~THE ~~with~~LAWS ~~health~~AFFECTING ~~insurance~~OUR ~~may~~BUSINESS ~~decrease. As~~IN aTHOSE ~~result,~~MARKETS COULD ~~our~~HAVE ~~Hospitals~~A ~~may~~MATERIAL inADVERSE ~~turn~~EFFECT ~~experience~~ON aTHE ~~decrease in patient volumes or an increase in services provided to uninsured patients. These factors, although uncertain, could have a negative impact on our results of operations.~~COMPANY

WEWe ~~MUST~~receive ~~EFFECTIVELY~~all ~~AND~~of ~~TIMELY~~our inpatient ~~IMPLEMENT~~services ~~ELECTRONIC~~revenue ~~HEALTH~~from ~~RECORD~~operations ~~SYSTEMS~~in INOrange ~~ORDER~~County, TOCalifornia. The ~~AVOID~~economic ~~MEDICARE~~condition ~~PAYMENT~~of ~~REDUCTIONS~~this market could affect the ability of our patients and third-party payers to reimburse us for our services, through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs. An economic downturn, or changes in the laws affecting our business in our market and in surrounding markets, could have a material adverse effect on the Company.

The Health Information Technology for Economic and Clinical Health Act (“HITECH”) was introduced as part of the American Recovery and Reinvestment Act of 2009. The legislation was created to both stimulate the adoption of electronic health records in the United States and to require enhanced privacy safeguards for protected health information. The HITECH Act provides for incentives to those providers who have adopted EHR systems and meet Medicare’s requirements for meaningful use thereof. Further, beginning in 2015, providers who fail to demonstrate meaningful use will receive negative adjustments in Medicare reimbursement. Failure to demonstrate meaningful use of an electronic health record system by the 2015 deadline could have an adverse effect on our results of operations.19

WEFurther, ~~MAY~~many BEindividuals receive ~~SUBJECT~~health TOinsurance ~~GOVERNMENTAL~~coverage ~~INVESTIGATIONS~~through ~~AND~~their ~~WHISTLEBLOWER~~employers. ~~ACTIONS~~If unemployment levels continue to increase, the number of individuals with health insurance may decrease. As a result, our hospitals may in turn experience a decrease in patient volumes or an increase in services provided to uninsured patients. These factors, although uncertain, could have a negative impact on our results of operations.

~~The~~WE ~~federal~~MUST ~~False~~EFFECTIVELY ~~Claims~~AND ~~Act~~TIMELY ~~imposes~~IMPLEMENT ELECTRONIC ~~penalties~~HEALTH onRECORD ~~anyone~~SYSTEMS ~~who~~IN ~~knowingly~~ORDER ~~submits~~TO orAVOID ~~causes~~MEDICARE ~~the~~PAYMENT submission of a fraudulent reimbursement claim to the government. The law further allows a private party to initiate a False Claims Act suit on behalf of the government, known as a qui tam action. In past years, settlements and judgments related to False Claims Act violations have totaled in the billions of dollars. While we believe that our company operates in compliance with applicable laws and regulations, being named as a defendant in a False Claims Act lawsuit could have a material adverse effect on our results of operations.REDUCTIONS

WEThe ~~MAY~~Health BEInformation Technology ~~LIABLE~~for ~~FOR~~Economic ~~LOSSES~~and ~~NOT~~Clinical ~~COVERED~~Health BYAct OR(“HITECH”) INwas ~~EXCESS~~introduced OFas ~~OUR~~part ~~INSURANCE~~of the American Recovery and Reinvestment Act of 2009. The legislation was created to both stimulate the adoption of electronic health records in the United States and to require enhanced privacy safeguards for protected health information. The HITECH Act provides for incentives to those providers who have adopted EHR systems and meet Medicare’s requirements for meaningful use thereof. Further, beginning in 2015, providers who fail to demonstrate meaningful use will receive negative adjustments in Medicare reimbursement. Failure to demonstrate meaningful use of an electronic health record system by the 2015 deadline could have an adverse effect on our results of operations.

WeWE ~~are~~MAY ~~subject~~BE toSUBJECT ~~medical~~TO ~~malpractice~~GOVERNMENTAL ~~suits~~INVESTIGATIONS AND ~~and~~WHISTLEBLOWER other legal actions in the ordinary course of business. These actions may involve significant defense costs and large monetary claims. We cannot predict the frequency or the effect these lawsuits will have on our results of operations. While we believe that we have retained adequate insurance coverage to protect our operations, all general liability insurance we purchase is subject to policy limitations. If any insurance policy limitations are reached, we may be subject to payments not covered by insurance and which may have a material adverse effect on our results of operations. ACTIONS

~~ITEM~~The 1Bfederal False Claims Act imposes penalties on anyone who knowingly submits or causes the submission of a fraudulent reimbursement claim to the government. The ~~UNRESOLVED~~law ~~STAFF~~further ~~COMMENTS~~allows a private party to initiate a False Claims Act suit on behalf of the government, known as a qui tam action. In past years, settlements and judgments related to False Claims Act violations have totaled in the billions of dollars. While we believe that our company operates in compliance with applicable laws and regulations, being named as a defendant in a False Claims Act lawsuit could have a material adverse effect on our results of operations.

~~None.~~WE MAY BE LIABLE FOR LOSSES NOT COVERED BY OR IN EXCESS OF OUR INSURANCE

19We are subject to medical malpractice suits and other legal actions in the ordinary course of business. These actions may involve significant defense costs and large monetary claims. We cannot predict the frequency or the effect these lawsuits will have on our results of operations. While we believe that we have retained adequate insurance coverage to protect our operations, all general liability insurance we purchase is subject to policy limitations. If any insurance policy limitations are reached, we may be subject to payments not covered by insurance and which may have a material adverse effect on our results of operations.

ITEM 21B. ~~PROPERTIES~~UNRESOLVED STAFF COMMENTS

~~In March 2005, the Company completed the acquisition of the Hospitals and their associated real estate from Tenet~~None. At the closing of the acquisition, the Company transferred all of the fee interests in the acquired real estate to PCHI, a company owned indirectly by two of the Company's largest shareholders. As further discussed in the consolidated financial statements, the Company consolidates PCHI. The Company entered into a Triple Net Lease dated March 7, 2005 (amended and restated as of April 13, 2010) under which it leased back from PCHI all of the real estate that it transferred to PCHI. Additionally, the Company leases property from other lessors. As of March 31, 2012, the Company's principal facilities are listed in the following table:

PROPERTY	APPROXIMATE AGGREGATE SQUARE FOOTAGE	LEASE RATE	INITIAL LEASE EXPIRATION
Western Medical Center-Santa Ana 1001 North Tustin Avenue Santa Ana, CA 92705	360,000	See note 1.	February 28, 2030
Administrative Building 1301 N. Tustin Avenue Santa Ana, CA	40,000	See note 1.	February 28, 2030
Western Medical Center-Anaheim 1025 South Anaheim Boulevard Anaheim, CA 92805	132,000	See note 1.	February 28, 2030
Coastal Communities Hospital 2701 South Bristol Street Santa Ana, CA 92704	115,000	See note 1.	February 28, 2030
Chapman Medical Center 2601 East Chapman Avenue Orange, CA 92869	140,000	See note 2.	December 31, 2023

1.ITEM ~~Effective April 13, 2010, the Company entered into an amended and restated lease with PCHI~~2. The amended lease terminates on the 25-year anniversary of the original lease (March 7, 2005), grants the Company the right to renew for one additional 25-year period, and requires combined annual base rental payments of $8.3 million for all four properties. However, until PCHI refinances the related real estate loan, the annual base rental payments are reduced to $7.3 million. In addition, the Company may offset, against its rental payments owed to PCHI, interest payments that it makes on the related real estate loan. Lease payments to PCHI are eliminated in consolidation.PROPERTIES

2.In ~~Leased~~March 2005, the Company completed the acquisition of our hospitals and their associated real estate from anTenet. ~~unrelated~~At ~~party~~the closing of the acquisition, the Company transferred all of the fee interests in the acquired real estate to PCHI, a company owned indirectly by two of the Company's largest shareholders. ~~Monthly~~As ~~lease~~further ~~payments~~discussed ~~are~~in ~~$133~~the consolidated financial statements,~~860~~ the Company consolidates PCHI. The Company entered into a Triple Net Lease dated March 7, 2005 (amended and restated as of April 13, 2010) under which it leased back from PCHI all of the real estate that it transferred to PCHI. Additionally, the Company leases property from other lessors. As of March 31, 2013, the Company's principal facilities are listed in the following table:

The State of California has imposed new hospital seismic safety requirements. Under these new requirements, the Hospitals must meet stringent seismic safety criteria in the future. In addition, there could be other remediation costs pursuant to this seismic retrofit.

PROPERTY	APPROXIMATE AGGREGATE SQUARE FOOTAGE	LEASE RATE	INITIAL LEASE EXPIRATION

Western Medical Center-Santa Ana 1001 North Tustin Avenue Santa Ana, CA 92705	360,000	See note 1.	February 28, 2030

Administrative Building 1301 N. Tustin Avenue Santa Ana, CA	40,000	See note 1.	February 28, 2030

Western Medical Center-Anaheim 1025 South Anaheim Boulevard Anaheim, CA 92805	132,000	See note 1.	February 28, 2030

Coastal Communities Hospital 2701 South Bristol Street Santa Ana, CA 92704	115,000	See note 1.	February 28, 2030

Chapman Medical Center 2601 East Chapman Avenue Orange, CA 92869	140,000	See note 2.	December 31, 2023

~~The~~1. ~~State~~Effective ofApril ~~California~~13, ~~has~~2010, ~~introduced~~the aCompany ~~new~~entered ~~seismic~~into ~~review~~an ~~methodology~~amended ~~known~~and asrestated ~~HAZUS~~lease with PCHI. The ~~HAZUS~~amended ~~methodology~~lease ~~may~~terminates ~~preclude~~on the ~~need~~25-year ~~for~~anniversary ~~some~~of ~~structural~~the ~~modifications.~~original ~~All~~lease ~~four~~(March ~~Hospitals~~7, ~~requested~~2005), ~~HAZUS~~grants ~~review~~the ~~and~~Company ~~received~~the aright ~~favorable~~to ~~notice~~renew ~~pertaining~~for toone ~~structural~~additional ~~reclassification.~~25-year ~~All~~period, ~~Hospital~~and ~~buildings,~~requires ~~with~~combined ~~the~~annual ~~exception~~base rental payments of ~~one~~$8.3 ~~(an~~million ~~administrative~~for ~~building)~~all four properties. However, ~~have~~until ~~been~~PCHI ~~deemed~~refinances ~~compliant~~the ~~until~~related ~~January~~real 1estate loan, ~~2030~~the ~~for~~annual ~~both~~base ~~structural~~rental ~~and~~payments ~~nonstructural~~are ~~retrofit~~reduced to $7. ~~The~~3 ~~Company~~million. ~~does~~In ~~not~~addition, ~~have~~the anCompany ~~estimate~~may ofoffset, ~~the~~against ~~cost~~its rental payments owed to ~~remediate~~PCHI, ~~the~~interest ~~seismic~~payments ~~requirements~~that ~~for~~it makes on the ~~administrative~~related ~~building~~real asestate ofloan. ~~March~~Lease ~~31,~~payments ~~2012~~to PCHI are eliminated in consolidation.

~~There are additional requirements that must be complied with by 2030~~2. ~~The~~Leased ~~costs~~from ofan ~~meeting~~unrelated ~~these requirements have not yet been determined~~party. ~~Compliance~~Monthly ~~with~~lease ~~seismic~~payments ~~ordinances~~are ~~will be costly and could have a material adverse effect on the Company's cash flow. In addition~~$144, ~~remediation could possibly result in certain environmental liabilities, such as asbestos abatement~~652.

The ~~Company~~State ~~believes~~of ~~that~~California has ~~its~~imposed ~~current~~new ~~leased~~hospital ~~space~~seismic issafety ~~adequate~~requirements. ~~for~~Under ~~its~~these ~~current~~new ~~purposes~~requirements, ~~and~~the ~~for~~hospitals must meet stringent seismic safety criteria in the ~~next~~future. ~~fiscal~~In ~~year~~addition, there could be other remediation costs pursuant to this seismic retrofit.

20The State of California has introduced a new seismic review methodology known as HAZUS. The HAZUS methodology may preclude the need for some structural modifications. All four hospitals requested HAZUS review and received a favorable notice pertaining to structural reclassification. All hospital buildings, with the exception of one (an administrative building), have been deemed compliant until January 1, 2030 for both structural and nonstructural retrofit. The Company does not have an estimate of the cost to remediate the seismic requirements for the administrative building as of March 31, 2013.

~~ITEM~~There 3are additional requirements that must be complied with by 2030. ~~LEGAL~~The ~~PROCEEDINGS~~costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on the Company's cash flow. In addition, remediation could possibly result in certain environmental liabilities, such as asbestos abatement.

~~LABOR~~The ~~AND~~Company ~~EMPLOYMENT~~believes that its current leased space is adequate for its current purposes and for the next fiscal year.

From time to time, health care facilities receive requests for information in the form of a subpoena from licensing entities, such as the Medical Board of California, regarding members of their medical staffs. Also, California state law mandates that each medical staff is required to perform peer review of its members. As a result of the performance of such peer reviews, action is sometimes taken to limit or revoke an individual's medical staff membership and privileges in order to assure patient safety.21

~~Approximately~~ITEM ~~43% of the Company's employees are represented by labor unions as of March 31, 2012~~3. ~~The~~LEGAL CNA Agreement expired on February 28, 2011 and the SEIU Agreement expired on August 31, 2011. Both agreements are currently in negotiations. The agreements have “no strike” provisions and compensation caps which provide the Company with long term compensation and workforce stability.PROCEEDINGS

~~For~~LABOR ~~both~~AND unions, all prior grievances regarding retiree medical benefits, the administration of pay adjustments and pay practices, changes in medical benefits and several wrongful terminations have been resolved in the form of settlement agreements.EMPLOYMENT

~~OTHER~~From ~~LEGAL~~time ~~PROCEEDINGS~~to time, health care facilities receive requests for information in the form of a subpoena from licensing entities, such as the Medical Board of California, regarding members of their medical staffs. Also, California state law mandates that each medical staff is required to perform peer review of its members. As a result of the performance of such peer reviews, action is sometimes taken to limit or revoke an individual's medical staff membership and privileges in order to assure patient safety.

OnApproximately ~~January~~37% ~~6, 2012, the Regents~~ of the ~~University~~Company’s ofemployees ~~California~~are ~~(UC),~~represented ~~acting~~by onlabor ~~behalf~~unions as of UCMarch ~~Irvine Healthcare~~31, filed suit in Orange County Superior Court against Western Medical Center-Anaheim (WMC-A) for breach of contract based upon an allegation that WMC-A guaranteed payment for health care services provided to a patient WMC-A transferred to UC Irvine Medical Center because the patient needed a higher level of care than WMC-A could provide2013. The ~~Company~~CNA ~~filed~~Agreement anand ~~answer to~~ the ~~complaint~~SEIU ~~and~~Agreement both UCexpire ~~demurred~~on toAugust ~~the~~31, ~~Company’s answer~~2014. The ~~Company~~agreements ~~then~~have ~~filed~~“no anstrike” ~~amended~~provisions ~~answer to UC’s complaint~~ and UCcompensation ~~demurred~~caps towhich ~~the~~provide ~~Company’s amended answer. UC’s demurrer is currently set for hearing in June 2012. At March 31, 2012,~~ the Company ~~had~~with ~~accrued~~long ~~$1.8~~term ~~million~~compensation ~~for~~and ~~this~~workforce ~~guarantee~~stability.

~~ITEM~~For 4.both ~~MINE~~unions, ~~SAFETY~~all prior ~~DISCLOSURES~~grievances regarding retiree medical benefits, the administration of pay adjustments and pay practices, changes in medical benefits and several wrongful terminations have been resolved in the form of settlement agreements.

~~Not~~OTHER ~~applicable.~~LEGAL PROCEEDINGS

21The Company and our hospitals are subject to various legal proceedings, most of which relate to routine matters incidental to operations. The results of these claims cannot be predicted, and it is possible that the ultimate resolution of these matters, individually or in the aggregate, may have a material adverse effect on the Company's business (both in the near and long term), financial position, results of operations, or cash flows. Although the Company defends itself vigorously against claims and lawsuits and cooperates with investigations, these matters (1) could require payment of substantial damages or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under insurance policies where coverage applies and is available, (2) cause substantial expenses to be incurred, (3) require significant time and attention from the Company's management, and (4) could cause the Company to close or sell the hospitals or otherwise modify the way its business is conducted. The Company accrues for claims and lawsuits when an unfavorable outcome is probable and the amount is reasonably estimable.

~~PART~~On IIJune 5, 2009, a potential class action lawsuit was filed against the Company by Alexandra Avery. Ms. Avery purports to represent all 12-hourly employees and the complaint alleges causes of action for restitution of unpaid wages as a result of unfair business practices, injunctive relief for unfair business practices, failure to pay overtime wages, and penalties associated therewith. On December 23, 2009, the Company filed an answer to the complaint, generally denying all of the plaintiff's allegations. On January 25, 2010, a potential class action lawsuit was filed against the Company by Julie Ross. Ms. Ross purports to represent all similarly-situated employees and the complaint alleges causes of action for violation of the California Labor Code and unfair competition law. On September 3, 2010 the plaintiffs in both the Avery and Ross actions filed a consolidated complaint (the "Consolidated Complaint") that alleges the causes of action found in the initial Ross complaint. On October 12, 2010, the Company filed an answer to the Consolidated Complaint, which generally denied all allegations. On July 18, 2011, the Company filed a motion to compel arbitration of the matter, which was denied on October 21, 2011. The Company appealed this decision and the Court of Appeal decided against the Company on June 26, 2013. The Company intends to vigorously defend itself in connection with the claims in the Consolidated Complaint. Discovery is ongoing and at this stage in the proceedings, the Company is unable to determine the cost of defending this lawsuit or the impact, if any, this action may have on its results of operations.

~~ITEM~~On February 13, 2013, the jury in Fitzgibbons v. IHHI, et. al., awarded $500,000 in punitive damages against the Company, bringing the jury’s total verdict in this lawsuit for intentional infliction of emotional distress to $5.7 ~~MARKET~~million. ~~FOR~~The ~~REGISTRANT'S~~Company ~~COMMON~~thereafter ~~EQUITY~~filed two post-trial motions, ~~RELATED~~one ~~STOCKHOLDER~~seeking ~~MATTERS~~a ~~AND~~new ~~ISSUER~~trial ~~PURCHASES~~and OFanother ~~EQUITY~~seeking ~~SECURITIES~~a judgment in the Company’s favor notwithstanding the verdict. On April 30, 2013, the trial judge granted the Company’s motion for a judgment notwithstanding the verdict and in the alternative granted the Company’s motion for a new trial. The same day the trial judge signed a judgment in the Company’s favor by which Dr. Fitzgibbons took nothing by way of his complaint and the Company was entitled to recover its costs of suit from Dr. Fitzgibbons. Dr. Fitzgibbons filed a notice of appeal of the judgment in the Company’s favor on May 6, 2013. The Company estimates the appeal will take at least one year to resolve. Due to these favorable rulings, the Company reversed the $5.2 million contingent loss that was reserved on its financial statements as of December 31, 2012.

~~The~~ITEM ~~Company's common stock is listed for trading on the OTC Bulletin Board under the symbol "IHCH~~4.~~OB."~~ ~~The~~MINE ~~trading~~SAFETY market for the Company's common stock has been extremely thin. In view of the extreme thinness of the trading market, the prices reflected on the chart below as reported on the OTC Bulletin Board may not be indicative of the price at which any prior or future transactions were or may be effected in the Company's common stock. Stockholders are cautioned against drawing any conclusions from the data contained herein, as past results are not necessarily indicative of future stock performance.DISCLOSURES

~~The~~Not following table sets forth the quarterly high and low bid price for the Company's common stock for each quarter for the period from April 1, 2010 through March 31, 2012, as quoted on the Over-the-Counter Bulletin Boardapplicable. ~~Such Over-the-Counter market quotations reflect inter dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.~~

PERIOD	HIGH	LOW
Apr 2010 - Jun 2010	$0.07	$0.05
Jul 2010 - Sep 2010	$0.07	$0.03
Oct 2010 - Dec 2010	$0.06	$0.02
Jan 2011 - Mar 2011	$0.05	$0.02
Apr 2011 - Jun 2011	$0.22	$0.01
Jul 2011 - Sep 2011	$0.09	$0.05
Oct 2011 - Dec 2011	$0.06	$0.03
Jan 2012 - Mar 2012	$0.08	$0.02

AsPART of the date of this report, there were approximately 131 record holders of the Company's common stock; this number does not include an indeterminate number of stockholders whose shares may be held by brokers in street name. The Company has not paid and does not expect to pay any dividends on its shares of common stock for the foreseeable future, as any earnings will be retained for use in the business.II

~~Equity~~The ~~Compensation~~Company's ~~Plan~~common stock ~~Information~~is listed for trading on the OTCQB marketplace under the symbol "IHCH." The trading market for the Company's common stock has been extremely thin. In view of the extreme thinness of the trading market, the prices reflected on the chart below as reported on the OTCQB marketplace may not be indicative of the price at which any prior or future transactions were or may be effected in the Company's common stock. Stockholders are cautioned against drawing any conclusions from the data contained herein, as past results are not necessarily indicative of future stock performance.

Plan Category	Number of Securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	8,235,000	$ 0.18	15,290,489
Equity compensation plans not approved by security holders	405,000,000	$ 0.07	-
Total	413,235,000	$ 0.07	15,290,489

The following table sets forth the quarterly high and low bid price for the Company's common stock for each quarter for the period from April 1, 2011 through March 31, 2013, as quoted on the OTCQB marketplace. Such OTCQB marketplace quotations reflect inter dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

PERIOD	HIGH	LOW
Apr 2011 - Jun 2011	$0.22	$0.01
Jul 2011 - Sep 2011	$0.09	$0.05
Oct 2011 - Dec 2011	$0.06	$0.03
Jan 2012 - Mar 2012	$0.08	$0.02
Apr 2012 - Jun 2012	$0.06	$0.04
Jul 2012 - Sep 2012	$0.11	$0.04
Oct 2012 - Dec 2012	$0.11	$0.06
Jan 2013 - Mar 2013	$0.10	$0.06

~~ITEM~~As 6of the date of this report, there were approximately 129 record holders of the Company's common stock; this number does not include an indeterminate number of stockholders whose shares may be held by brokers in street name. ~~SELECTED~~The ~~FINANCIAL~~Company ~~DATA~~has not paid and does not expect to pay any dividends on its shares of common stock for the foreseeable future, as any earnings will be retained for use in the business. While the Company is generally prohibited from paying dividends under its revolving line of credit, the Company is permitted to pay dividends under its term loan in the absence of default.

~~Not~~The ~~applicable~~following table provides summary information concerning the Company's equity compensation plan as of March 31, 2013.

~~ITEM~~Equity 7.Compensation ~~MANAGEMENT'S~~Plan ~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.~~Information

FORWARD-LOOKING INFORMATION

Plan Category	Number of Securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)

Equity compensation plans approved by security holders	7,595,000	$ 0.18	18,483,561
Equity compensation plans not approved by security holders	405,000,000	$ 0.07	-

Total	412,595,000	$ 0.07	18,483,561

~~Although~~ITEM ~~we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements~~6. ~~Except~~SELECTED asFINANCIAL ~~may be required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to actual results.~~DATA

AsNot ~~used in this report, the terms "we," "us," "our," "the Company," "Integrated Healthcare Holdings" or "IHHI" mean Integrated Healthcare Holdings, Inc~~applicable.~~, a Nevada corporation, unless otherwise indicated.~~

~~Unless~~ITEM ~~otherwise indicated, all amounts included in this Item~~ 7. ~~are~~MANAGEMENT'S ~~expressed~~DISCUSSION inAND ~~thousands~~ANALYSIS ~~(except~~OF ~~percentages~~FINANCIAL ~~and~~CONDITION ~~per~~AND ~~share~~RESULTS ~~amounts)~~OF OPERATIONS.

~~OVERVIEW~~FORWARD-LOOKING INFORMATION

OnThis ~~March~~Annual 8,Report on ~~2005,~~Form ~~we completed our acquisition (the "Acquisition") of four Orange County, California hospitals and associated real estate, including: (i) 282~~10-~~bed~~K ~~Western~~contains ~~Medical Center~~ forward-looking ~~Santa Ana~~statements, ~~CA;~~as ~~(ii)~~that ~~188-bed~~term ~~Western~~is ~~Medical~~defined ~~Center - Anaheim, CA; (iii) 178-bed Coastal Communities Hospital~~ in ~~Santa~~the ~~Ana,~~Private ~~CA;~~Securities ~~and~~Litigation ~~(iv)~~Reform ~~114-bed~~Act ~~Chapman~~of ~~Medical Center in Orange, CA (collectively, the "Hospitals") from Tenet Healthcare Corporation~~1995. These ~~The~~statements ~~Hospitals~~relate ~~were assigned~~ to ~~four~~future ofevents or our ~~wholly~~future ~~owned~~financial ~~subsidiaries formed for the purpose of completing the Acquisition~~performance. WeIn ~~also~~some ~~acquired the following real estate~~cases, ~~leases~~you ~~and~~can ~~assets~~identify ~~associated~~forward-looking ~~with~~statements by ~~the~~terminology ~~Hospitals:~~such ~~(i)~~as ~~a fee interest in the Western Medical Center at 1001 North Tustin Avenue~~"may," ~~Santa Ana~~"will," CA"should," ~~a fee interest in the administration building at 1301 North Tustin Avenue~~"expects," ~~Santa Ana~~"plans," CA"anticipates," "believes," ~~certain rights to acquire condominium suites located in the medical office building at 999 North Tustin Avenue~~"estimates," ~~Santa Ana~~"predicts," ~~CA;~~"potential" ~~(ii)~~or a"continue" ~~fee~~or ~~interest in~~ the ~~Western~~negative of ~~Medical~~these ~~Center~~terms ator ~~1025~~other ~~South~~comparable ~~Anaheim Blvd~~terminology., ~~Anaheim,~~These ~~CA;~~statements ~~(iii)~~are aonly ~~fee~~predictions ~~interest~~and ininvolve ~~the~~known ~~Coastal~~and ~~Communities~~unknown ~~Hospital at 2701 South Bristol Street~~risks, ~~Santa~~uncertainties and ~~Ana,~~other CAfactors, ~~and~~including ~~a fee interest in~~ the ~~medical~~risks ~~office~~discussed ~~building~~under ~~at 1901 North College Avenue, Santa Ana, CA; (iv) a lease for~~ the ~~Chapman~~caption ~~Medical~~"Risk ~~Center~~Factors" atherein ~~2601~~that ~~East~~may ~~Chapman~~cause ~~Avenue,~~our ~~Orange,~~Company's or ~~CA,~~our ~~and~~industry's aactual ~~fee interest in the medical office building at 2617 East Chapman Avenue~~results, ~~Orange,~~levels ~~CA; and (v) equipment and contract rights. At the closing~~ of ~~the Acquisition~~activity, weperformance ~~transferred~~or ~~all~~achievements ~~of the fee interests in the acquired real estate (the "Hospital Properties")~~ to ~~Pacific~~be ~~Coast~~materially ~~Holdings~~different ~~Investment,~~from ~~LLC~~those ~~("PCHI"),~~expressed or aimplied ~~company owned 51%~~ by ~~various~~these ~~physician~~forward-looking ~~investors and 49% by our largest shareholder~~statements.

~~SIGNIFICANT~~Although ~~CHALLENGES~~we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as may be required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

~~COMPANY –~~As ~~Our~~used ~~Acquisition~~in ~~involved~~this ~~significant~~report, the ~~cash~~terms ~~expenditures~~"we," ~~debt~~"us," ~~incurrence and integration expenses that has seriously strained~~ "our," ~~consolidated~~"the ~~financial~~Company," ~~condition.~~"Integrated IfHealthcare ~~we are required to issue equity securities to raise additional capital~~ Holdings" or ~~for~~"IHHI" ~~any~~mean ~~other~~Integrated ~~reasons,~~Healthcare ~~existing stockholders will likely be substantially diluted~~Holdings, ~~which could affect the market price of our stock~~Inc., Ina ~~April~~Nevada ~~2010~~corporation, weunless ~~issued~~otherwise ~~equity securities to existing shareholders and a new lender~~indicated. ~~(see "WARRANTS”).~~

~~INDUSTRY –~~Unless ~~Our~~otherwise ~~Hospitals receive a substantial portion of their revenues from Medicare and Medicaid. The healthcare industry is experiencing a strong trend toward cost containment~~indicated, all asamounts ~~the~~included government seeks to impose lower reimbursement and resource utilization group rates, limit the scope of covered services and negotiate reduced payment schedules with providers. These cost containment measures generally have resulted in athis ~~reduced~~Item ~~rate~~7 ofare ~~growth~~expressed in ~~the~~thousands ~~reimbursement~~(except ~~for~~percentages ~~the~~and ~~services~~per ~~that~~share ~~we provide relative to the increase in our cost to provide such services~~amounts).

Changes to Medicare and Medicaid reimbursement programs have limited, and are expected to continue to have limited, payment increases. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints resulting in a risk that the time period between submission of claims and payment could increase. Further, within the statutory framework of the Medicare and Medicaid programs, a substantial number of areas are subject to administrative rulings and interpretations which may further affect payments.OVERVIEW

23On March 8, 2005, we completed our acquisition (the "Acquisition") of four Orange County, California hospitals and associated real estate, including: (i) 282-bed Western Medical Center - Santa Ana, CA; (ii) 188-bed Western Medical Center - Anaheim, CA; (iii) 178-bed Coastal Communities Hospital in Santa Ana, CA; and (iv) 114-bed Chapman Medical Center in Orange, CA (collectively, the "Hospitals") from Tenet Healthcare Corporation. The Hospitals were assigned to four of our wholly owned subsidiaries formed for the purpose of completing the Acquisition. We also acquired the following real estate, leases and assets associated with the Hospitals: (i) a fee interest in the Western Medical Center at 1001 North Tustin Avenue, Santa Ana, CA, a fee interest in the administration building at 1301 North Tustin Avenue, Santa Ana, CA, certain rights to acquire condominium suites located in the medical office building at 999 North Tustin Avenue, Santa Ana, CA; (ii) a fee interest in the Western Medical Center at 1025 South Anaheim Blvd., Anaheim, CA; (iii) a fee interest in the Coastal Communities Hospital at 2701 South Bristol Street, Santa Ana, CA, and a fee interest in the medical office building at 1901 North College Avenue, Santa Ana, CA; (iv) a lease for the Chapman Medical Center at 2601 East Chapman Avenue, Orange, CA, and a fee interest in the medical office building at 2617 East Chapman Avenue, Orange, CA; and (v) equipment and contract rights. At the closing of the Acquisition, we transferred all of the fee interests in the acquired real estate (the "Hospital Properties") to Pacific Coast Holdings Investment, LLC ("PCHI"), a company owned 51% by various physician investors and 49% by our largest shareholder.

~~Our~~SIGNIFICANT business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, participation in the Medicare and Medicaid programs, licensure and certification of facilities, and reimbursement. These regulations relate, among other things, to the adequacy of physical property and equipment, qualifications of personnel, standards of care, government reimbursement and operational requirements. Compliance with these regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Since these regulations are amended from time to time and are subject to interpretation, we cannot predict when and to what extent liability may arise. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including (with respect to inpatient care) fines, restrictions on admission, denial of payment for all or new admissions, the revocation of licensure, decertification, imposition of temporary management or the closure of a facility or site of service.CHALLENGES

WeCOMPANY ~~are~~- ~~subject~~Our toAcquisition involved ~~periodic~~significant ~~audits~~cash byexpenditures, ~~the~~debt ~~Medicare~~incurrence and ~~Medicaid~~integration ~~programs,~~expenses ~~which~~that ~~have~~has ~~various~~seriously ~~rights~~strained ~~and~~our ~~remedies~~consolidated ~~against~~financial condition. usIf ~~if they assert that~~ we ~~have~~are ~~overcharged~~required ~~the programs or failed~~ to ~~comply~~issue ~~with~~equity ~~program~~securities ~~requirements. Rights and remedies available~~ to ~~these~~raise ~~programs~~additional ~~include~~capital ~~repayment~~or offor any ~~amounts~~other ~~alleged~~reasons, toexisting bestockholders will ~~overpayments~~likely orbe insubstantially ~~violation of program requirements~~diluted, orwhich ~~making~~could ~~deductions~~affect ~~from~~the ~~future~~market ~~amounts~~price ~~due~~of toour usstock. ~~These~~In ~~programs~~April ~~may~~2010 ~~also~~we ~~impose~~issued ~~fines,~~warrants ~~criminal~~to ~~penalties~~existing shareholders orand ~~program~~a ~~exclusions~~lender. ~~Other~~In ~~third-party~~February ~~payer~~2013 ~~sources~~we ~~also~~repurchased ~~reserve~~certain ~~rights~~warrants, toissued ~~conduct~~new ~~audits~~warrants, and ~~make~~extended ~~monetary~~the ~~adjustments~~expiration indates of ~~connection~~the ~~with~~remaining orwarrants. ~~exclusive~~(see ~~of audit activities~~"WARRANTS”).

~~The~~INDUSTRY ~~healthcare~~- ~~industry~~Our isHospitals receive ~~highly~~a ~~competitive.~~substantial Weportion ~~compete~~of ~~with~~their arevenues ~~variety~~from ofMedicare ~~other~~and ~~organizations~~Medicaid. inThe ~~providing~~healthcare ~~medical~~industry ~~services,~~is ~~many~~experiencing ofa ~~which~~strong ~~have~~trend toward ~~greater~~cost ~~financial~~containment, ~~and~~as ~~other~~the ~~resources~~government seeks to impose lower reimbursement and ~~may~~resource beutilization ~~more~~group ~~established~~rates, inlimit ~~their~~the scope ~~respective~~of ~~communities~~covered ~~than~~services weand ~~are.~~negotiate ~~Competing~~reduced ~~companies~~payment ~~may~~schedules ~~offer~~with ~~newer~~providers. orThese ~~different~~cost ~~centers~~containment ormeasures ~~services~~generally ~~than~~have resulted wein doa ~~and~~reduced ~~may~~rate ~~thereby~~of ~~attract~~growth ~~patients~~in orthe ~~customers~~reimbursement ~~who~~for ~~are~~the ~~presently~~services ~~our~~that ~~patients~~we orprovide ~~customers~~relative orto ~~are~~the ~~otherwise~~increase ~~receiving~~in our cost to provide such services.

AnChanges ~~increasing~~to ~~trend~~Medicare and inMedicaid ~~malpractice~~reimbursement ~~litigation~~programs ~~claims~~have limited, ~~rising~~and ~~costs~~are ofexpected ~~malpractice~~to ~~litigation~~continue to have limited, ~~losses~~payment ~~associated~~increases. ~~with~~Also, ~~these~~the ~~malpractice~~timing of ~~lawsuits~~payments made under the Medicare and aMedicaid ~~constriction~~programs ofis ~~insurers~~subject ~~have~~to ~~caused~~regulatory ~~many~~action ~~insurance~~and ~~carriers~~governmental tobudgetary ~~raise~~constraints resulting ~~the~~in ~~cost~~a ofrisk ~~insurance~~that ~~premiums~~the ortime ~~refuse~~period tobetween ~~write~~submission ~~insurance~~of ~~policies~~claims ~~for~~and ~~hospital~~payment ~~facilities~~could increase. ~~Also~~Further, awithin ~~tightening~~the statutory framework of the ~~reinsurance~~Medicare ~~market~~and ~~has~~Medicaid ~~affected property~~programs, ~~vehicle,~~a substantial number of areas are subject to administrative rulings and ~~excess~~interpretations which ~~liability~~may ~~insurance~~further ~~carriers~~affect payments.

We receive all of our inpatient services revenue from operations in Orange County, California. The economic condition of this market could affect the ability of our patients and third-party payers to reimburse us for our services, through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs. An economic downturn, or changes in the laws affecting our business in our market and in surrounding markets, could have a material adverse effect on our financial position, results of operations, and cash flows.24

~~LIQUIDITY~~Our ~~AND~~business ~~CAPITAL~~is ~~RESOURCES~~subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, participation in the Medicare and Medicaid programs, licensure and certification of facilities, and reimbursement. These regulations relate, among other things, to the adequacy of physical property and equipment, qualifications of personnel, standards of care, government reimbursement and operational requirements. Compliance with these regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Since these regulations are amended from time to time and are subject to interpretation, we cannot predict when and to what extent liability may arise. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including (with respect to inpatient care) fines, restrictions on admission, denial of payment for all or new admissions, the revocation of licensure, decertification, imposition of temporary management or the closure of a facility or site of service.

~~The~~We ~~accompanying~~are ~~consolidated~~subject ~~financial~~to ~~statements~~periodic audits ~~have~~by ~~been~~the ~~prepared~~Medicare onand aMedicaid ~~going concern basis~~programs, which ~~contemplates~~have ~~the~~various ~~realization~~rights ~~of assets~~ and ~~settlement~~remedies ofagainst ~~obligations~~us inif ~~the~~they ~~normal~~assert ~~course~~that ~~of business. We had a total stockholders’ deficiency of $11.6 million and a working capital deficit of $14.7 million at March 31, 2012. For the year ended March 31, 2012,~~ we ~~had~~have ~~net income of $7.5 million. As discussed below,~~ overcharged the ~~stated~~programs ~~maturity~~or ~~date~~failed ofto ~~our~~comply ~~$45.0 million Term Note under our Credit Agreements~~ with ~~Silver~~program ~~Point is April 13, 2013~~requirements. If weRights ~~are~~and ~~unable~~remedies toavailable ~~refinance, restructure or extend our obligation~~ to ~~repay~~these ~~the~~programs ~~principal~~include ~~amount~~repayment byof any ~~the~~amounts ~~maturity~~alleged ~~date,~~to ~~such~~be ~~failure~~overpayments ~~would~~or ~~constitute~~in aviolation ~~default~~of ~~under~~program ~~the Credit Agreement with Silver Point and our other loan facilities~~requirements, ~~which~~or ~~would~~making ~~permit~~deductions ~~Silver~~from ~~Point~~future ~~and~~amounts ~~our~~due ~~other lenders~~ to us. ~~seize~~These ~~our~~programs ~~assets~~may ~~and~~also ~~those~~impose offines, ~~our~~criminal ~~variable~~penalties ~~interest~~or ~~entity,~~program ~~PCHI~~exclusions. ~~Any~~ ~~actions~~Other bythird-party ~~Silver~~payer ~~Point~~sources oralso ~~our~~reserve rights ~~other lenders~~ to ~~enforce~~conduct ~~their~~audits ~~rights~~and bymake ~~seizing~~monetary ~~our~~adjustments ~~assets~~in ~~could~~connection ~~force~~with ~~us into bankruptcy~~ or ~~liquidation,~~exclusive ~~which would have a material adverse effect on our liquidity and financial position and the value~~ of ~~our~~audit ~~common stock~~activities.

~~Key~~The ~~items~~healthcare ~~for~~industry is ~~the~~highly ~~year~~competitive. ~~ended~~We ~~March~~compete 31with a variety of other organizations in providing medical services, ~~2012~~many ~~included:~~of which have greater financial and other resources and may be more established in their respective communities than we are. Competing companies may offer newer or different centers or services than we do and may thereby attract patients or customers who are presently our patients or customers or are otherwise receiving our services.

1.An ~~Net~~increasing ~~service~~trend in ~~patient~~malpractice ~~revenues~~litigation ~~(patient service revenues~~claims, ~~net~~rising costs of ~~contractual~~malpractice ~~allowances and discounts~~litigation, ~~less~~losses ~~provision~~associated ~~for~~with ~~doubtful~~these ~~accounts)~~malpractice ~~for~~lawsuits ~~the years ended March 31, 2012~~ and ~~2011 were $365.3 million and $423.1 million, respectively, representing~~ a ~~decrease~~constriction of ~~13.7%.~~insurers ~~The~~have ~~Hospitals~~caused ~~serve~~many ainsurance ~~disproportionate~~carriers ~~number~~to ofraise ~~indigent~~the ~~patients~~cost ~~and~~of ~~receive~~insurance ~~governmental~~premiums ~~revenues~~or ~~and~~refuse ~~subsidies~~to inwrite ~~support~~insurance policies ~~of care~~ for ~~these~~hospital ~~patients~~facilities. ~~Governmental revenues include payments from Medicaid~~Also, ~~Medicaid~~a ~~DSH,~~tightening and Orange County, CA (CalOptima). Governmental net revenues decreased $58.5 million for the year ended March 31, 2012 compared to the year ended March 31, 2011. The primary reason for the significant decrease in governmental net revenues related to the Hospital Quality Assurance Fee program (“QAF”) payments received from the State of ~~California. During~~ the ~~year~~reinsurance ~~ended~~market ~~March~~has ~~31,~~affected ~~2012~~property, ~~we received $31.9 million in QAF payments compared to $87.2 million during the year ended March 31~~vehicle, ~~2011~~and ~~(see~~excess ~~“HOSPITAL~~liability insurance ~~QUALITY ASSURANCE FEES”)~~carriers.

~~Inpatient~~We ~~admissions~~receive ~~decreased~~all byof ~~7.8%~~our inpatient toservices 21revenue from operations in Orange County, California.3 ~~for~~The economic condition of this market could affect the ability ~~year~~of ~~ended~~our ~~March~~patients ~~31,~~and ~~2012~~third-party ~~compared~~payers to ~~23.1~~reimburse us for our services, through its effect on disposable household income and the ~~year~~tax ~~ended~~base ~~March~~used ~~31,~~to ~~2011~~generate state funding for Medicaid programs. ~~The~~An ~~decline~~economic downturn, or changes in ~~admissions~~the islaws ~~primarily~~affecting ~~related~~our business toin ~~reductions~~our market and in ~~managed~~surrounding ~~care~~markets, ~~shifts~~could ~~from~~have ~~inpatient~~a tomaterial ~~outpatient~~adverse ~~observation~~effect on our financial position, results of operations, and ~~obstetrics~~cash ~~admissions~~flows.

24LIQUIDITY AND CAPITAL RESOURCES

~~Uninsured~~The accompanying ~~patients~~consolidated financial statements have been prepared on a going concern basis, aswhich contemplates the realization of assets and settlement of obligations in the normal course of business. We had a ~~percentage~~total stockholders’ deficiency of ~~gross~~$29.9 million ~~charges~~and ~~(retail~~a ~~charges),~~working ~~were~~capital 5deficit of $36.3%7 ~~for~~million at March 31, 2013. For the year ended March 31, ~~2012~~2013, ~~compared~~we had a net loss of $15.5 million, and negative cash flow from operations of $9.6 million. We anticipate making payments for provider fees and other expenses relating to the 2013 hospital quality assurance fee program of approximately $105.8 million and receiving approximately $235.5 million in revenues from the State ($79.4% million ~~for~~from the ~~year~~fee-for-service ~~ended~~portion ~~March~~and ~~31,~~$156.1 ~~2011~~million from the managed care portion).

2.Key ~~Operating~~items expenses: Management is working aggressively to reduce costs without reduction in service levels. These efforts have in large part been offset by inflationary pressures. Operating expenses before interest for the year ended March 31, ~~2012~~2013 were $352.6 million, or 6.8%, lower than during the year ended March 31, 2011. The most significant factor of this decrease related to QAF fees paid totaling $15.9 million and $47.8 million during the years ended March 31, 2012 and 2011, respectively. Without including the QAF fees in fiscal years 2012 and 2011, operating expenses before interest for the year ended March 31, 2012 increased by $6.1 million over the same period in fiscal 2011. The primary reason for this increase related to an increase in salaries and benefits of $7.2 million, of which $4.7 million related to increased costs of health insurance for our employees.included:

~~DEBT~~1. –Net Onservice ~~April~~patient ~~13,~~revenues ~~2010~~ (~~the~~patient ~~“Effective~~service ~~Date”)~~revenues, wenet ~~entered~~of ~~into~~contractual anallowances ~~Omnibus~~and ~~Credit~~discounts, ~~Agreement~~less ~~Amendment~~provision ~~(the~~for ~~“Omnibus~~doubtful ~~Amendment”~~accounts) ~~with~~for ~~SPCP~~the ~~Group~~years IVended March 31, ~~LLC~~2013 and ~~SPCP~~2012 ~~Group,~~were ~~LLC~~$383.5 ~~(together,~~million ~~“Silver~~and ~~Point”)~~$362.2 million, ~~Silver~~respectively, ~~Point~~representing ~~Finance,~~an ~~LLC~~increase of $21.3 million, asor ~~the~~5.9%. ~~Lender~~The ~~Agent~~Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, ~~PCHI~~Medicaid DSH, ~~Ganesha~~and ~~Realty~~Orange ~~LLC~~County, CA (~~“Ganesha”~~CalOptima). Governmental net revenues increased $21.8 million for the year ended March 31, Dr2013 compared to the year ended March 31, 2012. ~~Chaudhuri~~The ~~and~~increase ~~KPC~~was ~~Resolution~~primarily ~~Company~~related to Hospital Quality Assurance Fee (“~~KPC~~QAF”) revenues received from the State of California. ~~KPC~~ ~~and~~For ~~Ganesha~~the ~~are~~year ~~companies~~ended ~~owned~~March ~~and~~31, ~~controlled~~2013, bywe Drreceived $54.2 ~~Chaudhuri,~~million ~~who~~in isQAF ~~our~~payments ~~majority~~compared ~~shareholder~~to $31. ~~Ganesha~~9 ~~owns~~million aduring ~~49%~~the ~~membership~~year ~~interest~~ended inMarch ~~PCHI~~31, 2012 (see “HOSPITAL QUALITY ASSURANCE FEES”).

WeInpatient ~~entered~~admissions decreased ~~into the Omnibus Amendment in connection with the Loan Purchase and Sale Agreement (the “Loan Purchase Agreement”), dated as of January 13, 2010, as amended,~~ by ~~and~~5.2% ~~between~~to ~~KPC and the previous lender’s receiver~~20. ~~Under~~2 ~~the~~for ~~Loan Purchase Agreement, and as approved by~~ the ~~Court~~year onended ~~April~~March 231, ~~2010,~~2013 ~~KPC~~compared ~~agreed~~ to ~~purchase~~21.3 ~~all of the Credit Agreements from Medical Capital Corporation’s receiver~~ for ~~$70.0 million. Concurrent with~~ the ~~closing~~year ofended ~~the~~March ~~Loan Purchase Agreement~~31, ~~KPC~~2012. ~~sold~~The ~~its~~decline ~~interest~~ in admissions ~~the~~is ~~Credit~~primarily ~~Agreements~~related to ~~Silver~~reductions ~~Point, and KPC purchased from Silver Point a 15% participation interest~~ in ~~the~~managed ~~Credit Agreements. On April 13~~care, ~~2010,~~shifts ~~concurrent~~from ~~with~~inpatient ~~the~~to ~~effectiveness~~outpatient ~~of the Omnibus Amendment and the closing of the Loan Purchase Agreement~~observation, ~~Silver Point acquired all of the Credit Agreements, including the security agreements~~ and ~~other~~lower ~~ancillary documents executed by us in connection with the Credit Agreements, and became the “New Lender” under the Credit Agreements~~obstetrics admissions.

~~The~~Uninsured ~~following~~patients, as ~~are~~a ~~material~~percentage ~~terms~~ of gross charges (retail charges), were 5.5% for the ~~Omnibus~~year ~~Amendment:~~ended March 31, 2013 compared to 5.3% for the year ended March 31, 2012.

● The stated maturity date under each Credit Agreement was changed to April 13, 2013. ● Affirming release of prior claims between us and the previous lender’s receiver, Silver Point agreed to waive any events of default that had occurred under the Credit Agreements and waived claims to accrued and unpaid interest and fees of $6.4 million under the Credit Agreements as of April 13, 2010. ● The $80.0 million Credit Agreement was amended so that the $45.0 million term note (the “$45.0 million Loan”) and $35.0 million non-revolving line of credit note (the “$35.0 million Loan”) will each bear a fixed interest rate of 14.5% per year. These loans previously bore interest rates of 10.25% and 9.25%, respectively. In addition, we agreed to make certain mandatory prepayments of the $35.0 million Loan when we received proceeds from certain new financing of our accounts receivable or provider fee funds from Medi-Cal under the Hospital Quality Assurance Fee program (see “HOSPITAL QUALITY ASSURANCE FEES PROGRAM”). The $35.0 million non-revolving line of credit was refinanced on August 30, 2010 (see below). ● The $50.0 million Revolving Credit Agreement was amended so that Silver Point would, subject to the terms and conditions contained therein, make up to $10.0 million in new revolving funds available to us for working capital and general corporate purposes. Each advance under the $50.0 million Revolving Credit Agreement would bear interest at an annual rate of Adjusted LIBOR (calculated as LIBOR subject to certain adjustments, with a floor of 2% and a cap of 5%) plus 12.5%, compared to an interest rate of 24.0% that was previously in effect under the $50.0 million revolving credit agreement. In addition, we agreed to make mandatory prepayments of the $50.0 million Revolving Credit Agreement under the conditions described above with respect to the $80.0 million Credit Agreement. The financial covenants under the $50.0 million Revolving Credit Agreement were also amended to increase the required levels of minimum EBITDA (as defined in the Omnibus Amendment) from the levels previously in effect under the $50.0 million Revolving Credit Agreement. This $50.0 million revolving line of credit was refinanced on August 30, 2010 (see below). ● The $10.7 million Credit Agreement was amended so that the $10.7 million convertible term note will bear a fixed interest rate of 14.5% per year, compared to the interest rate of 9.25% previously in effect and to eliminate the conversion feature of the loan. In addition, we agreed to make mandatory prepayments of the $10.7 million Credit Agreement under the conditions described above with respect to the $80.0 million Credit Agreement. This $10.7 million term note was refinanced on August 30, 2010 (see below).

252. Operating expenses: Management is working aggressively to reduce costs without reduction in service levels. These efforts have in large part been offset by inflationary pressures. Operating expenses for the year ended March 31, 2013 were $393.7 million, representing an increase of $41.1 million, or 11.7%, compared to the year ended March 31, 2012. The increase is primarily related to QAF expenses of $52.5 million incurred during the year ended March 31, 2013 compared to $15.9 million incurred during the year ended March 31, 2012.

InDEBT connection with the sale of the Credit Agreements, all warrants and stock conversion rights issued to the previous lender were cancelled. In connection with the Omnibus Amendment, we issued new warrants (see “WARRANTS”).–

OnAs ~~August~~of ~~30,~~March ~~2010~~31, 2013, we ~~(excluding~~had ~~PCHI) entered into a Credit and Security Agreement (~~the ~~“New~~following ~~Credit~~credit ~~Agreement”) with MidCap Financial, LLC, a commercial finance lender specializing in loans to middle market health care companies, and Silicon Valley Bank (collectively, the “AR Lender”).~~agreements:

Under the New Credit Agreement, the AR Lender committed to provide up to $40.0 million in loans to us under a secured revolving credit facility (the “New Credit Facility”), which may be increased to up to $45.0 million upon our request, if the AR Lender consents to such increase. Upon execution of the New Credit Agreement, the AR Lender funded approximately $39.7 million of the New Credit Facility, which funds were used primarily to repay approximately $35.0 million in loans outstanding to affiliates of Silver Point (“Term Lender”). Upon such repayment, the remaining balances on our $35.0 million non-revolving line of credit loan, $50.0 million revolving credit agreement and $10.7 million credit agreement with the Term Lender were fully repaid and terminated. The only loan currently outstanding to the Term Lender consists of a $45.0 million Loan issued under our $80.0 million Credit Agreement.

	—	A $47.277 million Term Loan issued under the $80.0 million Restated Credit Agreement, bearing an interest rate of LIBOR plus 10%, with the LIBOR floor set at 2% (12% at March 31, 2013). If any event of default occurs and continues, the lender can increase the interest rate by 5% per year. As of March 31, 2013, we were in compliance with all financial covenants. The stated maturity date for this Restated Credit Agreement is April 13, 2016.

	—	A $35.0 million Revolving Credit Agreement, bearing an interest rate of 4.25% plus LIBOR, with a 2.5% floor, per year (6.75% at March 31, 2013) and an unused commitment fee of 0.5% per year ($30.0 million outstanding balance at March 31, 2013). For purposes of calculating interest, all payments we make on the Revolving Credit Agreement are subject to a five business day clearance period. As of March 31, 2013, we were in compliance with all financial covenants. The stated maturity date for this Revolving Credit Agreement is March 25, 2016. At March 31, 2013, we had $5.0 million in additional availability under this facility

~~The~~Term ~~New~~loan - On August 1, 2012, we entered into Amendment No. 4 to Credit ~~Facility~~Agreement isand ~~secured~~Consent by(the a“Credit Agreement ~~first~~Amendment”), ~~priority~~which ~~security~~amends ~~interest~~the on$80.0 ~~substantially~~million ~~all~~Credit Agreement, dated as of ~~our~~October ~~assets~~9, 2007, ~~including~~as amended, (the ~~equity~~“Credit ~~interests~~Agreement”) ~~in all of~~with ~~our~~SPCP ~~subsidiaries~~Group IV, LLC, SPCP Group, LLC, and Silver Point Finance, LLC, as the Lender Agent (~~excluding~~collectively, “Silver Point”), PCHI and Ganesha Realty, llc (“Ganesha”). ~~The~~ Under ~~availability~~the Credit Agreement Amendment, Silver Point consented to and waived certain provisions under the Credit Agreement in connection with our execution of the AR ~~Lender’s~~Revolving ~~commitments~~Loan Amendment No. 3. In addition, the provisions in the Credit Agreement that provide for mandatory prepayment of our outstanding “A/R Financing,” as defined, upon receipt of certain federal matching funds under the ~~New~~QAF program were amended to replace 65% with 80%. In connection with the Credit ~~Facility~~Agreement isAmendment, ~~limited~~we byagreed to pay Silver Point a ~~borrowing~~one-time consent ~~base~~and ~~tied~~amendment fee in an aggregate amount equal to ~~our~~$1.8 ~~eligible accounts~~million, ~~receivable~~of which $450 was paid upon execution of the Credit Agreement Amendment and ~~certain~~the ~~other~~balance ~~availability~~was ~~restrictions~~added to the principal amount under the Credit Agreement. The consent and amendment fee was recorded as a discount to the loan balance and is being amortized over the remaining life of the loan.

~~Loans~~On ~~under~~February ~~the New Credit Facility accrue interest at LIBOR (subject to a 2.5% floor) plus 5.0% per annum~~7, ~~subject to a default rate of interest and other adjustments provided for in the New Credit Agreement. For purposes of calculating interest~~2013, ~~all payments~~ we ~~make~~entered oninto ~~the~~an ~~New~~“Amendment ~~Credit~~and ~~Facility~~Restatement ~~are subject~~ to ~~a six business day clearance period. We also pay a collateral management fee of .0625% per month on~~ the ~~outstanding~~Credit ~~balance~~Agreement” (~~or a minimum balance amount equal to 85% of~~ the ~~monthly average borrowing base (the~~ “~~Minimum Balance Amount~~Amendment”), ifwith ~~such~~Silver ~~amount is greater than the outstanding balance)~~Point, PCHI ~~a monthly minimum balance fee equal to the highest interest rate applicable to the loans if the Minimum Balance Amount is greater that the outstanding balance,~~ and ~~an unused line fee equal to~~ Ganesha.~~042%~~ per month of the average unused portion of the New Credit Facility. We paid to the AR Lender a non-refundable origination fee of 1.0% of the AR Lender’s commitments under the New Credit Facility at closing.

~~The~~Under the ~~New~~Amendment, the Credit Agreement ~~contains~~was ~~various~~amended ~~affirmative~~ and ~~negative~~restated ~~covenants~~in its entirety in the form of the “Amended and ~~customary~~Restated ~~events~~Credit Agreement ($47.277 million Term Loan)” attached as Exhibit A to the Amendment (the “Restated Credit Agreement”). The Restated Credit Agreement reflects changes to the terms of ~~default,~~the ~~including~~Credit ~~payment~~Agreement ~~defaults,~~that ~~breaches~~were previously made under various amendments we entered into since inception of ~~representations~~the ~~and~~Credit ~~warranties~~Agreement in October 2007. In connection with the Restated Credit Amendment, we ~~covenant~~agreed ~~defaults~~to pay Silver Point a one-time amendment fee of $841, ~~cross~~which was added to the principal amount under the Restated Credit Agreement. The one-~~defaults~~time amendment fee was recorded as a discount to ~~similar~~the ~~obligations~~loan balance and, ~~events~~together with the amortized portion of ~~bankruptcy~~the ~~and~~discount ~~insolvency~~recorded under the Credit Agreement Amendment, ~~judgment~~is ~~defaults~~being amortized over the remaining life of the loan. In addition, the increase in the ~~invalidity~~fair value of ~~liens~~warrants issued to Silver Point on ~~collateral~~February 7, 2013 of $543 also were recorded as a discount from the loan balance and is being amortized over the ~~occurrence~~remaining life of ~~events~~the ~~which~~loan. ~~have~~During athe ~~material~~year ~~adverse~~ended ~~effect~~March on31, us2013, we recognized $1.4 million in loan discount amortization expense relating to the Restated Credit Agreement.

~~Amendment~~In toaddition, ~~$80.0 million Credit Agreement – Concurrently with~~ the ~~execution~~following new ofamendments ~~the~~were ~~New~~made ~~Credit Agreement, on August 30, 2010 we entered into an amendment~~ to ~~its existing $80.0 million Credit Agreement, as amended (~~the ~~“Original~~ Credit Agreement~~”),~~ ~~with the Term Lender, PCHI,~~ and ~~Ganesha. Under~~reflected ~~this~~in ~~amendment, we agreed with~~ the ~~Term~~Restated ~~Lender to the following material changes to the Original~~ Credit Agreement:

●— InThe ~~the~~Stated ~~event~~Maturity ofDate awas ~~mandatory~~extended ~~prepayment~~to ofApril ~~our~~13, ~~accounts~~2016. ~~receivable~~The ~~based~~Credit ~~financing~~Agreement ~~facility~~was ~~under~~previously ~~the~~due ~~Original~~to ~~Credit~~mature ~~Agreement~~on April 13, ~~the~~2013. ~~outstanding~~— ~~loans~~The ~~under~~annual ~~such~~interest ~~agreement~~rate ~~shall~~applicable ~~not~~to bethe ~~required~~loans tounder bethe ~~prepaid~~Credit ~~below~~Agreement ~~$10.0~~was ~~million.~~modified ~~There~~from isthe ~~also~~previous afixed ~~floor~~rate of ~~$10~~14.05% ~~million~~to ~~below~~LIBOR ~~which~~plus ~~commitments~~10%, ~~under~~with ~~such~~the ~~accounts~~LIBOR ~~receivable~~floor ~~based~~set ~~facility~~at ~~would~~2% ~~not~~(12% beat ~~mandatorily~~March ~~reduced~~31, as2013), aexcept ~~result~~upon ofan ~~such~~Event ~~prepayment~~of Default. ●We ~~The~~may ~~Original~~elect ~~Credit~~from ~~Agreement~~one, ~~was~~two ~~amended~~or tothree ~~add~~months anLIBOR ~~affirmative~~interest ~~covenant~~periods, ~~requiring~~except usin toan ~~deliver~~Event ~~financial~~of ~~statements~~Default ~~and~~when ~~other financial and non-financial information to~~ the ~~Term~~interest ~~Lender~~period onmay anot ~~regular~~exceed ~~basis,~~one ~~and~~month. a— ~~negative~~The ~~covenant~~principal ~~requiring~~balance ~~that~~under wethe ~~maintain~~Credit aAgreement ~~minimum~~was ~~fixed~~increased ~~charge~~from ~~coverage~~$46.350 ~~ratio~~million ofto 1$47.0277 ~~and~~million, ~~minimum~~to ~~levels~~reflect ofour ~~earnings~~new ~~before~~borrowings ~~interest,~~under ~~tax,~~the ~~depreciation~~Restated ~~and~~Credit ~~amortization~~Agreement. ●— We ~~agreed~~repaid toall ~~the~~amounts ~~provisions~~owing ofto anSPCP ~~Intercreditor~~Group ~~Agreement executed on August 30~~IV, ~~2010~~LLC byunder ~~and~~the ~~between~~Credit ~~the~~Agreement, ARconsisting ~~Lender~~of ~~and~~a ~~the~~principal ~~Term~~balance ~~Lender~~of ~~with~~$8.120 ~~respect~~million toplus ~~shared~~accrued ~~collateral~~interest of ~~ours~~$19.6, ~~that~~and isincreased ~~being~~the ~~pledged~~principal ~~under~~amount ~~both~~owing ~~the~~to ~~New~~SPCP ~~Credit~~Group, ~~Agreement~~LLC ~~and~~under the ~~Original~~ Credit Agreement. ~~Under~~by ~~the~~$9.047 ~~Intercreditor~~million ~~Agreement,~~to ~~among~~reflect ~~other things~~ the ~~Term~~repayment ~~Lender consented~~ to ~~the~~SPCP ARGroup ~~Lender~~IV, ~~having~~LLC aand ~~first~~other ~~priority~~new ~~lien~~borrowings. on— ~~substantially~~The ~~all~~financial ofcovenants ~~the~~under ~~operating company’s assets while~~ the ~~Term~~Credit ~~Lender~~Agreement ~~retained~~were aamended, ~~second~~including ~~lien~~the oncovenants ~~such~~requiring ~~assets,~~us ~~in addition~~ to ~~the~~maintain ~~Term~~minimum ~~Lender’s~~levels ~~first~~of ~~priority~~EBITDA ~~lien~~(as ondefined ~~our~~in ~~leased~~the ~~properties~~Restated ~~owned~~Credit ~~by PCHI~~Agreement).

On October 29, 2010, we entered into Amendment No. 1 to the New Credit Agreement, dated as of August 30, 2010, by and among us and the AR Lender. Under Amendment No. 1, the AR Lender committed to increase the total revolving loan commitment amount under the New Credit Agreement from $40.0 million to $45.0 million, and we agreed to pay to the AR Lender a non-refundable origination fee of 1.0% of the AR Lender’s increased commitment under the amendment, or $50.26

	—	Upon our receipt of enhanced federal matching funds from Medi-Cal under the QAF program (defined as “Net QAF Funds” under the Restated Credit Agreement), we are required to make certain prepayments of principal under its Revolving Loan Agreement with MidCap Financial, LLC.

	—	A prepayment fee was established for voluntary prepayments under the Credit Agreement equal to 5% for prepayments made on or prior to December 31, 2013, and 2% for prepayments made after January 1, 2014 and before December 31, 2014.

~~Also~~Revolving ~~under~~line ~~Amendment~~of ~~No.~~credit - On August 1, ~~the~~2012, ARwe ~~Lender~~entered ~~agreed~~into Amendment No. 3 to ~~allow~~Credit and Security Agreement (the ~~inclusion~~“Revolving inLoan ~~Eligible~~Amendment ~~Accounts~~No. 3), ~~that~~which ~~are~~amends ~~used~~Credit toand ~~determine~~Security ~~our~~Agreement, ~~Borrowing~~dated ~~Base~~ as of upAugust to30, ~~$33.6~~2012, ~~million~~as inamended, ~~aggregate~~(the ~~federal~~“Revolving orLoan ~~state~~Agreement”) with ~~matching~~MidCap ~~payments~~Funding toIV, usLLC ~~related~~and toSilicon Valley Bank, as lenders (the ~~Hospital~~“Lenders”), ~~Quality~~and ~~Assurance~~MidCap ~~Fee~~Financial, ~~program~~LLC, as agent (~~see~~the “~~HOSPITAL~~Agent”). ~~QUALITY~~Under ~~ASSURANCE~~the ~~FEES~~Revolving ~~PROGRAM”)~~Loan ~~which~~Amendment ~~amount~~No. 3, the minimum Revolving Loan Commitment Amount under the Revolving Loan Agreement was increased from $1114.80 million ~~for~~to $30.0 million, and we agreed to pay the ~~first~~Lenders ~~matching~~an ~~payment~~origination fee of 1.0% of the Lenders’ increased commitment under the Revolving Loan Amendment No. 3, or $160.

InOn ~~addition~~February 7, ~~the~~2013, we ~~optional~~entered ~~prepayment~~into ~~and~~“Amendment ~~permanent~~No. ~~commitment~~4 ~~reduction provisions~~to ofCredit ~~the~~and ~~New~~Security ~~Credit~~ Agreement ~~were~~and ~~amended~~Limited toConsent” ~~change~~ (the ~~minimum~~ “Revolving Loan ~~Commitment Amount to $20~~Amendment No.0 ~~million~~4”) ~~from~~with ~~$5.0 million. In addition,~~ the ~~prepayment~~Lenders ~~fee~~and ~~calculation under~~ the ~~New Credit Agreement was changed so that the prepayment fee is based on $40~~Agent.~~0 million rather than the amount of the permanent revolving loan commitment reduction amount.~~

~~Lastly,~~The ~~under~~Revolving Loan Amendment No. 1,4 inamends the ~~event we permanently reduce our~~ Revolving Loan ~~Commitment Amount to $20.0 million (and assuming there is no Event of Default at the time)~~Agreement, ~~we would be permitted~~ to ~~transfer~~reflect ~~funds that are swept into~~ the ~~Lender’s~~following account from our lockbox accounts to a different bank account designated by us. Effective March 1, 2011, we reduced our Revolving Loan Commitment Amount to $20.0 million. Beginning in April 2011, the funds that were previously swept into the Lender’s account were swept directly to our main account.changes:

~~During~~— ~~the~~The ~~year~~maximum ~~ended~~face ~~March~~amount ~~31,~~of ~~2012,~~the weLetter ~~paid~~of ~~down~~Credit ~~the~~Liabilities ~~balance~~permitted ofunder the ~~$20.0~~Revolving ~~million~~Loan ~~revolving~~Agreement ~~line~~was ofincreased ~~credit~~ to $~~14.0 million. On June 8~~761, ~~2012,~~and wethe ~~entered~~Lenders ~~into~~consented ~~Amendment~~to ~~No.~~the 2issuance toof ~~the~~a ~~New~~Letter of Credit ~~Agreement~~in ~~with~~ the ARsame ~~Lender. Under~~amount ~~Amendment~~by ~~No.~~Wells 2Fargo Bank, ~~the~~National ~~minimum~~Association. ~~Revolving~~— ~~Loan~~The ~~Commitment~~period ~~Amount~~during ~~under~~which the ~~New~~Prepayment ~~Credit~~Fee ~~Agreement~~of 1% is applicable was ~~permanently~~extended ~~reduced~~from three years from ~~$20.0~~the ~~million~~original closing date to ~~$14~~the Commitment Expiry Date.0 ~~million,~~— The Agent and ~~the~~Lenders ARconsented ~~Lender~~to ~~agreed~~our ~~that~~entry nointo ~~Prepayment~~the ~~Fee~~Amendment ~~will~~with beSilver ~~payable~~Point inand ~~connection~~the ~~with~~Restated ~~such~~Credit ~~reduction~~Agreement thereunder.

AsOn of March 3125, ~~2012~~2013, we ~~had~~entered ~~the~~into ~~following~~Amendment No. 5 to Credit ~~Agreements:~~and Security Agreement and Limited Waiver (the “Revolving Loan Amendment No. 5”), which amends the Revolving Loan Agreement with the Lenders and the Agent. We agreed to pay the Lenders an origination fee of 1.0% of the Lenders’ commitment under the Revolving Loan Amendment No. 5, or $350.

	●	A $45.0 million Term Note issued under the $80.0 million Credit Agreement, bearing a fixed interest rate of 14.5% per year ($45.0 million outstanding balance at March 31, 2012). If any event of default occurs and continues, the lender can increase the interest rate to 19.5% per year. As of March 31, 2012, we were in compliance with all financial covenants. The stated maturity date for this Credit Agreement is April 13, 2013.
	●	A $20.0 million Revolving Credit Agreement, bearing an interest rate of 5.0% plus LIBOR, with a 2.5% floor, per year (7.5% at March 31, 2012) and an unused commitment fee of 0.625% per year ($14.0 million outstanding balance at March 31, 2012). For purposes of calculating interest, all payments we make on the New Credit Facility are subject to a six business day clearance period. As of March 31, 2012, we were in compliance with all financial covenants. The stated maturity date for this New Credit Facility is August 30, 2013.

Among other things, the Revolving Loan Amendment No. 5 provides for the following:

~~WARRANTS~~— –An Onincrease ~~April~~in ~~13,~~the ~~2010~~Revolving weLoan ~~issued~~Commitment ~~warrants~~amount ~~(the~~from ~~“Omnibus~~$30.0 ~~Warrants”)~~million to ~~purchase~~$35.0 ~~our~~million; ~~common~~— ~~stock~~The ~~for~~Applicable aMargin ~~period~~was ofchanged: ~~three~~(a) ~~years~~from at3.00% anto ~~exercise~~2.25% ~~price~~with ofrespect ~~$0.07~~to ~~per~~Revolving ~~share~~Loans inbearing interest upon the ~~following~~Base ~~denominations:~~Rate ~~139.0~~and ~~million~~(b) ~~shares~~from 5.00% to ~~KPC~~4.25% orfor ~~its~~all ~~designees~~other Revolving Loans and ~~96.0~~Obligations; ~~million~~— ~~shares~~The toCommitment ~~Silver~~Expiry ~~Point~~Date orwas ~~its~~extended ~~designees.~~to ~~The~~March ~~Omnibus~~25, ~~Warrants~~2016; ~~also~~— ~~provide~~Certain ~~the~~modifications ~~holders~~were ~~with~~made ~~certain~~to ~~pre-emptive,~~the ~~information~~definitions of Permitted Indebtedness and ~~registration~~Prepayment ~~rights.~~Fee Asand ofthe ~~April~~lockbox ~~13,~~requirements; ~~2010,~~and we— ~~recorded~~We ~~warrant~~were ~~expense~~granted ~~and~~a ~~the~~waiver ~~related~~of ~~warrant~~certain ~~liability~~prior Events of ~~$2.9~~Default ~~million,~~or ~~representing~~Defaults ~~fair~~under ~~value. As~~the Revolving Loan Agreement and a waiver of ~~March~~the ~~31,~~requirement ~~2012,~~to comply with the ~~fair~~Fixed ~~value~~Charge ofCoverage Ratio covenant for the ~~Omnibus~~Defined ~~Warrants~~Period ~~was~~ending ~~$952~~March 31, 2013.

InWARRANTS ~~addition,~~– onOn April 13, 2010, we issued a three-year ~~warrant~~warrants (the “~~Release~~Omnibus ~~Warrant~~Warrants”) to ~~acquire~~purchase upour tocommon ~~170.0~~stock ~~million~~at ~~shares~~an ofexercise ~~common~~price ~~stock~~of at $0.07 per share ~~to Dr. Chaudhuri who facilitated~~ in the ~~release~~following ~~(see~~denominations: ~~“DEBT”)~~139.0 ~~enabling~~million usshares to ~~recover~~KPC ~~amounts~~or ~~due~~its ~~from~~designees ~~our prior lender~~ and ~~a $1~~96.0 million ~~reduction~~shares into ~~principal~~Silver ofPoint ~~our~~or ~~outstanding~~its ~~debt, among other benefits to us~~designees. The ~~Release~~Omnibus ~~Warrant~~Warrants also ~~provides~~provide the ~~holder~~holders with certain pre-emptive, information and registration rights. ~~During~~As ~~the~~of ~~year~~April ~~ended March 31~~13, 2010, we recorded ~~the~~warrant ~~fair~~expense ~~value~~and ofthe ~~$2.1~~related ~~million~~warrant asliability ~~an offsetting cost~~ of ~~the recovery~~$2. As9 ~~of March 31~~million, ~~2012,~~representing ~~the~~ fair value ~~of the Release Warrant was $689~~.

The Omnibus Warrants and the Release Warrant are collectively referred to as the “April Warrants.” The net gain (loss) related to the April Warrants for the year ended March 31, 2012 and 2011 was $(1.5) million and $1.9 million, respectively.27

~~HOSPITAL QUALITY ASSURANCE FEES PROGRAM –~~ In ~~October 2009~~addition, ~~the~~on ~~Governor~~April 13, of2010, ~~California~~we ~~signed~~issued ~~legislation~~a ~~supported~~three-year bywarrant (the ~~hospital~~“Release ~~industry~~Warrant”) to ~~impose~~acquire aup ~~provider~~to ~~fee~~170.0 onmillion ~~general~~shares ~~acute~~of ~~care~~common ~~hospitals~~stock at ~~that,~~$0.07 ~~combined~~per ~~with~~share ~~federal matching funds, would be used~~ to ~~provide supplemental Medi-Cal payments to hospitals~~Dr. ~~The~~Chaudhuri ~~state~~who ~~submitted~~facilitated the ~~plan~~release to(see ~~the~~“DEBT”) ~~Centers~~enabling ~~for~~us ~~Medicare~~to ~~and~~recover ~~Medicaid~~amounts ~~Services~~due ~~(“CMS”)~~from our ~~for~~prior alender ~~required review~~ and ~~approval~~a ~~process,~~$1.0 ~~and~~million ~~certain~~reduction ~~changes~~ in ~~the~~principal ~~plan~~of ~~were~~our ~~required~~outstanding bydebt, ~~CMS.~~among ~~Legislation~~other ~~amending~~benefits ~~the~~to ~~fee~~us. The Release ~~program~~Warrant toalso ~~reflect~~provides the ~~required~~holder ~~changes~~with ~~was~~certain ~~passed~~pre-emptive, byinformation ~~the legislature~~ and ~~signed~~registration byrights. During the ~~Governor~~year onended ~~September 8~~March 31, 2010., ~~Among~~we ~~other~~recorded ~~changes,~~ the ~~legislation~~fair ~~leaves~~value ~~distribution~~ of ~~“pass-through”~~$2.1 ~~payments~~million ~~received~~as byan ~~Medi-Cal~~offsetting ~~managed~~cost ~~care plans that will be paid to hospitals under the program to the discretion~~ of the ~~plans~~recovery.

~~The~~On ~~hospital~~February ~~quality assurance fee program (“QAF”) created by this legislation initially provided payments for up to 21 months retroactive to April 2009 and expiring on December 31~~7, ~~2010 (“2010 QAF”). In February 2011~~2013, in ~~CMS~~connection ~~gave~~with ~~final approval for~~ the ~~2010~~Restated ~~QAF. In~~Credit ~~December 2011~~Agreement, ~~CMS~~we ~~gave~~entered ~~final~~into ~~approval for~~ the ~~extension~~following oftransactions ~~the~~involving ~~QAF for the six month period from January 1 through June 30, 2011 (“2011 QAF”).~~warrants:

27We entered into a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which we repurchased the outstanding common stock warrant issued to SPCP Group IV, LLC on or about April 13, 2010 (the “Cancelled Warrant”). The Cancelled Warrant (part of the Omnibus Warrants) entitled the holder to purchase an aggregate of 16.8 million shares of our common stock at an exercise price of $0.07 per share. We repurchased the Cancelled Warrant for a purchase price of $0.12 per share minus the exercise price of $0.07 per share resulting in a net purchase price of $0.05 per share multiplied by 16.8 million shares for an aggregate purchase price of $840.9.

~~During~~Immediately following the ~~year~~warrant ~~ended March 31~~repurchase, ~~2012,~~ we ~~recognized~~issued ~~$31.9~~a ~~million~~new incommon ~~revenue~~stock ~~from~~warrant (the ~~state~~“New ~~for~~Warrant”) ~~the~~to ~~2011~~SPCP ~~QAF~~Group, (LLC for a price of $180.405 ~~million~~per ~~from~~share ~~the~~(an ~~fee-for-service~~aggregate ~~portion~~price ~~and~~of $13840.59) ~~million~~on ~~from~~ the ~~supplemental~~same ~~managed~~terms ~~care~~as ~~portion). During~~ the ~~year~~Cancelled ~~ended~~Warrant ~~March~~entitling ~~31,~~the ~~2012,~~holder weto ~~recorded~~purchase ~~expenses~~an aggregate of ~~$15~~16.18 million ~~for~~shares ~~the~~of ~~2011~~common ~~QAF~~stock ~~fees~~at ~~paid~~an toexercise ~~the~~price ~~state~~of ~~and~~ $0.807 ~~million~~per inshare, ~~other~~except ~~expenses~~that ~~relating~~the toNew ~~the~~Warrant ~~2011~~expires on ~~QAF~~April 13, 2016.

~~During~~Also simultaneous with the ~~year~~transactions ~~ended~~described ~~March 31~~above, ~~2011,~~ we ~~recognized~~extended ~~$87.2~~the ~~million~~expiration indate ~~revenue~~ from ~~the~~April ~~state~~13, ~~for~~2013 ~~the~~to ~~2010~~April ~~QAF~~13, ~~($44.4~~2016 ~~million~~for ~~from~~ the ~~fee-for-service~~Omnibus ~~portion~~Warrants issued to KPC and ~~$42.8~~the ~~million~~remaining ~~from~~Omnibus ~~the~~Warrants ~~supplemental~~held ~~managed~~by ~~care~~Silver ~~portion). During~~Point ~~the~~(to ~~year~~purchase ~~ended~~79.2 ~~March~~million ~~31,~~shares) ~~2011,~~and wethe ~~recorded~~Release ~~expenses~~Warrant issued ofto ~~$44~~Dr.7 ~~million~~Chaudhuri. ~~for~~The ~~the~~extension ~~2010~~of ~~QAF~~the ~~fees~~warrant ~~paid~~expiration todate ~~the~~was ~~state~~intended ~~and~~to ~~$3.1~~conform ~~million~~the interms ~~other~~of ~~expenses~~the ~~relating~~warrants to that of the ~~2010~~Restated ~~QAF~~Credit Agreement.

We ~~cannot~~assessed ~~provide~~the ~~any~~amended credit ~~assurances~~agreement orentered ~~estimates~~into in ~~connection~~August ~~with~~2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt amendments should be accounted for as a ~~possible~~debt ~~continuation~~modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the ~~QAF~~New ~~program~~Warrant ~~beyond~~and ~~June~~the 30Omnibus Warrant held by SPCP Group, ~~2011~~LLC was recognized as a component of the debt discount on the Term Loan (Note 3) and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

~~ELECTRONIC~~The ~~HEALTH~~warrant ~~RECORDS~~expense relating ~~INCENTIVE~~to ~~PROGRAM – Provisions of~~ the ~~American~~Release ~~Recovery~~Warrant and ~~Reinvestment~~the ~~Act~~Omnibus ofWarrant ~~2009~~held ~~provide~~by ~~incentive~~Dr. ~~payments~~Chaudhuri for the ~~adoption~~years ~~and~~ended ~~meaningful~~March ~~use~~31, of2013 ~~certified~~and ~~electronic~~2012 ~~health~~was ~~record (EHR) technology~~$1. ~~The~~7 million ~~Medicare EHR incentive program provides incentive payments to eligible hospitals (~~and ~~certain~~$0, ~~other~~respectively. ~~providers)~~The ~~that~~change ~~are~~in ~~meaningful~~fair ~~users~~value of ~~certified~~the ~~EHRs. The~~Release ~~Medicaid~~Warrant ~~EHR incentive program provides incentive payments to eligible hospitals (~~and ~~certain~~the ~~other~~Omnibus ~~providers)~~was ~~for~~immediately ~~efforts~~charged to ~~adopt, implement, upgrade, or meaningfully use of certified EHR technology~~expense.

~~CMS~~The ~~has~~Omnibus ~~established~~ Warrants, the ~~final~~Release ~~rule~~Warrant, ~~which~~and ~~requires~~the ~~eligible~~New ~~providers~~Warrant inare ~~their~~collectively ~~first~~referred ~~year~~to ofas ~~participation in~~ the ~~Medicaid~~“IHHI ~~incentive~~Warrants.” ~~payment~~As ~~program~~of toMarch ~~demonstrate that they have adopted (acquired~~31, ~~purchased~~2013, ~~or secured access to), or implemented, or upgraded to certified EHR technology in order to qualify for an incentive payment. During~~ the ~~second~~fair ~~and~~value ~~subsequent years~~ of the ~~program,~~IHHI ~~eligible~~Warrants ~~providers~~was ~~are required to meet other criteria, including meaningful use, to receive additional funds. We have been awarded a total amount of~~ $135.63 million ~~under the Medicaid EHR incentive program, which will be earned and received over a four year period~~.

WeThe ~~adopted~~net ~~certified~~loss ~~EHR~~related to ~~technology~~the ~~and~~change wein ~~recognized~~fair ~~income~~value of the IHHI Warrants for the year ended March 31, 2013 and 2012 was $61.84 million ~~relative~~and to$1.5 ~~the~~million, respectively. ~~first~~The ~~year~~total ~~under~~loss ~~the~~on ~~Medicaid~~warrants ~~EHR~~was ~~incentive~~$3.1 ~~program~~million ~~during~~and $1.5 million for the ~~year~~years ended March 31, 2013 and 2012, respectively.

~~LONG~~HOSPITAL ~~TERM~~QUALITY ~~LEASE~~ASSURANCE FEES ~~COMMITMENT~~PROGRAM ~~WITH~~- ~~VARIABLE~~In ~~INTEREST~~October ~~ENTITY~~2009, –the OnGovernor ~~April~~of ~~13,~~California ~~2010,~~signed welegislation ~~and~~supported ~~PCHI~~by ~~entered~~the ~~into~~hospital industry to impose a ~~Second~~provider fee ~~Amendment~~on general acute care hospitals that, combined with federal matching funds, would be used to ~~Amended~~provide ~~and~~supplemental ~~Restated~~Medi-Cal payments ~~Triple~~to ~~Net~~hospitals. ~~Hospital~~The ~~Building~~state ~~Lease~~submitted (the ~~“2010~~plan ~~Lease~~to ~~Amendment~~the Centers for Medicare and Medicaid Services (“CMS”) for a required review and approval process, and certain changes in the plan were required by CMS. ~~Under~~ Legislation amending the fee program to reflect the required changes was passed by the legislature and signed by the Governor on September 8, 2010. ~~Lease~~Among ~~Amendment~~other changes, the ~~annual~~legislation ~~base~~leaves ~~rent~~distribution toof “pass-through” payments received by Medi-Cal managed care plans that will be paid to ~~PCHI~~hospitals ~~was~~under ~~increased~~the ~~from~~program $5to the discretion of the plans.4 The ~~million~~hospital quality assurance fee program (“QAF”) created by this legislation initially provided payments for up to ~~$7.3~~21 months ~~million,~~retroactive ~~but~~to ifApril ~~PCHI~~2009 and ~~refinances~~expiring ~~the~~on ~~$45~~December 31, 2010 (“2010 QAF”).0 In ~~million~~February ~~Loan~~2011, CMS gave final approval for the ~~annual~~2010 ~~base~~QAF. During fiscal ~~rent~~year ~~may~~2011, ~~increase~~we torecognized $887.32 million~~. This~~ ~~lease~~in ~~commitment~~revenue ~~with~~and ~~PCHI~~recorded isexpenses ~~eliminated~~of in$47.8 ~~consolidation~~million relating to the 2010 QAF.

~~COMMITMENTS~~In ~~AND~~December ~~CONTINGENCIES~~2011, –CMS gave ~~The~~final ~~State~~approval for the extension of ~~California~~the ~~has~~QAF ~~imposed~~for ~~new~~the ~~hospital~~six ~~seismic~~month ~~safety~~period ~~requirements.~~from ~~Under~~January ~~these~~1 ~~new~~through ~~requirements~~June 30, ~~the~~2011 ~~Hospitals~~(“2011 ~~must~~QAF”). Accordingly, ~~meet~~for ~~stringent~~the ~~seismic~~year ~~safety~~ended ~~criteria~~March in31, ~~the~~2012 ~~future~~we recognized $31.9 Inmillion ~~addition,~~in ~~there~~revenue ~~could~~and berecorded ~~other~~expenses ~~remediation~~of ~~costs~~$15.9 ~~pursuant~~million relating to ~~this~~the ~~seismic~~2011 ~~retrofit~~QAF.

~~The~~In June ~~State~~2012, CMS conditionally approved the extension of ~~California~~the ~~has~~QAF ~~introduced~~for athe ~~new~~thirty ~~seismic~~month ~~review~~period ~~methodology~~from ~~known~~July as1, ~~HAZUS~~2011 through December 31, 2013 (“2013 QAF”). In ~~The~~June ~~HAZUS~~2012, ~~methodology~~the ~~may~~California ~~preclude~~State Legislature amended the ~~need~~hospital ~~for~~fee ~~some~~statute ~~structural~~to ~~modifications.~~recognize separate ~~All~~CMS ~~four~~approval ~~Hospitals~~of ~~requested~~the ~~HAZUS~~fee-for-service ~~review~~portion and ~~received~~managed acare ~~favorable~~portion ~~notice~~of ~~pertaining~~the to2013 ~~structural~~QAF, ~~reclassification.~~which ~~All~~was ~~Hospital~~further ~~buildings,~~clarified ~~with~~in legislation approved by the ~~exception~~governor of ~~one~~California ~~(an~~in ~~administrative~~September ~~building)~~2012. As a result, ~~have~~during ~~been~~the ~~deemed~~year ~~compliant~~ended ~~until~~March ~~January~~31, 12013, we ~~2030~~recognized ~~for~~revenue ~~both~~of ~~structural~~$54.2 million and ~~nonstructural~~expenses ~~retrofit~~of $52.5 Wemillion dorelating ~~not~~to ~~have~~the anfee-for-service ~~estimate~~portion of the ~~cost~~2013 toQAF ~~remediate~~ for the ~~seismic~~periods ~~requirements~~from ~~for~~July ~~the~~1, ~~administrative~~2011 ~~building~~through ~~as of~~ March 31, ~~2012~~2013.

~~There~~In May ~~are~~2013, ~~additional~~CMS ~~requirements~~approved ~~that~~the ~~must~~managed becare ~~complied~~portion ~~with by 2030. The costs~~ of ~~meeting~~the ~~these~~2013 ~~requirements~~QAF ~~have~~for ~~not~~the ~~yet~~period ~~been~~from ~~determined.~~July ~~Compliance with seismic ordinances will be costly and could have a material adverse effect on our cash flow. In addition~~1, ~~remediation~~2011 ~~could~~through ~~possible~~June ~~result in certain environmental liabilities~~30, ~~such as asbestos abatement~~2012.

OnBased on ~~July~~the 1,most ~~2011~~recent modeling prepared by the California Hospital Association, we ~~entered~~anticipate ~~into~~making ~~software~~payments for provider fees and other ~~services~~expenses ~~agreements~~relating ~~with~~to ~~McKesson~~the ~~Technologies~~2013 ~~Inc~~QAF of approximately $105.8 million and receiving approximately $235.5 million in revenues from the State (~~“McKesson”)~~$79.4 tomillion ~~upgrade~~from ~~our~~the ~~information~~fee-for-service ~~technology~~portion ~~systems~~and $156.1 million from the managed care portion).

Under the agreements, McKesson will provide us with a variety of services, including new software implementation and education/training services for our personnel, software maintenance services and professional services related to movement and migration of data from legacy systems. McKesson will also furnish to us and maintain new hardware to accommodate the upgraded software and systems. The new hardware will include computers and servers, among other things, and will include installation, testing, and ongoing maintenance. We have entered into the arrangement to enhance our clinical information systems and upgrade our billing and revenue management information systems.28

~~The~~We ~~agreements~~cannot ~~will~~provide ~~initially~~any assurances ~~run~~or ~~for~~estimates ain ~~period~~connection ofwith ~~five~~CMS’s ~~years,~~final ~~and~~managed ~~the~~care ~~recurring~~approval ~~services~~of ~~may~~the be2013 ~~renewed~~QAF ~~by us~~ (for ~~successive~~the ~~periods. The~~period ~~agreements~~from doJuly ~~not~~1, 2012 ~~provide that they may be terminated by us prior~~ to ~~the~~December ~~initial~~31, ~~expiration~~2013) ~~date. The~~or ~~agreements provide for one-time fees and recurring fees which aggregate~~ a ~~total~~possible ofcontinuation ~~$22.0 million. Approximately 60%~~ of the ~~fees~~QAF ~~are~~program ~~for~~beyond ~~one-time~~December ~~charges~~31, ~~while the balance is for recurring services~~2013.

28ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM – Provisions of the American Recovery and Reinvestment Act of 2009 provide incentive payments for the adoption and meaningful use of certified electronic health record (EHR) technology. The Medicare EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) that are meaningful users of certified EHRs. The Medicaid EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) for efforts to adopt, implement, upgrade, or meaningful use of certified EHR technology.

~~CASH~~CMS ~~FLOW –~~has ~~Net~~established the ~~cash~~final ~~provided~~rule bywhich ~~operating~~requires ~~activities~~eligible ~~for~~providers ~~the~~in ~~years~~their ~~ended~~first ~~March~~year ~~31,~~of ~~2012~~participation ~~and~~in ~~2011~~the ~~was~~Medicaid ~~$4.5~~incentive ~~million~~payment ~~and~~program to ~~$32.5~~demonstrate ~~million,~~that ~~respectively.~~they ~~Net~~have ~~income~~adopted (acquired, ~~adjusted~~purchased, ~~for~~or ~~depreciation~~secured ~~and~~access ~~other~~to), ~~non-cash~~or ~~items~~implemented, ~~excluding~~or ~~the~~upgraded ~~provision~~to ~~for~~certified ~~doubtful~~EHR technology ~~accounts~~in ~~and~~order ~~net~~to ~~income~~qualify ~~from~~for ~~non-controlling~~an ~~interests~~incentive ~~(not~~payment. aDuring ~~measurement~~the ~~under~~second ~~accounting~~and ~~principles~~subsequent ~~generally~~years ~~accepted~~of in the ~~United States of America (“GAAP”)~~program, ~~totaled~~eligible ~~$14.2~~providers are ~~million~~required ~~and~~to ~~$23.1~~meet ~~million~~other ~~for~~criteria, ~~the~~including ~~years~~meaningful ~~ended March 31~~use, ~~2012~~to ~~and~~receive ~~2011,~~additional ~~respectively~~funds. We ~~used~~have ~~$9.1~~been ~~million~~awarded ~~and~~a ~~provided~~total amount of $913.86 million inunder ~~working capital for~~ the ~~years~~Medicaid ~~ended~~EHR ~~March~~incentive 31program, ~~2012~~which ~~and~~will ~~2011,~~be ~~respectively.~~earned ~~Net cash provided in payment of accounts payable, accrued compensation~~ and ~~benefits~~received ~~and~~over ~~other~~a ~~current~~four ~~liabilities~~year ~~was $4~~period.3 ~~million~~We ~~and~~adopted certified ~~$0.1~~EHR ~~million~~technology ~~for the years ended March 31, 2012~~ and ~~2011,~~recognized ~~respectively.~~other ~~Cash~~income ~~provided by accounts receivable, net~~ of ~~provision for doubtful accounts, was~~ $16.18 million ~~and~~relative ~~$0.6~~to ~~million~~the ~~for~~first ~~the~~year ~~years~~under ~~ended~~the ~~March~~Medicaid ~~31,~~EHR ~~2012~~incentive program ~~and~~during ~~2011,~~fiscal ~~respectively~~year 2012.

~~Net~~LONG ~~cash~~TERM ~~used~~LEASE inCOMMITMENT WITH ~~investing~~VARIABLE ~~activities~~INTEREST ~~during~~ENTITY ~~the~~– ~~years~~On ~~ended~~April ~~March~~13, 312010, ~~2012~~we and ~~2011~~PCHI entered into a Second Amendment to Amended and Restated Triple Net Hospital Building Lease (the “2010 Lease Amendment”). Under the 2010 Lease Amendment, the annual base rent to be paid by us to PCHI was increased from $5.54 million ~~and~~to $1.7.3 million~~, respectively~~. InThe ~~the~~base ~~years~~rent ~~ended~~is ~~March~~subject ~~31,~~to ~~2012~~an ~~and~~annual ~~2011~~Consumer Price Index increase on January 1 of each year; provided, wethat, ~~invested~~such increase shall not be less than 2% or more than 6% per year. The annual base rent is currently $57.58 million. ~~and~~If PCHI refinances the $147.7277 million interm ~~cash~~loan, ~~respectively,~~the inannual ~~new~~base ~~property~~rent ~~and~~will ~~equipment~~increase to $8.3 million. This lease commitment with PCHI is eliminated in consolidation.

~~Net~~COMMITMENTS ~~cash~~AND ~~used~~CONTINGENCIES – inThe ~~financing~~State ~~activities~~of ~~for~~California ~~the~~has ~~years~~imposed ~~ended~~hospital ~~March~~seismic 31safety requirements. Under these requirements, ~~2012~~the ~~and~~Hospitals ~~2011~~must meet ~~was~~stringent ~~$7.8~~seismic ~~million~~safety ~~and~~criteria ~~$20~~in the future.4 ~~million~~In addition, ~~respectively~~there could be other remediation costs pursuant to this seismic retrofit.

~~RESULTS~~The OFState ~~OPERATIONS~~of ~~AND~~California has ~~FINANCIAL~~a ~~CONDITION~~seismic review methodology known as HAZUS. The HAZUS methodology may preclude the need for some structural modifications. All four Hospitals requested HAZUS review and received a favorable notice pertaining to structural reclassification. All Hospital buildings, with the exception of one (an administrative building), have been deemed compliant until January 1, 2030 for both structural and nonstructural retrofit. We do not have an estimate of the cost to remediate the seismic requirements for the administrative building as of March 31, 2013.

There are additional requirements that must be complied with by 2030. The ~~following~~costs ~~table~~of ~~sets~~meeting ~~forth,~~these ~~for~~requirements ~~the~~have ~~years~~not ~~ended~~yet ~~March~~been ~~31,~~determined. ~~2012~~Compliance with seismic ordinances will be costly and ~~2011,~~could have a material adverse effect on our ~~consolidated~~cash ~~statements~~flow. In ofaddition, ~~operations~~remediation could ~~expressed~~possibly asresult ain ~~percentage~~certain ofenvironmental ~~net~~liabilities, ~~patient~~such ~~services~~as ~~revenues~~asbestos abatement.

	Year ended March 31,
	2012			2011
Net patient service revenues		100.0%			100.0%
Operating expenses:
Salaries and benefits		59.9%			50.0%
Supplies		15.1%			12.5%
Other operating expenses		20.4%			26.0%
Depreciation and amortization		1.1%			1.0%
		96.5%			89.5%
Operating income		3.5%			10.5%
Other income (expense):
Income from electronic health records incentive program		1.9%			0.0%
Interest expense, net		(2.8%	)		(2.9%	)
Gain (loss) on warrants		(0.4%	)		0.5%
		(1.3%	)		(2.4%	)
Income before income tax provision (benefit)		2.2%			8.1%
Income tax provision (benefit)		(0.0%	)		3.3%
Net income		2.2%			4.8%
Net income attributable to noncontrolling interests		(0.1%	)		(0.1%	)
Net income attributable to Integrated Healthcare Holdings, Inc.		2.1%			4.7%

On July 1, 2011, we entered into software and services agreements with McKesson Technologies Inc. (“McKesson”) to upgrade our information technology systems.

29Under the agreements, McKesson will provide us with a variety of services, including new software implementation and education/training services for our personnel, software maintenance services and professional services related to movement and migration of data from legacy systems. McKesson will also furnish to us and maintain new hardware to accommodate the upgraded software and systems. The new hardware will include computers and servers, among other things, and will include installation, testing, and ongoing maintenance. We have entered into the arrangement to enhance our clinical information systems and upgrade our billing and revenue management information systems.

~~FISCAL~~The ~~YEAR~~agreements ~~ENDED~~will initially ~~MARCH~~run 31for a period of five years, ~~2012~~and ~~COMPARED~~the TOrecurring ~~FISCAL~~services ~~YEAR~~may ~~ENDED~~be ~~MARCH~~renewed by us for successive periods. The agreements do not provide that they may be terminated by us prior to the initial expiration date. The agreements provide for one-time fees and recurring fees which aggregate a total of $22.0 million. Approximately 60% of the fees are for one-time charges, while the balance is for recurring services. During the year ended March 31, ~~2011~~2013 we completed conversion of one of our facilities to the McKesson system and are continuing to convert the remaining three facilities during the first quarter of our fiscal year 2014. We are also continuing to test and develop system applications where necessary.

NET PATIENT SERVICE REVENUES – Net patient service revenues for the year ended March 31, 2012 decreased 13.7% compared to fiscal year 2011, from $423.1 million to $365.3 million. Net patient service revenues for the year ended March 31, 2012 included QAF payments received from the State of California totaling $31.9 million and a lump sum distressed hospital fund payment of $50. Net patient service revenues for the year ended March 31, 2011 included QAF payments received from the State of California totaling $87.2 million and a lump sum distressed hospital fund payment of $450. If the QAF payments and one-time lump sum payments noted above are excluded, net patient service revenues for fiscal year 2012 were $2.1 million, or 0.6%, lower than fiscal year 2011 primarily due to a decline in admissions. The provision for doubtful accounts for the year ended March 31, 2012 was $40.4 million compared to $34.8 million for the year ended March 31, 2011, representing a 16.1% increase. The primary reason for the increase in the provision for doubtful accounts was related to the write off of receivables of $4.0 million due to the termination of Section 1011 of the Medicare Modernization Act of 2003 program which provided federal funding of emergency health services for “eligible aliens.”29

~~Admissions~~CASH FLOW - Net cash provided (used) by operating activities for the ~~year~~years ended March 31, 2013 and 2012 ~~decreased~~was 8$(9.0%6) ~~compared~~million toand ~~fiscal~~$4.5 ~~year~~million, ~~2011~~respectively. Net ~~The~~income ~~decline~~(loss), inadjusted ~~admissions~~for isdepreciation and other non-cash items, excluding the ~~combined~~provision ~~result~~for doubtful accounts and net income from non-controlling interests (not a measurement under accounting principles generally accepted in the United States of ~~lower~~America (“GAAP”), ~~obstetrical~~totaled ~~deliveries~~$(13.8) million and $14.2 million for the years ended March 31, ~~psychiatric~~2013 ~~admissions~~and 2012, respectively. We used $2.9 million and ~~managed~~$9.1 ~~care~~million ~~contracts~~in ~~that~~working ~~have~~capital ~~reached~~for ~~term~~the ~~and~~years ~~are~~ended ~~pending~~March ~~renegotiation~~31, 2013 and 2012, respectively. Net ~~patient~~cash ~~service~~provided ~~revenues~~in payment ~~per~~of ~~admission~~accounts ~~declined~~payable, 6accrued compensation and benefits and other current liabilities was $8.2%8 ~~during~~million and $4.3 million for the ~~year~~years ended March 31, 2013 and 2012, ~~primarily~~respectively. ~~due~~Cash toprovided ~~the~~(used) ~~decrease~~by inaccounts ~~QAF~~receivable, ~~payments~~net ~~received~~of ~~from~~provision for doubtful accounts, was $(9.2) million and $1.1 million for the ~~state~~years ended March 31, 2013 and 2012, respectively.

~~Essentially~~Net ~~all~~cash ~~patient~~used ~~service~~in ~~revenues~~investing activities ~~come~~during ~~from external customers. The largest payers are~~ the ~~Medicare~~years ~~and~~ended ~~Medicaid~~March ~~(including~~31, ~~Medicare~~2013 and ~~Medicaid~~2012 ~~managed~~was ~~care plans) programs accounting for 59~~$10.4%3 million and 65$5.5% ofmillion, ~~the~~respectively. ~~patient~~In ~~service revenues for~~ the years ended March 31, 2013 and 2012, we invested $10.3 million and ~~2011~~$5.5 million in cash, respectively, in new property and equipment.

~~Uninsured~~Net ~~patients,~~cash asprovided aby (used ~~percentage~~in) offinancing ~~gross~~activities ~~charges, decreased to 5.3% from 5.4%~~ for the ~~year~~years ended March 31, ~~2012~~2013 ~~compared~~and to2012 ~~the~~was ~~year~~$11.7 ~~ended~~million ~~March~~and 31$(7.8) million, ~~2011~~respectively.

~~The~~RESULTS ~~Hospitals~~OF ~~serve~~OPERATIONS aAND ~~disproportionate~~FINANCIAL number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental net revenues decreased $58.5 million for the year ended March 31, 2012 compared to the year ended March 31, 2011. The primary reason for the significant decrease in governmental net revenues was related to a $55.3 million decrease in QAF payments received ($31.9 million) during the year ended March 31, 2012 compared to the QAF payments received ($87.2 million) during the year ended March 31, 2011. CONDITION

~~OPERATING~~The ~~EXPENSES~~following -table ~~Operating~~sets ~~expenses~~forth ~~for~~our ~~the~~consolidated statements ~~year ended March 31, 2012 decreased to $352.6 million from $378.4 million, a decrease~~ of ~~$25.8~~operations million, or 6.8%, compared to fiscal year 2011. The primary reason for decrease in operating expenses was related to a $31.9 million decrease in QAF fees paid during the year ended March 31, 2012 ($15.9 million) compared to the QAF fees paid during the year ended March 31, 2011 ($47.8 million). Operating expenses expressed as a percentage of net patient services revenues for the years ended March 31, ~~2012~~2013 and ~~2011 were 96~~2012.~~5% and 89.5%, respectively. On a per admission basis, operating expenses increased 1.3%.~~

Salaries and benefits increased $7.2 million (3.4%) for the year ended March 31, 2012 compared to fiscal year 2011. The increase is primarily due to an increase in health insurance ($4.7 million).

	Year ended March 31,
	2013			2012

Revenues		100.0%			100.0%

Operating expenses:
Salaries and benefits		55.7%			59.9%
Supplies		14.5%			15.1%
Other operating expenses		30.5%			20.4%
Depreciation and amortization		1.1%			1.1%
		101.8%			96.5%

Operating income (loss)		(1.8%	)		3.5%

Other income (expense):
Interest expense, net		(3.0%	)		(2.8%	)
Income from electronic health records incentive program		0.0%			1.9%
Loss on warrants		(0.8%	)		(0.4%	)
		(3.8%	)		(1.3%	)

Income (loss) before income tax benefit		(5.6%	)		2.2%
Income tax benefit		(1.5%	)		0.0%
Net income (loss)		(4.1%	)		2.2%
Net (income) loss attributable to noncontrolling interests		0.2%			(0.1%	)
Net income (loss) attributable to
Integrated Healthcare Holdings, Inc.		(3.9%	)		2.1%

~~Other~~FISCAL ~~operating~~YEAR ~~expenses~~ENDED ~~during~~MARCH ~~the year ended March~~ 31, ~~2012~~2013 ~~decreased~~COMPARED TO toFISCAL ~~$74.5~~YEAR ~~million~~ENDED ~~from~~MARCH ~~$109.8 million~~31, ~~a decrease of $35.3 million, or 32.1%, compared to fiscal 2011, primarily due to the decrease in QAF fees paid, as described above.~~2012

~~OPERATING~~REVENUES ~~INCOME~~ – ~~The~~Net patient ~~operating~~service ~~income~~revenues for the ~~years~~year ended March 31, 2013 increased 5.9% compared to fiscal year 2012, ~~and~~from ~~2011~~$362.2 ~~was~~million to $12383.75 million. ~~and~~The increase was primarily related to QAF revenues of $4454.72 million, ~~respectively. Of~~recognized during the year ended March 31, 2013 compared to $3231.09 million ~~decrease~~ in ~~operating~~fiscal ~~income~~2012. The provision for bad debts for the year ended March 31, 2013 was $2344.6 million compared to $40.4 million ~~related~~for the year ended March 31, 2012, representing a 10.4% increase. The primary reason for the increase in the provision for bad debts relates to the ~~decrease~~termination of Section 1011 of the Medicare Modernization Act of 2003 program in January 2012. Section 1011 provided federal funding of emergency health services for “eligible aliens.” Until its termination in January 2012, patient service revenues recorded under Section 1011 were reduced by contractual allowances and discounts whereas patient service revenues related to the same type of services provided after the termination of Section 1011 are adjusted to net patient ~~QAF~~service ~~payments~~revenues ~~received~~through the provision for bad debts.

~~OTHER INCOME (EXPENSE) – We adopted certified EHR technology and recognized other income of $6.8 million under the Medicaid EHR incentive program during the year ended March 31, 2012.~~30

~~Interest~~Admissions ~~expense~~ for the year ended March 31, ~~2012~~2013 ~~was~~decreased ~~$10~~5.2% ~~million~~ compared to ~~$12~~fiscal year 2012.0 ~~million~~The ~~for~~decline in admissions is the ~~same~~combined ~~period~~result inof ~~fiscal~~lower obstetrical deliveries and psychiatric admissions. Net patient service revenues per admission increased 11.7% during the year ~~2011~~ended March 31, 2013. ~~The~~This ~~decrease~~increase was primarily ~~related~~due to ~~the~~an ~~paydown~~increase ofin ~~our~~orthopedic ~~revolving~~surgeries ~~line~~and ofan ~~credit~~increase ~~(see~~in ~~“DEBT”)~~QAF revenue.

OnSubstantially ~~April~~all ~~13,~~patient service ~~2010,~~revenues wecome ~~issued~~from ~~warrants~~external ~~which had a fair value at the date of issuance of $5~~customers.0 ~~million. Of~~The ~~the~~largest ~~fair~~payers ~~value~~are onMedicare ~~April~~and ~~13,~~Medicaid ~~2010,~~(including ~~$2.1~~Medicare ~~million was related to the warrants issued to Dr. Chaudhuri~~ and ~~were~~Medicaid amanaged care component of the recovery of overswept funds by our previous lender that was recorded during fiscal year 2010. The remaining $2.9 million was recorded as warrant expense during the year ended March 31plans), ~~2011. As~~which ofcombined ~~March~~accounted ~~31,~~for ~~2012,~~58% ~~the~~and ~~fair~~57% ~~value~~ of ~~the~~patient ~~warrants~~service ~~aggregated~~revenues ~~$1.64~~for ~~million compared to $167 as of March 31, 2011. Accordingly, a gain (loss) relating to~~ the ~~change in fair value of the April Warrants of $(1.5) million and $1.9 million was recorded during the~~ years ended March 31, ~~2012~~2013 and ~~2011~~2012, respectively. ~~See “WARRANTS.”~~

~~NET~~Uninsured ~~INCOME –~~patients, as ~~Net~~a ~~income~~percentage of gross charges, increased to 5.5% from 5.3% for the ~~years~~year ended March 31, ~~2012~~2013 ~~and~~compared ~~2011~~to ~~was~~the ~~$7.5~~year ~~million~~ended ~~and $20.2 million~~March 31, ~~respectively~~2012.

30The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental revenues (net of contractual allowances and discounts), including QAF funds, increased $21.7 million for the year ended March 31, 2013 compared to the year ended March 31, 2012.

~~CRITICAL~~Other ~~ACCOUNTING~~operating ~~POLICIES~~revenues of ~~AND~~$3.4 ~~ESTIMATES~~million and $3.1 million for the years ended March 31, 2013 and 2012, respectively, consist primarily of rental income and cafeteria sales.

~~PATIENT~~OPERATING ~~SERVICE REVENUES~~ EXPENSES – ~~Patient~~Operating ~~service~~expenses ~~revenues~~for ~~are recognized in~~ the ~~period~~year inended ~~which~~March ~~services~~31, ~~are~~2013 ~~performed~~increased ~~and~~to ~~are~~$393.7 ~~recorded~~million ~~based~~from on$352.6 ~~established billing rates (gross charges) less contractual allowances and discounts~~million, ~~principally~~an ~~for~~increase ~~patients~~of ~~covered by Medicare~~$41.1 million, ~~Medicaid,~~or ~~managed care~~11.7%, ~~and~~compared ~~other~~to ~~health~~fiscal ~~plans.~~year ~~Gross charges are retail charges~~2012. ~~They~~Operating ~~are~~expenses ~~not~~expressed ~~the same~~ as ~~actual~~a ~~pricing,~~percentage ~~and~~of ~~they~~revenues ~~generally~~for dothe ~~not~~years ~~reflect~~ended ~~what~~March 31, a2013 ~~hospital~~and is2012 ~~ultimately~~were ~~paid~~101.8% and ~~therefore~~96.5%, ~~are not displayed in the consolidated statements of operations~~respectively. ~~Hospitals~~On ~~are~~a ~~typically~~per ~~paid~~admission ~~amounts~~basis, ~~that~~operating ~~are~~expenses ~~negotiated~~increased ~~with insurance companies or are set by the government~~17.7%. ~~Gross~~The ~~charges~~increase is ~~are~~primarily ~~used~~related to ~~calculate~~QAF ~~Medicare~~expenses ~~outlier payments and to determine certain elements~~ of ~~payment under managed care contracts (such as stop-loss payments)~~$52.5 ~~Since~~million ~~Medicare~~incurred ~~requires~~during ~~that a hospital's gross charges be~~ the ~~same~~year ~~for~~ended ~~all~~March ~~patients (regardless of payer category)~~31, ~~gross~~2013 ~~charges~~compared ~~are also what the Hospitals charge all other patients prior~~ to ~~the~~$15.9 ~~application~~million ofin fiscal ~~discounts~~year ~~and allowances~~2012.

~~Revenues~~Salaries ~~under the traditional fee-for-service Medicare~~ and ~~Medicaid~~benefits decreased ~~programs~~$3.2 ~~are~~million ~~based primarily on prospective payment systems~~(1.5%) ~~Discounts~~ for ~~retrospectively cost based revenues and certain other payments, which are based on~~ the ~~Hospitals'~~year ~~cost~~ended ~~reports,~~March are estimated using historical trends and current factors. Cost report settlements for retrospectively cost-based revenues under these programs are subject to audit and administrative and judicial review31, ~~which~~2013 ~~can~~compared ~~take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related~~ to afiscal ~~specific~~ year ~~are~~2012 ~~updated~~due ~~periodically and at year end and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made~~ to ~~the~~lower ~~estimates~~admissions ~~until~~partially offset ~~the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited~~ by ~~the~~wage ~~fiscal intermediary~~increases. There could be a time lag of several years between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. We have established settlement receivables of $190 and $456 as of March 31, 2012 and 2011, respectively.

~~The~~Supplies Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of increased $141.31 million ~~and $21~~(2.40%) ~~million during the years ended March 31, 2012 and 2011, respectively. The related revenue recorded~~ for the ~~years~~year ended March 31, ~~2012~~2013 ~~and~~compared ~~2011,~~to ~~was~~fiscal ~~$15.4~~year ~~million and $20.6 million, respectively. As of March 31,~~ 2012 ~~and 2011, estimated DSH receivables were $5~~.0 ~~million~~The ~~and~~increase ~~$3.9~~primarily ~~million,~~related ~~respectively,~~to ~~which are included as due from government payers~~ increases in ~~the~~orthopedic ~~accompanying~~supplies ~~consolidated~~and ~~balance sheets~~pacemakers.

~~Revenues~~Other ~~under~~operating ~~managed~~expenses during ~~care~~the ~~plans~~year ~~are~~ended ~~based~~March ~~primarily~~31, on2013 ~~payment~~increased ~~terms~~to ~~involving~~$118.1 ~~predetermined~~million ~~rates~~from ~~per~~$74.5 ~~diagnosis~~million, ~~per-diem~~an ~~rates,~~increase ~~discounted~~of ~~fee-for-service~~$43.6 ~~rates~~million, ~~and/~~or ~~other similar contractual arrangements~~58.5%, ~~These revenues are also subject~~ compared to ~~review~~fiscal ~~and~~year ~~possible audit by the payers~~2012. The ~~payers~~increase ~~are billed for patient services on an individual patient basis. An individual patient's bill~~ is ~~subject~~primarily related to ~~adjustment~~QAF onexpenses ~~a patient-by-patient basis in the ordinary course~~ of ~~business by the payers following their review and adjudication of each particular bill~~$52.5 ~~The~~million ~~Hospitals~~incurred ~~estimate~~during the ~~discounts~~year ~~for~~ended ~~contractual~~March ~~allowances~~31, 2013 ~~utilizing~~compared ~~billing~~to ~~data on an individual patient basis~~$15.9 ~~Management~~million ~~believes~~during ~~the~~fiscal ~~estimation~~year 2012 and ~~review~~loss ~~process~~reserves ~~allows~~ for ~~timely~~potential ~~identification~~legal ~~of instances where such estimates need to be revised~~settlements. ~~We do not believe there were any adjustments to estimates of individual patient bills that were material to our patient service revenues.~~

~~The~~OPERATING ~~Hospitals~~INCOME provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance are offered assistance in applying for Medicaid and other programs they may be eligible for, such as state disability, Victims of Crime, or county indigent programs. Patient advocates from the Hospitals' Medical Eligibility Program (~~"MEP"~~LOSS) – ~~screen patients in the hospital and determine potential linkage to financial assistance programs. They also expedite the process of applying for these government programs.~~ The ~~estimated~~operating ~~costs~~income (~~based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients~~loss) for the years ended March 31, ~~2012~~ 2013 and ~~2011~~2012 ~~were~~was ~~approximately~~ ($76.08) million and $812.7 million, respectively.

~~Receivables~~OTHER ~~from~~INCOME (EXPENSE) ~~patients~~– ~~who~~Interest ~~are~~expense ~~potentially eligible~~ for ~~Medicaid~~the ~~are~~year ~~classified~~ended asMarch ~~Medicaid pending under the MEP~~31, ~~with~~2013 ~~appropriate~~was ~~contractual allowances recorded~~$11.8 Ifmillion ~~the~~compared ~~patient does not qualify for Medicaid, the receivables are reclassified~~ to ~~charity~~$10.2 ~~care~~million ~~and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision~~ for ~~doubtful~~fiscal year ~~accounts~~2012. ~~Reclassifications~~The ofincrease ~~pending~~primarily ~~Medicaid~~related ~~accounts~~ to ~~self-pay~~increased donet ~~not~~drawdowns ~~typically have a material impact on the results~~ of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for doubtful accounts recorded when the accounts are reclassified$15.5 ~~All~~million ~~accounts~~on ~~classified~~our asrevolving ~~pending~~line ~~Medicaid, as well as certain other governmental receivables, over the age~~ of ~~90 days were reserved in contractual allowances as of March 31, 2012 and 2011 based on historical collections experience~~ credit.

We ~~previously~~adopted ~~received~~certified ~~payments~~EHR ~~for~~technology ~~“eligible~~and recognized ~~alien”~~other ~~care~~income ~~under Section 1011~~ of ~~the~~$0 ~~Medicare Modernization Act of 2003. During the year ended March 31, 2012, the federal funds available under Section 1011 were exhausted by the state~~ and, ~~as a result, we wrote-off~~ $16.38 million inunder ~~related~~the ~~receivables,~~Medicaid ~~net~~EHR ofincentive ~~previously~~program ~~accrued~~during ~~discount~~the ~~allowances.~~years Asended of March 31, ~~2012~~2013 and ~~2011~~ 2012, ~~we established a receivable in the amount of $0 and $1.6 million,~~ respectively~~, related to discharges deemed eligible to meet program criteria~~.

As of March 31, 2013, the aggregate fair value of the IHHI Warrants was $5.3 million. A loss relating to the change in fair value of the IHHI Warrants of $3.1 million and $1.5 million was recorded during the years ended March 31, 2013 and 2012, respectively. See “WARRANTS.”

WeNET ~~are~~INCOME ~~not~~(LOSS) ~~aware~~- Net ofincome ~~any~~(loss) ~~material~~for ~~claims,~~the ~~disputes,~~years orended ~~unsettled~~March ~~matters~~31, ~~with~~2013 ~~any~~and ~~payers~~2012 ~~that~~was ~~would~~($15.5) ~~affect~~million ~~revenues~~and ~~that~~$7.5 ~~have~~million, ~~not been adequately provided for in our consolidated financial statements~~respectively.

~~PROVISION~~CRITICAL ~~FOR~~ACCOUNTING ~~DOUBTFUL~~POLICIES ~~ACCOUNTS –~~AND We provide for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. The Hospitals estimate this allowance based on the aging of their accounts receivable, historical collections experience for each type of payer and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, volume of patients through the emergency department, the increased burden of copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.ESTIMATES

~~Our~~PATIENT ~~policy~~SERVICE isREVENUES – toPatient ~~attempt~~service torevenues ~~collect~~are ~~amounts~~recognized ~~due~~in ~~from~~the ~~patients,~~period ~~including~~in ~~copayments~~which ~~and~~services ~~deductibles~~are ~~due~~performed ~~from~~and ~~patients~~are ~~with~~recorded ~~insurance,~~based aton ~~the~~established billing ~~time~~rates of(gross ~~service~~charges) ~~while~~less ~~complying~~contractual ~~with~~allowances ~~all~~and ~~federal~~discounts, ~~and~~principally ~~state~~for ~~laws~~patients ~~and~~covered ~~regulations~~by Medicare, ~~including~~Medicaid, managed ~~but~~care, ~~not~~and ~~limited~~other ~~to,~~health ~~the~~plans. ~~Emergency~~Gross ~~Medical~~charges ~~Treatment~~are ~~and~~retail ~~Labor~~charges. ~~Act~~They ~~("EMTALA").~~are ~~Generally,~~not asthe ~~required~~same byas ~~EMTALA~~actual pricing, ~~patients~~and ~~may~~they generally do not bereflect ~~denied~~what ~~emergency~~a ~~treatment~~hospital ~~due~~is toultimately ~~inability~~paid toand ~~pay.~~therefore ~~Therefore,~~are ~~until~~not displayed in the ~~legally~~consolidated ~~required~~statements ~~medical~~of ~~screening~~operations. Hospitals ~~examination~~are istypically ~~complete~~paid ~~and~~amounts ~~stabilization~~that ofare ~~the~~negotiated ~~patient~~with ~~has~~insurance ~~begun,~~companies ~~services~~or are ~~performed~~set ~~prior~~by the government. Gross charges are used to ~~the~~calculate ~~verification~~Medicare outlier payments and to determine certain elements of ~~the~~payment ~~patient's~~under ~~insurance,~~managed ifcare ~~any~~contracts (such as stop-loss payments). InSince ~~nonemergency~~Medicare ~~circumstances~~requires orthat a hospital's gross charges be the same for ~~elective~~all ~~procedures~~patients ~~and~~(regardless ~~services~~of payer category), itgross ischarges ~~the~~are ~~Hospitals'~~also ~~policy,~~what ~~when~~the ~~appropriate,~~Hospitals tocharge ~~verify~~all ~~insurance~~other patients prior to athe ~~patient~~application ~~being~~of ~~treated~~discounts and allowances.

~~Effective March~~ 31, 2012, we adopted Accounting Standards Update (“ASU”) 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which requires health care entities to present the provision for doubtful accounts relating to patient service revenue as a deduction from patient service revenue in the statement of operations rather than as an operating expense. All periods presented have been reclassified in accordance with the provisions of ASU 2011-07.

~~INCOME~~Revenues ~~TAXES –~~under ~~Deferred~~the traditional ~~income~~fee-for-service ~~tax~~Medicare ~~assets~~ and ~~liabilities~~Medicaid programs are ~~determined~~based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the ~~differences~~Hospitals' ~~between~~cost ~~the~~reports, ~~book~~are estimated using historical trends and ~~tax~~current ~~basis~~factors. ofCost ~~assets~~report settlements for retrospectively cost-based revenues under these programs are subject to audit and ~~liabilities~~administrative and judicial review, which can take several years until final settlement of such matters are ~~measured~~determined and ~~using~~completely ~~the~~resolved. ~~currently~~Estimates ~~enacted~~of ~~tax~~settlement ~~rates~~receivables or payables related to a specific year are updated periodically and at ~~laws~~year ~~using~~end and at the ~~asset~~time ~~and~~the ~~liability~~cost ~~method.~~report Weis ~~assess~~filed with the ~~realization~~fiscal ofintermediary. ~~deferred~~Typically ~~tax~~no ~~assets~~further updates are made to ~~determine~~the estimates ~~whether~~until anthe ~~income~~final ~~tax~~Notice ~~valuation~~of ~~allowance~~Program Reimbursement is ~~required~~received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be a time lag of several years between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. We have ~~recorded~~established asettlement ~~100%~~(payables) ~~valuation~~receivables ~~allowance~~of on($179) ~~its~~and ~~deferred~~$190 ~~tax~~as ~~assets~~of March 31, 2013 and 2012, respectively.

~~There~~The isHospitals areceive supplemental ~~recognition~~payments ~~threshold~~from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and ~~measurement~~from ~~attribute~~the ~~for~~California ~~recognition~~Medical Assistance Commission ("CMAC") under the SB 1100 and ~~measurement~~SB 1255 programs. The Hospitals received supplemental payments of a$13.4 ~~tax~~million ~~position~~and ~~taken~~$14.3 ormillion ~~expected~~during tothe beyears ~~taken~~ended inMarch a31, ~~tax~~2013 ~~return~~and 2012, respectively. ItThe ~~also~~related ~~provides~~revenue ~~guidance~~recorded onfor ~~de-recognition~~the years ended March 31, ~~classification~~2013 and 2012, ~~interest~~was $14.3 million and ~~penalties~~$15.4 million, ~~accounting~~respectively. As inof ~~interim~~March ~~periods~~31, ~~disclosure~~2013 and ~~transition~~2012, estimated DSH receivables were $5.9 million and $5.0 million, respectively.

WeRevenues under managed care plans, including Medicare and ~~our~~Medicaid ~~subsidiaries~~managed ~~file~~care ~~income~~plans ~~tax~~(with ~~returns~~patient inservice ~~the~~revenues Uof $84.S7 million and $84.2 ~~federal~~million for ~~jurisdiction~~the years ended March 31, 2013 and ~~California.~~2012, ~~Certain~~respectively), ~~tax~~are ~~attributes~~based ~~carried~~primarily ~~over~~on ~~from~~payment ~~prior~~terms ~~years~~involving ~~continue~~predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to bereview and possible audit by the payers. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patient-by-patient ~~taxing~~basis ~~authorities~~in the ordinary course of business by the payers following their review and adjudication of each particular bill. ~~Any~~The ~~penalties~~Hospitals orestimate ~~interest~~the ~~arising~~discounts ~~from~~for ~~federal~~contractual orallowances utilizing ~~state~~billing ~~taxes~~data ~~are~~on ~~recorded~~an asindividual apatient ~~component~~basis. Management believes the estimation and review process allows for timely identification of ~~our~~instances ~~income~~where ~~tax~~such ~~provision~~estimates need to be revised. We do not believe there were any adjustments to estimates of individual patient bills that were material to patient service revenues.

~~INSURANCE –~~The WeHospitals ~~accrue~~provide charity ~~for~~care ~~estimated general and professional liability claims,~~ to ~~the~~patients ~~extent~~whose ~~not~~income ~~covered~~level byis ~~insurance,~~below ~~when~~300% ~~they~~of ~~are~~the ~~probable~~Federal ~~and~~Poverty ~~reasonably estimable~~Level. WePatients ~~have~~with ~~purchased~~income aslevels ~~primary~~between ~~coverage a claims-made form insurance policy for general~~ 300% and ~~professional~~350% ~~liability~~of ~~risks.~~the ~~Estimated~~Federal ~~losses~~Poverty ~~within~~Level ~~general~~qualify ~~and~~to ~~professional~~pay ~~liability~~a ~~retentions~~discounted ~~from~~rate ~~claims~~under ~~incurred~~AB ~~and~~774 ~~reported,~~based ~~along~~on ~~with~~various ~~incurred~~government ~~but~~program ~~not~~reimbursement levels. ~~reported~~Patients ~~(“IBNR”)~~without ~~claims,~~insurance are ~~accrued~~offered ~~based~~assistance ~~upon~~in ~~projections~~applying ~~and~~for ~~are~~Medicaid ~~discounted~~and toother ~~their~~programs ~~net~~they ~~present~~may ~~value~~be ~~using~~eligible afor, such ~~weighted~~as ~~average~~state ~~risk-free~~disability, ~~discount~~Victims ~~rate~~ of ~~5%.~~Crime, Toor ~~the~~county ~~extent~~indigent ~~that~~programs. ~~subsequent~~Patient ~~claims~~advocates ~~information~~from ~~varies~~the ~~from~~Hospitals' ~~estimates,~~Medical ~~the~~Eligibility Program ~~liability~~("MEP") isscreen ~~adjusted~~patients in the ~~period~~hospital ~~such~~and ~~information~~determine ~~becomes~~potential ~~available.~~linkage Asto offinancial ~~March~~assistance ~~31,~~programs. ~~2012~~They also ~~and~~expedite ~~2011,~~the weprocess ~~had~~of ~~accrued~~applying ~~$11.5~~for ~~million~~these ~~and~~government ~~$11~~programs.3 ~~million,~~The ~~respectively,~~estimated ~~which~~costs isof ~~comprised~~charity ofcare ~~$4.5~~(based ~~million~~on direct and ~~$6.6~~indirect costs ~~million,~~as ~~respectively,~~a inratio ~~incurred~~of ~~and~~gross ~~reported~~uncompensated ~~claims,~~charges ~~along~~associated with ~~$7.0~~providing ~~million~~care ~~and~~to ~~$4.7~~charity ~~million,~~patients) ~~respectively,~~for inthe ~~estimated~~years ~~IBNR. Estimated~~ended ~~insurance~~March ~~recoveries~~31, 2013 and of2012 were approximately $38.0 million and $2.7.0 million ~~are included in other prepaid expenses and current assets as of March 31~~, ~~2012 and 2011,~~ respectively.

We ~~have~~are ~~also~~not ~~purchased~~aware occurrence coverage insurance to fund our obligations under our workers compensation program. We have a "guaranteed cost" policy, under which the carrier pays all workers compensation claims, with no deductible or reimbursement required of any ~~us.~~material ~~We accrue for estimated workers compensation~~ claims, ~~to the extent not covered by insurance~~disputes, ~~when~~or ~~they~~unsettled ~~are~~matters ~~probable and reasonably estimable. The ultimate costs related to this program include expenses for deductible amounts associated~~ with ~~claims~~any ~~incurred~~payers ~~and~~that ~~reported~~would inaffect ~~addition~~revenues to an accrual for the estimated expenses incurred in connection with IBNR claims. Claims are accrued based upon projections and are discounted to their net present value using a weighted average risk-free discount rate of 5%. To the extent that ~~subsequent~~have ~~claims~~not ~~information~~been ~~varies~~adequately ~~from~~provided for ~~estimates, the liability is adjusted~~ in the ~~period~~accompanying ~~such~~unaudited ~~information~~condensed ~~becomes~~consolidated ~~available.~~financial As of March 31, 2012 and 2011, we had accrued $673 and $836, respectively, comprised of $338 and $434, respectively, in incurred and reported claims, along with $335 and $402, respectively, in estimated IBNRstatements.

InPROVISION ~~addition,~~FOR weBAD ~~have a self~~DEBTS -~~insured~~ ~~health~~We ~~benefits~~provide ~~plan~~ for ~~our~~accounts ~~employees.~~receivable Asthat acould ~~result,~~become weuncollectible ~~have~~by ~~established~~establishing ~~and~~an ~~maintain~~allowance anto ~~accrual~~reduce ~~for~~the ~~IBNR~~carrying ~~claims~~value of ~~arising~~such ~~from~~receivables ~~self-insured~~to ~~health~~their ~~benefits~~estimated ~~provided~~net torealizable ~~employees~~value. ~~Our~~The ~~IBNR~~Hospitals ~~accruals~~estimate atthis ~~March~~allowance ~~31,~~based ~~2012~~on ~~and~~the ~~2011~~aging ~~were~~of ~~based~~their accounts ~~upon~~receivable, ~~projections.~~historical Wecollections ~~determine~~experience ~~the~~for ~~adequacy~~each type of ~~this~~payer ~~accrual~~and byother ~~evaluating~~relevant ~~our~~factors. ~~historical~~There ~~experience~~are ~~and~~various ~~trends~~factors that ~~related~~can toimpact ~~both~~the ~~health~~collection ~~insurance~~trends, ~~claims~~such ~~and~~as ~~payments,~~changes ~~information~~in ~~provided~~the byeconomy, ~~our~~which ~~insurance~~in ~~broker~~turn ~~and~~have ~~third~~an ~~party~~impact ~~administrator~~on unemployment rates and ~~industry~~the number ~~experience~~of uninsured and ~~trends.~~underinsured ~~The~~patients, ~~accrual~~volume isof anpatients ~~estimate~~through ~~and~~the isemergency ~~subject~~department, tothe ~~change.~~increased ~~Such~~burden ~~change~~of ~~could~~copayments to be ~~material~~made toby ~~our~~patients ~~consolidated~~with ~~financial~~insurance ~~statements.~~and Asbusiness ofpractices ~~March~~related ~~31,~~to ~~2012~~collection ~~and~~efforts. ~~2011,~~These wefactors ~~had~~continuously ~~accrued~~change ~~$2.2~~and can ~~million~~have ~~and~~an ~~$1.8~~impact ~~million,~~on ~~respectively,~~collection intrends ~~estimated~~and ~~IBNR~~the estimation process.

32Our policy is to attempt to collect amounts due from patients, including copayments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations, including, but not limited to, the Emergency Medical Treatment and Labor Act ("EMTALA"). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, until the legally required medical screening examination is complete and stabilization of the patient has begun, services are performed prior to the verification of the patient's insurance, if any. In nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

WeEffective ~~have~~March 31, 2012, ~~also~~we ~~purchased~~adopted ~~umbrella~~Accounting ~~liability~~Standards ~~policies~~Update ~~with~~(“ASU”) ~~aggregate~~2011-07, ~~limits~~“Health ofCare ~~$25~~Entities ~~million.~~(Topic ~~The~~954): ~~umbrella~~Presentation and ~~policies~~Disclosure ~~provide~~of ~~coverage~~Patient inService ~~excess~~Revenue, ofProvision ~~the~~for ~~primary~~Bad ~~layer~~Debts, and ~~applicable~~the ~~retentions~~Allowance for ~~insured~~Doubtful ~~liability~~Accounts ~~risks~~for ~~such~~Certain Health Care Entities,” which requires health care entities to present the provision for bad debts relating to patient service revenues as ~~general~~a ~~and~~deduction ~~professional~~from ~~liability,~~patient ~~auto~~service ~~liability,~~revenues ~~and~~in ~~workers~~the ~~compensation~~statement ~~(employer’s~~of ~~liability)~~operations rather than as an operating expense.

~~NEW ACCOUNTING STANDARDS~~32

InINCOME ~~August 2010,~~TAXES ~~the~~- ~~FASB~~Deferred income ~~approved~~tax ~~certain~~assets ~~modifications~~and toliabilities ~~existing~~are ~~accounting~~determined ~~standards~~based ~~that~~on ~~will directly affect health care entities in~~ the ~~future.~~differences ~~The~~between ~~first change provides clarification to companies in~~ the ~~healthcare~~book ~~industry~~and ontax ~~the~~basis ~~accounting~~of ~~for~~assets ~~professional liability insurance. Specifically, it states that receivables related to insurance recoveries should not be netted against the related claim liability~~ and ~~such claim~~ liabilities and ~~should~~are bemeasured ~~determined~~using ~~without considering insurance recoveries. The second change clarifies that disclosures regarding~~ the ~~level~~currently ofenacted ~~charity~~tax ~~care~~rates ~~provided~~and bylaws ausing ~~health care entity must (i) represent~~ the ~~direct~~asset and ~~indirect~~liability ~~costs~~method. ofWe ~~providing~~assess ~~such~~the ~~services, and (ii) include a description~~ realization of ~~the~~deferred ~~method~~tax ~~used~~assets to determine ~~those~~whether ~~costs.~~an ~~Additionally,~~income ~~disclosures~~tax ~~about~~valuation ~~charity~~allowance ~~care~~is ~~must now include information regarding any related reimbursements received by a health care entity. The modified accounting standards are~~ required ~~to be adopted for fiscal years that begin after December 15, 2010~~. ~~The~~We ~~charity~~recorded ~~care disclosure change must be applied on~~ a ~~retrospective~~58% ~~basis;~~and ~~however,~~100% ~~the~~valuation allowance ~~accounting change for insurance recoveries may be applied~~ on ~~either~~our anet ~~prospective~~deferred ortax ~~retrospective~~assets ~~basis~~as ~~(the~~of ~~Company has applied the accounting change for insurance recoveries on a retrospective basis). The Company adopted the modified accounting standards during the yeard ended~~ March 31, 2013 and 2012, ~~which did not have a material impact on the consolidated financial statements~~respectively.

~~OFF~~There ~~BALANCE~~is ~~SHEET~~a ~~ARRANGEMENTS~~recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

AsWe ofand ~~March~~our ~~31,~~subsidiaries file ~~2012~~income wetax ~~had~~returns noin ~~off-balance~~the ~~sheet~~U.S. ~~arrangements~~federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Any penalties or interest arising from federal or state taxes are recorded as a component of our income tax provision.

~~ITEM~~INSURANCE 7A– We accrue for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. ~~QUANTITATIVE~~We ~~AND~~have ~~QUALITATIVE~~purchased ~~DISCLOSURES~~as ~~ABOUT~~primary ~~MARKET~~coverage ~~RISK~~a claims-made form insurance policy for general and professional liability risks. Estimated losses within general and professional liability retentions from claims incurred and reported, along with incurred but not reported (“IBNR”) claims, are accrued based upon projections and are discounted to their net present value using an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of March 31, 2013 and 2012, we had accrued $10.6 million and $11.5 million, respectively, which is comprised of $5.5 million and $4.5 million, respectively, in incurred and reported claims, along with $5.1 million and $7.0 million, respectively, in estimated IBNR. Estimated insurance recoveries of $2.1 million and $3.0 million are included in other prepaid expenses and current assets as of March 31, 2013 and 2012, respectively.

~~Not~~We ~~applicable~~have also purchased occurrence coverage insurance to fund our obligations under our workers compensation program. We have a "paid loss plan" policy, under which the carrier pays all workers compensation claims, with no deductible or reimbursement required of us. We accrue for estimated workers compensation claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The ultimate costs related to this program include expenses for deductible amounts associated with claims incurred and reported in addition to an accrual for the estimated expenses incurred in connection with IBNR claims. Claims are accrued based upon projections and are discounted to their net present value using an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of March 31, 2013 and 2012, we had accrued $500 and $673, respectively, comprised of $200 and $338, respectively, in incurred and reported claims, along with $300 and $335, respectively, in estimated IBNR.

33In addition, we have a self-insured health benefits plan for our employees. As a result, we have established and maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. Our IBNR accruals at March 31, 2013 and 2012 were based upon projections. We determine the adequacy of this accrual by evaluating our limited historical experience and trends related to both health insurance claims and payments, information provided by our insurance broker and third party administrator, and industry experience and trends. The accrual is an estimate and is subject to change. Such change could be material to our consolidated financial statements. As of March 31, 2013 and 2012, we had accrued $1.9 million and $2.2 million, respectively, in estimated IBNR.

~~ITEM~~We 8have also purchased umbrella liability policies with aggregate limits of $25 million. ~~FINANCIAL~~The ~~STATEMENTS~~umbrella ~~AND~~policies ~~SUPPLEMENTARY~~provide ~~DATA~~coverage in excess of the primary layer and applicable retentions for insured liability risks such as general and professional liability, auto liability, and workers compensation (employers liability).

~~The~~NEW ~~following~~ACCOUNTING ~~consolidated financial statements are filed as a part of this report beginning on page F-1:~~STANDARDS

	PAGE		DESCRIPTION
	F-1		Report of Independent Registered Public Accounting Firm
	F-2		Consolidated Balance Sheets as of March 31, 2012 and 2011
	F-3		Consolidated Statements of Operations for the years ended March 31, 2012 and 2011
	F-4		Consolidated Statements of Stockholders' Deficiency for the years ended March 31, 2012 and 2011
	F-5		Consolidated Statements of Cash Flows for the years ended March 31, 2012 and 2011
	F-6		Notes to Consolidated Financial Statements
	F-25		Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2012 and 2011

Effective March 31, 2012, we adopted ASU 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which requires health care entities to present the provision for bad debts relating to patient service revenue as a deduction from patient service revenue in the statement of operations rather than as an operating expense. Additional disclosures relating to sources of patient revenue and the allowance for doubtful accounts related to patient accounts receivable are also required. The adoption of this ASU did not have a material impact on our consolidated financial statements.

~~ITEM~~OFF ~~9. CHANGES~~BALANCE ~~IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~SHEET ARRANGEMENTS

~~None~~As of March 31, 2013 we had no off-balance sheet arrangements.

ITEM 9A7A. ~~CONTROLS~~QUANTITATIVE AND ~~PROCEDURES~~QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

~~MANAGEMENT'S~~Not ~~REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING~~applicable.

Management of Integrated Healthcare Holdings, Inc. is responsible for the preparation, integrity and fair presentation of its published consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include amounts based on judgments and estimates made by management. The Company also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements.33

~~Management~~ITEM ~~is also responsible for establishing and maintaining effective internal control over financial reporting~~8. ~~The~~FINANCIAL ~~Company's~~STATEMENTS ~~internal~~AND ~~control~~SUPPLEMENTARY over financial reporting includes those policies and procedures that pertain to the Company's ability to record, process, summarize and report reliable financial data. The Company maintains a system of internal control over financial reporting, which is designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation of reliable published consolidated financial statements and safeguarding of the Company's assets. The system includes a documented organizational structure and division of responsibility, established policies and procedures, including a code of conduct to foster a strong ethical climate, which are communicated throughout the Company, and the careful selection, training and development of our people.DATA

The ~~Board~~following ~~of Directors, acting through its Audit Committee, is responsible for the oversight of the Company's accounting policies,~~ consolidated financial ~~reporting,~~statements ~~and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who~~ are ~~independent~~filed ofas ~~management.~~a ~~The~~part ~~Audit Committee is responsible for the appointment and compensation~~ of ~~the~~this independent registered public accounting firm. It meets periodically with management, the independent registered public accounting firm, and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's financial reports. Internal auditors monitor the operation of the internal control system and report ~~findings~~beginning ~~and~~on ~~recommendations~~page to management and the Audit Committee. Corrective actions are taken to address control deficiencies and other opportunities for improving the internal control system as they are identified. The independent registered public accounting firm and the internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.F-1:

Management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

	PAGE		DESCRIPTION
	F-1		Report of Independent Registered Public Accounting Firm
	F-2		Consolidated Balance Sheets as of March 31, 2013 and 2012
	F-3		Consolidated Statements of Operations for the years ended March 31, 2013 and 2012
	F-4		Consolidated Statements of Stockholders' Deficiency for the years ended March 31, 2013 and 2012
	F-5		Consolidated Statements of Cash Flows for the years ended March 31, 2013 and 2012
	F-6		Notes to Consolidated Financial Statements
	F-25		Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2013 and 2012

~~The~~ITEM Company assessed its internal control system as of March 31, 2012 in relation to criteria for effective internal control over financial reporting described in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission9. ~~Based~~CHANGES onIN ~~its~~AND ~~assessment,~~DISAGREEMENTS ~~the~~WITH ~~Company~~ACCOUNTANTS ~~has~~ON ~~determined~~ACCOUNTING ~~that,~~AND asFINANCIAL ~~of March 31, 2012, its system of internal control over financial reporting was effective.~~DISCLOSURE

34None

~~This~~ITEM ~~annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting~~9A. ~~Management's~~CONTROLS ~~report~~AND was not subject to attestation by the Company's registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.PROCEDURES

~~CHANGES~~DISCLOSURE INCONTROLS ~~INTERNAL~~AND ~~CONTROL OVER FINANCIAL REPORTING~~PROCEDURES

~~During~~The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the ~~fiscal~~Company's ~~quarter~~reports under ~~ended~~the ~~March~~Securities 31Exchange Act of 1934 is recorded, ~~2012~~processed, ~~there~~summarized ~~was~~and noreported ~~change~~within the time periods specified in the ~~our~~Security ~~internal~~and ~~control~~Exchange ~~over~~Commission’s ~~financial~~(the ~~reporting~~“SEC”) rules and forms, and that ~~has~~such ~~materially~~information ~~affected~~is accumulated and communicated to its management, orincluding isits ~~reasonably~~Chief ~~likely~~Executive Officer and Chief Financial Officer, as appropriate, to ~~materially~~allow timely ~~affect~~decisions regarding required disclosure. The Company’s disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching the Company's desired disclosure control objectives. In designing and evaluating the disclosure controls and procedures, ~~our~~management ~~internal~~recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control ~~over~~objectives ~~financial~~and ~~reporting~~management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

~~DISCLOSURE~~The ~~CONTROLS~~Company ~~AND~~conducted an ~~PROCEDURES~~evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of March 31, 2013. The evaluation by management, including the Company’s Chief Executive Officer and Chief Financial Officer, as of March 31, 2013 concluded that the Company's disclosure controls and procedures are effective as of such date to ensure that the information required to be disclosed in its reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

~~We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company~~MANAGEMENT'sS ~~reports~~REPORT ~~under~~ON ~~the~~INTERNAL ~~Securities~~CONTROL ~~Exchange~~OVER Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching the Company's desired disclosure control objectives. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.FINANCIAL REPORTING

WeManagement ~~conducted an evaluation under the supervision and with the participation~~ of ~~our~~Integrated Healthcare ~~management~~Holdings, ~~including~~Inc. ~~our~~is ~~Chief~~responsible ~~Executive~~for ~~Officer~~the ~~and Chief Financial Officer~~preparation, ofintegrity ~~the effectiveness of the design~~ and ~~operation~~fair ofpresentation ~~our disclosure controls and procedures as~~ of ~~March~~its ~~31,~~published ~~2012~~consolidated financial statements. ~~This~~The ~~evaluation~~consolidated ~~was~~financial ~~based~~statements onhave ~~the~~been ~~framework~~prepared in ~~Internal~~accordance ~~Control~~with ~~Integrated~~accounting ~~Framework~~principles ~~published~~generally byaccepted in the ~~Committee~~United ofStates ~~Sponsoring Organizations~~ of ~~the~~America ~~Treadway~~and, ~~Commission. The evaluation by management~~ as ~~of March 31~~such, ~~2012~~include ~~concluded~~amounts ~~that~~based ~~the~~on ~~Company's~~judgments ~~disclosure controls~~ and ~~procedures~~estimates ~~are~~made ~~effective~~by asmanagement. ofThe ~~such~~Company also ~~date~~prepared ~~to ensure that~~ the other information ~~required~~included ~~to be disclosed~~ in ~~our reports filed or submitted under~~ the ~~Securities~~annual ~~Exchange~~report ~~Act of 1934 is recorded, processed, summarized~~ and ~~reported within the time periods specified in the SEC’s rules and forms, and that such information~~ is ~~accumulated~~responsible ~~and~~for ~~communicated~~its toaccuracy ~~our management, including our Chief Executive Officer~~ and ~~Chief~~consistency ~~Financial~~with ~~Officer,~~the consolidated asfinancial ~~appropriate, to allow timely decisions regarding required disclosure~~statements.

~~ITEM 9B. OTHER INFORMATION~~34

~~None~~Management is also responsible for establishing and maintaining effective internal control over financial reporting. The Company's internal control over financial reporting includes those policies and procedures that pertain to the Company's ability to record, process, summarize and report reliable financial data. The Company maintains a system of internal control over financial reporting, which is designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation of reliable published consolidated financial statements and safeguarding of the Company's assets. The system includes a documented organizational structure and division of responsibility, established policies and procedures, including a code of conduct to foster a strong ethical climate, which are communicated throughout the Company, and the careful selection, training and development of its people.

35The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Company's accounting policies, financial reporting, and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent registered public accounting firm. It meets periodically with management, the independent registered public accounting firm, and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's financial reports. Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee. Corrective actions are taken to address control deficiencies and other opportunities for improving the internal control system as they are identified. The independent registered public accounting firm and the internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.

~~PART~~Management ~~III~~recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

~~ITEM~~Management 10assessed the Company’s internal control system as of March 31, 2013 in relation to criteria for effective internal control over financial reporting described in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. ~~DIRECTORS~~Based on its assessment, ~~EXECUTIVE~~management ~~OFFICERS~~has ~~AND~~determined ~~CORPORATE~~that, ~~GOVERNANCE~~as of March 31, 2013, the Company’s system of internal control over financial reporting was effective.

~~The~~This ~~following~~annual ~~table~~report does ~~contains~~not ~~certain~~include ~~information~~an ~~concerning~~attestation ~~our~~report ~~directors~~of ~~and~~the ~~executive~~Company's ~~officers~~registered aspublic accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of ~~March~~the ~~31,~~Dodd-Frank ~~2012:~~Wall Street Reform and Consumer Protection Act.

NAME	AGE	POSITION WITH COMPANY	DATE BECAME DIRECTOR
Maurice J. DeWald	72	Chairman of the Board	August 1, 2005
Hon. C. Robert Jameson	72	Director	July 11, 2007
Ajay G. Meka, M.D.	61	Director	September 28, 2006
Michael Metzler	65	Director	September 5, 2007
J. Fernando Niebla	72	Director	August 1, 2005
William E. Thomas	63	Director	September 5, 2007
Kenneth K. Westbrook	61	Director, Chief Executive Officer & President	December 2, 2008
Steven R. Blake	59	Chief Financial Officer & Executive Vice President, Finance
Daniel J. Brothman	57	Chief Operating Officer & Executive Vice President, Operations

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

~~MAURICE~~During ~~J. DEWALD has served as a member of~~ the ~~Board~~fiscal ofquarter ended ~~Directors~~March ~~of the Company since August 1~~31, ~~2005 and has served as Chairman of the Board of Directors since October 7~~2013, ~~2008.~~there ~~Mr.~~was ~~DeWald~~no ischange chairman of the Audit Committee and sits on the Compensation Committee, Finance Committee, and Special Committee. As a senior finance executive, Mr. DeWald brings to our Board extensive qualifications and experience in ~~management, finance, and public accounting, as well as his experience in~~ the ~~healthcare~~Company’s ~~industry. Mr.~~internal ~~DeWald~~control isover ~~Chairman~~financial ~~and~~reporting ~~Chief Executive Officer of Verity Financial Group, Inc., a private investment firm~~ that hehas ~~founded in 1992. From 1962-1991~~materially affected, ~~Mr.~~or DeWald was with KPMG LLP, one of the world's largest international accounting and tax consulting firms, where he served at various times as director and as the Managing Partner of the Chicago, Orange County and Los Angeles Offices. Mr. DeWald is ~~the~~reasonably ~~non-executive~~likely ~~Chairman~~to ofmaterially ~~Targeted Medical Pharma~~affect, ~~Inc.~~its ~~and~~internal acontrol ~~director~~over offinancial ~~Healthcare Trust of America, Inc~~reporting. and Emmaus Life Sciences, Inc. Mr. DeWald is a former director of Tenet Healthcare Corporation ("Tenet") and Quality Systems, Inc. He also sits on the Advisory Council of the University of Notre Dame Mendoza School of Business. Mr. DeWald is a past Chairman and director of United Way of Greater Los Angeles. Mr. DeWald received a B.B.A. from the University of Notre Dame in 1962. He is also a Certified Public Accountant (inactive) and a member of the American Institute of CPAs, the California Society of CPAs, and the National Association of Corporate Directors.

~~HON.~~ITEM C9B. ~~ROBERT~~OTHER JAMESON has been a director of the Company since July 11, 2007. Judge Jameson is a retired Orange County Superior judge. Judge Jameson brings to our Board extensive experience in the legal profession and negotiating skills. He is now affiliated with Judicate West, a provider of alternative dispute resolution, handling complex alternative dispute resolution matters. Before leaving the bench, he was Presiding Judge of the Orange County Superior Court Appellate Division. Judge Jameson obtained his B.A. degree in Political Science from the University of California, Davis in 1963 and his Juris Doctor degree at the University of California, Hastings College of the Law in 1966. He served as a judge from 1984-2005 and also was President of the Banyard Inn of Court and an Adjunct Professor of Law at Whittier Law School during his tenure. Judge Jameson was awarded "Judge of the Year" nine times over the course of his career by organizations such as: the Orange County Bar Association Business Litigation section, Orange County Trial Lawyers, the American Board of Trial Advocates and the Consumer Attorneys of California.INFORMATION

~~AJAY G~~None. MEKA, M.D has served as a member of the Board of Directors of the Company since September 28, 2006. Dr. Meka brings to our Board extensive experience in the healthcare industry. Dr. Meka has been a licensed physician in California for the past 26 years. He is a board certified physician practicing in Orange County, California. Dr. Meka received his medical degree from Guntur Medical College in Gunter, India. He performed his postgraduate training at Brooklyn Jewish Hospital and Coney Island Hospital, both in Brooklyn, New York.

MICHAEL METZLER has been a member of the Board of Directors of the Company since September 5, 2007 and is Chairman of the Nominations and Governance Committee and sits on the Audit Committee and Special Committee. Mr. Metzler brings to our Board extensive leadership, organizational, and management skills. He is CEO of Metzler and Associates, a consulting firm specializing in organization development. He served as President and Chief Executive Officer of the Santa Ana Chamber of Commerce for 27 years from 1983 to 2010. Mr. Metzler has served on numerous community boards, city commissions, and county, regional, state and national committees and task forces. He was a founder of the Santa Ana Business Bank. Mr. Metzler received a Ford Foundation Fellowship in Regionalism and Sustainable Development in 2008. He is a graduate of California State University, Fullerton, and attended Loyola University School of Law and the Peter F. Drucker Graduate School of Management at Claremont University.35

J.PART FERNANDO NIEBLA has served as a member of the Board of Directors of the Company since August 1, 2005. Mr. Niebla is the Chairman of the Compensation Committee and sits on the Audit Committee, Finance Committee, and Special Committee. Mr. Niebla brings to our Board extensive experience in executive leadership and board membership experience with large publicly traded companies. He has served as Managing Partner of International Technology Partners, LLC, an information technology and business consulting services company based on Orange County, California since August 1998. He is also a founder of Infotec Development Inc. and Infotec Commercial Systems, two national information technology firms. He currently serves on the Boards of Directors of Union Bank of California, Pacific Life Corp., Life Modeler, Inc., and Granite Construction Corp., the Board of Trustees of the Orange County Health Foundation, and is the Chairman of the California Advisory Committee to Nacional Financiera, a Mexican Government agency similar to the U.S. Government Small Business Administration office. Mr. Niebla holds a B.S. degree in Electrical Engineering from the University of Arizona and an M.S. QBA from the University of Southern California.III

36ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

~~WILLIAM~~The E.following ~~THOMAS~~table contains ~~brings~~certain toinformation concerning our Board extensive experience in the legal profession and healthcare industry. Mr. Thomas is the Executive Vice President and General Counsel of Strategic Global Management, Inc., a healthcare ventures firm in Riverside, California. He has served in such capacity since October of 1998. Prior to that Mr. Thomas was a founding and managing partner of a law firm in Riverside, California specializing in business, real estate, and other transactional matters. He is a member of the board of directors ~~of Provident Financial Holdings, Inc. Mr. Thomas graduated from the University of California at Santa Barbara with a Bachelor of Arts degree in History~~ and ~~Political~~executive ~~Science.~~officers Heas ~~holds a Juris Doctor degree from the University~~ of ~~California,~~March ~~Hastings College of the Law~~31, ~~and a Master of Laws degree from New York University. He is a member of the California Bar Association.~~2013:

KENNETH K. WESTBROOK has served as President and Chief Executive Officer of the Company since December 2, 2008. Mr. Westbrook brings to our Board extensive experience as a healthcare executive with unique operational and management skills. Mr. Westbrook was Senior Vice President for Operations for OrNda HealthCorp (1996) and Senior Vice President of Operations for Tenet (1997 through 2004). Mr. Westbrook sold the four hospitals that created the Company as he left Tenet. During the years at OrNda and Tenet, Mr. Westbrook also had the experience of acting as each of the four hospitals' interim CEO when vacancies occurred. Prior to OrNda, Mr. Westbrook was the Chief Operating Officer for Hospital Corporation of America's Pacific Division and was previously a hospital CEO at several Southern California hospitals. He has graduate and undergraduate degrees in business from the University of Redlands and is currently a member of several healthcare professional associations.

NAME	AGE	POSITION WITH COMPANY	DATE BECAME DIRECTOR
Maurice J. DeWald	73	Chairman of the Board	August 1, 2005
Hon. C. Robert Jameson	73	Director	July 11, 2007
Ajay G. Meka, M.D.	62	Director	September 28, 2006
Michael Metzler	66	Director	September 5, 2007
J. Fernando Niebla	73	Director	August 1, 2005
William E. Thomas	64	Director	September 5, 2007
Kenneth K. Westbrook	62	Director, Chief Executive Officer & President	December 2, 2008
Steven R. Blake	60	Chief Financial Officer & Executive Vice President, Finance
Daniel J. Brothman	58	Chief Operating Officer & Executive Vice President, Operations

~~STEVEN~~MAURICE RJ. ~~BLAKE~~DEWALD –has served ~~FHFMA,~~as ~~CPA~~a ~~has~~member ~~served~~of asthe ~~Chief~~Board ~~Financial~~of ~~Officer~~Directors of the Company since ~~July~~August 1, 2005 and ~~Executive~~has ~~Vice~~served ~~President,~~as ~~Finance~~Chairman of the Board of Directors since ~~March~~October 217, 2008. HeMr. DeWald is achairman ~~California~~of ~~licensed~~the ~~Certified~~Audit ~~Public~~Committee ~~Accountant~~and sits on the Compensation Committee, Finance Committee, and Special Committee. As a senior finance executive, Mr. ~~Blake~~DeWald ~~came~~brings to ~~the~~our ~~Company~~Board ~~with~~extensive ~~over~~qualifications 20and ~~years~~experience ofin management, finance, and public accounting, as well as his experience in ~~multi-hospital~~the ~~financial~~healthcare ~~management~~industry. Mr. HeDeWald ~~also~~is ~~has~~Chairman and ~~extensive~~Chief ~~experience~~Executive ~~serving~~Officer of Verity Financial Group, Inc., a private investment firm that he founded in ~~financial~~1992. ~~roles~~From 1962-1991, Mr. DeWald was with ~~public~~KPMG ~~companies.~~LLP, ~~Most~~one ~~recently~~of the world's largest international accounting and tax consulting firms, where he served at various times as ~~Regional~~director ~~Vice~~and ~~President~~as the Managing Partner of ~~Finance~~the ~~for~~Chicago, ~~Tenet~~Orange County and Los Angeles Offices. Mr. DeWald is the non-executive Chairman of Targeted Medical Pharma, Inc. and a ~~position~~director heof ~~held~~Healthcare ~~for~~Trust ~~over~~of 17America, ~~years~~Inc. Inand ~~this~~Emmaus ~~position~~Life Sciences, Inc. Mr. ~~Blake~~DeWald ~~was~~is ~~responsible~~a ~~for~~former ~~the~~director ~~financial~~of ~~management~~Tenet ofHealthcare ~~numerous~~Corporation ("Tenet") ~~assets~~and ~~covering~~Quality ~~five~~Systems, ~~western~~Inc. ~~states~~He ~~(California,~~also ~~Arizona,~~sits on ~~Washington,~~the ~~Nebraska~~Advisory ~~and~~Council ~~Texas)~~of the University of Notre Dame Mendoza School of Business. Mr. ~~Blake~~DeWald is a past ~~President~~Chairman ~~for~~and ~~the~~director of ~~Southern~~United ~~California~~Way ~~Chapter~~ of ~~the~~Greater ~~Healthcare~~Los ~~Financial~~Angeles. ~~Management~~Mr. ~~Association;~~DeWald isreceived a ~~member~~B.B.A. offrom the ~~Audit~~University ~~Committee~~of ~~for~~Notre ~~the~~Dame ~~Hospital~~in ~~Association~~1962. ofHe ~~Southern~~is ~~California~~also a Certified Public Accountant (inactive) and a ~~former~~member ~~Trustee~~of ~~for~~the American Institute of CPAs, the California ~~Hospital~~Society of CPAs, and the National Association of Corporate Directors.

~~DANIEL~~HON. JC. ~~BROTHMAN~~ROBERT JAMESON has ~~served~~been asa ~~Chief~~director ~~Operating~~of ~~Officer~~the &Company ~~Executive~~since ~~Vice~~July ~~President~~11, ~~Operations~~2007. ~~since~~Judge ~~May~~Jameson 6,is ~~2008~~a ~~and~~retired asOrange ~~Chief~~County ~~Executive~~Superior ~~Officer~~judge. Judge Jameson ofbrings ~~Western~~to ~~Medical~~our ~~Center~~Board -extensive ~~Santa~~experience ~~Ana~~in ~~since~~the ~~March~~legal 8,profession ~~2005.~~and Mrnegotiating skills. He ~~Brothman~~is ~~also~~now ~~served~~affiliated with asJudicate ~~Senior~~West, ~~Vice~~a ~~President~~provider of alternative dispute resolution, ~~Operations~~handling ofcomplex ~~the~~alternative ~~Company~~dispute ~~from~~resolution ~~March~~matters. 8Before leaving the bench, ~~2005~~he towas ~~May~~Presiding 6,Judge ~~2008.~~of ~~Mr.~~the ~~Brothman~~Orange isCounty anSuperior ~~experienced~~Court. ~~single~~Judge ~~and~~Jameson ~~multi-hospital~~obtained ~~operations~~his ~~executive~~B.A. ~~Since~~degree ~~1999,~~in ~~prior~~Political Science tofrom the ~~acquisition~~University of ~~the~~California, ~~Hospitals~~Davis byin ~~the~~1963 ~~Company~~and hehis ~~helped~~Juris ~~build~~Doctor degree at the ~~Western~~University ~~Medical~~of ~~Center~~California, inHastings College ~~Santa~~of ~~Ana~~the ~~for~~Law ~~Tenet.~~in Mr1966. ~~Brothman~~He ~~also~~served ~~ran~~as ~~HCA's~~a ~~Utah~~judge ~~Division~~ from ~~1996~~1984-2005 toand ~~1998.~~also ~~Mr.~~was ~~Brothman~~President ~~has~~of inthe ~~excess~~Banyard Inn of 30Court ~~years~~and ~~experience~~an inAdjunct Professor ~~hospital~~of ~~administration.~~Law ~~Mr.~~at ~~Brothman~~Whittier ~~earned~~Law School during his ~~Bachelor~~tenure. ofJudge ~~Arts~~Jameson ~~degree~~was ~~from~~awarded ~~Washington~~"Judge ~~University~~of atthe ~~St.~~Year" ~~Louis~~nine ~~and~~times over the course of his ~~Master's~~career inby ~~Health~~organizations ~~Care~~such ~~Administration~~as: ~~from~~the Orange County Bar Association Business Litigation section, Orange County Trial Lawyers, the ~~University~~American Board of ~~Colorado~~Trial atAdvocates ~~Denver~~and the Consumer Attorneys of California.

~~CORPORATE~~AJAY ~~GOVERNANCE~~G. MEKA, M.D has served as a member of the Board of Directors of the Company since September 28, 2006. Dr. Meka brings to our Board extensive experience in the healthcare industry. Dr. Meka has been a licensed physician in California for the past 29 years. He is a board certified physician practicing in Orange County, California. Dr. Meka received his medical degree from Guntur Medical College in Gunter, India. He performed his postgraduate training at Brooklyn Jewish Hospital and Coney Island Hospital, both in Brooklyn, New York.

~~Director~~MICHAEL ~~Independence~~METZLER has been a member of the Board of Directors of the Company since September 5, 2007 and is Chairman of the Nominations and Governance Committee and sits on the Audit Committee and Special Committee. Mr. Metzler brings to our Board extensive leadership, organizational, and management skills. He is CEO of Trimoda Corporate Governance, aka Metzler and Associates, a consulting firm specializing in corporate governance and organization development. He also is the Chairman of the Board of The Values Institute, a nonprofit organization that specializes in the area of values-driven corporate culture. He served as President and Chief Executive ~~Sessions~~Officer of the Santa Ana Chamber of Commerce for 27 years from 1983 – 2010. Mr. Metzler has served on numerous community boards, city, county, regional, state and national committees and task forces. He was a founder of the Santa Ana Business Bank. Mr. Metzler received a Ford Foundation Fellowship in Regionalism and Sustainable Development in 2008. He is a graduate of California State University, Fullerton and attended Loyola University School of Law and the Peter F. Drucker Graduate School of Management at Claremont University.

The Board of Directors has determined that Directors DeWald, Jameson, Meka, Metzler, Niebla, and Thomas each satisfy the definition of "independent director" as established in the NASDAQ listing standards. The independent directors regularly meet in executive sessions without the CEO or other members of management present to review the performance of management and other relevant matters.36

J. FERNANDO NIEBLA has served as a member of the Board’s ~~Leadership~~of ~~Structure~~Directors of the Company since August 1, 2005. Mr. Niebla is the Chairman of the Compensation Committee and sits on the Audit Committee, Finance Committee, and Special Committee. Mr. Niebla brings to our Board extensive experience in executive leadership and board membership experience with large publicly traded companies. He has served as Managing Partner of International Technology Partners, an information technology and business consulting services company based on Orange County, California since August 1998. He was also a founder of Infotec Development Inc. and Infotec Commercial Systems, two national information technology firms. He currently serves on the Board of Trustees of the Orange County Health Foundation, and is a member of the California Advisory Committee to Nacional Financiera, a Mexican Government agency similar to the U.S. Government Small Business Administration office. Until May 2012, Mr. Niebla served on the Boards of Directors of Union Bank of California, Pacific Life Corp., Life Modeler, Inc., and Granite Construction Corp. Mr. Niebla holds a B.S. degree in Electrical Engineering from the University of Arizona and an M.S. QBA from the University of Southern California.

~~The~~WILLIAM E. THOMAS has served as a member of the Board’s ~~current~~of ~~leadership~~Directors ~~structure~~of isthe ~~characterized~~Company bysince anSeptember ~~active~~5, 2007. Mr. Thomas brings to our Board extensive experience in the legal profession and ~~independent~~healthcare ~~Chairman~~industry. Mr. ~~(who~~Thomas is ~~not~~ the ~~same~~Executive ~~person~~Vice asPresident ~~our~~and ~~CEO)~~General Counsel of Strategic Global Management, ~~robust~~Inc., ~~Committee~~a ~~structure~~healthcare ~~with~~ventures ~~oversight~~firm ofin ~~various~~Riverside, ~~types~~California. He has served in such capacity since October of ~~risks~~1998. Prior to that Mr. Thomas was a founding and anmanaging ~~engaged~~partner of a law firm in Riverside, California specializing in business, real estate, and ~~majority-independent~~other ~~Board~~transactional matters. ~~The~~He ~~Board~~is ~~believes~~a ~~that~~member ~~its~~of ~~current~~the ~~leadership~~board ~~structure~~of ~~provides~~directors ~~strong~~of Provident Financial Holdings, Inc. Mr. Thomas graduated from the University of California at Santa Barbara with a Bachelor of Arts degree in History and ~~independent~~Political Science. ~~board~~He ~~leadership~~holds ~~while~~a ~~deriving~~Juris Doctor degree from the ~~benefit~~University of ~~having~~California, ~~our~~Hastings ~~CEO~~College ~~serve~~of asthe Law, and a Master of Laws degree from New York University. He is a member of ~~our~~the ~~Board~~California Bar Association.

~~Risk~~KENNETH ~~Oversight~~K. WESTBROOK has served as President and Chief Executive Officer of the Company and as a director of the Company since December 2, 2008. Mr. Westbrook brings to our Board extensive experience as a healthcare executive with unique operational and management skills. Mr. Westbrook was Senior Vice President for Operations for OrNda HealthCorp (1996) and Senior Vice President of Operations for Tenet (1997 through 2004). Mr. Westbrook sold the four hospitals that created the Company as he left Tenet. During the years at OrNda and Tenet, Mr. Westbrook also had the experience of acting as each of the four hospitals' interim CEO when vacancies occurred. Prior to OrNda, Mr. Westbrook was the Chief Operating Officer for Hospital Corporation of America's Pacific Division and was previously a hospital CEO at several Southern California hospitals. He has graduate and undergraduate degrees in business from the University of Redlands and is currently a member of several healthcare professional associations. Mr. Westbrook is currently serving a two year term as a member of the Board of Trustees of the California Association of Hospitals and Healthcare Systems.

~~Our~~STEVEN ~~Board~~R. ~~oversees~~BLAKE an– FHFMA, ~~enterprise-wide~~CPA ~~approach~~has toserved ~~risk~~as ~~management,~~Chief ~~designed~~Financial toOfficer ~~support~~of the ~~achievement~~Company ofsince ~~our~~July ~~strategic and organizational objectives~~1, to2005 ~~improve~~and ~~long-term~~Executive ~~organizational~~Vice ~~performance~~President, ~~and~~Finance ~~enhance~~since March ~~shareholder~~21, ~~value~~2008. AHe ~~fundamental~~is ~~part~~a ofCalifornia ~~risk~~licensed ~~oversight~~Certified isPublic toAccountant. ~~understand~~Mr. ~~the~~Blake ~~risks~~has ~~our~~over ~~Company~~36 ~~faces,~~years ~~the~~of ~~steps~~experience ~~management~~in ismulti-hospital financial ~~taking~~management, toas ~~manage~~well ~~those~~as ~~risks~~attestation services and tofinancial ~~assess~~consulting ~~management’s appetite~~ for ~~risk~~hospitals. ItHe isalso ~~management’s~~has ~~responsibility~~extensive toexperience serving ~~manage~~in ~~risk~~financial ~~and~~roles ~~bring~~with topublic ~~the~~companies. ~~Board’s~~Most ~~attention~~recently, ~~material~~he ~~risks~~served ~~facing~~as ~~our~~Regional ~~Company.~~Vice ~~Our~~President ~~Board~~of ~~receives~~Finance ~~regular~~for ~~reports~~Tenet, ~~from~~a ~~management~~position he onheld ~~matters~~for ~~relating~~over to17 ~~strategic~~years. ~~and~~In ~~operational~~this ~~initiatives~~position, ~~financial~~Mr. ~~performance~~Blake ~~and~~was ~~legal~~responsible ~~developments~~for ~~which~~the ~~are~~financial ~~each~~management ~~integrated~~of ~~with~~numerous ~~enterprise-risk~~Tenet ~~exposures.~~assets ~~The~~covering five ~~Compensation~~western ~~Committee~~states of(California, ~~our~~Arizona, ~~Board~~Washington, ~~also~~Nebraska ~~approves~~and ~~our~~Texas). ~~CEO’s~~Mr. ~~performance~~Blake ~~goals~~is ~~for~~a ~~each~~past ~~year.~~President Infor ~~doing so,~~ the ~~Committee~~Southern ~~has~~California Chapter anof ~~opportunity to ensure that~~ the ~~CEO’s~~Healthcare ~~goals~~Financial ~~include~~Management ~~responsibility~~Association; ~~for~~is ~~broad~~a ~~risk~~member ~~management. The involvement~~ of the ~~full~~Audit ~~Board~~Committee infor ~~setting~~the ~~our~~Hospital ~~strategic~~Association ~~plan~~of Southern isCalifornia and a ~~key~~former ~~part~~Trustee offor ~~its assessment of~~ the ~~risks~~California ~~inherent~~Hospital ~~in our corporate strategy~~Association.

37DANIEL J. BROTHMAN has served as Chief Operating Officer & Executive Vice President, Operations since May 6, 2008 and as Chief Executive Officer of Western Medical Center - Santa Ana since March 8, 2005. Mr. Brothman also served as Senior Vice President, Operations of the Company from March 8, 2005 to May 6, 2008. Mr. Brothman is an experienced single and multi-hospital operations executive. Since 1999, prior to the acquisition of the Hospitals by the Company he helped build the Western Medical Center in Santa Ana for Tenet. Mr. Brothman also ran HCA's Utah Division from 1996 to 1998. Mr. Brothman has in excess of 30 years experience in hospital administration. Mr. Brothman earned his Bachelor of Arts degree from Washington University at St. Louis and his Master's in Health Care Administration from the University of Colorado at Denver.

~~While~~CORPORATE the Board has the ultimate responsibility for overall risk oversight, each Committee of the Board also has responsibility for particular areas of risk oversight. For example, the Audit Committee focuses on financial risk and internal controls, and receives an annual risk assessment report from our internal auditors. In addition, the Compensation Committee evaluates and sets compensation programs that encourage decision making predicated upon a level of risk consistent with our business strategy. The Compensation Committee also reviews compensation and benefit plans affecting employees in addition to those applicable to executive officers.GOVERNANCE

~~Attendance~~Director atIndependence ~~Meetings~~and Executive Sessions

The Board of Directors has ~~are~~determined ~~elected~~that atDirectors ~~our~~DeWald, ~~annual~~Jameson, ~~meeting~~Meka, Metzler, Niebla, and Thomas each satisfy the definition of "independent director" ~~serves~~as ~~until~~established in the ~~following~~NASDAQ ~~annual~~listing ~~meeting~~standards. The ~~and~~independent ~~until~~directors ~~his~~regularly ~~successor~~meet isin ~~elected~~executive sessions without the CEO or other members of management present to review the performance of management and ~~qualified~~other relevant matters.

~~Although we do not have a formal policy regarding attendance by~~ Board’s ~~members~~Leadership ~~at our annual meeting of stockholders, directors are encouraged to attend our annual meetings. All of our current directors attended our last Annual Meeting of Stockholders.~~Structure

~~Our~~The Board’s ofcurrent leadership ~~Directors~~structure ~~held~~is ~~six~~characterized ~~meetings~~by ~~during~~an ~~fiscal~~active ~~2012.~~and ~~All~~independent ofChairman ~~the~~(who ~~directors~~is ~~attended~~not orthe ~~participated~~same inperson ~~75%~~as orour ~~more~~CEO), ofrobust ~~the~~Committee structure ~~aggregate~~with ~~number~~oversight of ~~meetings~~various types of ~~the~~risks and an engaged and majority-independent Board. The Board believes that its current leadership structure provides strong and ofindependent ~~meetings~~board ofleadership while deriving the ~~committees~~benefit of ~~the~~having ~~Board~~our CEO onserve ~~which~~as ~~such~~a ~~director~~member ~~served~~of our Board.

~~SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE~~37

~~Section~~Risk 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) reports they file.Oversight

~~Based~~Our ~~solely~~Board ~~upon~~oversees an enterprise-wide approach to risk management, designed to support the ~~copies~~achievement of ~~Section~~our ~~16(a)~~strategic ~~reports~~and ~~filed~~organizational byobjectives, to ~~such~~improve ~~persons~~long-term ororganizational ~~written~~performance ~~representations~~and ~~from~~enhance ~~them~~shareholder ~~regarding~~value. ~~their~~A ~~transactions~~fundamental inpart of risk oversight is to understand the risks our ~~common~~Company ~~stock~~faces, wethe ~~believe~~steps ~~that,~~management ~~during~~is taking to manage those risks and to assess management’s appetite for risk. It is management’s responsibility to manage risk and bring to the ~~year~~Board’s ~~ended~~attention ~~March~~material ~~31,~~risks ~~2012~~facing our Company. Our Board receives regular reports from management on matters relating to strategic and operational initiatives, ~~all~~financial performance ~~such~~and ~~forms~~legal developments which are each integrated with enterprise-risk exposures. The Compensation Committee of our Board also approves our CEO’s performance goals for each year. In doing so, ifthe ~~required~~Committee has an opportunity to beensure ~~filed,~~that the ~~were~~CEO’s ~~filed~~goals include responsibility for broad risk management. The involvement of the full Board in setting our strategic plan is a ~~timely~~key ~~fashion~~part of its assessment of the risks inherent in our corporate strategy.

~~CODE~~While OFthe ~~ETHICS~~Board has the ultimate responsibility for overall risk oversight, each Committee of the Board also has responsibility for particular areas of risk oversight. For example, the Audit Committee focuses on financial risk and internal controls, and receives an annual risk assessment report from our internal auditors. In addition, the Compensation Committee evaluates and sets compensation programs that encourage decision making predicated upon a level of risk consistent with our business strategy. The Compensation Committee also reviews compensation and benefit plans affecting employees in addition to those applicable to executive officers.

WeAttendance have adopted Standards of Conduct and Ethics that apply to our employees (including our principal executive officer, principal financial officer, principal accounting officer, and controller) and our directors. Our Standards of Conduct and Ethics can be accessed on our website at ~~http://www.ihhioc.com under the Investor Relations section.~~Meetings

~~STOCKHOLDER~~Directors ~~COMMUNICATIONS~~are elected at our annual meeting and each director serves until the following annual meeting and until his successor is elected and qualified.

InAlthough ~~order~~we todo ~~facilitate~~not have ~~communications~~a ~~with~~formal ~~the~~policy ~~Board~~regarding ofattendance ~~Directors,~~by orBoard ~~any individual~~ members orat ~~any~~our ~~committees~~annual ofmeeting ~~the Board~~ of ~~Directors~~stockholders, ~~stockholders~~directors ~~should~~are ~~direct~~encouraged ~~all communication in writing~~ to attend our ~~General~~annual ~~Counsel at Integrated Healthcare Holdings, Inc~~meetings., ~~1301~~All ~~North Tustin Avenue, Santa Ana, California 92705, who will forward all such correspondence to the Board~~ of ~~Directors,~~our ~~individual~~current ~~members~~directors ofattended ~~the~~our ~~Board~~last ofAnnual ~~Directors~~Meeting ~~or applicable chairpersons~~ of ~~any committee of the Board of Directors, as appropriate and as directed in the communication~~Stockholders.

~~BOARD~~Our ~~COMMITTEES~~Board of Directors held 13 meetings during fiscal 2013. Six of the seven directors attended or participated in 75% or more of the aggregate number of meetings of the Board and of meetings of the committees of the Board on which such director served. Dr. Meka attended less than 75% of the Board meetings during fiscal 2013.

~~Our~~SECTION ~~board~~16(a) ofBENEFICIAL ~~directors~~OWNERSHIP ~~has~~REPORTING ~~established an Audit Committee, Compensation Committee, and Nominations and Governance Committee.~~ COMPLIANCE

~~Audit~~Section ~~Committee~~16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) reports they file.

~~The~~Based ~~Audit~~solely ~~Committee~~upon of the copies ~~Board~~ of ~~Directors~~Section ~~was~~16(a) ~~formed~~reports infiled ~~August~~by ~~2005~~such ~~and~~persons ~~consists~~or ofwritten ~~three~~representations offrom ~~our~~them ~~independent~~regarding ~~directors,~~their ~~Maurice~~transactions ~~DeWald and J. Fernando Niebla, who joined the Board of Directors~~ in ~~August~~our common ~~2005~~stock, ~~and~~we ~~Michael~~believe ~~Metzler~~that, who joined the Board of Directors in September 2007. The Board of Directors has determined that Maurice DeWald is an "audit committee financial expert" as defined in the rules and regulations of the SEC. The Audit Committee of the Board of Directors preapproves all audit and permissible non-audit services to be performed by the independent registered public accounting firm. The Audit Committee will also advise management on the engagement of experts with sufficient expertise to advise on accounting and financial reporting of complex financial transactions. Of the five audit committee meetings held during the year ended March 31, ~~2012~~2013, ~~Messrs.~~all ~~DeWald,~~such ~~Niebla~~forms, ~~and~~if ~~Metzler~~required ~~attended~~to ~~all~~be ~~meetings.~~filed, ~~The~~were ~~Board~~filed ofin ~~Directors~~a ~~has adopted and approved an Audit Committee Charter for the Audit Committee~~timely fashion. ~~A current copy of this charter is posted on our website at http://www.ihhioc.com under the Investor Relations section.~~

38CODE OF ETHICS

~~Management~~We ishave ~~responsible~~adopted ~~for~~Standards of ~~the~~Conduct ~~Company's internal controls~~ and ~~financial~~Ethics ~~reporting~~that ~~process.~~apply ~~The~~to ~~independent~~our ~~registered~~employees ~~public~~(including ~~accounting~~our ~~firm~~principal isexecutive ~~responsible~~officer, ~~for~~principal ~~performing~~financial anofficer, ~~independent~~principal accounting ~~audit~~officer, ofand ~~the~~controller) ~~Company's~~and ~~consolidated~~our ~~financial~~directors. ~~statements~~Our inStandards ~~accordance with the standards~~ of ~~the~~Conduct ~~Public Company Accounting Oversight Board (United States)~~ and toEthics ~~issue~~can abe ~~report~~accessed on ~~the~~our ~~consolidated~~website ~~financial~~at ~~statements~~www.ihhioc.com under ~~The~~the ~~Audit~~Investor ~~Committee's~~Relations ~~responsibility is to oversee these activities~~section.

InSTOCKHOLDER this context, the Audit Committee has met and held discussions with management and the independent registered public accounting firm. Management represented to the Audit Committee that the Company's consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States and the Audit Committee has reviewed and discussed the consolidated financial statements with management and the independent registered public accounting firm. The Audit Committee also discussed with the independent registered public accounting firm matters required to be discussed by Statement on Auditing Standards No. 114, "Communication with Audit Committees," as modified or supplemented, including the auditor's judgment about the quality, as well as the acceptability, of our accounting principles as applied in the financial reporting.COMMUNICATIONS

~~Our~~In ~~independent~~order ~~registered~~to ~~public~~facilitate communications ~~accounting~~with ~~firm~~the ~~also~~Board ~~provided~~of toDirectors, ~~the~~or ~~Audit~~any ~~Committee~~individual ~~the~~members ~~written~~or ~~disclosures~~any ~~required~~committees byof ~~Rule~~the ~~3520~~Board of ~~the~~Directors, ~~Public~~stockholders should ~~Company~~direct ~~Accounting~~all ~~Oversight~~communication ~~Board~~in ~~(Independence~~writing ~~Discussions~~to ~~with~~our ~~Audit~~General ~~Committees)~~Counsel at Integrated Healthcare Holdings, ~~and~~Inc., 1301 North Tustin Avenue, Santa Ana, California 92705, who will forward all such correspondence to the ~~Audit~~Board ~~Committee~~of ~~discussed~~Directors, ~~with~~individual members of the ~~independent~~Board of ~~registered~~Directors ~~public~~or ~~accounting~~applicable ~~firm~~chairpersons ~~that~~of ~~firm's~~any ~~independence~~committee of the Board of Directors, as ~~well~~appropriate and as ~~internal~~directed ~~quality~~in ~~control~~the ~~procedures~~communication.

~~Based~~BOARD on the Audit Committee's discussions with management and the independent registered public accounting firm and the Audit Committee's review of the representations of management and the report of the independent registered public accounting firm to the Audit Committee, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited consolidated financial statements be included in the Company's Annual Report on Form 10-K for the year ended March 31, 2012 for filing with the SEC. This report was submitted by Mr. DeWald, Chair, and Messrs. Metzler and Niebla.COMMITTEES

Our board of directors has established an Audit Committee, Compensation Committee, and Nominations and Governance Committee.

The Compensation Committee of the Board of Directors was formed in October 2005 and consists of three directors, Mr. Maurice DeWald, Mr. J. Fernando Niebla, chair, and Mr. William E. Thomas. In our fiscal year ended March 31, 2012, the Compensation Committee held three meetings. The Compensation Committee is responsible for overseeing the administration of the Company's executive compensation programs, establishing and interpreting the Company's compensation policies and approving all compensation paid to executive officers, including the named executive officers listed in the Summary Compensation Table. The Board of Directors has adopted and approved a Compensation Committee Charter for the Compensation Committee. 38

~~Nominations~~Audit ~~and Governance~~ Committee

The ~~Nominations~~Audit ~~and Governance~~ Committee of the Board of Directors ~~(the~~was ~~“Nominations~~formed ~~Committee”)~~in August 2005 and consists of three of our independent directors, ~~Mr.~~ Maurice DeWald, Mrand J. ~~Michael Metzler~~Fernando Niebla, ~~chair,~~who ~~and~~joined ~~Judge~~the ~~Jameson. In~~Board ~~our~~of ~~fiscal~~Directors ~~year~~in ~~ended~~August ~~March 31~~2005, ~~2012~~and Michael Metzler, who joined the ~~Nominations~~Board ~~Committee~~of ~~held~~Directors ~~three~~in ~~meetings.~~September 2007. The ~~general~~Board ~~purpose~~of ~~and~~Directors ~~authority~~has ofdetermined ~~the~~that ~~Nominations~~Maurice ~~Committee~~ DeWald is ~~(1)~~an to"audit ~~select,~~committee orfinancial ~~recommend~~expert" ~~for~~as defined in the rules ~~Board~~and regulations of ~~Directors’~~the ~~selection,~~SEC. ~~the~~The ~~individuals~~Audit toCommittee ~~stand~~of ~~for~~the ~~election~~Board asof ~~directors~~Directors atpreapproves ~~the~~all ~~annual~~audit ~~meeting~~and ofpermissible ~~shareholders~~non-audit services ~~or,~~to ifbe ~~applicable,~~performed aby ~~special~~the ~~meeting~~independent ofregistered ~~shareholders,~~public ~~(2)~~accounting tofirm. ~~receive~~The ~~communications~~Audit ~~from~~Committee ~~shareholders~~will ~~directed~~also toadvise management on the ~~Board~~engagement of ~~Directors,~~experts ~~including~~with ~~shareholder~~sufficient ~~proposals~~expertise ~~regarding~~to ~~director~~advise ~~nominations~~on toaccounting ~~the~~and ~~Board~~financial reporting of ~~Directors,~~complex ~~(3)~~financial totransactions. Of ~~oversee~~ the ~~selection~~four ~~and~~audit ~~composition~~committee ofmeetings ~~Committees~~held ofduring the ~~Board~~year ofended ~~Directors~~March ~~and~~31, ~~as applicable~~2013, ~~oversee~~Messrs. ~~management~~DeWald ~~continuity~~and ~~planning~~Niebla ~~processes,~~attended all meetings and ~~(4)~~Mr. toMetzler ~~oversee~~attended ~~and~~three ~~maintain~~meetings. ~~the~~The ~~corporate~~Board ~~governance~~of ~~principles~~Directors ~~that~~has ~~apply~~adopted toand ~~the~~approved ~~Company,~~an Audit Committee Charter for the ~~Board~~Audit Committee. A current copy of ~~Directors~~this ~~and~~charter ~~Committees~~is ofposted on our website at www.ihhioc.com under the ~~Board~~Investor Relations section.

~~When~~Management ~~considering~~is ~~a potential candidate~~ responsible for ~~membership~~the onCompany's ~~our~~internal ~~Board~~controls ~~of Directors, our Nominations Committee considers relevant business~~ and ~~industry~~financial ~~experience~~reporting ~~and demonstrated character and judgment~~process. The ~~Nominations~~independent ~~Committee~~registered ~~considers~~public ~~diversity~~accounting infirm ~~identifying~~is ~~candidates~~responsible for byperforming ~~generally~~an ~~seeking~~independent toaudit ~~achieve a diversity~~ of ~~occupational and personal backgrounds on~~ the ~~Board.~~Company's ~~However~~consolidated ~~the~~financial ~~Nominations~~statements ~~Committee has no formal policy regarding diversity. The Nominations Committee will consider stockholder nominations for directors submitted~~ in accordance with the ~~procedures~~standards ~~and~~of the Public ~~deadlines~~Company ~~set~~Accounting ~~forth~~Oversight inBoard ~~our~~(United ~~Bylaws. Such~~States) ~~recommendations~~(“PCAOB”) ~~should~~and ~~be addressed~~ to ~~Michael~~issue ~~Metzler,~~a ~~Chairman~~report ofon the ~~Nominations~~consolidated ~~and Governance Committee, at the Company’s headquarters at 1301 North Tustin Avenue, Santa Ana, California 92705~~financial statements. ~~There~~ ~~are~~The noAudit ~~differences in the manner in which the Nominations~~ Committee's ~~evaluates~~responsibility ~~a candidate that~~ is ~~recommended~~to ~~for~~oversee ~~nomination~~these ~~for membership on our Board of Directors or by a stockholder~~activities.

39In this context, the Audit Committee has met and held discussions with management and the independent registered public accounting firm. Management represented to the Audit Committee that the Company's consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and the Audit Committee has reviewed and discussed the consolidated financial statements with management and the independent registered public accounting firm. The Audit Committee also discussed with the independent registered public accounting firm matters required to be discussed by Statement on Auditing Standards No. 61, "Communications with Audit Committees," as amended and adopted by the PCAOB in Rule 3200T, including the auditor's judgment about the quality, as well as the acceptability, of our accounting principles as applied in the financial reporting.

~~ITEM~~Our ~~11.~~independent ~~EXECUTIVE~~registered ~~COMPENSATION~~public accounting firm also provided to the Audit Committee the written disclosures required by Rule 3526 of the PCAOB (Communication with Audit Committees Concerning Independence), and the Audit Committee discussed with the independent registered public accounting firm that firm's independence as well as internal quality control procedures.

~~The~~Based ~~following~~on ~~table~~the ~~sets~~Audit Committee's ~~forth~~discussions ~~summary~~with ~~information~~management ~~regarding~~and ~~compensation~~the toindependent ~~(i)~~registered ~~our~~public ~~Chief~~accounting ~~Executive~~firm ~~Officer;~~ and ~~(ii)~~the ~~our~~Audit ~~two~~Committee's ~~other~~review of ~~most~~the ~~highly~~representations ~~compensated~~of ~~executive~~management ~~officers~~and ~~employed~~the byreport usof asthe ofindependent ~~March~~registered ~~31,~~public ~~2012~~accounting ~~whose~~firm ~~salary~~to ~~and~~the ~~bonus~~Audit ~~for~~Committee, the Audit Committee recommended to the ~~fiscal~~Board ~~year~~of ~~ended~~Directors, ~~March~~and 31the Board has approved, ~~2012~~that ~~was~~the audited consolidated financial statements be included in ~~excess~~the ofCompany's ~~$100,000~~Annual Report on Form 10-K for ~~their~~the ~~services~~year ~~rendered~~ended inMarch ~~all~~31, ~~capacities~~2013 tofor usfiling with the SEC. ~~The~~This report ~~listed~~was ~~individuals~~submitted ~~are~~by ~~referred~~Mr. toDeWald, asChair, ~~the~~and ~~"Named~~Messrs. ~~Executive~~Metzler ~~Officers~~and Niebla."

~~SUMMARY~~Compensation ~~COMPENSATION TABLE~~Committee

Name and Principal Position	Year	Salary (1) ($)		Bonus ($)		Option awards ($)		All other compensation ($)		Total ($)
Kenneth K. Westbrook	2012		575,532		-		-		20,509		596,041
Principal Executive Officer (2)	2011		556,742		204,500		-		26,953		788,195
Steven R. Blake	2012		444,550		-		-		16,706		461,256
Principal Financial Officer & Executive Vice President, Finance (3)	2011		423,404		185,722		-		22,267		631,393
Daniel J. Brothman	2012		444,550		-		-		16,108		460,658
Chief Operating Officer (4)	2011		423,404		181,875		-		21,497		626,776

The Compensation Committee of the Board of Directors was formed in October 2005 and consists of three directors, Mr. Maurice DeWald, Mr. J. Fernando Niebla, chair, and Mr. William E. Thomas. In our fiscal year ended March 31, 2013, the Compensation Committee held six meetings. The Compensation Committee is responsible for overseeing the administration of the Company's executive compensation programs, establishing and interpreting the Company's compensation policies and approving all compensation paid to executive officers, including the named executive officers listed in the Summary Compensation Table. The Board of Directors has adopted and approved a Compensation Committee Charter for the Compensation Committee.

~~_____________________~~Nominations and Governance Committee

The Nominations and Governance Committee of the Board of Directors (the “Nominations Committee”) consists of three directors, Mr. Maurice DeWald, Mr. Michael Metzler, chair, and Judge C. Robert Jameson. In our fiscal year ended March 31, 2013, the Nominations Committee held five meetings. The general purpose and authority of the Nominations Committee is (1) ~~Salary~~to ~~amounts~~select, or recommend for ~~2012~~the ~~include~~Board 27of ~~pay~~Directors’ ~~periods~~selection, ~~compared~~the individuals to 26stand ~~pay~~for ~~periods~~election inas ~~2011~~directors at the annual meeting of shareholders or, if applicable, a special meeting of shareholders, (2) to receive communications from shareholders directed to the Board of Directors, including shareholder proposals regarding director nominations to the Board of Directors, (3) to oversee the selection and composition of Committees of the Board of Directors and, as applicable, oversee management continuity planning processes, and (4) to oversee and maintain the corporate governance principles that apply to the Company, the Board of Directors and Committees of the Board.

~~(2)~~When ~~All~~considering ~~other~~a potential ~~compensation~~candidate for ~~2012~~membership on our Board of Directors, our Nominations Committee considers relevant business and ~~2011~~industry experience ~~includes~~and ~~auto~~demonstrated ~~allowance~~character and judgment. The Nominations Committee considers diversity in identifying candidates by generally seeking to achieve a diversity of ~~$18,000~~occupational and personal backgrounds on the ~~balance~~Board. isHowever ~~Company~~the ~~contribution~~Nominations Committee has no formal policy regarding diversity. The Nominations Committee will consider stockholder nominations for directors submitted in accordance with the procedures and the deadlines set forth in our Bylaws. Such recommendations should be addressed to Michael Metzler, Chairman of the ~~401(k)~~Nominations ~~plan~~and Governance Committee, at the Company’s headquarters at 1301 North Tustin Avenue, Santa Ana, California 92705. There are no differences in the manner in which the Nominations Committee evaluates a candidate that is recommended for nomination by our Board of Directors or by a stockholder.

~~(3) All other compensation for 2012 and 2011 consists of an auto allowance of $12,000 and the balance is Company contribution to the 401(k) plan.~~39

~~(4)~~ITEM ~~All~~11. ~~other~~EXECUTIVE ~~compensation for 2012 and 2011 includes auto allowance of $12,000 and the balance is Company contribution to the 401(k) plan.~~COMPENSATION

The following table sets forth summary information regarding ~~stock~~compensation ~~options~~to ~~the~~(i) ~~Company~~our ~~has~~Chief ~~granted~~Executive toOfficer; ~~the~~and ~~Named~~(ii) ~~Executive~~our ~~Officers~~two other most highly compensated executive officers employed by us as of March 31, ~~2012~~2013 ~~under~~whose salary and bonus for the ~~Company's~~fiscal ~~2006~~year ~~Stock~~ended ~~Incentive~~March ~~Plan~~31, 2013 was in excess of $100,000 for their services rendered in all capacities to us. The listed individuals are referred to as the "Named Executive Officers."

~~OUTSTANDING~~SUMMARY ~~STOCK~~COMPENSATION ~~OPTIONS AWARDS AT FISCAL YEAR-END~~TABLE

Name	Grant date	Number of securities underlying unexercised options exercisable	Number of securities underlying unexercised options unexercisable	Equity incentive plan awards: Number of securities underlying unexercised unearned options	Option exercise price ($)	Option expiration date	Grant date fair value per share ($)
Name and Principal Position		Year		Salary (1) ($)				Bonus ($)		Option awards ($)		All other compensation ($)		Total ($)
Kenneth K. Westbrook (1)	December 2, 2008	2,000,000	-	-	0.01	December 2, 2015	0.00
Kenneth K. Westbrook		2013			554,216				-		-		21,197		575,413
Steven R. Blake (2)	August 6, 2007	300,000	-	-	0.26	August 6, 2014	0.03
Principal Executive Officer (2)		2012			575,532				-		-		20,509		596,041
Daniel J. Brothman (3)	August 6, 2007	1,000,000	-	-	0.26	August 6, 2014	0.02
Steven R. Blake		2013			428,085				-		-		16,445		444,530
Principal Financial Officer & Executive Vice President, Finance (3)		2012			444,550				-		-		16,706		461,256
Daniel J. Brothman		2013			428,085				-		-		16,445		444,530
Chief Operating Officer (3)		2012			444,550				-		-		16,108		460,658

___________________

(1)	Salary amounts for 2013 include 26 pay periods compared to 27 pay periods in 2012.
(2)	All other compensation for 2013 and 2012 includes auto allowance of $18,000 and the balance is Company contribution to the 401(k) plan.
(3)	All other compensation for 2013 and 2012 consists of an auto allowance of $12,000 and the balance is Company contribution to the 401(k) plan.

(1)	1/3 of the shares vested on the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company beginning on March 31, 2009, all options were fully vested as of March 31, 2012.
(2)	1/3 of the shares vested on the twelve month anniversary of the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company following such twelve month anniversary, all options were fully vested as of March 31, 2012.
(3)	Vesting retroactively commenced on March 8, 2005, all options were fully vested as of March 31, 2012.

The following table sets forth summary information regarding stock options the Company has granted to the Named Executive Officers as of March 31, 2013 under the Company's 2006 Stock Incentive Plan.

40OUTSTANDING STOCK OPTIONS AWARDS AT FISCAL YEAR-END

EMPLOYMENT AGREEMENTS

Name	Grant date	Number of securities underlying unexercised options exercisable	Number of securities underlying unexercised options unexercisable	Equity incentive plan awards: Number of securities underlying unexercised unearned options	Option exercise price ($)	Option expiration date	Grant date fair value per share ($)

Kenneth K. Westbrook (1)	December 2, 2008	2,000,000	-	-	0.01	December 2, 2015	0.00
Steven R. Blake (2)	August 6, 2007	300,000	-	-	0.26	August 6, 2014	0.03
Daniel J. Brothman (3)	August 6, 2007	1,000,000	-	-	0.26	August 6, 2014	0.02

~~The Company has employment agreements with each of the Named Executive Officers. The Employment Agreements provide for the following material terms:~~___________________

● Each individual's employment is for a fixed term of employment of three years, commencing April 1, 2010, with automatic renewals for successive one year periods. The Company or the Named Executive may only terminate the employment relationship during the final 120 days of the initial three-year period or one-year renewal periods, except for a termination by either party "for cause" (as defined in the employment agreements). ● The base salary of Mr. Westbrook is set at $550,000 per annum, and the base salaries of each of Messrs. Blake and Brothman are set at $422,000 per annum. ● The agreements provide for the establishment of annual performance targets for each individual by the Compensation Committee and the Executive within 60 days after the end of each fiscal year. Each Executive's annual bonus will be determined based on his achievement in reaching his individual performance targets. ● The employment agreements provided for payment of a severance package to each Executive upon a termination by the Executive "for cause" or termination by the Company "without cause." The severance period is 24 months (36 months during the first year of effectiveness of the employment agreements). The employment agreements also provide for payment of severance in the event of (i) a termination of employment following a change of control of the Company or (ii) a non-renewal of the Executive's employment by the Company at the end of the fixed 3-year or 1-year employment term. In the case of Messrs. Westbrook and Brothman, the right to receive severance terminates if the individual accepts employment with a competing hospital in a specified geographic area during the severance period.

(1)	1/3 of the shares vested on the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company beginning on March 31, 2009, all options were fully vested as of March 31, 2013.
(2)	1/3 of the shares vested on the twelve month anniversary of the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company following such twelve month anniversary, all options were fully vested as of March 31, 2013.
(3)	Vesting retroactively commenced on March 8, 2005, all options were fully vested as of March 31, 2013.

~~POTENTIAL~~EMPLOYMENT ~~PAYMENTS UPON TERMINATION~~AGREEMENTS

~~Each~~The ~~of the~~ Company's ~~Named~~has ~~Executive Officers have~~ employment agreements ~~which~~with ~~provide,~~each ~~generally, for payments in the event~~ of ~~resignation for cause. Cause includes, among other items, changes in job duties, reporting relationships, bankruptcy of~~ the ~~Company or change in shareholders of over 50% of the stock. As of April 1, 2012, unless otherwise noted, each~~ Named Executive ~~Officer~~Officers. The ~~would~~Employment beAgreements ~~entitled~~provide tofor upthe tofollowing 24material ~~months’ salary, benefits and health insurance, but not any additional accruals of paid time off, vacation or sick pay.~~terms:

The following table provides information concerning the estimated payments and benefits that would be provided in the circumstances described above for each of the Named Executive Officers. Payments and benefits are estimated assuming that the triggering event took place on April 1, 2012. There can be no assurance that a triggering event would produce the same or similar results as those estimated below if such event occurs on any other date or if any other assumption used to estimate potential payments and benefits is not correct. The amounts which would be due the Named Executive Officers as of April 1, 2012, if they resigned for cause is as follows.40

~~PAYMENTS~~● ~~DUE~~Each ~~UPON~~individual's ~~TERMINATION~~employment is for a fixed term of employment of three years, commencing April 1, 2010, with automatic renewals for successive one year periods. The Company or the Named Executive may only terminate the employment relationship during the final 120 days of the initial three-year period or one-year renewal periods, except for a termination by either party "for cause" (as defined in the employment agreements). ● The base salary of Mr. Westbrook is set at $550,000 per annum, and the base salaries of each of Messrs. Blake and Brothman are set at $422,000 per annum. ● The agreements provide for the establishment of annual performance targets for each individual by the Compensation Committee and the Executive within 60 days after the end of each fiscal year. Each Executive's annual bonus will be determined based on his achievement in reaching his individual performance targets. ● The employment agreements provided for payment of a severance package to each Executive upon a termination by the Executive "for cause" or termination by the Company "without cause." The severance period is 24 months (36 months during the first year of effectiveness of the employment agreements). The employment agreements also provide for payment of severance in the event of (i) a termination of employment following a change of control of the Company or (ii) a non-renewal of the Executive's employment by the Company at the end of the fixed 3-year or 1-year employment term. In the case of Messrs. Westbrook and Brothman, the right to receive severance terminates if the individual accepts employment with a competing hospital in a specified geographic area during the severance period.

Name and principal position	Salary		Employee health insurance		Car allowance		Other benefits		Total
Kenneth K. Westbrook Chief Executive Officer (1)	$	1,100,000	$	11,279	$	36,000		-	$	1,147,279
Steven R. Blake Chief Financial Officer & Executive Vice President, Finance (1)	$	844,000	$	14,385	$	24,000		-	$	882,385
Daniel J. Brothman Senior Vice President, Operations (1)	$	844,000	$	11,565	$	24,000		-	$	879,565

POTENTIAL PAYMENTS UPON TERMINATION

~~_______________________~~Each of the Company's Named Executive Officers have employment agreements which provide, generally, for payments in the event of resignation for cause. Cause includes, among other items, changes in job duties, reporting relationships, bankruptcy of the Company or change in shareholders of over 50% of the stock. As of March 31, 2013, unless otherwise noted, each Named Executive Officer would be entitled to up to 24 months’ salary, benefits and health insurance, but not any additional accruals of paid time off, vacation or sick pay.

~~(1)~~The ~~Represents~~following table provides information concerning the estimated payments and benefits that would be provided in the circumstances described above for 24each ~~months~~of ~~per~~the ~~employment~~Named ~~agreement~~Executive Officers. Payments and benefits are estimated assuming that the triggering event took place on March 31, 2013. There can be no assurance that a triggering event would produce the same or similar results as those estimated below if such event occurs on any other date or if any other assumption used to estimate potential payments and benefits is not correct. The amounts which would be due the Named Executive Officers as of ~~April~~March 131, ~~2012~~2013, if they resigned for cause is as follows.

~~COMPENSATION~~PAYMENTS OFDUE ~~DIRECTORS~~UPON TERMINATION

The following table provides information concerning the compensation of our non-management directors during the fiscal year ended March 31, 2012.

Name and principal position	Salary (1)		Employee health insurance		Car allowance		Other benefits		Total

Kenneth K. Westbrook Chief Executive Officer	$	1,100,000	$	9,149	$	36,000		–	$	1,145,149

Steven R. Blake Chief Financial Officer & Executive Vice President, Finance	$	844,000	$	12,992	$	24,000		–	$	880,992

Daniel J. Brothman Senior Vice President, Operations	$	844,000	$	9,149	$	24,000		–	$	877,149

41(1) Represents payments for 24 months per employment agreement as of March 31, 2013.

~~DIRECTOR~~ COMPENSATION OF DIRECTORS

Name	Fees earned or paid in cash ($)	Stock options ($)	Total ($)
Maurice J. DeWald	82,750	-	82,750
Hon. C. Robert Jameson	57,000	-	57,000
Ajay G. Meka, M.D.	127,125	-	127,125
Michael Metzler	75,000	-	75,000
J. Fernando Niebla	52,750	-	52,750
William E. Thomas	47,500	-	47,500

The following table provides information concerning the compensation of our non-management directors during the fiscal year ended March 31, 2013.

~~Our current compensation and reimbursement policy for Directors is as follows:~~41

1.DIRECTOR Cash: Each non-employee Director earns an annual fee of $30,000 and an attendance fee of $1,500 for each Board meeting attended, and a separate $1,000 fee for each committee meeting attended. The Chairman of the Board earns an additional annual retainer of $25,000. Committee chairmen earn an additional annual retainer of $5,000 or $10,000. The above fees were received in cash by the named Directors during the year ended March 31, 2012. For some directors, the fees listed may include fees which relate to service in a prior fiscal year but were paid in fiscal 2012.COMPENSATION

2. Stock: No options were granted to the Directors during the year ended March 31, 2012.

Name	Fees earned or paid in cash ($)		Stock options ($)		Total ($)

Maurice J. DeWald		30,000		–		30,000
Hon. C. Robert Jameson		30,000		–		30,000
Ajay G. Meka, M.D.		19,500		–		19,500
Michael Metzler		30,000		–		30,000
J. Fernando Niebla		30,000		–		30,000
William E. Thomas		30,000		–		30,000

3.Our ~~Travel~~current ~~Reimbursement: All travel~~ compensation and ~~related~~reimbursement ~~expenses~~policy ~~incurred~~for by Directors tois ~~attend~~as ~~Board meetings, committee meetings and other Company activities are reimbursed by the Company.~~follows:

~~Employee~~1. ~~directors~~Cash: ~~receive~~Each nonon-employee ~~compensation~~Director earns an annual fee of $40,000 and an attendance fee of $2,500 for each Board ~~service~~meeting attended, and ~~the~~a ~~Company~~separate ~~does~~$1,500 ~~not~~fee ~~provide~~for ~~any~~each ~~retirement~~committee ~~benefits~~meeting toattended. ~~non-employee~~The ~~directors~~Chairman of the Board earns an additional annual retainer of $25,000. ~~Director~~ ~~Westbrook~~Committee ischairmen ~~not~~earn ~~included~~an additional annual retainer of $10,000 or $20,000. The above asfees ~~all~~were ~~compensation~~received ~~paid~~in cash by the named Directors during the year ended March 31, 2013. For some directors, the fees listed may include fees which relate to ~~him~~service isin ~~included~~a prior fiscal year but were paid in fiscal 2013. 2. Stock: No options were granted to the ~~Summary~~Directors ~~Compensation~~during ~~Table~~the year ended March 31, 2013. 3. Travel Reimbursement: All travel and related expenses incurred by Directors to attend Board meetings, committee meetings and other Company activities are reimbursed by the Company.

~~ITEM~~Employee 12directors receive no compensation for Board service and the Company does not provide any retirement benefits to non-employee directors. ~~SECURITY~~Director Westbrook ~~OWNERSHIP~~is OFnot ~~CERTAIN~~included ~~BENEFICIAL~~above ~~OWNERS~~as ~~AND~~all ~~MANAGEMENT~~compensation ~~AND~~paid ~~RELATED~~to ~~STOCKHOLDER~~him ~~MATTERS~~is included in the Summary Compensation Table.

~~For~~ITEM a12. ~~discussion~~SECURITY ofOWNERSHIP ~~securities~~OF ~~authorized~~CERTAIN ~~for~~BENEFICIAL ~~issuance~~OWNERS ~~under~~AND ~~equity~~MANAGEMENT

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