As filed with the Securities and Exchange Commission on January 30, 2015

Registration No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

IASIS Healthcare Corporation

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

8062

(Primary Standard Industrial

Classification Code Number)

76-0450619

(I.R.S. Employer

Identification Number)

117 Seaboard Lane, Bldg. E

Franklin, TN 37067

(615) 844-2747

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

W. Carl Whitmer

IASIS Healthcare Corporation

Chief Executive Officer

117 Seaboard Lane, Bldg. E

Franklin, TN 37067

(615) 844-2747

(Name, address, including zip code, and telephone number, including area code, of agent for service)

With copies to:


Patrick O’Brien, Esq.	Chris Chi, Esq.	William V. Fogg, Esq.
Ropes & Gray LLP	IASIS Healthcare Corporation	Joseph D. Zavaglia, Esq.
Prudential Tower	Vice President & Associate General Counsel	Cravath, Swaine & Moore LLP
800 Boylston Street	117 Seaboard Lane, Bldg. E	Worldwide Plaza
Boston, MA 02199	Franklin, TN	825 Eighth Avenue
(617) 951-7000	(615) 844-2747	New York, NY 10019
		(212) 474-1000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer þ	Smaller reporting company ¨
	(Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE



Title of each class of securities to be registered	Proposed maximum aggregate offering price(1)(2)	Amount of registration fee
Common stock, par value $0.01 per share	$100,000,000	$11,620

(1)	Includes shares to be sold upon exercise of the underwriters’ option. See “Underwriting (Conflicts of Interest).”

(2)	Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to completion, dated January 30, 2015

Preliminary prospectus

shares

LOGO

IASIS Healthcare Corporation

Common stock

$ per share

This is the initial public offering of our common stock. We are selling shares of our common stock. We currently expect the initial public offering price to be between $ and $ per share of common stock.

After the completion of this offering, an investment vehicle affiliated with TPG Global, LLC will continue to own a majority of the voting power of our outstanding shares of common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange. See “Principal and Selling Stockholders.”

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “IAS.”


	Per share	Total
Initial public offering price	$	$
Underwriting discounts and commissions	$	$
Proceeds to us before expenses⁽¹⁾	$	$

(1)	We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting (conflicts of interest).”

The selling stockholders identified in this prospectus have granted the underwriters an option to purchase up to additional shares of common stock at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Investing in our common stock involves risk. See “Risk factors” beginning on page 21.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to investors on or about , 2015.


J.P. Morgan		BofA Merrill Lynch		Barclays


Evercore ISI	Goldman, Sachs & Co.	Citigroup

	BMO Capital Markets

Prospectus dated , 2015.

You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize be delivered to you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. We and the underwriters are not making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information in this prospectus is accurate only as of the date on the front cover, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, prospects, financial condition and results of operations may have changed since that date.

Table of contents



Prospectus summary			1

Risk factors			21

Forward-looking statements			58

Use of proceeds			60

Dividend policy			61

Capitalization			62

Dilution			63

Selected financial data			65

Management’s discussion and analysis of financial condition and results of operations			69

Business			98

Management			149

Executive compensation			157

Principal and selling stockholders			179

Certain relationships and related party transactions			181

Description of indebtedness			183

Description of capital stock			186

Shares eligible for future sale			189

Material united states federal income and estate tax consequences to Non-U.S. holders			191

Underwriting (conflicts of interest)			196

Legal matters			204

Experts			204

Where you can find more information			204

Index to consolidated financial statements			F-1

Trademarks and trade names

This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ^® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

Market, ranking and other industry data

The data included in this prospectus regarding markets and ranking, including the size of certain markets and our position within these markets, are based on reports of government agencies or industry sources, including the Centers for Medicare and Medicaid Services, the Department of Health and Human Services and the U.S. Bureau of Labor Statistics, or estimates based on our management’s knowledge and experience in the markets in which we operate. These estimates have been based on information obtained from our trade and business organizations and other contacts familiar with the markets in which we operate. We believe these estimates to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because of the method by which we or our sources obtained some of the data for the estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market, ranking and other similar industry data included in this prospectus, and estimates and beliefs based on that data, may not be reliable. We cannot guarantee the accuracy or completeness of any such information contained in this prospectus.

Prospectus summary

This summary highlights significant aspects of our business and this offering, but it is not complete and does not contain all of the information you should consider before making your investment decision. You should carefully read the entire prospectus, including the information presented under the section entitled “Risk factors” and the financial statements and related notes, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors, including those set forth in “Risk factors” and “Forward-looking statements.”

As used herein, unless otherwise stated or indicated by context, references to the “Company,” “IASIS,” “we,” “our” or “us” refer to IASIS Healthcare Corporation and its affiliates. Unless the context otherwise implies, the term “affiliates” means direct and indirect subsidiaries of IASIS Healthcare Corporation and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of IASIS and the term “employees” refers to employees of affiliates of IASIS.

Our company

We are a healthcare services company delivering high-quality, cost-effective healthcare through a broad and differentiated set of capabilities and assets that includes acute care hospitals with related patient access points, and a diversified and growing managed care risk platform (“risk platform”). Our business model is centered on deploying our acute care expertise and risk platform, either separately or on an integrated basis, in attractive markets to manage population health, integrate the delivery and payment of healthcare services and ultimately expand our total market opportunities within our existing and new geographic markets. Our company is comprised of our acute care operations, which include 15 acute care hospitals, one behavioral hospital and multiple other access points, including 132 physician clinics, multiple outpatient surgical units, imaging centers, and investments in urgent care centers and on-site employer-based clinics, and our diversified and growing risk platform, Health Choice and its affiliated entities (“Health Choice”). Our facilities served 1.1 million patients and had adjusted admissions growth of 1.9% in calendar year 2014, while our risk platform managed 336,700 covered lives as of January 1, 2015.

Our business strategy and geographic market focus are designed to capitalize on the transition towards value-based care, the expansion of integrated healthcare delivery models, growth in managed care in government-sponsored health insurance programs, the growing need for cost-effective healthcare delivery models and the consolidation of physician groups and health systems. We believe that the growth of value-based care programs is accelerating and providers will assume increasing financial risk for the quality of care they deliver. We also believe traditional fee-for-service (“FFS”) reimbursement will become less prominent over time as the regulatory and business environment incentivizes better patient outcomes and increased cost efficiency. For Medicare spending alone, the Department of Health and Human Services (the “Department”) has targeted 30% of all payments to be made through value-based care programs by 2016 and 50% of all payments by 2018. According to the Department, Medicare expenditures excluding Medicare Advantage and Part D totaled $362 billion in 2014. The nature of our presence in our existing markets, and how we have leveraged our delivery and risk platform in multiple markets, are reflective of our business strategy, as follows:

•

Choice presence includes approximately 6,200 managed Medicaid lives and an accountable care network, called Health Choice Preferred Utah, that includes approximately 18,500 attributed lives and aligns approximately 700 physicians as of January 1, 2015.

•

Arizona: Our risk platform, Health Choice, is headquartered in Phoenix, Arizona. Its managed Medicaid business continues to grow and expand and currently manages approximately 219,000 total Medicaid and dual Medicare and Medicaid eligible lives (“Duals”) state-wide. Health Choice, together with a joint venture partner, recently won a competitive bid to begin operating an integrated acute and behavioral health plan in Northern Arizona with an estimated 225,000 behavioral health lives expected to be covered in our 2016 fiscal year. We also expect to enroll more than 5,000 covered lives through the 2015 open enrollment process under our health insurance exchange (“Exchange”) plan in Arizona, which predominantly serves the Phoenix market.

We have leveraged our delivery assets in conjunction with Health Choice’s risk platform to develop an accountable care network with approximately 40,000 attributed lives and 1,000 aligned physicians as of January 1, 2015. Our delivery assets located in the cities of Phoenix and Mesa are core to our local accountable care network and include three acute care hospitals and a full-service, high-acuity behavioral hospital, a growing number of patient access points and an employed physician group.

•

Florida: Applying the capabilities of our Health Choice risk platform in a market in which we do not own healthcare delivery assets, we manage the healthcare benefits and utilization of 88,300 managed Medicaid plan members as of January 1, 2015 for a large national insurer through the care management and administrative services of our management services organization (“MSO”).

•

Texas: We have developed a diverse healthcare delivery presence through acute care hospitals in Odessa, San Antonio, Houston, Port Arthur and Texarkana, 49 physician clinic sites, multiple outpatient access points, employed physician groups and additional satellite campuses in Houston and Hope, Arkansas. Our strategic focus, throughout our Texas market, centers on integration of our hospitals and physician operations through developing a more extensive network of primary care physicians, the expansion of our physician alignment strategies and extending the reach of our outpatient business, including both surgical and imaging services.

•

Louisiana: Our expanding delivery network in the West Monroe area includes one acute care hospital, a related surgical hospital and a free-standing imaging center supported by employed physicians and a growing affiliated physician network designed to compete in a value-based environment.

•

Colorado: We provide high-quality care through a critical access hospital in the Pikes Peak area of Woodland Park, Colorado.

industry’s migration to cost efficiency and value-based reimbursement due to its breadth, ability to manage third-party, risk-based covered lives at scale, ability to deliver integrated care with owned and aligned hospitals and ambulatory assets, and ability to facilitate value-based physician alignment. Our Health Choice risk platform includes the following capabilities:

•

Extensive medical management experience: Our 25-year history of continuously managing capitated covered lives includes a large cohort of managed Medicaid lives in Arizona, a population with historically lower reimbursement rates that requires intensive care coordination and sensitivity to cultural and linguistic needs. We believe that Health Choice’s experience in managing Medicaid lives demonstrates its core competencies in care management, population health and global risk management. In recent years, through our Health Choice Preferred networks and MSO, we have applied our experience to new populations, including attributed lives in Medicare, Exchange and commercial health plans, which we believe has been effective in improving patient outcomes and cost efficiencies. We have deployed our risk platform in conjunction with our hospitals and physicians to enter into Bundled Payments for Care Improvement Initiative contracts with CMS. This value-based CMS initiative structures reimbursement on an episode-of-care basis and rewards providers for quality of outcomes and cost efficiency.

•

Geographic and product diversification: Our 336,700 covered lives across three states as of January 1, 2015 include 216,000 managed Medicaid lives, 9,400 Duals, 58,500 lives attributed to our networks from multiple payors whose care is managed by our network providers, 3,300 Exchange lives and 88,300 MSO lives. We recently won a competitive bid for an integrated and acute behavioral health contract that we expect to commence in fiscal 2016. Under this contract, we expect to manage the standalone behavioral health benefit for an estimated 225,000 plan members and acute and behavioral care on an integrated basis for approximately 6,000 members who are seriously mentally ill.

•

Management services organization: Through our MSO services, we manage 88,300 managed Medicaid plan members of a large national insurer in Florida. In this relationship, we leverage Health Choice’s administrative, medical risk and population health expertise in a manner that we believe is distinct among healthcare companies with significant acute care hospital operations.

•

Risk-based, physician-centric managed care model: Our Health Choice risk platform, which includes Health Choice Preferred, allows us to align with physicians, build provider networks, integrate care across the delivery system and engage in value-based contracting. Health Choice Preferred organizes and partners with physicians to manage population health, enabling them to participate in the transition from FFS towards value-based payments. Through Health Choice Preferred, we have aligned with approximately 1,700 physicians as of January 1, 2015 through accountable care networks that coordinate care for 58,500 attributed patient lives in two states, consisting of managed Medicaid, Medicare and commercial lives.

We leverage common management, systems infrastructure and processes across our business operations to produce scale efficiencies, increase the consistency of clinical outcomes, and respond to existing market dynamics and new market opportunities. We believe our growing risk platform enables us to: (1) enter new markets by utilizing our managed care and risk capabilities without expending capital in facility assets, such as our recent MSO expansion into the Florida market; (2) grow our physician networks and patient lives base through an organized response to the growth of value-based reimbursement; (3) increase our overall growth opportunity in risk-based contracting and government-sponsored programs; and (4) enter new markets on an integrated basis through investment in acute care facility assets and the deployment of our risk platform.

our business operations through the divestiture of non-core hospital operations and other related assets in Florida and Nevada and by raising capital for investment in our core markets. In our core markets, we seek to provide high-quality, cost-effective clinical care by expending capital on a disciplined basis to support and grow our delivery assets and using our risk platform where we believe it will enhance patient care. At the same time, we have also considered new market expansion that would be accretive to our core businesses. We have expanded our risk capabilities to cover new and emerging populations such as those covered by accountable care networks and Exchanges, broadened our facility portfolio to include a wider array of outpatient lines of business and access points, and created an MSO business to support new and existing market expansion. Our multi-pronged approach to the total healthcare services opportunity in a market is demonstrated in the following examples:

Coordinated expansion of risk platform and delivery assets

We have leveraged our existing delivery assets in conjunction with our risk platform to grow our market presence in Utah. We have developed an accountable care network that includes our four acute care hospital campuses in the Salt Lake City area and 700 aligned physicians that collectively manage 18,500 attributed lives. We have also extended our managed Medicaid capabilities to manage 6,200 lives through Health Choice Utah. To support our market growth and the expansion of our risk platform, we continue to invest in key service lines, including a planned new cancer center on our Jordan Valley campus, and expand our ambulatory network through investments in patient access points such as urgent care centers, on-site employer-based health clinics and a free-standing emergency department. We are also completing construction of a new inpatient and outpatient healthcare campus south of Salt Lake City in Lehi, Utah (one of the fastest growing areas in Utah) that includes a hospital with 40 inpatient beds and full-service outpatient capabilities and a medical office building. The new healthcare campus is designed to be expandable based on community need and is scheduled to open in the summer of 2015. By deploying the full breadth of our integrated healthcare services platform, we seek to create a collaborative, coordinated care delivery model among our healthcare delivery assets, aligned physicians and risk platform, to position us to achieve incremental growth for both our network providers and the payors who contract with them. Since the beginning of our 2012 fiscal year, our Utah acute care revenues on average have grown faster than our company-wide acute care revenues.

New market expansion with our MSO

Leveraging our experience in providing cost-effective health plan services, we launched an MSO that is capable of providing services nationally to health plans and providers. In 2014, we began providing services for a large national insurer’s managed Medicaid members in Florida and as of January 1, 2015, we are providing services for 88,300 lives, applying our risk capabilities in a market in which we do not own healthcare delivery assets. We were able to integrate our MSO with our client’s systems, open a local office, and begin operations within 90 days of signing an agreement with our client. The ability to enter a new market through the expansion of our risk platform accounted for 71% of the growth in our risk platform lives in calendar year 2014. We believe this capability provides a different way for us to expand into new geographies and creates new opportunities for us to provide our distinct medical management services.

Growing lines of business

Since Health Choice was established in 1990, we have consistently grown our core Arizona managed Medicaid plan membership while building a statewide provider network. We have leveraged this core

managed Medicaid experience to expand our risk platform in Arizona to cover approximately 40,000 attributed accountable care network lives, establish an Exchange plan, and form an integrated behavioral health joint venture that recently won a competitive bid for a three-year contract with two two-year state renewal options, under which we expect to manage the standalone behavioral health benefit for an estimated 225,000 plan members and acute and behavioral care on an integrated basis for approximately 6,000 members who are seriously mentally ill. We are also managing a growing number of complex care lives in Arizona through our Duals special needs plan, which grew from 6,500 lives to 9,400 lives in calendar year 2014.

Our multi-pronged approach has enabled us to accelerate our growth, as reflected in: (a) 10.9% annual revenue growth in fiscal 2014 as compared to fiscal 2013 and 16.4% quarter over quarter growth in revenue in the fourth quarter of fiscal 2014 as compared to the fourth quarter of fiscal 2013; (b) 13.4% annual growth in Adjusted EBITDAR for fiscal 2014 as compared to fiscal 2013 and 16.5% growth in Adjusted EBITDAR in the fourth quarter of fiscal 2014 as compared to the fourth quarter of fiscal 2013; (c) 0.8% growth in adjusted admissions for fiscal 2014 as compared to fiscal 2013 and 2.6% quarter over quarter growth in adjusted admissions in the fourth quarter of fiscal 2014 as compared to the fourth quarter of fiscal 2013; (d) 74% growth in Health Choice covered lives in fiscal 2014 as total covered lives managed on our risk platform grew from 188,000 to 327,600; and (e) new types of contracts with governmental and other third-party payors, such as the integrated acute care and behavioral health contract for which our joint venture in Northern Arizona recently won a competitive bid, and our Florida MSO relationship. In fiscal 2014 and fiscal 2013, our net earnings from continuing operations were $23.3 million and $4.9 million (which take into account $18.0 million and $0.3 million of rent expense from our 2013 sale-leaseback transaction), respectively. Our net earnings (loss) from continuing operations in the fourth quarters of fiscal 2014 and fiscal 2013 were $16.3 million and ($2.5) million (which take into account $4.7 million and $0.3 million of rent expense from our 2013 sale-leaseback transaction), respectively.

For fiscal 2014, we generated revenues of $2.53 billion, net earnings from continuing operations of $23.3 million and Adjusted EBITDA of $269.8 million. For additional information regarding Adjusted EBITDA and Adjusted EBITDAR, which are non-GAAP measures, including a reconciliation of Adjusted EBITDA and Adjusted EBITDAR to the most directly comparable measure presented in accordance with U.S. generally accepted accounting principles (“GAAP”), see “Summary financial data” included elsewhere in this prospectus. Approximately $1.8 billion, or 71.2%, of our revenue for fiscal 2014 was derived from our acute care segment and approximately $730.0 million, or 28.8%, of our revenue for this period was derived from our Health Choice segment.

Healthcare industry overview and trends

Cost-conscious healthcare environment and shift towards value-based healthcare

The U.S. healthcare system is evolving in ways that favor cost-effective healthcare delivery, focusing on value-based payments and quality of outcomes. Many observers believe the traditional FFS reimbursement model is not effective or cost-efficient in coordinating patient care, and has therefore played a major role in elevating both the level and growth rate of healthcare spending. In response, both the public and private sectors are shifting away from the historical FFS models and moving towards value-based reimbursement methodologies, including capitation payment models, that are designed to incentivize value and quality. We believe that as governmental and private insurers seek to control healthcare costs and to increase quality of care, value-based payment methodologies and reimbursement trends, such as bundled payments, shared cost savings and other cost- and quality incentive-based arrangements, will continue to grow. We believe that these will include the continued growth of value-based payment methodologies tied to both quality and coordination of care, with

incentives paid for the effective use of integrated electronic health records (“EHR”) technology and other programs that promote clinical integration and coordination of care, and movement more toward risk-based arrangements. We also believe that patient-centered and disease state medical home reimbursement models, in which a primary care or specialty physician serves as a care coordinator, will grow in prominence in certain markets.

The number of people in the United States covered by risk-based payment programs has been increasing rapidly and, according to industry sources, is estimated to increase from approximately 108 million at the start of 2014 to approximately 155 million by 2019. This increase is expected to further drive the critical importance to accurately measure, analyze, report, and improve patient outcomes. We believe we are well-positioned to capitalize on these trends as we seek to integrate, and drive synergies among, the core competencies of our managed care and acute care businesses.

Growth of healthcare spending

The Centers for Medicare & Medicaid Services (“CMS”) estimates that U.S. healthcare expenditures were $2.9 trillion in 2013, or more than 17% of the total U.S. gross domestic product (“GDP”). CMS projects that total U.S. healthcare expenditures are expected to grow by 5.6% in 2014 and by an average of 6.0% annually from 2015 to 2023. Because of this growth, total U.S. healthcare expenditures are estimated by CMS to be $5.2 trillion, or 19.3% of the total GDP, by 2023.

The hospital services sector represents the single largest category of healthcare spending in the United States at $936.9 billion in 2013. CMS expects continued increases in hospital services based on the aging of the U.S. population, the expansion of Medicaid, advances in medical procedures, expansion of health coverage, increasing consumer demand for expanded medical services and increased prevalence of chronic conditions such as diabetes, heart disease and obesity. CMS estimates that hospital care expenditures will increase to approximately $1.6 trillion by 2023. We believe that these factors will drive long-term utilization increases for certain healthcare services and the need for hospital networks that can provide comprehensive healthcare services in a coordinated, cost-effective manner.

Growth in government-sponsored healthcare

Government-sponsored coverage is an important element of the U.S. healthcare system. According to CMS, federal and state spending on Medicaid, Children’s Health Insurance Programs (“CHIPs”), and Medicare is expected to have exceeded $1.2 trillion and aided over 125 million people in 2014. By 2020, CMS anticipates spending on these three programs to grow to more than $1.8 trillion. Managed care solutions have a well-established track record of helping governments improve healthcare quality and access for beneficiaries while strengthening the fiscal sustainability of these programs.

We believe that the enrollment in government-sponsored programs will continue to increase, driven by an aging population and expanded coverage from the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”). As a result, we expect that government value-based models will also expand to manage costs and incentivize providers to deliver high quality, cost-effective care. The programs that utilize these value-based models include Medicare Advantage, Managed Medicaid, Medicare Accountable Care Organizations (“Medicare ACOs”), Dual Eligible Pilot Programs and Medicare Value Based Purchasing. We believe our experience in managing government-insured lives positions us to benefit from the expected growth of these programs.

Impact of health reform law

We believe that the Health Reform Law’s expansion of healthcare coverage through the growth of Exchanges, private sector coverage and expanded Medicaid coverage will, over time, reduce the level of uncompensated care we provide to uninsured individuals. The reductions in the growth in Medicare payments and the decreases in disproportionate share hospital (“DSH”) payments, however, will adversely affect our government reimbursement, which is offset by the benefits realized from expanded healthcare coverage under the Health Reform Law. Because of the many variables, including the law’s complexity, continued delays or exceptions to employer mandates, possible amendments or changes, court challenges to the law, uncertainty regarding the success of Exchanges in enrolling uninsured individuals and possible reductions in funding by Congress and future reductions in Medicare and Medicaid reimbursement, the long-term effect of the Health Reform Law on our company, including how individuals and businesses will respond to the new choices and obligations, is not yet fully known. For example, the Supreme Court of the United States (“SCOTUS”) has agreed to hear a case known as King v. Burwell during its 2015 judicial session. The plaintiffs are challenging the extension of premium subsidies to health insurance policies purchased through federally operated Exchanges, arguing that subsidies must be limited to state-operated Exchanges. If decided in favor of the plaintiffs, this case could make it more difficult for uninsured individuals in states that do not operate an Exchange to purchase coverage and otherwise significantly affect implementation of the Health Reform Law, in a manner that may result in less than projected numbers of newly insured individuals. We cannot predict the impact on our Company of these continuing developments with respect to the Health Reform Law.

Our competitive strengths

We believe our key competitive strengths position us as a provider-centric, payor-agnostic provider of broad and differentiated healthcare services, with flexibility for growth in new and existing markets. We believe these key competitive strengths include:

High-quality, cost-effective care

We seek to provide high-quality, high-value and cost-effective care for patients in collaboration with physicians, providers and payors. Central to our mission is a focus on clinical quality, including investments in patient care initiatives and information technology solutions that enable us to track and trend the quality of patient care, increase patient safety and increase the time our hospital staffs interact face-to-face with patients. In addition, we believe that our experience in operating and seeking to integrate delivery networks, including acute care hospitals, physician clinics and patient access points, enables us to provide our patients with the right level of care, in the right setting at the right time. As a result of our focus on the patient and delivering high quality, cost-effective care, we have achieved scores better than the national average across a broad variety of healthcare industry benchmarks, including CMS Core Measures and readmission rates. In addition, as of the date of this prospectus, all of our hospitals have met the Stage 2 “meaningful use” criteria specified by CMS for adoption and meaningful use of certified integrated EHR technology, and all of our hospitals have received ISO-9001 certification relating to the quality of our management systems and processes.

Multi-pronged growth strategy that maximizes total market opportunity

can offer delivery, health plan and risk management services on an individual or combined basis to each of our new and existing markets. Our MSO expansion in Florida to provide administrative and care management services for a national insurer’s Medicaid beneficiaries highlights our ability to leverage our provider-centric, payor-agnostic platform to enter new markets quickly on a services-only basis. In Utah, we built on the strength of our facility assets and physician relationships to establish a managed Medicaid health plan and an accountable care network, which together cover 24,700 lives as of January 1, 2015, significantly increasing our presence in that market and enabling us to further align with local physician networks.

A diversified and growing risk platform

We have built a risk platform that we believe positions us to pursue the broad and growing risk and value-based care opportunity. The breadth of capabilities of our platform is reflected in the lives and relationships we manage, including: 216,000 managed Medicaid, 9,400 Duals, 58,500 accountable care network, 3,300 Exchange, and 88,300 MSO lives. In addition, our behavioral health joint venture recently won a competitive bid to manage the standalone behavioral health benefit for an estimated 225,000 plan members and acute and behavioral care on an integrated basis for approximately 6,000 members who are seriously mentally ill.

Our ability to operate a single platform for multiple government and commercial populations, deploy an MSO model at scale, develop and manage global risk accountable care relationships across our healthcare delivery system, and successfully manage the high-risk portions of the population positions us to penetrate multiple new opportunities that are being created by a rapidly changing healthcare environment. Industry sources estimate these new opportunities to include: Medicaid and/or Duals procurement opportunities in multiple states, a $300 billion value-based care opportunity and a $34 billion MSO opportunity.

Positions in higher-growth markets

We have established a significant presence in attractive markets in seven states in the United States. We believe the markets in which we operate are attractive due to their favorable demographics, competitive landscape, larger size, diverse payor mix, and opportunities for expansion. According to the U.S. Bureau of Labor Statistics, our markets have experienced declining unemployment and most of our markets have populations that are growing faster than the national average. In addition, two of the states in which we operate have expanded Medicaid, which has measurably improved our payor mix in those states. Overall, we believe we are differentiated in our markets through our integrated care capabilities, creating opportunities to strategically deploy capital in projects that we believe will expand our capabilities and drive additional growth and market penetration.

Experience with managing government-insured lives

We believe our experience operating in a competitive and mature managed Medicaid and Duals market positions us to expand the types and number of governmental risk arrangements we offer. According to CMS, the number of total lives covered by government-sponsored healthcare programs is estimated to grow from approximately 134.4 million covered lives in 2014 to approximately 147.7 million covered lives by 2020. To service this growing number of government-insured lives, we have developed a cost-effective administrative structure, which benefits our entire risk platform. Our experience in managing government-insured lives and administrative efficiencies has created differentiated opportunities, such as our MSO expansion in Florida, and ability to obtain capitated government contracts after competitive bid processes, such as the integrated acute care and behavioral risk contract for which our joint venture in Northern Arizona recently won a competitive bid.

Our growth strategy

We seek to provide high-quality, cost-effective healthcare services to the communities we serve, while positioning our Company for long-term growth and re-investment opportunities in a dynamic healthcare environment. To achieve these objectives, we are focusing on the following key components of our business strategy:

Capture growth opportunities in existing markets

We believe we are well-positioned in our existing markets given favorable demographics, including lower unemployment, growing government-sponsored plan members and faster-than-average population growth in most markets. In addition, there are multiple opportunities that are early in their life cycles that we believe could further accelerate our growth within our existing markets, as described below:

•

In 2014, we deployed our MSO platform in Florida approximately 90 days after entering into an agreement with a large national insurer. As a result, in less than a year, we have added more than 88,000 covered lives to our risk platform. We believe our proven ability to quickly mobilize our MSO services and our establishment of an east coast operations hub that employs approximately 90 managed care professionals, positions us for additional MSO opportunities.

•

On December 18, 2014, we and our joint venture partner, the Northern Arizona Behavioral Health Authority (“NARBHA”), won a competitive bid for an integrated acute care and behavioral healthcare contract for six counties in Northern Arizona. Under this contract, we expect to manage the standalone behavioral health benefit for an estimated 225,000 plan members and acute and behavioral healthcare on an integrated basis for approximately 6,000 members who are seriously mentally ill.

•

We have established our own Health Choice Exchange products in Arizona. As of January 1, 2015, we have 3,300 Exchange lives and expect to enroll more than 5,000 total Exchange lives through the 2015 open enrollment process. By establishing an Exchange presence, we expect to be able to benefit from Medicaid beneficiaries who move to Exchange products, thereby leveraging our common Medicaid and Exchange brand, as well as the consumerization of health plan purchases. As of January 1, 2015, approximately 82% of our Exchange lives have chosen benefit plans through the Health Choice Preferred accountable care network, which includes our local hospitals and network physicians.

•

expandable based on community need and is scheduled to open in the summer of 2015. We also have recently expanded our patient access points in Utah to include multiple ambulatory sites, including a free-standing emergency department, urgent care centers and on-site employer-based health clinics.

•

Through our accountable care networks in Arizona and Utah, we have aligned approximately 1,700 physicians with our local hospitals and other providers. We believe these networks provide a cost-effective physician alignment model that is expandable and creates additional opportunities to manage lives on our risk platform.

•

We have benefited from expanded insurance coverage under the Health Reform Law for patients who previously were uninsured, which has improved our payor mix from self-pay to Medicaid and commercial insurance coverage for medical services provided by our hospitals. We believe the improvement in our uncompensated care as a percentage of acute care revenue and our self-pay admissions mix can be attributed primarily to this expanded coverage, including the impact of Medicaid expansion in the state of Arizona and improvements in employment and other economic factors in our markets, which has resulted in lower self-pay volume and revenue for fiscal 2014 compared to the prior fiscal year. During fiscal 2014, our uncompensated care as a percentage of acute care revenue was 21.1%, compared to 23.0% in the prior fiscal year. During fiscal 2014, our self-pay admissions represented 6.9% of our total admissions, compared to 8.0% in the prior fiscal year. We anticipate uninsured volumes will continue to decline in the near future as the impact of the Health Reform Law is fully realized and our local economies continue to improve, all contributing to market conditions that support continued near-term organic growth in our acute care operations.

Expand MSO relationships

We are in the early stages of deploying our MSO services. We have been able to expand our capabilities and markets in multiple ways, including:

•

MSO services—In 2014, we launched our MSO partnership with a large national insurer pursuant to which we provide administrative services to its managed Medicaid members in Florida. We established a local office that could service the insurer’s 88,300 members approximately 90 days after entering into an agreement with the national insurer.

•

Accountable care networks—Our accountable care networks in Arizona and Utah cover 58,500 Medicare, Medicaid and commercial managed care enrollees and have allowed us to align with approximately 1,700 physicians as of January 1, 2015. Through Health Choice Preferred, we believe we have the opportunity to expand our physician network and grow our attributed lives.

•

Medicare Advantage—We have deployed our medical management experience and population health services (some of which delegate risk to us) through our Health Choice Preferred accountable care networks in relationships with multiple third-party Medicare Advantage plans.

We believe that an increasing number of health systems have begun adopting value-based care models to create increased financial stability by receiving more value for the coordinated care they deliver while maintaining and growing their patient volumes. Our expanded capabilities, including MSO services and risk-based reimbursement aligned with both hospitals and physicians, allow us to benefit from the growth of provider-led population health management. According to industry sources, the MSO market was $34 billion in 2014. In addition, the number of people in the United States covered by risk-based payment programs is expected by industry sources to grow from approximately 108 million at the start of 2014 to approximately 155 million by 2019, many under new accountable care network and population health models.

Capture growth opportunities in government-sponsored lives

We have used our experience in managed Medicaid to cover new populations, including Medicare, Exchanges, behavioral health and Duals. According to CMS, government-sponsored coverage is expected to continue to grow significantly, from 134.4 million persons and $1.2 trillion in 2014 to 147.7 million persons and more than $1.8 trillion in 2020. Through our diversified risk platform, we believe we will be able to capitalize on the multiple forms of growth in government-insured lives, such as increased penetration of Medicare Advantage, expansion of Medicaid, including where states use federal Medicaid money to purchase private insurance on the Exchanges for eligible enrollees, and additional risk arrangements such as accountable care networks and Medicare Shared Savings Programs (“MSSPs”). As the trend towards managing government-sponsored lives increases, we believe our care management capabilities, clinical integration, quality measures and demonstrated ability to implement value-based programs positions us to benefit from large scale government contracts.

Selectively enter new markets

Through our broad and differentiated set of capabilities and assets, there are multiple ways for us to enter markets, including by way of acute care hospitals, health plans, risk services or any combination of the three. For instance, our risk platform enables us to enter new markets to develop accountable care networks, launch health plans or provide MSO services, either in support of newly acquired provider assets or solely as a health insurer or MSO contracting with third-party payors and providers in the market. As a result, in addition to the acquisition or construction approaches pursued most often by pure acute care hospital systems, we have greater flexibility to enter new markets in a capital-efficient manner.

Selectively pursue acquisitions

There are multiple factors accelerating the need for providers and health plans to seek strategic partners, including lower reimbursements, expansion of government-sponsored programs and the growth of value-based care. We believe that our patient-centered, integrated healthcare services offerings make us an appealing strategic partner for payors, physicians and other healthcare providers in new and existing markets. In addition, our team has successfully executed on strategic acquisitions that have achieved strong operating results. We continue to monitor opportunities that strategically fit our vision and long-term strategies.

Risk factors

Investing in our common stock involves substantial risk, and our ability to successfully operate our business is subject to numerous risks, including those that are associated with operating in the healthcare industry. Any of the factors set forth under “Risk factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information in this prospectus and, in particular, should evaluate the factors set forth under “Risk factors” in deciding whether to invest in our common stock. Certain of these important risks are listed below:

•

the effects of changes in governmental healthcare programs, principally Medicare, Medicaid and other federal healthcare programs, including limitations or reductions of levels of payments that our hospitals receive under such programs;

•

the effects related to implementation of the Health Reform Law, the possible enactment of additional federal or state healthcare reforms and possible amendments, changes or court challenges to such laws and other federal, state or local laws or regulations affecting the healthcare industry;

•

our Health Choice managed care business’ ability to effectively manage costs of care, maintain its governmental contracts and achieve its service line expansion strategies;

•

risks associated with our acquisition and development strategy, including liabilities assumed in acquisitions of facilities and physician practices and our need to effectively integrate acquired companies into our existing operations;

•

the effects of a shift in volume or payor mix from commercial managed-care payors to self-pay and Medicaid;

•

increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts;

•

industry trends towards value-based purchasing and narrow networks and related competitive challenges to our hospitals;

•

the generally competitive nature of the healthcare industry;

•

the possibility of health pandemics and the related impacts on our operations and financial results;

•

the costs and operational challenges associated with information technology and medical equipment upgrades;

•

compliance with extensive healthcare industry laws, regulations and investigations, including those with respect to physician-owned hospitals; and

•

risks related to our indebtedness and capital structure.

This list is not exhaustive. Please read the full discussion of these risks and other risks described under the caption “Risk factors” beginning on page 21 of this prospectus.

Our sponsors

In 2004, a private investor group led by affiliates of TPG Global, LLC (“TPG”) acquired our company. Our ownership consists primarily of a private investor group (“Sponsors”) comprised of affiliates of or funds sponsored by TPG, JLL Partners, Inc. (“JLL”) and Trimaran Capital L.L.C. (“Trimaran”), and members of management and certain other investors.

TPG. TPG is a leading global private investment firm founded in 1992 with over $65 billion of assets under management as of September 30, 2014, and offices in San Francisco, Fort Worth, Austin, Beijing, Dallas, Hong Kong, Houston, London, Luxembourg, Melbourne, Moscow, Mumbai, New York, São Paulo, Shanghai, Singapore, Tokyo and Toronto. TPG has extensive experience with global public and private investments executed through leveraged buyouts, recapitalizations, spinouts, growth investments, joint ventures and restructurings. The firm’s investments span a variety of industries, including healthcare, financial services, travel and entertainment, technology, energy, industrials, retail, consumer, real estate and media and communications.

JLL. Founded in 1988 and headquartered in New York, New York, JLL is a leading mid-market private equity investment firm. Since its inception, JLL has managed a series of private equity funds aggregating approximately $4.0 billion in committed capital. JLL’s healthcare investments, in addition to our Company, have included DPx, BioClinica-CCBR SYNARC, American Dental Products, Medical Card Systems, PharmaNet, Patheon, OrNda Healthcorp, Kendall International, and AdvancePCS.

Trimaran. Trimaran is a private asset management firm, headquartered in New York. Since 1995, Trimaran has completed over 60 private equity investments totaling over $1.3 billion of equity capital, including investments in the manufacturing, healthcare, restaurant, retail, education, media, financial services and utilities sectors.

Following the completion of this offering, the Sponsors will indirectly own approximately % of our common stock through their ownership of IASIS Investment LLC, or % if the underwriters’ option to purchase additional shares of our common stock is fully exercised. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange (the “NYSE”) on which we intend to apply for our shares to be listed. See “Risk factors—Risks relating to this offering and ownership of our common stock.”

Corporate information and structure

We commenced operations in 1998. IASIS Healthcare Corporation was incorporated in Delaware in September 1994. Our principal executive offices are located at 117 Seaboard Lane, Bldg. E, Franklin, Tennessee 37067, and our telephone number is (615) 844-2747. Our website address is www.iasishealthcare.com. The information contained in or connected to our website is not part of this prospectus.

The only material asset of IASIS Healthcare Corporation is the equity interests of its wholly-owned subsidiary IASIS Healthcare LLC, through which we conduct our operations. The following chart shows our simplified organizational structure immediately following the consummation of this offering assuming no exercise of the underwriters’ option to purchase additional shares:

LOGO

The offering

Issuer

IASIS Healthcare Corporation

Common stock offered by IASIS

Common stock to be outstanding after this offering

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $ million, assuming the shares are offered at $ per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus.

We intend to use the anticipated net proceeds from this offering to repay certain of our existing indebtedness. We intend to use the remainder of the net proceeds from this offering, if any, for working capital and other general corporate purposes. See “Use of proceeds.”

Underwriters’ option

The selling stockholders have granted the underwriters a 30-day option to purchase up to additional shares of our common stock at the initial public offering price (less underwriting discounts). We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

Dividend policy

We do not intend to pay dividends on our common stock for the foreseeable future following completion of the offering. Any decision to declare and pay dividends will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, because we are a holding company, our ability to pay dividends depends on our receipt of cash dividends and distributions from our subsidiaries, which is limited by covenants in our senior secured credit facilities and in the indenture governing our notes. See “Dividend policy” and “Description of indebtedness.”

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under “Risk factors” beginning on page 21 of this prospectus and all other information set forth in this prospectus before investing in our common stock.

Conflicts of interest

Affiliates of TPG Capital BD, LLC, an underwriter of this offering, will beneficially own in excess of 10% of our issued and outstanding common stock following this offering. Therefore, TPG Capital BD, LLC is deemed to have a “conflict of interest” under FINRA Rule 5121(f)(5)(B). In addition, because IASIS Investment LLC is an affiliate of TPG Capital BD, LLC and, as the selling stockholder, could receive more than 5% of the net proceeds of this offering, TPG Capital BD, LLC is deemed to have a “conflict of interest” under FINRA Rule 5121(f)(5)(C)(ii).

Accordingly, this offering will be made in compliance with the applicable provisions of FINRA Rule 5121. Pursuant to that rule, the appointment of a qualified independent underwriter is not necessary in connection with this offering because the underwriters primarily responsible for managing this public offering do not have a “conflict of interest” under Rule 5121, are not an affiliate of any underwriter that does have a “conflict of interest” under Rule 5121 and meet the requirements of paragraph (f)(12)(E) of Rule 5121. In accordance with FINRA Rule 5121(c), no sales of the shares will be made by TPG Capital BD, LLC to any discretionary account over which TPG Capital BD, LLC exercises discretion without the prior specific written approval of the account holder. See “Use of proceeds.”

Proposed NYSE ticker symbol

“IAS”

Unless we indicate otherwise or the context requires, all information in this prospectus:

•

assumes the filing of our amended and restated certificate of incorporation and effectiveness of our amended and restated bylaws in connection with the closing of this offering;

•

assumes no exercise of the underwriters’ option to purchase additional shares of common stock from the selling stockholder;

•

assumes an initial public offering price of $ per share, the midpoint of the initial public offering range indicated on the cover of this prospectus;

•

does not reflect shares of our common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $ per share as of September 30, 2014, of which were then exercisable; shares issuable upon vesting of restricted stock units outstanding as of September 30, 2014, and shares of our common stock reserved for future grants under our stock incentive plans effective upon the consummation of this offering; and

•

reflects the to stock split that became effective on , 2015.

Summary financial data

The following table sets forth IASIS Healthcare Corporation’s summary financial data as of and for the periods indicated. The financial data as of September 30, 2014 and 2013 and for each of the years ended September 30, 2014, 2013 and 2012 have been derived from IASIS Healthcare Corporation’s consolidated financial statements included elsewhere in this prospectus, which have been audited by Ernst & Young LLP. The financial data as of September 30, 2012 has been derived from IASIS Healthcare Corporation’s consolidated financial statements that are not included in this prospectus and were not audited by Ernst & Young LLP.

The summary financial data should be read in conjunction with, and are qualified by reference to, “Selected financial data,” “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.


	Year ended September 30,
	2014			2013			2012
	($ in thousands, except per share data)

Statement of Operations Data
Total revenue	$	2,533,587		$	2,285,054		$	2,244,941
Costs and expenses
Salaries and benefits		892,714			848,010			790,080
Supplies		299,760			294,409			283,663
Medical claims		596,778			467,294			466,125
Rentals and leases		72,714			52,896			42,785
Other operating expenses		426,933			393,633			415,097
Medicare and Medicaid EHR incentives		(14,753	)		(20,723	)		(21,831	)
Interest expense, net		130,818			133,154			137,687
Depreciation and amortization		95,312			94,026			101,264
Management fees		5,000			5,000			5,000

Total costs and expenses		2,505,276			2,267,699			2,219,870

Earnings from continuing operations before gain (loss) on disposal of assets and income taxes		28,311			17,355			25,071
Gain (loss) on disposal of assets, net		3,402			(8,982	)		2,241

Earnings from continuing operations before income taxes		31,713			8,373			27,312
Income tax expense		8,424			3,504			2,108

Net earnings from continuing operations		23,289			4,869			25,204
Earnings (loss) from discontinued operations, net of income taxes		(14,005	)		5,708			6,560

Net earnings		9,284			10,577			31,764
Net earnings attributable to non-controlling interests		(11,668	)		(7,215	)		(8,712	)

Net earnings (loss) attributable to IASIS Healthcare Corporation		(2,384	)		3,362			23,052
Accrued dividends on preferred stock		—			—			(3,689	)

Net earnings (loss) attributable to common stockholders	$	(2,384	)	$	3,362		$	19,363

Net earnings (loss) per share attributable to common stockholders
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted


	Year ended September 30,
	2014		2013		2012
	($ in thousands)

Balance Sheet Data
Cash and cash equivalents	$	341,739	$	553,487	$	164,186
Total assets	$	2,719,523	$	2,995,621	$	2,814,028
Long-term debt, capital leases and other obligations (including current portion)	$	1,853,800	$	1,866,043	$	1,866,494
Stockholders’ equity	$	139,815	$	257,799	$	257,452

Other Financial Data(1)
Adjusted EBITDA	$	269,770	$	253,390	$	279,099
Adjusted EBITDAR	$	287,720	$	253,703	$	279,099

Selected operating data

The following table sets forth certain unaudited operating data for each of the periods presented.


	Year ended September 30,
Acute care operations(2)	2014		2013		2012
Number of acute care hospital facilities at end of period		15		15		15
Licensed beds at end of period(3)		3,604		3,626		3,603
Average length of stay (days)(4)		5.0		4.9		4.7
Occupancy rates(5)		48.5%		48.5%		49.0%
Admissions(6)		100,909		103,509		106,084
Adjusted admissions(7)		186,609		185,147		182,420
Patient days(8)		503,648		508,157		500,935
Adjusted patient days(7)		931,387		908,941		861,396
Surgeries		65,484		64,460		60,121
Emergency room visits		411,156		410,503		384,790
Net patient revenue per adjusted admission(9)	$	9,544	$	9,140	$	9,048
Outpatient revenue as a % of gross patient revenue		45.9%		44.1%		41.8%


	Year ended September 30,
Managed care operations	2014		2013		2012
Health plan lives(10)		223,400		188,000		192,500
MSO lives(11)		83,400		—		—
Accountable care network lives(12)		20,800		—		—

Total lives		327,600		188,000		192,500
Medical Loss ratio(13)		84.2%		84.1%		83.1%

(1)

Adjusted EBITDA and Adjusted EBITDAR are financial measures that are not defined under U.S. GAAP and are presented in this prospectus because our management considers them important analytical indicators that are commonly used within the healthcare industry to evaluate performance, allocate resources and measure leverage capacity and debt service ability. Further, our management believes that Adjusted EBITDA and Adjusted EBITDAR are useful financial metrics to assess our operating performance from period to period by excluding certain material non-cash items, unusual or non-recurring items that we do not expect to continue in the future and certain other adjustments we believe are not reflective of our ongoing operations and our performance. Neither Adjusted EBITDA nor Adjusted EBITDAR is a measure of net earnings or any other performance measure derived in accordance with U.S. GAAP, and both are subject to important limitations.

Adjusted EBITDA, as we use it, represents net earnings from continuing operations before net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation, net loss (gain) on disposal of assets and management fees. Management fees represent monitoring and advisory fees paid to management companies affiliated with TPG and JLL. Adjusted EBITDAR, as we use it, is Adjusted EBITDA with an additional adjustment to exclude rent expense associated with our sale leaseback transaction, which closed in September 2013.

We understand that although Adjusted EBITDA and Adjusted EBITDAR are frequently used by securities analysts, investors and others in their evaluation of companies, they have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

•

they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

•

they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and neither Adjusted EBITDA nor Adjusted EBITDAR reflects any cash requirements for such replacements or improvements;

•

they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

•

they are not adjusted for the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

•

they do not reflect a deduction of net earnings (loss) attributable to non-controlling interests; and

•

other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, neither Adjusted EBITDA nor Adjusted EBITDAR should be considered as a measure of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using Adjusted EBITDA and Adjusted EBITDAR along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. These U.S. GAAP measurements include net earnings, net earnings from continuing operations, cash flows from operations and other cash flow data. We have significant uses of cash flows from operations, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in Adjusted EBITDA or Adjusted EBITDAR. Neither Adjusted EBITDA nor Adjusted EBITDAR should be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. You should therefore not place undue reliance on Adjusted EBITDA or Adjusted EBITDAR or ratios calculated using those measures. Our U.S. GAAP-based measures can be found in our consolidated financial statements and related notes included elsewhere in this prospectus.

The following table presents a reconciliation of Adjusted EBITDA and Adjusted EBITDAR to net earnings (loss) from continuing operations, determined in accordance with GAAP:


	Year ended September 30,								Quarter ended September 30,
	2014			2013		2012			2014			2013
	($ in thousands)
Net earnings (loss) from continuing operations	$	23,289		$	4,869	$	25,204		$	16,297			(2,346	)
Interest expense, net		130,818			133,154		137,687			32,520			33,220
Income tax expense (benefit)		8,424			3,504		2,108			(5,609	)		(2,898	)
Depreciation and amortization		95,312			94,026		101,264			25,540			23,381
Stock-based compensation		10,329			3,855		10,077			1,533			909
Loss (gain) on disposal of assets, net		(3,402	)		8,982		(2,241	)		(2,304	)		9,626
Management fees		5,000			5,000		5,000			1,250			1,250

Adjusted EBITDA		269,770			253,390		279,099			69,227			63,142
Sale-leaseback rent expense		17,950			313		—			4,709			313

Adjusted EBITDAR	$	287,720		$	253,703	$	279,099		$	73,936		$	63,455

(2)

Excludes the impact of our Nevada and Florida operations, which are reflected in discontinued operations.

(3)

Includes St. Luke’s Behavioral Hospital in Phoenix, Arizona.

(4)

Represents the average number of days that a patient stayed in our hospitals.

(5)

Calculated by dividing the average daily number of inpatients by the weighted-average number of beds in service.

(6)

Represents the total number of patients admitted to our hospitals that qualify for inpatient status. Management and investors use this number as a general measure of inpatient volume.

(7)

Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions (or adjusted patient days) by multiplying admissions (or patient days) by gross patient revenue and then dividing that number by gross inpatient revenue.

(8)

Represents the number of days our beds were occupied by inpatients over the period.

(9)

Includes the impact of the provision for bad debts as a component of revenue.

(10)

Represents total lives enrolled across all health plan product lines. Includes dual-eligible lives, which are members eligible for Medicare and Medicaid benefits, under Health Choice’s contract with CMS to provide coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”) totaling 8,700 and 4,500 as of September 30, 2014 and 2013, respectively.

(11)

Represents lives enrolled in Health Choice’s MSO that provides management and administrative services to a large national insurer’s Medicaid plan members in the Tampa and “panhandle” regions of Florida.

(12)

Represents attributed health plan member lives from other third-party payors for which Health Choice Preferred accountable care networks manage medical care and participating providers and Health Choice share associated financial risks. This excludes 13,500 attributed Health Choice plan member lives.

(13)

Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

Risk factors

An investment in our common stock involves a high degree of risk. You should carefully consider the following risks and the other information in this prospectus, including “Management’s discussion and analysis of financial condition and results of operations” and the financial statements and related notes included elsewhere in this prospectus, before deciding whether to invest in our common stock. We have presented the below risks as “Risks related to our acute care operations,” “Risks related to our managed care operations,” “Risks related to our capital structure” and “Risks related to our common stock and this offering.” Any of these risks could materially and adversely affect our business, financial condition or results of operations, and the factors that we identify as risks to a particular segment of our business could materially affect another segment of our business or our company generally. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial also may materially and adversely affect our business, financial condition or results of operations. In such a case, the trading price of our common stock would likely decline, and you may lose all or part of your investment in us.

Risks related to our acute care operations

Changes in governmental healthcare programs may reduce our revenues.

Governmental healthcare programs, principally Medicare and Medicaid, including managed Medicare and managed Medicaid, accounted for 44.0%, 43.5% and 44.4% of our hospitals’ net patient revenue before the provision for bad debts for the years ended September 30, 2014, 2013 and 2012, respectively. However, in recent years legislative and regulatory changes have limited, and sometimes reduced, the levels of payments that our hospitals receive for various services under Medicare, Medicaid and other federal healthcare programs. The Budget Control Act of 2011 (“BCA”) provides for spending on program integrity initiatives intended to reduce fraud and abuse under the Medicare program. The BCA requires automatic spending reductions of $1.2 trillion for federal fiscal years 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. However, the percentage reduction for Medicare may not be more than 2% for a fiscal year, with a uniform percentage reduction across all Medicare programs. These automatic spending reductions are commonly referred to as “sequestration.” Sequestration began on March 1, 2013, with CMS imposing a 2% reduction on Medicare claims beginning April 1, 2013. These spending reductions have been extended through 2024. We cannot predict what other deficit reduction initiatives may be proposed by the President or the Congress or whether the President and the Congress will restructure or suspend sequestration. Changes in the law to end or restructure sequestration may cause greater spending reductions than required by the BCA.

The Health Reform Law also provides for material reductions in the growth of Medicare program spending, including reductions in Medicare market basket updates and Medicare DSH funding. Further, from time to time, CMS revises the reimbursement systems used to reimburse healthcare providers and the requirements for coverage of services, including changes to the MS-DRG system and national and local coverage decisions, which may result in reduced Medicare payments. Sometimes, commercial third-party payors and other payors, such as some state Medicaid programs, rely on all or portions of the Medicare MS-DRG system to determine payment rates, and therefore, adjustments that negatively affect Medicare payments also may negatively affect payments from Medicaid programs or commercial third-party payors and other payors.

In addition, from time to time, state legislatures consider measures to reform healthcare programs and coverage within their respective states. Because of economic conditions and other factors, several states are experiencing budget problems and have adopted or are considering legislation designed to reduce their Medicaid expenditures, including enrolling Medicaid recipients in managed care programs, reducing the number of Medicaid beneficiaries by implementing more stringent eligibility requirements and imposing

additional taxes or assessments on hospitals to help finance or expand states’ Medicaid systems. The states in which we operate have decreased funding for healthcare programs or made other structural changes resulting in a reduction in Medicaid hospital rates in recent years. Additional Medicaid spending cuts may be implemented in the states in which we operate, including reductions in supplemental Medicaid reimbursement programs.

Our Texas hospitals participate in private supplemental Medicaid reimbursement programs that are structured to expand the community safety net by providing indigent healthcare services and result in additional revenues for participating hospitals. Although CMS approved a five-year Medicaid waiver in December 2011 that allows Texas to continue receiving supplemental Medicaid reimbursement while expanding its managed Medicaid program, we cannot predict whether the Texas private supplemental Medicaid reimbursement programs will continue or guarantee that revenues recognized from the programs will not decrease. Beginning in 2014, the Health Reform Law provides for significant expansion of the Medicaid program, but the Department may not penalize states that do not implement the Medicaid expansion provisions by withholding existing federal Medicaid funding. As a result, a number of states have opted not to implement the expansion, including Texas and Louisiana.

We believe that hospital operating margins across the country, including ours, have been and may continue to be under pressure because of limited pricing flexibility and growth in operating expenses in excess of the increase in payments under Medicare and other governmental programs. Current or future healthcare reform efforts, additional changes in laws or regulations regarding government health programs, changes to structure and reimbursement rates of governmental health programs or other changes in the administration of government health programs could have a material adverse effect on our financial position and results of operations.

We cannot predict with certainty the long-term impact of the Health Reform Law, which represents significant change to the healthcare industry.

The Health Reform Law represents a significant change across the healthcare industry. The Health Reform Law is decreasing the number of uninsured individuals by expanding coverage to additional individuals through public program expansion and private sector health insurance reforms. The Health Reform Law expands eligibility under existing Medicaid programs and subsidizes states that create non-Medicaid plans for certain residents that do not qualify for Medicaid. States have opted, and may continue to opt, not to implement the expansion. Several state governors and legislatures, including Texas and Louisiana, have chosen not to participate in the expanded Medicaid program; however these states could implement the expansion at a later date. Further, the Health Reform Law requires states to establish or participate in health insurance exchanges or default to a federally operated Exchange to facilitate the purchase of health insurance by individuals and small businesses. Through the “individual mandate,” the Health Reform Law imposes financial penalties on individuals who fail to carry insurance coverage. However, there were significant problems during the initial implementation of the federal online Exchange and certain state Exchanges which negatively impacted the ability of individuals to enroll in Medicaid and to purchase health insurance. Further implementation issues, especially if not corrected in a timely manner, could lead to the federal government suspending the individual mandate tax penalties, further delays in uninsured individuals obtaining health insurance and an increase in the number of individuals who choose to pay the tax mandates rather than to purchase health insurance. In addition, the employer mandate requires companies with 50 or more employees to provide health insurance or pay fines, as well as insurer reporting requirements, but will not be fully implemented until January 1, 2016. The Health Reform Law also establishes a number of health insurance market reforms, including a ban on lifetime limits and pre-existing condition exclusions, new benefit mandates, and increased dependent coverage.

Although the expansion of health insurance coverage should increase revenues from providing care to certain previously uninsured individuals, we believe that the Health Reform Law could adversely affect our business and results of operations due to provisions of the Health Reform Law that are intended to reduce Medicare and Medicaid healthcare costs. Among other things, in order to fund the expansion of coverage to the uninsured population, the Health Reform Law reduces market basket updates, reduces Medicare and Medicaid DSH funding, and expands efforts to tie payments to quality and clinical integration. Any decrease in payment rates or an increase in rates that is below our increase in costs may adversely affect our results of operations. The Health Reform Law also provides additional resources to combat fraud, waste, and abuse, including expansion of the Recovery Audit Contractors (“RAC”) program to identify and recoup improper Medicare payments, which may result in increased costs for us to appeal or refund any alleged overpayments.

The Health Reform Law contains additional provisions intended to promote value-based purchasing. The Department has established a value-based purchasing system for hospitals that provides incentive payments to hospitals that meet or exceed certain quality performance standards, and such system is funded through decreases in the inpatient prospective payment system market basket updates to all hospitals. Further, hospitals with excess readmissions for conditions designated by the Department receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excess readmissions standard. The Health Reform Law also prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat certain hospital-acquired conditions (“HACs”) and other provider-preventable conditions. In addition, beginning in federal fiscal year 2015, hospitals that fall into the worst 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments.

The Health Reform Law changes how healthcare services are covered, delivered, and reimbursed. However, many variables continue to impact the effect of the Health Reform Law, including the law’s complexity, continued delays or exceptions to employer mandates, possible amendment or repeal, changes or court challenges to the law, further technical issues with operating the federal and state Exchanges, uncertainty regarding the success of Exchanges enrolling uninsured individuals, possible reductions in funding by Congress and future reductions in Medicare and Medicaid reimbursement, how individuals and businesses will respond to the new choices and obligations under the law as well as the uncertainty as to the extent to which states will choose to participate in the expanded Medicaid program. For example, the SCOTUS has agreed to hear a case known as King v. Burwell during its 2015 judicial session. The plaintiffs are challenging the extension of premium subsidies to health insurance policies purchased through federally operated Exchanges, arguing that subsidies must be limited to state-operated Exchanges. If decided in favor of the plaintiffs, this case could make it more difficult for uninsured individuals in states that do not operate an Exchange to purchase coverage and otherwise significantly affect implementation of the Health Reform Law, in a manner that may result in less than projected numbers of newly insured individuals. Because of these many variables, we are unable to predict with certainty the net effect on our operations of the expected increases in insured individuals using our facilities, the reductions in government healthcare spending, and numerous other provisions in the Health Reform Law that may affect us. We are unable to predict with certainty how providers, payors, employers and other market participants will respond to the various reform provisions because many provisions will not be implemented for several years under the Health Reform Law’s implementation schedule.

If we experience a shift in payor mix from commercial managed care payors to self-pay and Medicaid, our revenue and results of operations could be adversely affected.

Reimbursement from self-pay and Medicaid programs is generally lower than traditional commercial managed care products. In the several years prior to fiscal 2014, we experienced a shift in our patient volumes and revenue from commercial and managed care payors to self-pay and Medicaid, including managed Medicaid. This shift resulted in pressure on pricing and operating margins from expending the same resources to provide

patient care, but for less reimbursement. This shift also reflected elevated unemployment levels and the resulting increases in states’ Medicaid rolls and the uninsured population. In addition, certain states have implemented measures to reduce enrollment in Medicaid which increased the number of uninsured patients seeking care at our hospitals. More recently, we have seen a reduction in the levels of our self-pay payor mix, which reflects improvement in the U.S. economy and decline in unemployment rate, and adoption of Medicaid expansion under the Health Reform Law in certain of our markets, including Arizona. However, we can provide no assurance that our payor mix will continue to improve. Despite an overall anticipated expansion in the number of insured individuals, implementation of the Health Reform Law could cause some patients to terminate their current insurance plans in favor of lower cost Medicaid plans or other insurance coverage with lower reimbursement. Increased enrollment in Exchange plans may cause lower reimbursement rates relative to traditional employer-sponsored health insurance plans for the healthcare services provided by our hospitals and employed physicians, and those Exchange-insured persons may pay higher deductibles, which may cause them to delay their medical treatment. Certain Exchange plans may also include limits on an enrollee’s overall benefit coverage as well as higher deductibles and other out-of-pocket costs that are the responsibility of such Exchange insured-persons, which, if unpaid, would result in higher levels of bad debt.

Utilization behavior of the insured population has changed because of the increasing prevalence of higher deductible and co-insurance plans implemented by employers, which has resulted in the deferral of elective and non-emergent procedures by individuals with high co-payments. We may be adversely affected by the growth in patient responsibility accounts because of increased adoption of plan structures, including health savings accounts, which shift greater responsibility for care to individuals through greater exclusions and higher co-payment and deductible amounts. Patient responsibility accounts may continue to increase even with expanded health plan coverage because of increases in plan exclusions and co-payment and deductible amounts. If we experience certain shifts in our patient volumes, our revenue and results of operations may be adversely affected.

If government-sponsored reimbursement and supplemental payment programs withhold payments due to our hospitals for services rendered, our cash flows, revenues and profitability of our operations could be adversely affected.

Our Texas hospitals participate in private supplemental Medicaid reimbursement programs structured to expand the community safety net by providing indigent healthcare services and result in additional revenues for participating hospitals. Although CMS approved a Medicaid waiver allowing Texas to continue receiving supplemental Medicaid reimbursement while expanding its managed Medicaid program, we cannot predict whether the Texas private supplemental Medicaid reimbursement programs will continue or guarantee that revenues recognized from the programs will not decrease, which may negatively affect our cash flows and profitability.

On October 1, 2014, the Texas Health and Human Services Commission (“THHSC”) issued a notice to certain hospitals participating in a Texas Medicaid waiver program. The waiver, from CMS, allows the state to receive federal matching Medicaid funds for certain local government/hospital affiliations. According to the notice, a review conducted by CMS identified certain of these affiliations it believed may be inconsistent with the waiver. Because of these findings, CMS temporarily deferred the federal portion of the Medicaid payments associated with these affiliations. CMS lifted the deferral on January 7, 2015, but has not yet made a final determination regarding the acceptability of the affiliations. The CMS review referenced in the notice did not target any of our hospitals and we do not operate in the Texas geographic regions mentioned in the notice. However, the review reflects the nature of challenges that we may face with receiving governmental matching funds and supplemental payments. We cannot assure you that in the future that CMS, THHSC and other similar agencies will not audit or delay our operations in a manner that reduces the amount or slows the timing of our receipt of such funding.

If we are unable to retain and negotiate reasonable contracts with managed care plans or if insured patients switch from traditional commercial insurance plans to Exchange plans, then our net revenue may be reduced.

Our ability to obtain reasonable contracts with health maintenance organizations, preferred provider organizations and other managed care plans significantly affects the revenue and operating results of our hospitals. Net patient revenue, before the provision for bad debts, derived from health maintenance organizations, preferred provider organizations and other managed care plans accounted for 40.9%, 39.2% and 39.8% of our hospitals’ net patient revenue for the years ended September 30, 2014, 2013 and 2012, respectively. Our hospitals have more than 250 managed care contracts with no one payor contract representing more than 10.0% of our net patient revenue. Typically, we negotiate our managed care contracts annually as they come up for renewal at various times during the year. Further, many are terminable by either party on relatively short notice. Our future success will depend, in part, on our ability to retain and renew our managed care contracts and enter into new managed care contracts on terms favorable to us. Other healthcare providers, including some with larger and more integrated health systems, provider networks, greater geographic coverage or a wider range of services, may affect our ability to enter into managed care contracts or negotiate increases in our reimbursement and other favorable terms and conditions. Some of our competitors may negotiate exclusivity provisions with managed care plans or otherwise restrict the ability of managed care companies to contract with us. In one region in which we operate, the largest healthcare provider organization controls one of the largest payor organizations and operates it primarily as a closed network. The patients enrolled in this integrated health system are largely unavailable to us. In addition, continued consolidation among managed care companies may reduce our ability to negotiate favorable contracts with such payors.

Also, some employed individuals may move from commercial insurance coverage with higher reimbursement rates for our services and lower co-pays and deductibles for the insured employee to Exchange insurance plans that may provide lower reimbursement for our services, higher co-pays and deductibles for the insured employee or even exclusion of our hospitals and employed-physicians from coverage under certain Exchange plans. It is not clear what impact the increased obligations on managed care and other payors imposed by the Health Reform Law will have on our ability to negotiate reimbursement increases or other terms favorable to us. If we cannot retain and negotiate favorable contracts with managed care plans or experience reductions in payment increases or amounts received from non-governmental payors or a shift in business from commercial insurance payors to Exchange plans, then our revenues may be reduced.

If we experience growth in volume and revenue related to uncompensated care, our financial condition or results of operations could be adversely affected.

Like others in the hospital industry, from time to time we have experienced high levels of uncompensated care, including charity care and bad debts. These levels are driven by the number of uninsured and under-insured patients seeking care at our hospitals, the acuity levels at which these patients present for treatment, primarily resulting from economic pressures and their related decisions to defer care, increasing healthcare costs and other factors beyond our control, such as increases for co-payments and deductibles as employers continue to pass more of these costs on to their employees. In addition, in periods of high unemployment, we believe that our hospitals may continue to experience high levels of or possibly growth in bad debts and charity care.

While, over time, the Health Reform Law is expected to continue to decrease the number of uninsured individuals through expanding Medicaid and incentivizing employers to offer, and requiring individuals to carry health insurance or be subject to penalties, these provisions generally did not become effective until January 1, 2014 and some are still in the implementation stage. The federal Exchange experienced significant technical issues that negatively affected the ability of individuals to enroll in Medicaid and to purchase health insurance during 2014. Further, the extent to which additional states, including Texas and Louisiana, will participate in the Health Reform Law’s expanded Medicaid program is unclear since the federal government cannot eliminate or

reduce existing federal Medicaid funding if states opt out of the law’s Medicaid expansion. Several state governors and legislatures, including Texas and Louisiana, have chosen not to participate in the expanded Medicaid program, the results of which have adversely affected our operations in those markets compared to states that have elected to expand their Medicaid programs; however, these states could implement some form of Medicaid expansion at a later date.

It is difficult to predict with certainty the full impact of the Health Reform Law due to the law’s complexity, continued delays or exceptions to employer mandates, possible amendment, or changes, court challenges to the law including the outcome of the SCOTUS’ decision regarding premium subsidies for eligible enrollees under federally operated health insurance exchanges, further technical issues with the federal government’s or any state’s website, uncertainty regarding the long-term success of Exchanges enrolling uninsured individuals, possible reductions in funding by Congress, future reductions in Medicare and Medicaid reimbursement and uncertainty surrounding state participation in the law’s expanded Medicaid program, as well as our inability to foresee how individuals and businesses will respond to choices afforded them under the law. We may continue to provide charity care to those who choose not to comply with the insurance requirements and undocumented aliens not permitted to enroll in a health insurance exchange or government healthcare program.

Although we continue to seek ways of improving point of service collection efforts and implementing payment plans with our patients, if we experience growth in self-pay volume and revenue, including increased acuity levels for uninsured patients and continued increases in co-payments and deductibles for insured patients, our results of operations could be adversely affected. Further, our ability to improve collections from self-pay patients may be limited by regulatory and investigatory initiatives, including private lawsuits directed at hospital charges and collection practices for uninsured and underinsured patients.

Industry trends towards value-based purchasing, care coordination and “narrow networks” of healthcare providers may present our Company with operational, financial and competitive challenges.

There is a trend in the healthcare industry towards value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs, including Medicare and Medicaid, require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events (called “never events”). Many large commercial payors require hospitals to report quality data, and several commercial payors do not reimburse hospitals for certain preventable adverse events. The Health Reform Law contains several provisions intended to promote value-based purchasing under Medicare and Medicaid. We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. While we believe we are adapting our business strategies to compete in a value-based reimbursement environment, we cannot predict how this trend will affect our results of operations, and it could negatively affect our revenues.

Integrated accountable care organizations and other kinds of “narrow” provider networks or organizations may exclude our hospitals, employed-physicians and other affiliated providers from their plans’ networks of healthcare providers. These contracting networks often organize hospitals, physicians and ancillary healthcare providers into narrow networks involving a smaller number of healthcare providers than does a network that allows all providers to participate, a so-called “open panel” network of providers, in exchange for which the “narrow network” may, if appropriately structured, achieve lower cost and/or higher quality in a way that benefits patients, employers, providers and payors. For instance, in some of the regions in which our hospitals operate, we face competition from large, not-for-profit healthcare systems with vertically integrated healthcare providers including health plans, physician groups and facilities, which affect our ability to obtain managed care contracts with their affiliated health insurance plans. Similarly, accountable care organizations commonly

require physicians and other providers to participate exclusively in their organization. If our affiliated providers are excluded from such networks, or we are unable to recruit sufficient providers to our own networks, our business will face competitive disadvantages.

If controls imposed by Medicare, Medicaid and other third-party payors to reduce admissions and length of stay affect our inpatient volumes, our financial condition or results of operations could be adversely affected.

Controls imposed by Medicare, Medicaid and commercial third-party payors designed to reduce admissions and lengths of stay, commonly referred to as “utilization reviews,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and course of treatment of a patient by managed care plans. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-required preadmission authorization and utilization review and by payor pressures to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Efforts to impose more stringent cost controls and reductions are expected to continue. For example, the Health Reform Law potentially expands the use of prepayment review by Medicare Administrative Contractors (“MACs”) by eliminating statutory restrictions on their use. Furthermore, the modified CMS policy on how MACs review inpatient hospital admissions for payment purposes could potentially reduce inpatient volume for patient stays spanning fewer than two midnights.

There has been increased scrutiny of a hospital’s “Medicare Observation Rate” from government enforcement agencies and industry observers. A low rate may raise suspicions that a hospital is inappropriately admitting patients that could be cared for in an observation setting. The industry may be subject to increased scrutiny and litigation risk, including government investigations and qui tam suits, related to inpatient admission decisions and the Medicare Observation Rate. In addition, CMS has established what is referred to as the “two midnight rule” (“TMR”) to guide practitioners admitting patients and contractors conducting payment reviews on when it is appropriate to admit individuals as hospital inpatients. Under the TMR, Medicare beneficiaries are to be admitted as inpatients only when there is a reasonable expectation that the care is medically necessary and expectation that the care will cross two midnights absent unusual circumstances. Compliance with TMR becomes subject to audits beginning October 1, 2015, but CMS began conducting reviews for admissions beginning October 1, 2013 at selected facilities to provide educational outreach on the TMR.

If we are unable to attract and retain quality medical professionals, our financial condition or results of operations could be adversely affected.

The success of our hospitals depends on the following factors, among others:

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the number and quality of the physicians on the medical staffs of our hospitals;

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the competency of those physicians and our facilities to meet their communities’ needs for healthcare services in a convenient, high quality and high value manner;

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the referral patterns of those physicians; and

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our maintenance of good relations with those physicians.

Our efforts to attract and retain physicians are affected by our managed care contracting relationships, national shortages in some specialties, the adequacy of our support personnel, the condition of our facilities and medical equipment, the availability of suitable medical office space and federal and state laws and regulations prohibiting financial relationships that may have the effect of inducing patient referrals.

To meet varying community needs for healthcare services in certain markets in which we operate, and to better coordinate patient care, we have implemented a strategy to employ physicians, which has expanded our employed physician base. The execution of a physician employment strategy includes an increased cost at our

company for salaries, wages and benefits; increases in malpractice insurance coverage costs; risks of unsuccessful physician integration and difficulties associated with physician practice management. While we believe this strategy follows industry trends, we cannot be assured of the long-term success of our physician employment strategy.

We also compete with other healthcare providers in recruiting and retaining qualified management and staff to run the day-to-day operations of our hospitals, including administrators, nurses, technicians and non-physician healthcare professionals. Some of our markets are more difficult to recruit physicians and nurses to locate there compared to other of our markets or other competing markets, depending on the community need, area of practice and the recruited physician’s or nurse’s personal considerations. Our failure to recruit and retain such management personnel and skilled professionals could adversely affect our financial condition and results of operations.

Our hospitals face competition for staffing, especially because of the shortage of nurses, which has in the past and may in the future increase our labor costs and materially reduce our profitability.

We compete with other healthcare providers in recruiting and retaining qualified management and staff personnel responsible for the day-to-day operations of each of our hospitals, physician practices and our managed care operations, including most significantly nurses and other non-physician healthcare professionals. While the national nursing shortage has abated somewhat, certain portions of our markets have limited nursing resources. In the healthcare industry, including in our markets, the shortage of nurses and other medical support personnel is a significant operating issue. This shortage has caused us in the past and may require us in the future to increase wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary personnel. Frequently in the past, we voluntarily raised, and expect to raise, wages for our nurses and other medical support personnel.

If our labor costs continue to increase, we may not be able to achieve higher payor reimbursement levels or reduce other operating expenses in a manner sufficient to offset these increased labor costs. Because substantially all of our net patient revenues are based on reimbursement rates fixed or negotiated no less frequently than annually, our ability to pass along periodic increased labor costs is materially constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control our labor costs, could have a material adverse effect on our profitability.

Our hospitals face competition from other hospitals and healthcare providers that could negatively affect patient volume.

The hospital industry is highly competitive. Our hospitals face competition for patients from other hospitals in our markets, large vertically integrated providers, large tertiary care centers and outpatient service providers that provide similar services to those provided by our hospitals. While our small 15-bed critical access hospital in Woodland Park, Colorado is an exception, none of our other hospitals are sole community providers and all of them are in geographic areas in which at least one other hospital provides services comparable to those offered by our hospitals. Some of the hospitals that compete with ours are owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions and can finance capital expenditures and operations on a tax-exempt basis. In addition, the number of freestanding specialty hospitals, outpatient surgery centers, emergency departments, urgent care centers and outpatient diagnostic centers has increased significantly in the areas in which we operate. We also face competition from competitors implementing physician alignment strategies, such as employing physicians, acquiring physician practice groups and participating in accountable care organizations or other clinical integration models. Some of our competitors also have greater geographic coverage, offer a wider range of services or invest more capital or other resources than we do. In addition, competitors that operate non-hospital facilities or hospitals not owned by physicians are not subject to the same federal restrictions on expansion as our physician-owned hospitals. If our

competitors can achieve greater geographic coverage, improve access and convenience to physicians and patients, recruit physicians to provide competing services at their facilities, expand or improve their services or obtain more favorable managed care contracts, we may experience a decline in patient volume.

CMS publicizes performance data relating to quality measures and data on patient satisfaction surveys that hospitals are required to submit to CMS. Federal law provides for the expansion of the number of quality measures that we are required to make publicly available. Further, the Health Reform Law requires all hospitals annually to establish, update and make public a list of their standard charges for items and services. If any of our hospitals should achieve poor results (or results that are lower than our competitors) on these quality criteria, or if our standard charges are higher than those published by our competitors, our patient volumes could decline. The required reporting of additional quality measures and other trends toward clinical transparency and value-based purchasing of healthcare services may have an adverse impact on our competitive position and patient volume.

A health pandemic could negatively affect our business.

If a pandemic or other widespread health crisis, such as the spread of the Ebola virus, were to occur in our markets, our business could be adversely affected. Such a crisis could diminish the public trust in healthcare facilities, especially hospitals treating (or that have treated) patients affected by the pandemic. If any of our facilities treated patients from such a health crisis, patients might cancel elective procedures or fail to seek needed care at our facilities. Further, a health pandemic might adversely affect our business by disrupting or delaying production and delivery of materials and products in the supply chain or by causing staffing shortages in our facilities. Although we have infection control and disaster plans in place, and we manage our hospital facilities pursuant to infectious disease protocols, the impact of a pandemic on our business could be materially adverse.

A failure of our information systems, or increased costs associated with upgrading and operating such systems, could adversely affect our ability to properly manage our operations.

We rely on our advanced information systems and our ability to successfully use these systems in our operations. These systems are essential to the following areas of our business operations, among others:

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patient accounting, including billing and collection of net patient revenue;

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financial, accounting, reporting and payroll;

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coding and compliance;

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laboratory, radiology and pharmacy systems;

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materials and asset management;

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negotiating, pricing and administering managed care contracts; and

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monitoring quality of care and collecting data on quality measures for full Medicare payment updates.

If we fail to operate these systems effectively, we may experience delays in collection of net patient revenue and may not properly manage our operations or oversee compliance with laws or regulations. Moreover, if we fail to continue to demonstrate meaningful use of certified EHR technology, we will be subject to reduced payments from Medicare (in addition to any ongoing statutory reductions). Furthermore, because the information technology landscape changes frequently, our systems require upgrades and replacement as new technologies are introduced, old technologies are no longer supported and physician and patient needs evolve requiring greater emphasis on integration of clinical, revenue and patient accounting systems. In this context, we may face significant financial costs, cash flow disruptions and operational difficulties as we from time to time change our information technology platforms, as well as operational difficulties in installing such new technology into our hospitals and operating it effectively. Such difficulties could affect our ability to properly manage our operations and adversely affect our cash flows.

Our inability to effectively replace information technology systems used by our hospitals, or the costs associated with such replacements and upgrades, could adversely affect our operations and financial results.

Healthcare information technology continues to evolve at a rapid pace. In order to remain competitive and to provide high quality clinical care, our company invests heavily in numerous information technology systems used by our hospitals and other lines of business. These information technology systems relate to clinical care, quality review, communications among providers, the storage of health records and many other business functions.

We incur substantial costs to maintain and upgrade our information technology systems. Such costs can occur not only in connection with maintenance and upgrades, but also when our third-party information technology vendors discontinue systems upon which we rely. For instance, we are party to a services contract with McKesson Information Solutions LLC (“McKesson”), through which we operate an advanced clinical information technology platform called Horizon Clinicals (“Horizon Clinicals”). Horizon Clinicals provides patient care information solutions, including computerized provider order entry solutions, medication management solutions, shared communications for providers meant to enhance patient safety, management reporting capabilities, compliance tools and advanced clinical analytics to simplify data collection and reporting. Horizon Clinicals has been the primary advanced clinical information technology platform used by our hospitals for an number of years. In December 2011, McKesson announced its plan to stop development of Horizon Clinicals. McKesson has stated that it plans to support Horizon Clinicals through March 2018. In response to this announcement, we are evaluating the capabilities of, and costs associated with transitioning to, alternate healthcare information technology platforms that could replace the capabilities currently provided by Horizon Clinicals. Moreover, if we fail to demonstrate meaningful use of certified EHR technology either through Horizon Clinicals or a replacement platform, we will be subject to reduced payments from Medicare (in addition to any ongoing statutory reductions).

The replacement of any information technology system upon which we rely may be financially and administratively burdensome to us. Such replacements, upgrades and similar projects require modifications to our capital expenditure plans and constrain our ability to pursue other opportunities requiring significant capital and management resources. Additionally, such upgrades may be time consuming and complex from an administrative standpoint. If our implementation of a replacement technology system is inefficient, delayed or ineffective, we may experience disruptions or delays in our cash flows and day-to-day caregiver processes, experience errors related to sharing of patient care information and declines in patient and/or hospital employee satisfaction. Because the healthcare information technology business and our business’ and patients’ needs continuously evolve, we cannot assure you that we will not incur such financial and administrative difficulties.

We are required to comply with laws governing the transmission, security and privacy of health information.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) administrative simplification provisions require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. In addition, the Health Reform Law requires the Department to adopt standards for additional electronic transactions and to establish operating rules to promote uniformity in the implementation of each standardized electronic transaction. On August 10, 2012, the Department issued an interim final rule to establish operating rules for healthcare electronic funds transfers and remittance advice transactions. Compliance with the interim final rule was required by January 1, 2014. Further, CMS has published final rule making changes to the formats used for certain electronic transactions and requiring the use of updated standard code sets for certain diagnoses and procedures known as ICD-10

code sets. Use of the ICD-10 code sets is required by October 1, 2015, and will require significant changes; however, we believe that the cost of compliance with these regulations has not had and is not expected to have a material adverse effect on our business, financial position or results of operations.

As required by HIPAA, the Department has issued privacy and security regulations that extensively regulate the use and disclosure of individually identifiable health information (known as protected health information or “PHI”) and require covered entities, including healthcare providers, to implement administrative, physical and technical safeguards to protect the security of PHI. As a result of changes made as part of ARRA and implementing regulations, entities that handle PHI on behalf of covered entities (known as “business associates”) or of other business associates must comply with most provisions of the HIPAA privacy and security regulations and are subject to civil and criminal penalties for violations to these regulations. A covered entity may be subject to penalties as a result of a business associate violating HIPAA, if the business associate is found to be an agent of the covered entity. Covered entities and business associates were generally required to comply with regulations implementing the ARRA changes by September 23, 2013. Covered entities must report breaches of unsecured PHI to affected individuals without unreasonable delay, but not to exceed 60 days, of discovery of the breach by the covered entity or its agents. Agreements with certain of our business associates may also subject us contractually to breach notification periods of fewer than 60 days. Notification must also be made to the Department and, in certain situations involving large breaches, to the media. All non-permitted uses or disclosures of unsecured PHI are presumed to be breaches unless the covered entity or business associate establishes that there is a low probability the information has been compromised.

The privacy and security regulations have and will continue to impose significant costs on our facilities in order to comply with these standards. Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties, which have been significantly increased by ARRA. Further, the Department is required to perform compliance audits, which may result in increased enforcement activity. In addition, state attorneys general may bring civil actions seeking either injunctive relief or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents. The Department is required to impose penalties for violations resulting from willful neglect. There are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and security concerns. Our facilities remain subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary, may impose additional obligations and could impose additional penalties. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving individually identifiable information (even if no health-related information is involved). In addition, the Federal Trade Commission (“FTC”) uses its consumer protection authority to initiate enforcement actions in response to data breaches. To the extent we fail to comply with one or more federal and/or state privacy and security requirements, we could be subject to substantial fines, penalties as well as third-party claims which could have a material adverse effect on our financial position, results of our operations and cash flows.

A breach of our information system’s cyber-security precautions may cause loss of protected health information, adversely affect our ability to properly manage our operations, cause us to incur remediation costs, increase our operating expenses and result in litigation and negative publicity.

Aspects of our business operations give rise to material cybersecurity risks and the potential costs and consequences. Additionally, we outsource functions that may also have material cybersecurity risks. Certain risks related to cyber incidents may remain undetected for an extended period. We maintain a cyber and privacy risk commercial insurance policy with a $20 million limit of liability. If we incur a security breach, the policy provides coverage for information security and privacy liability, regulatory defense and penalties, website media content liability, notification services and privacy breach response services.

The objectives of cyber attacks vary widely and may include theft of PHI, financial assets, intellectual property, or other sensitive information belonging to us, our customers or our business partners. Cyber attacks also may be directed at disrupting our operations or the operations of our business partners. If we fall victim to cyber attacks, we may incur substantial costs and suffer other negative consequences, which may include, but are not limited to, remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused, including incentives offered to customers or other business partners in an effort to maintain the business relationships after an attack; increased cyber-security protection costs that may include organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence. Furthermore, breaches of unsecured PHI caused by cyber-attacks will trigger notification requirements under HIPAA as well as additional procedures, which if not followed properly, could result in civil and criminal penalties and could have a material adverse effect on our business.

If we fail to continually enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment, our ability to maintain and expand our markets may be adversely affected.

Technological advances regarding CTs, MRIs and PET equipment, and other equipment used in our facilities, are continually evolving. To compete with other healthcare providers, we must constantly evaluate our equipment needs and upgrade equipment because of technological improvements. If we fail to remain current with the technological advancements of the medical community, our volumes and revenue may be negatively affected. Further, technological advances, including regarding both medical equipment and pharmaceuticals, may cure disease or alter the processes used for the diagnosis or treatment of certain illnesses or diseases which could increase competition for our healthcare services, reduce our patient volumes, reduce our revenues and have a material adverse effect on our profitability.

If we fail to effectively and timely implement EHR systems and transition to the ICD-10 coding system, our operations could be adversely affected.

As required by the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Department has adopted an incentive payment program for eligible hospitals and healthcare professionals that implement certified EHR technology and use it consistently with “meaningful use” requirements. If our hospitals and employed or contracted professionals do not meet the Medicare or Medicaid EHR incentive program requirements, we will not receive Medicare or Medicaid incentive payments to offset some of the costs of implementing the EHR systems. Further, beginning in federal fiscal year 2015, eligible hospitals and physicians that fail to demonstrate meaningful use of certified EHR technology are subject to reduced payments from Medicare. Failure to implement EHR systems effectively and in a timely manner could have a material adverse effect on our financial position and results of operations.

Health plans and providers, including our hospitals, must transition to the new ICD-10 coding system, which greatly expands the number and detail of billing codes used for inpatient claims. Use of the ICD-10 system will be required on October 1, 2015. Although we anticipate meeting such requirements, transitioning to the new ICD-10 system requires significant investment in coding technology and software and the training of staff involved in the coding and billing process. Besides these upfront costs of transition to ICD-10, our hospitals might experience disruption or delays in payment due to technical or coding errors or other implementation issues involving our systems or the systems and implementation efforts of health plans and their business partners. Further, the transition to the more detailed ICD-10 coding system could cause decreased reimbursement if using ICD-10 codes result in conditions being reclassified to MS-DRGs or commercial payor or payment groupings with lower levels of reimbursement than assigned under the previous system.

If we fail to comply with extensive laws and governmental regulations, we could suffer penalties, be required to alter financial arrangements with our referral sources, including referral source investors in some of our hospitals, or be required to significantly change our operations.

The healthcare industry, including our company, must comply with extensive and complex statutes and regulations at the federal, state and local government levels relating to:

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billing and coding for services and proper handling of overpayments;

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classification of level of care provided, including proper classification of emergency treatment, inpatient admissions, observation status and outpatient care;

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relationships with physicians and other referral sources, including financial arrangements and ownership interests involving physicians and other referral sources, such as physicians holding ownership interests in hospitals;

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necessity and adequacy of medical care;

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quality of medical equipment and services;

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qualifications of medical and support personnel;

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confidentiality, maintenance, data breach, identity theft and security issues associated with health related and personal information and medical records;

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screening, stabilization and transfer of individuals who have emergency medical conditions;

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licensure and certification;

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hospital rate or budget review;

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preparation and filing of cost reports;

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activities regarding competitors;

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operating policies and procedures;

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addition of facilities and services;

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provider-based reimbursement, including complying with requirements allowing multiple locations of a hospital to be billed under the hospital’s Medicare provider number;

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incentive payments for the adoption and meaningful use of certified EHR technology; and

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disclosures to patients, including disclosure of any physician ownership in a hospital.

Because some of these statutes and regulations are relatively new and subject to ongoing interpretation by regulatory agencies, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. Because these laws and regulations are so complex, hospital companies face a risk of inadvertent violations. Different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to change our facilities, equipment, personnel, services, capital expenditure programs and operating expenses.

If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including:

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criminal penalties;

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civil penalties, including the loss of our licenses to operate one or more of our facilities; and

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exclusion of one or more of our facilities from participation in the Medicare, Medicaid and other federal and state healthcare programs.

The Health Reform Law imposes significant restrictions on hospitals that have physician owners.

Some of our hospitals have physician ownership pursuant to an exception to the Stark Law known as the “whole-hospital” exception. The Health Reform Law significantly narrows this exception to apply only to hospitals that had physician ownership in place as of March 23, 2010, and a Medicare provider agreement effective as of December 31, 2010. While the amended whole-hospital exception grandfathers certain existing physician-owned hospitals, including nine of ours, it prohibits a grandfathered hospital from increasing its percentage of physician ownership beyond the aggregate level that was in place as of March 23, 2010. Subject to limited exceptions, a grandfathered physician-owned hospital may not increase its aggregate number of operating rooms, procedure rooms, and beds for which it is licensed beyond the number in place as of March 23, 2010. A grandfathered physician-owned hospital must comply with a number of additional requirements, including not conditioning any physician ownership directly or indirectly on the owner making or influencing referrals, not offering any ownership interests to physician owners on more favorable terms than those offered to non-physicians and not providing any guarantee to physician owners to purchase other business interests related to the hospital. Further, a grandfathered hospital cannot have been converted from an ambulatory surgery center to a hospital.

The whole-hospital exception, as amended, also contains additional disclosure requirements. For example, a grandfathered physician-owned hospital is required to submit an annual report to the Department listing each investor in the hospital, including all physician owners. In addition, grandfathered physician-owned hospitals must have procedures in place that require each referring physician owner to disclose to patients, with enough notice for the patient to make a meaningful decision regarding receipt of care, the physician’s ownership interest and, if applicable, any ownership interest held by the treating physician. A grandfathered physician-owned hospital also must disclose on its website and in any public advertising the fact that it has physician ownership. The Health Reform Law requires the Department to audit grandfathered physician-owned hospitals’ compliance with these requirements.

On September 25, 2013, we voluntarily self-disclosed for resolution through the Self-Referral Disclosure Protocol established by CMS, non-compliance by ten of our affiliated hospitals with the whole-hospital exception provision that requires disclosure of physician ownership on hospital websites and in public advertising. Provisions of the Health Reform Law that became effective on September 23, 2011 require, as an element of the Stark Law’s whole-hospital exception, that hospitals having physician ownership disclose such ownership on their public websites and in public advertising. Our self-disclosure states that, on August 12, 2013, we discovered that the ten of our affiliated hospitals partially owned by physicians did not consistently make such disclosures. The self-disclosure also states that, on August 13, 2013, the hospitals added the disclosures to those public websites that did not previously have them and began to include the disclosures in new public advertising. The self-disclosure explains that, as a result of the absence of the website and advertising disclosures, the referrals of direct and indirect physician owners (and physicians who are immediate family members of direct and indirect owners) to the physician-owned hospitals of Medicare beneficiaries did not consistently qualify for the whole-hospital exception from September 23, 2011 through August 13, 2013. On October 21, 2013, we submitted a supplement to our self-disclosure, reporting Medicare payments to these hospitals for services resulting from referrals affected by the non-compliance and the hospitals’ profit distributions to physicians (and known immediate family members of physicians) with respect to their ownership interests in the hospitals during the same period. We have been in communication with CMS about resolving this matter but, at present, CMS has made no commitments, as a general matter or in this case, regarding the timing or substance of resolution of self-disclosed Stark Law noncompliance through the voluntary CMS Self-Referral Disclosure Protocol. As a result, we express no opinion as to its outcome and, at this time, any repayment obligation or other penalties to be determined by CMS are unknown and not currently estimable. See Note 12, Commitments and contingencies, to our consolidated financial statements included elsewhere in this prospectus.

In light of the Health Reform Law’s restrictions on the whole-hospital exception and limited interpretive guidance, it may be difficult for us to determine how the exception will apply to specific situations, including the ones discussed above, that may arise with our hospitals. If any of our hospitals, including the ones discussed above, fail to comply with the amended whole-hospital exception, those hospitals could be found to be in violation of the Stark Law, and we could incur significant financial or other penalties.

Providers in the healthcare industry have been the subject of federal and state investigations, and we may become subject to additional investigations that could cause significant liabilities or penalties to us.

Both federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the healthcare area. There are numerous ongoing investigations of hospital companies, and their executives and managers. The Office of Inspector General of the U.S. Department of Health and Human Services (“OIG”) and the U.S. Department of Justice (“DOJ”) have, from time to time, established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Further, under the False Claims Act (“FCA”), private parties may bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions.

Federal and state investigations relate to a wide variety of routine healthcare operations including:

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cost reporting and billing practices;

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financial arrangements with referral sources;

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physician recruitment activities;

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physician joint ventures; and

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hospital charges and collection practices for self-pay patients.

We engage in many of these and other activities that could be the subject of governmental investigations or inquiries from time to time. We have significant Medicare and Medicaid billings, we have numerous financial arrangements with physicians who are referral sources to our hospitals and we have nine hospitals as of September 30, 2014, that have physician investors. In addition, our executives and managers, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, may be included in governmental investigations or named as defendants in private litigation. Any additional investigations of us, our executives or our managers could cause significant liabilities or penalties to us, and adverse publicity.

In addition, governmental agencies and their agents, such as MACs, fiscal intermediaries and carriers, and the OIG, CMS and state Medicaid programs, conduct audits of our healthcare operations. Private payors may conduct similar audits, and we also perform internal audits and monitoring. Depending on the conduct found in such audits and whether the underlying conduct could be considered systemic, resolving these audits could have a material adverse effect on our financial position, results of operations and cash flows.

CMS has implemented a nationwide RAC program under which it engages private contractors to conduct post-payment reviews to detect and correct improper payments in the Medicare program. The contractors receive a contingency fee based on corrected, improper payments. The Health Reform Law expanded the RAC program’s scope to include other Medicare programs, including managed Medicare, effective December 31, 2010. In addition, CMS has implemented a pre-payment demonstration project that allows RACs to review claims before they are paid to ensure that the provider complied with all Medicare payment rules. Under the demonstration project, RACs conduct prepayment reviews on certain types of claims that historically result in high rates of improper payments, beginning with those involving short stay inpatient hospital services. These reviews focus on seven states (Florida, California, Michigan, Texas, New York, Louisiana and Illinois) with high populations of

fraud and error-prone providers and four states (Pennsylvania, Ohio, North Carolina and Missouri) with high claims volumes of short inpatient hospital stays. The demonstration project began on August 27, 2012 and runs for a three year period.

In addition, through the Deficit Reduction Act of 2005 (“DEFRA”), Congress has expanded the federal government’s involvement in fighting fraud, waste and abuse in the Medicaid program by creating the Medicaid Integrity Program. Under this program, CMS engages private contractors, referred to as Medicaid Integrity Contractors (“MICs”), to perform post-payment audits of Medicaid claims and identify overpayments. In addition, the Health Reform Law expanded the RAC program’s scope to include Medicaid claims. In addition to MICs and RACs, several other contractors and state Medicaid agencies have increased their review activities.

In November 2010, the DOJ sent a letter to us requesting a 12-month tolling agreement in connection with an investigation into Medicare claims submitted by our hospitals in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) between January 1, 2003 and November 30, 2010. In January 2011, we entered into the tolling agreement with the DOJ which is currently set to expire in April 2015. Although we believe these procedure claims were properly documented for medical necessity and billed appropriately, to the extent the government disagrees with our determinations, we would be required to repay any improper payments as well any additional penalties imposed, which could adversely affect our business. For additional information, refer to Note 12, Commitments and contingencies, to our consolidated financial statements included elsewhere in this prospectus.

Any such audit or investigation could have a material adverse effect on our financial position, results of our operations and cash flows.

We face risks associated with federal and state antitrust laws applicable to the management and operation of our provider-sponsored networks.

Federal and state antitrust laws prohibit unreasonable restraints of trade, including price fixing and market allocations among competitors. Joint contracting among competitors may constitute price fixing, and may therefore be illegal, unless the contracting parties are under common governance, the contracting parties are involved in a legitimate joint venture to which joint contracting is ancillary, joint contracting is obtained through a “messenger” or there is sufficient clinical integration or substantial financial risk sharing. Violation of antitrust laws can result in civil penalties and/or criminal prosecution. The FTC has issued certain guidance regarding joint contracting among healthcare providers, including examples of financial arrangements that constitute sufficient risk sharing, and clinical integration that is sufficient, to permit joint provider contracting.

Our acute care hospitals have collaborated with Health Choice, through its Health Choice and accountable care networking business, to build networks consisting of our hospitals, some of our hospitals’ medical staffs and our employed physicians and independent physicians and facilities. These so-called “narrow networks” can provide managed services to patients in contract with select payors, with the goal of achieving clinical integration and associated efficiencies among such providers, to improve population health, improve patients’ experience of care and control healthcare costs.

Our aggregation of providers into single networks, our joint contracting policies and procedure and our financial arrangements with third party payors through these networks are structured to comply with all federal and state antitrust laws. However, we can provide no assurance we will meet all the requirements under applicable antitrust law regarding operation of our provider networks. Failure to comply with various federal and state antitrust laws and regulations, could result in investigations or litigation, with potential penalties or damages, and limitations on our ability to expand that could adversely affect our business, cash flows, financial condition and results of operations.

We are subject to risks associated with outsourcing functions to third parties.

To improve operating margins, productivity and efficiency, we outsource selected nonclinical business functions to third parties. We take steps to monitor and regulate the performance of independent third parties to whom we have delegated selected functions which may include revenue cycle management, patient access, billing, cash collections, payment compliance and other support services. Arrangements with third party service providers may make our operations vulnerable if vendors fail to satisfy their obligations to us because of their performance, changes in their own operations, financial condition, or other matters outside of our control. Our use of third party providers also may require changes to our existing operations and the adoption of new procedures and processes for retaining and managing these providers, and redistributing responsibilities to realize the potential productivity and operational efficiencies. Effective management, development and implementation of our outsourcing strategies are important to our business and strategy. If there are delays or difficulties in enhancing business processes or our third party providers do not perform as anticipated, we may not fully realize on a timely basis the anticipated economic and other benefits of the outsourcing projects or other relationships we enter into with key vendors, which could cause substantial costs, divert management’s attention from other strategic activities, negatively affect employee morale or create other operational or financial problems for us. Terminating or transitioning arrangements with key vendors could cause additional costs and a risk of operational delays, potential errors and possible control issues because of the termination or during the transition phase.

Regional economic downturns or other material changes in the economic condition in the markets in which we operate could cause our overall business results to suffer.

During times of economic volatility, which includes unstable consumer spending and high levels of unemployment, governmental entities often experience budgetary constraints because of increased costs and lower than expected tax collections. These budgetary constraints have resulted in decreased spending for health and human service programs, including Medicare, Medicaid and similar programs, which represent significant payor sources for our hospitals. Many states, including states in which we operate, have decreased funding for state healthcare programs or made other structural changes resulting in a reduction in Medicaid spending. Additional Medicaid spending cuts may be implemented in the states in which we operate. Other risks we face from general economic volatility include patient decisions to postpone or cancel elective and non-emergent healthcare procedures, increases in the uninsured population and further difficulties in our collection of patient co-payment and deductible receivables.

Our acute care and managed care business segments operate in various regions across the country. For the fiscal year ended September 30, 2014, our total revenue was generated in the following geographic areas:


Phoenix, Arizona			41.9%
Five cities in Texas, including Houston and San Antonio			30.1%
Salt Lake City, Utah			20.8%
Other			7.2%

Our business is not as geographically diversified as some competing multi-facility healthcare companies and, therefore, is subject to greater market risks. Any material change in the current demographic, economic, competitive or regulatory conditions in any of the regions in which we operate could materially adversely affect our overall business results because of the significance of our operations in each of these regions to our overall operating performance.

We may not achieve our acute care acquisition and growth strategies and we may have difficulty acquiring non-profit hospitals due to regulatory barriers and scrutiny.

Part of our business strategy has been expansion by acquiring hospitals and ambulatory care and other facilities in our existing markets and in markets and by entering into partnerships or affiliations with other healthcare service providers. The competition to acquire these facilities is significant, including competition from healthcare companies with financial resources greater than us. There is no guarantee we can successfully integrate acquired hospitals and ambulatory care facilities, which limits our ability to complete future acquisitions.

In addition, we may not acquire additional hospitals on satisfactory terms and future acquisitions may be on less than favorable terms. We may have difficulty obtaining financing for future acquisitions on satisfactory terms. We invest capital in our existing facilities to develop new services or expand or renovate our facilities to generate new, or sustain existing, revenues from our operations. We may finance these capital commitments or development programs through operating cash flows or additional debt proceeds. Many states, including some where we have hospitals and others where we may attempt to acquire hospitals, have adopted legislation regarding the sale or other disposition of hospitals operated by non-profit entities. In other states that do not have such legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste. These legislative and administrative efforts focus primarily on the valuation of the assets divested and the use of the sale proceeds by the non-profit seller. These review and approval processes can add time to the consummation of an acquisition of a non-profit hospital, and future actions on the state level could seriously delay or even prevent future acquisitions of non-profit hospitals. As a condition to approving an acquisition, the attorney general of the state in which the hospital is located may require us to maintain services, such as emergency departments, or to continue to provide certain levels of charity care, which may affect our decision to acquire, or the terms upon which we acquire, these hospitals.

Difficulties in integrating acquired businesses may disrupt our ongoing operations.

We may, from time to time, evaluate strategic opportunities such as joint ventures and acquisitions that may be material, including the acquisition of healthcare systems, individual hospitals, outpatient clinics, physician groups and other ancillary healthcare businesses. Integrating acquired hospitals, physician practices or other business operations may require a disproportionate amount of management’s time and attention, potentially distracting management from its other day-to-day responsibilities. In addition, poor integration of acquired businesses could cause interruptions to our business activities, including those of the acquired facilities, and could cause potential loss of key employees or customers of acquired companies. We may not realize all or any of the anticipated benefits of an acquisition and we may incur significant costs related to the acquisitions or integration of these facilities. In addition, we may acquire hospitals and other businesses that have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. Although we seek indemnification from prospective sellers covering these matters, we may have material liabilities for past activities of acquired hospitals.

We may be subject to liabilities because of claims brought against our hospitals, physician practices, outpatient facilities or other business operations.

Plaintiffs frequently sue hospitals and other healthcare providers, alleging malpractice, product liability or other legal theories. Many involve large claims and significant defense costs. Certain other hospital companies have been subject to class-action claims with respect to their billing practices for uninsured patients or lawsuits alleging inappropriate classification of claims, for billing, between observation and inpatient status.

We maintain professional malpractice liability insurance and general liability insurance in amounts we believe covers claims arising out of the operations of our facilities. Some of the claims could exceed the coverage in effect, and coverage of particular claims or damages could be denied.

The volatility of professional liability insurance and, sometimes, the lack of availability of such insurance coverage for physicians with privileges at our hospitals increase our risk of vicarious liability where both our hospital and the uninsured or underinsured physician are named as co-defendants. We are subject to self-insured risk and may be required to fund claims out of our operating cash flow. We cannot assure you that we can continue to obtain insurance coverage or that such insurance coverage, if it is available, will be available on acceptable terms.

As of September 30, 2014, our self-insured retention for professional and general liability coverage is $7.0 million for the first claim and $5.0 million per claim for each additional claim, with an excess aggregate limit of $55.0 million, and maximum coverage under our insurance policies is $75.0 million.

In addition, physicians’ professional liability insurance costs in certain markets have dramatically increased to where some physicians are choosing to retire early or leave those markets. If physician professional liability insurance costs continue to escalate in markets in which we operate, some physicians may choose not to practice at our facilities, which could reduce our patient volumes and revenues. Our hospitals also may incur a greater percentage of the amounts paid to claimants if physicians cannot obtain adequate malpractice coverage since we are often sued in the same malpractice suits brought against physicians on our medical staffs who are not employed by us.

As part of our broader physician alignment strategies, we expect to continue to employ additional physicians, which could result in a significant increase in our professional and general liability risks and related costs in future periods.

We have entered into sale-leaseback arrangements with a real estate investment trust for certain of our hospitals’ real estate and the related lease terms and obligations expose us to increased risk of loss of property or other unfavorable leasing implications, which could materially and adversely affect our business, financial condition and results of operations.

From time to time, we may enter into lease-related transactions with real estate investment trusts (“REITs”). On September 26, 2013, we entered into a sale-leaseback transaction involving the land and buildings associated with Glenwood Regional Medical Center in West Monroe, Louisiana; Mountain Vista Medical Center in Mesa, Arizona; and The Medical Center of Southeast Texas in Port Arthur, Texas. We continue to own and operate the business of these three hospitals but now lease the land and the buildings associated with these facilities for an initial period of 15 years at what we believe are attractive long-term lease rates, with renewal options. At the same time we entered into the sale-leaseback transaction, we amended an existing lease agreement with the same REIT with respect to Pioneer Valley Hospital, which extended the lease term and reduced the annual rent payment. Additionally, we lease from another landlord the land and buildings associated with Wadley Regional Medical Center in Texarkana, Texas. Our leases provide for renewal or extension options. These options are based upon prescribed formulas but, in certain cases, may be at fair market value. We expect to renew or extend our leases in the normal course of business; however, there can be no assurance these rights will be exercised or that we can satisfy the conditions precedent to exercising any such renewal or extension. The terms of any such options based upon fair market value are inherently uncertain and could be unacceptable or unfavorable to us depending upon the circumstances at the time of exercise.

In addition, our leases can be subject to early termination if we violate certain provisions or covenants in the leases. Some of our hospital leases are with the same landlord and contain cross-default provisions that would allow that landlord to terminate all leases with us if we violate certain defined provisions related to a single lease with them.

If we cannot renew or extend our existing leases, or purchase the hospitals subject to such leases, at or prior to the end of the existing lease terms, if the terms of such options are unfavorable or unacceptable to us, or if any landlord terminates a lease because of our breach of the lease, our business, financial condition and results of operations could be materially and adversely affected.

Our use of the proceeds we received from the sale-leaseback or other dispositions of assets is subject to restrictions, and although we have some discretion over how we apply such proceeds, we cannot guarantee that we will invest such proceeds promptly, effectively, or in compliance with our debt instruments.

We received certain proceeds for the sale-leaseback of three of our hospital properties on September 26, 2013, the disposition of our Florida operations on September 30, 2013, and the sale of our Nevada hospital operations on January 22, 2015. Our use of these net proceeds (gross proceeds less applicable taxes and other related transaction costs) is restricted by the terms of our senior credit agreement and the indenture under which we issued our senior notes.

Pursuant to the terms of our senior credit agreement, these net proceeds must be directed toward prepayment of borrowings under the senior credit agreement unless they are reinvested within 12 months in existing facilities or in 24 months in a greenfield construction project (36 months if there is a binding commitment for such investment within such 12 or 24 month periods). In September 2014, pursuant to an amendment to our senior credit agreement, our lenders extended for one year the deadlines related to the reinvestment of the net proceeds received from both the disposition of our Florida operations and the sale-leaseback of our three hospital properties. Similarly, the indenture requires us to use the proceeds to offer to repurchase the senior notes or make prepayments under the senior credit agreement unless they are reinvested in qualifying investments within 365 days. This deadline may also be extended by 180 days if we make a binding commitment to enter into a qualifying investment within such 365 day period. In October 2014, we satisfied these obligations under the indenture with respect to our September 2013 transactions by conducting such an offer to repurchase the senior notes. We are also required to comply with these obligations with respect to the proceeds from the sale of our Nevada facilities in January 2015. See “Management’s discussion and analysis—Liquidity and capital resources—Capital resources.”

While we currently expect to reinvest all of the net proceeds noted above, we are unable to make assurances that our plans to invest such proceeds will be achieved or that they will be on acceptable terms to our debt investors, within the prepayment grace period or at all. Any failure by us to invest these proceeds in compliance with our debt instruments could result in a default thereunder and harm our financial condition and operating results. Even if our investments fully comply with the terms of the senior credit agreement and indenture, we cannot assure you that they will generate positive value for us.

Delays in investing proceeds that have not been committed, besides requiring prepayments, may delay and/or impair our growth, revenues and cash flows. We cannot assure you we can identify any acquisition or development opportunities or other investments that meet our investment objectives or that any investment we make will produce a positive return. If we do not invest or apply such proceeds in ways that enhance our value, we may fail to achieve expected financial results and our business, financial condition and result from operations could be materially and adversely affected.

To the extent we engage in other similar capital-raising measures in the future, we may not invest the proceeds we receive from capital-raising measures promptly, effectively or on acceptable terms to our creditors. Subject to the types of restrictions described above, we have discretion over how to use such proceeds, and we may not do so effectively.

We may not complete construction of the Jordan Valley expansion project in Lehi, Utah in a timely manner and, even if we do, the start-up costs may exceed our current estimates.

We are building a new 40-bed hospital in Lehi, Utah as a campus of Jordan Valley Medical Center. The hospital has been designed to provide a full range of services including inpatient intensive care, obstetrics and surgical services, heart services, cardiac catheterization, emergency medical services, imaging, lab and outpatient surgery. A medical office building is being constructed immediately adjacent to, and connected with, the hospital to be occupied by primary care and multi-specialty physician groups practicing in the area. This project is anticipated to cost in excess of $80.0 million, a significant portion of which has been spent as of December 31, 2014, and is anticipated to be completed and open for business by the summer of 2015. There is no guarantee we can successfully complete this construction project on time or within budget or that its operating performance, once open for business, will perform as anticipated.

We depend on key personnel and losing one or more of our senior management team or local management personnel could have a material adverse effect on our business.

Our business strongly depends upon the services and management experience of our senior management team and local management personnel. We depend on the ability of these senior management team members and key employees to manage growth successfully and on our ability to attract and retain skilled employees. We manage our staffing carefully to enhance efficiency and control our salaries, wages and benefits. Historically our hospitals have not overstaffed or had deep ranks of employees for succession planning but, rather, have maintained an efficient, small group of experienced personnel to manage our day-to-day business operations. If any of our executive officers resign or otherwise cannot serve, our management expertise and ability to deliver healthcare services efficiently and to execute our business strategy could be diminished. If we fail to attract and retain managers at our hospitals and related facilities, our operations could be adversely affected. We do not maintain key man life insurance policies on any of our officers, including our senior corporate executives.

We may be subject to unionization, work stoppages, slowdowns or increased labor costs.

None of our employees are represented by a union. However, our employees have the right under the National Labor Relations Act to form or affiliate with a union. If some or all of our workforce were to become unionized and the terms of the collective bargaining agreement differed significantly from our current compensation agreements, it could increase our costs and adversely affect our profitability. Participation by our workforce in labor unions could put us at increased risk of labor strikes and disruption of our services.

Our hospitals are subject to compliance and other responsibilities and costs under environmental laws that could lead to material expenditures or liability.

We are subject to various federal, state and local environmental laws and regulations, including those relating to the protection of human health and the environment. We could incur substantial costs to maintain compliance with, and/or address liabilities arising under, these laws and regulations. We could become the subject of future enforcement or other legal proceedings, which could lead to damage claims, fines or criminal penalties if we are found to have liability under these laws and regulations. We also may be subject to requirements related to the investigation or remediation of substances or wastes released into the environment at properties owned or operated by us or our predecessors or at other properties where substances or wastes were sent for off-site treatment or disposal. These remediation requirements may be imposed without regard to fault, and liability for environmental remediation can be substantial.

To our knowledge, we have not been and are not the subject of any investigations relating to noncompliance with or liability under environmental laws and regulations. We maintain insurance coverage for third-party liability related to the storage tanks at our facilities, which consists of several separate insurance policies, each providing for at least $2.0 million per claim and $5.0 million in the aggregate.

If the fair value of our reporting units declines, a material non-cash charge to earnings from an impairment of our goodwill may result.

At September 30, 2014, we had $814.5 million of goodwill recorded in our consolidated financial statements. We expect to recover the carrying value of this goodwill through our future cash flows. On an ongoing basis, we evaluate, based on the fair value of our reporting units, whether the carrying value of our goodwill is impaired. If the carrying value of our goodwill is impaired, we may incur a material non-cash charge to earnings.

Risks related to our managed care operations

Our revenue and profitability could be adversely affected by the loss of, or changes in, Health Choice’s contract with AHCCCS, a failure to control medical costs at Health Choice and other factors related to Health Choice.

Effective October 1, 2013, Health Choice entered into a contract with Arizona Health Care Cost Containment System (“AHCCCS”), Arizona’s Medicaid agency. The contract has an initial term of three years and includes two additional one-year renewal options that can be exercised at the discretion of AHCCCS. The contract is terminable without cause on 90 days written notice or for cause upon written notice if Health Choice fails to comply with any term or condition or fail to take corrective action as required to comply with the terms of the contract. AHCCCS can also terminate our contract upon unavailability of state or federal funding. If our existing contract with AHCCCS is terminated, our financial condition, cash flows and results of operations would be materially adversely affected. The contract allows Health Choice to serve Medicaid members in the following Arizona counties: Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal. For the years ended September 30, 2014, 2013 and 2012, Health Choice’s contract with AHCCCS contributed 24.5%, 22.0% and 22.9%, respectively, to our consolidated total revenue.

In response to state budgetary issues in Arizona during recent years, AHCCCS worked to control its costs, through cuts in provider reimbursement and capitation premiums, targeted reductions in Medicaid eligible beneficiaries, the imposition of a tiered profit sharing plan and implementing a risk-based or severity-adjusted payment methodology for all health plans. Capitation rates for each health plan and geographic service area are adjusted annually based on the severity of treatment episodes experienced by each plan’s membership compared to the average over a specified 12-month period. Adjustments are calculated using diagnosis codes and procedural information from medical and pharmacy claims data, in addition to member demographic information. Each year, capitation rates are risk adjusted prospectively approximately six months into the contract year and then retroactively back to the start of the contract year. AHCCCS has implemented a tiered profit sharing plan, which is administered through an annual reconciliation process with all participating managed Medicaid health plans and will limit our net profit margins. If AHCCCS continues to reduce capitation premium rates, implements further eligibility restrictions or makes further alterations to the payment structure of its contracts, our results of operations and cash flows may be materially adversely affected.

Although Health Choice’s enrollment declined during recent years, in fiscal 2014, it experienced significant enrollment growth following the governor of Arizona’s 2013 signing into law the state’s expansion of its Medicaid program under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults previously frozen. The expansion of the state’s Medicaid program under the Health Reform Law may result in the addition of approximately 350,000 people to its Medicaid rolls over the next few years. As described above, the Health Reform Law, which became effective on January 1, 2014, faced and may continue to face opposition from groups considering lawsuits to challenge the passage of the law. The law was also implemented with a roll back provision if the federally matched portion is reduced by 80% from its current levels. If additional changes to the Arizona Medicaid program are implemented, our revenue and earnings could be significantly impacted.

Further, while the Arizona legislature approved an expansion of Medicaid in 2013 which became effective on January 1, 2014, a lawsuit filed by several state lawmakers has challenged the legality of a provider fee assessed to all providers and used to help pay for Arizona’s Medicaid expansion. The suit was dismissed by the trial court, based on a finding that the plaintiffs did not have standing to sue; however, on December 31, 2014, the Arizona Supreme Court ruled that the plaintiffs in the case had standing to sue, and the case is now moving forward in the trial court. If the legality of the provider fee used to help fund Arizona’s Medicaid expansion is successfully challenged in court, this may result in the loss of certain funding for the state’s Medicaid program, which could potentially result in changes that restrict eligibility and increase the number of uninsured individuals and adversely affecting our operations in Arizona. In addition, if similar challenges are successful in other states, we may be similarly adversely affected by such challenges.

AHCCCS and the Medicaid agency in Utah, with the required approval of CMS, set the capitated rates received at Health Choice which subcontracts with physicians, hospitals and other healthcare providers to provide services to its enrollees. If Health Choice fails to manage healthcare costs effectively, these costs may exceed the payments it receives. Our medical loss ratio (medical claims expense as a percentage of premium revenue) for the years ended September 30, 2014, 2013 and 2012, was 84.2%, 84.1% and 83.1%, respectively. Relatively small changes in these medical loss ratios can create significant changes in the profitability of Health Choice. Many factors can cause actual healthcare costs to exceed the capitated rates Health Choice receives, including:

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an inability to contract with cost-effective healthcare providers;

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the increased cost of individual healthcare services and new drug therapies;

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the type and number of individual healthcare services delivered; and

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catastrophes, epidemics or other unforeseen occurrences.

Although Health Choice has been able to manage medical claims expense through a variety of initiatives, it may not continue to manage medical claims expense effectively. Any future growth in members increases the risk associated with managing health claims expense. If our medical claims expense increases, our financial condition or results of operations may be materially adversely affected.

Effective October 1, 2013, Health Choice began offering insurance plans on the Arizona state insurance exchange (“AZ Exchange”). The profitability of our insurance plans offered on the AZ Exchange is directly linked with the ability of the AZ Exchange to attract a sufficient cross-section of risk membership to balance high and low cost membership. If the AZ Exchange is not perceived as attractive to healthier low cost consumers, the AZ Exchange could become susceptible to enrollment of a disproportionate amount of older members and/or members requiring higher utilization of medical services, a phenomenon known as “adverse selection.” The Health Reform Law includes provisions to mitigate the risk of adverse selection; however, there can be no assurance these provisions will be effective. The effectiveness of these provisions will not be known until certain provisions of the Health Reform Law are fully implemented. If our profitability decreases because of adverse selection, our financial condition or results of operations may be adversely affected.

Health Choice’s failure to successfully execute its growth strategy and expand its product lines, including its MSO services, may result in reduction or elimination of anticipated revenue or profitability and could have materially adverse consequences on our financial condition and results of operations.

We have sought to grow Health Choice’s business lines both in Arizona and beyond its core Arizona managed Medicaid operations. These growth initiatives include expansion of our service lines, expansion of our managed Medicaid business into other states, delivery of MSO services to third-party insurers and operation of accountable care networks in a manner that allows participating providers to engage in value- and risk-based contracts with such insurers.

Each of these growth strategies and expansion opportunities involves risks and there can be no assurance that we will successfully execute them. While Health Choice intends to pursue an expansion of its MSO and managed care solutions businesses, there can be no assurance that Health Choice will be successful in its efforts to diversify its client base, service offerings and geographic reach and compete successfully against other more established MSOs. For instance, in 2014, Health Choice Florida commenced operating as a MSO in the state of Florida, and employs approximately 90 employees located primarily in the Tampa area, providing managed care and administrative services for a large national insurer’s managed Medicaid plan members. Such service relationships, including Health Choice Florida’s existing arrangement with a large national insurer, customarily include rigorous performance standards applicable to the third party service provider and significant penalties associated with nonperformance, including termination rights of the service provider. If Health Choice does not meet these performance obligations and contractual penalties are imposed or termination rights are exercised as a result, this may result in an elimination or reduction in our anticipated revenue and profitability.

When we expand our core managed Medicaid business into new markets or service lines, we face competition with other managed Medicaid providers, many of whom may have incumbent relationships with state Medicaid agencies or who may be part of larger, more established regional or national insurance companies. Additionally, where Health Choice contracts with government agencies with respect to new business opportunities, there can be no assurance that such government programs will not be materially changed or that our contracts will be renewed and not be terminated, and as a result, we may not realize the benefits of these contracts. Furthermore, our development of accountable care networks involves significant challenges. These include efforts of other provider-based health systems to establish competing networks, recruit sufficient numbers of physicians into these networks, develop arrangements with sufficient payors, and effectively coordinate care and manage the health of various populations through these networks in a profitable manner. If we fail to execute successfully on any of these strategies, it will result in reduction or loss of anticipated revenue or profitability.

Our inability to effectively maintain and upgrade information technology systems used in our managed care operations, or the costs associated with such replacements and upgrades, could adversely affect our operations and financial results.

As with the healthcare information technology systems we use in our acute care operations, we invest heavily in our managed care information systems, and these systems evolve rapidly and are subject to extensive regulatory requirements. The replacement of any information technology system upon which we rely may be financially and administratively burdensome to us. Such replacements, upgrades and similar projects require modifications to our capital expenditure plans and constrain our ability to pursue other opportunities requiring significant capital and management resources. Additionally, such upgrades may be time consuming and complex from an administrative standpoint. If our implementation of a replacement technology system is inefficient, delayed or ineffective, we may experience disruptions or delays in our day-to-day administrative and care management processes, experience errors related to sharing of patient care information and declines in member, provider and/or employee satisfaction. Because the healthcare information technology business, regulatory requirements and the needs of our healthcare providers and health plan members continuously evolve, we cannot assure you that we will not incur such financial and administrative difficulties, which may have an adverse effect on our business, financial condition and results of operations.

Material risks are associated with participating in government-sponsored programs such as Medicaid, Medicare and the Exchanges, including dependence upon government funding, changes occurring because of the Health Reform Law, compliance with government contracts and increased regulatory oversight.

Health Choice contracts with state departments of health, Medicaid agencies and CMS to provide managed healthcare services. Revenues from the Medicaid and Medicare programs are dependent, in whole or in part, upon annual

funding from the federal government through CMS and/or applicable state or local governments. Funding for these programs depends on many factors outside our control, including general economic conditions, tax revenues, continuing government efforts to contain healthcare costs, budgetary constraints at the federal or applicable state or local level, and general political issues and priorities. These governmental agencies have the right not to renew or cancel their contracts with Health Choice on short notice without cause or if funds are not available. Unanticipated changes in funding by the federal or state governments could substantially reduce our revenues and profitability.

State governments have experienced tight budgetary conditions within their Medicaid programs due to difficult macroeconomic conditions and increases in the Medicaid eligible population. We anticipate this will require government agencies with which we contract to find funding alternatives, which may cause reductions in funding. If any state in which Health Choice operates were to decrease premiums paid to Health Choice, or pay Health Choice less than the amount to keep pace with its cost trends, it could have a material adverse effect on Health Choice’s revenues and results of operations. Economic conditions affecting state governments and agencies could also result in delays in receiving premium payments. If there is a significant delay in Health Choice’s receipt of premiums to pay health benefit costs, it could have a material adverse effect on our results of operations, cash flows and liquidity.

At both the federal and state government levels, legislative and regulatory proposals have been made related to, or potentially affecting, the health care industry, including but not limited to limitations on managed care organizations, including benefit mandates, and reform of the Medicaid and Medicare programs. Any such legislative or regulatory action, including benefit mandates or reform of the Medicaid and Medicare programs, could have the effect of reducing the premiums paid to us by governmental programs, increasing our medical and administrative costs or requiring us to materially alter the manner in which we operate. We are unable to predict the specific content of any future legislation, action or regulation that may be enacted or when any such future legislation or regulation will be adopted. Therefore, we cannot predict accurately the effect or ramifications of such future legislation, action or regulation on our managed care business.

The Medicare program has been the subject of recent regulatory reform initiatives, including the Health Reform Law. Effective in 2012, the Health Reform Law tied a portion of each Medicare Advantage plan’s reimbursement to the plan’s “star rating” by CMS, with those plans receiving a rating of three or more stars eligible for quality-based bonus payments. The star rating system considers various measures adopted by CMS, including quality of care, preventative services, chronic illness management and customer satisfaction. Beginning in 2015, plans must have a minimum of a “three star” rating to retain its contract with CMS and must have a star rating of four or higher to qualify for bonus payments. While Health Choice currently has a “three star” rating, if it does not maintain its star rating, its plan may be terminated, and if it does not continue to improve its star rating, it may not be eligible for full-level quality bonuses, which could adversely affect the benefits its plans offer, reduce our customer base, reduce profit margins or eliminate one or more of its plans all together.

Medicare has implemented a Hierarchical Condition Categories model to adjust capitation payments to private Medicare Advantage healthcare plans for the health expenditure risk of their beneficiaries. The CMS Risk Adjustment Model measures the disease burden which is correlated to diagnosis codes dependent upon clinical documentation and claims files. Each year CMS re-calibrates its model, pressuring acuity adjustment payments. If Health Choice does not maintain or continue to improve the effectiveness with which its provider delivery system codes the acuity of its patients, its financial performance could be adversely affected.

Contracts with CMS and the state governmental agencies contain certain provisions regarding data submission, provider network maintenance, quality measures, claims payment, continuity of care, call center performance and other requirements. If Health Choice fails to comply with these requirements, it may be subject to fines or penalties that could adversely affect its profitability.

In addition, Health Choice’s Exchange plan subsidiary in the State of Arizona and its Utah managed Medicaid plan subsidiary are subject to regulations by the respective state’s department of insurance oversight and

health maintenance organization rules. These require those business lines to operate under requirements governing minimum amounts of permissible capital, adequacy of provider networks and other complex rules. We cannot assure that future action taken by state insurance or health maintenance organization authorities, or federal authorities regarding our Exchange plan products, will not have a material adverse effect on Health Choice’s health plan products or its business, financial condition or results of operations.

Failure to comply with various state and federal healthcare laws and regulations, including those directed at preventing fraud and abuse in government funded programs, could cause investigations or litigation, with imposing fines, limitations on Health Choice’s ability to expand, restrictions or exclusions from program participation or other agreements with a federal or state governmental agency that could adversely affect its business, cash flows, financial condition and results of operations.

Managed care organizations have been the subject of federal and state investigations, and we may become subject to additional investigations that could cause significant liabilities or penalties to us.

Our managed care business is extensively regulated by the federal government and the states in which we operate. The laws and regulations governing our managed care operations are generally intended to benefit and protect health plan members and providers rather than stockholders and creditors. The government agencies administering these laws and regulations have broad latitude to enforce them. These laws and regulations, along with the terms of our government contracts, regulate how we do business, what services we offer, and how we interact with our members, providers and the public. Any violation by us of applicable laws or regulations could reduce our revenues and profitability, thereby having a material adverse effect on our financial condition and results of operations.

We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our managed care business. The following are examples of types of potential litigation and regulatory investigations we face:

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claims by government agencies relating to compliance with laws and regulations;

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claims relating to sales practices;

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claims relating to the methodologies for calculating premiums;

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claims relating to the denial or delay of health care benefit payments;

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claims relating to claims payments and procedures;

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claims relating to provider marketing;

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claims by providers for network termination or exclusion;

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anti-kickback claims;

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medical malpractice or negligence actions based on our medical necessity decisions or brought against us on the theory that we are liable for our providers’ malpractice or negligence;

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allegations of anti-competitive and unfair business activities;

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provider disputes over compensation and termination of provider contracts;

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allegations of discrimination;

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allegations of breaches of duties;

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claims relating to inadequate or incorrect disclosure or accounting in our public filings;

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allegations of agent misconduct;

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claims related to deceptive trade practices; and

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claims relating to audits and contract performance.

As we contract with various governmental agencies to provide managed health care services, we are subject to various reviews, audits and investigations to verify our compliance with the contracts and applicable laws and regulations. Any adverse review, audit, investigation or result from litigation could result in:

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loss of our right to participate in government-sponsored programs, including Medicaid and Medicare;

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forfeiture or recoupment of amounts we have been paid pursuant to our government contracts;

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imposition of significant civil or criminal penalties, fines or other sanctions on us and/or our key associates;

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reduction or limitation of our membership;

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damage to our reputation in various markets;

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increased difficulty in marketing our products and services;

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restrictions on acquisitions or dispositions;

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suspension or loss of one or more of our licenses to act as an insurer, health maintenance organization (“HMO”) or third-party administrator or to otherwise provide a service; and

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an event of default under our debt agreements.

In particular, because we receive payments from federal and state governmental agencies, we are subject to various laws commonly referred to as “fraud and abuse” laws, including the FCA, which permit agencies and enforcement authorities to institute suit against us for violations and, in some cases, to seek treble damages, penalties and assessments. Many states, including states where we currently operate, have enacted parallel legislation. Liability under such federal and state statutes and regulations may arise if we know, or it is found that we should have known, that information we provide to form the basis for a claim for government payment is false or fraudulent.

Some courts have permitted FCA suits to proceed if the claimant was out of compliance with program requirements. Liability for such matters could have a material adverse effect on our financial position, results of operations and cash flows. Qui tam actions under federal and state law can be brought by any individual on behalf of the government. Qui tam actions have increased significantly in recent years, causing greater numbers of health care companies to defend false claim actions, pay fines or be excluded from Medicare, Medicaid or other state or federal health care programs as a result of investigations arising out of such actions. Qui tam actions may have been filed against of us of which we are presently unaware, or qui tam actions may be filed against us in the future.

Health Choice’s medical membership remains concentrated in certain geographic areas and governmental health plan offerings, exposing us to unfavorable changes in local economic and governmental conditions.

Despite its recent expansion into new service lines and geographic markets, including management and administrative services, the formation of a Utah managed Medicaid plan, the launch of an Arizona Exchange plan, and provider networking on behalf of our acute care operations in certain markets, Health Choice’s core business remains its Arizona managed Medicaid plan, which as of January 1, 2015 served 209,700 members. Health Choice maintains this business subject to its contract with AHCCCS, the current version of which became effective October 1, 2013, and has a term of three years, subject to two one-year renewal terms at the option of AHCCCS. Health Choice’s continued maintenance of its managed Medicaid business in Arizona depends upon its ability to meet its contractual obligations under its governmental contracts, and win awards for new such

contracts during the state’s periodic procurement or request for proposal (“RFP”) process. These RFP processes typically involve intense competition with local and national managed care payors, many of whom have varying operational and greater financial resources than Health Choice. There can be no assurance that Health Choice’s managed Medicaid business will continue to perform effectively in this competitive landscape or continue to be awarded Arizona state contracts during future RFP cycles.

Unfavorable changes in healthcare or other benefit costs or reimbursement rates or increased competition in those geographic areas where Health Choice’s membership is concentrated could have a disproportionately adverse effect on our operating results. Health Choice’s membership has been and may continue to be affected by unfavorable general economic and state budgetary conditions, which in recent years have involved challenges such as capitation rate cuts by the state of Arizona and a tightening of eligibility requirements for Medicaid coverage, including past reductions in Medicaid coverage for childless adults.

If Medicaid programs, including the state of Arizona through its AHCCCS program, fail to provide supplemental payments to Health Choice for new or experimental drugs that physicians and consumers deem medically necessary, then Health Choice’s pharmaceutical costs and medical loss ratio may increase, and Health Choice’s profitability may decrease.

New or experimental drugs for which AHCCCS or other governmental agencies do not provide supplemental payments or other subsidies may affect Health Choice’s financial performance. For instance, during our 2014 fiscal year, Gilead Sciences, Inc. began marketing its pharmaceutical Sofosbuvir, commonly called Sovaldi, as a cure for patients diagnosed with Hepatitis C, a virus that spreads from person to person through blood and infects the liver. Medical costs involved with a single health plan member’s treatment through new or experimental drugs such as Sovaldi can exceed Health Choice’s annual capitation payment attributable to such plan member by many multiples. When rates are established during routine contracting cycles for Health Choice in its bids with state Medicaid agencies in Arizona and Utah, the availability and related costs of new and experimental drugs such as Sovaldi are often not fully taken into account, which can result in unexpected medical costs in the treatment of patients whose needs for such treatments are determined to be a medically necessary treatment.

In response to development of new pharmaceuticals and treatments, such as Sovaldi, there can be no assurance that state Medicaid programs, including AHCCCS and other governmental agencies, will retroactively or timely adjust their capitation payments to us under our contracts with them, in which case Health Choice may be forced to bear the financial cost of those new pharmaceuticals and treatments for covered patients it manages, either temporarily or permanently. These unanticipated medical costs, if not partially or fully reimbursed by governmental agencies, may increase our medical loss ratio and reduce the profitability of our managed care operations.

Health Choice’s profitability depends upon its ability to accurately predict and control healthcare costs.

A substantial majority of the revenue Health Choice receives is used to pay the costs of healthcare services or supplies delivered to our members. The total healthcare costs it incurs are affected by the number and type of individual services provided and the cost of each service. Our future profitability will depend, in part, on Health Choice’s ability to accurately predict healthcare costs and to control future healthcare utilization and costs through, utilization management, product design and negotiation of favorable physician provider, hospital and pharmacy contracts. Periodic renegotiations of healthcare provider contracts, coupled with continued consolidation of physician, hospital and other provider groups, may cause increased healthcare costs or limit our ability to negotiate favorable rates. Changes in utilization rates, demographic characteristics, the regulatory environment, healthcare practices, inflation, new technologies, new high cost drug therapies, clusters of high-cost cases, continued consolidation of physician, hospital and other provider groups and

numerous other factors affecting healthcare costs may negatively impact our ability to predict and control healthcare costs and, thereby materially adversely affecting our financial condition, results of operations and cash flows. In addition, a large scale public health epidemic, such as the avian flu or Ebola, could affect our ability to control healthcare costs.

For several years, one of the fastest increasing categories of our healthcare costs has been the cost of hospital-based products and services. Factors underlying the increase in hospital costs include, but are not limited to, the underfunding of public programs, such as Medicaid and Medicare, growing rates of uninsured individuals, new technology, state initiated mandates, alleged abuse of hospital chargemasters, an aging population and, under certain circumstances, relatively low levels of hospital competition. In addition to hospital costs, pharmacy costs for specialty medication and compounds trended higher than any other medical expense category of service in 2014 and included such medications as Sovaldi. New specialty drugs are being fast tracked through FDA trials. In connection with these new treatments Health Choice must meet certain medical necessity requirements for its Medicaid and Medicare program contracts with regard to the provision of medication therapy. Due to this paradigm, pharmacy costs likely may outpace capitation reimbursement rates, adversely affecting our financial condition.

Changes in the prescription drug industry pricing benchmarks may adversely affect our financial performance.

Pharmaceutical products and services constitute a significant portion of Health Choice’s medical costs. Contracts in the prescription drug industry use certain published benchmarks to establish pricing for prescription drugs. These benchmarks include average wholesale price, referred to as “AWP,” average selling price, referred to as “ASP,” and wholesale acquisition cost. It is uncertain whether pharmacy providers, pharmacy benefit managers, or PBMs, and others in the prescription drug industry will continue to utilize AWP as it has been calculated, or whether other pricing benchmarks will be adopted for establishing prices within the industry. Legislation may lead to changes in the pricing for Medicare and Medicaid programs. Regulators have investigated the use of AWP for federal program payment, and whether using AWP has inflated drug expenditures by the Medicare and Medicaid programs.

Federal and state proposals have sought to change the basis for calculating payment of certain drugs by the Medicare and Medicaid programs. Adoption of ASP in lieu of AWP as the measure for determining payment by Medicare or Medicaid programs for the drugs sold in our mail-order pharmacy business may reduce the revenues and gross margins of this business, which may cause a material adverse effect on our results of operations, financial position and cash flows.

If Health Choice fails to develop and maintain satisfactory relationships with physicians, hospitals and ancillary healthcare providers, our business and results of operations may be adversely affected.

Health Choice contracts with physicians, hospitals and other healthcare providers to provide healthcare services rendered to our health plan members. Its results of operations depend on our ability to contract for these services at competitive rates. In any market, physicians, hospitals and healthcare providers could refuse to contract with any of our health plans, demand higher payments or take other actions that could cause higher medical costs or less desirable products for our customers. In some markets, certain providers, particularly hospitals, physician/hospital organizations and multi-specialty physician groups, may have significant or controlling market positions that could cause a diminished bargaining position for us. If providers refuse to contract with Health Choice, use their market position to negotiate favorable contracts or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be materially and adversely affected.

Our ability to develop and maintain satisfactory relationships with healthcare providers also may be negatively affected by other factors not associated with us, such as changes in Medicare and/or Medicaid reimbursement

levels, increasing revenue and other pressures on healthcare providers and consolidation activity among hospitals, physician groups and healthcare providers. Ongoing reductions by CMS and state governments in amounts payable to providers for services provided to Medicare and Medicaid enrollees may pressure the financial condition of certain providers and adversely affect our ability to maintain or develop new cost-effective healthcare provider contracts or result in a loss of revenues or customers.

Recent and continuing consolidation among physicians, hospitals and other healthcare providers, development of accountable care organizations and other changes in the organizational structures that physicians, hospitals and healthcare providers choose may change the way these providers interact with us and may change the competitive landscape in which we operate. Sometimes, these organizations may compete directly with us, potentially affecting how we price our products or causing us to incur increased costs if we change our operations to be more competitive.

Out-of-network providers have no pre-established understanding with us about the compensation due for their services. Some states define by law or regulation the amounts due, but usually it is not defined or is established by a standard not clearly translatable into dollar terms. In such instances, providers may believe that they were underpaid and may litigate or arbitrate their dispute with us or try to recover from our customers the difference between what we have paid them and the amount they charged us. The outcome of disputes where we have no provider contract may cause us to pay higher medical or other benefit costs than we projected, which may adversely affect our cash flows and profitability.

Health Choice depends on the success of its relationships with third parties for various services and functions, including pharmacy benefit and radiation management services.

As part of its operations, Health Choice contracts with third parties for selected services and functions, including pharmacy benefit management services, radiology benefit management services, and various other service providers in areas such as information technology and disease management services. Health Choice’ operations may be vulnerable if these third parties fail to perform their obligations to it or if the arrangement is terminated. If there are delays or difficulties that cause our third party vendors to not perform as expected, Health Choice may not realize, or realize on a timely basis, the anticipated operating efficiencies and financial benefits of these relationships. Violation of or noncompliance with laws by our third party vendors could increase Health Choice’s exposure of liability to its members and government regulators. Noncompliance with any privacy or security laws and regulations or any security breach involving one of its third-party vendors could have a material adverse effect on Health Choice’s business, results of operations, financial condition, liquidity and reputation.

Risks related to capital structure

Servicing our indebtedness requires a significant amount of cash. Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may not generate sufficient cash flow to service our debt obligations, including making payments on our 8.375% Senior Notes and Senior Secured Credit Facilities.

As of September 30, 2014, we have outstanding $850.0 million in aggregate principal amount of 8.375% senior notes due 2019 (“Senior Notes”), which mature on May 15, 2019. We also have entered into our senior secured credit facilities, which include (1) amounts outstanding under our senior secured term loan of $989.4 million, maturing May 2018 and (2) a senior secured revolving credit facility of $300.0 million maturing in 2016, of which up to $150.0 million may be utilized for issuing letters of credit (together, the “Senior Secured Credit Facilities”). Our ability to borrow funds under our revolving credit facility is subject to the financial viability of the participating financial institutions. If any of our creditors were to suffer financial difficulties, or if the credit markets deteriorated, our ability to access funds under our revolving credit facility could be limited.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowing will be available to us under our Senior Secured Credit Facilities in an amount sufficient to enable us to pay the principal and interest on our indebtedness, including the Senior Notes and term loan, or to fund our other liquidity needs. Our ability to fund these payments is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. We may need to refinance all or a portion of our indebtedness, including the Senior Notes and term loan, by maturity. We cannot assure you we can refinance any of our indebtedness, on commercially reasonable terms or otherwise. In addition, the terms of existing or future debt agreements, including the amended and restated credit agreement governing the Senior Secured Credit Facilities and the indenture governing the Senior Notes, may restrict us from affecting any of these alternatives.

During the next twelve months, along with interest on our Senior Secured Credit Facilities, we must repay $10.1 million in principal under our Senior Secured Credit Facilities and $71.2 million in interest under the Senior Notes. If we cannot make scheduled payments on our debt, we will be in default and, as a result:

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our debt holders could declare all outstanding principal and interest to be due;

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our secured debt lenders could terminate their commitments and commence foreclosure proceedings against our assets; and

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we could be forced into bankruptcy or liquidation.

Our substantial indebtedness could adversely affect our financial flexibility and our competitive position.

We have significant indebtedness. As of September 30, 2014, we had $1.85 billion of indebtedness outstanding, besides availability under the revolving credit portion of our Senior Secured Credit Facilities. Our substantial amount of indebtedness could have significant consequences on our financial condition and results of operations. It could:

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make it more difficult for us to satisfy our obligations regarding our outstanding debt;

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increase our vulnerability to adverse economic and industry conditions;

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expose us to fluctuations in the interest rate environment because the interest rates under our Senior Secured Credit Facilities are variable;

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require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

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limit our flexibility in planning for, or reacting to, changes in the business and industry in which we operate;

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restrict us from exploiting business opportunities;

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place us at a disadvantage compared to our competitors that have less debt; and

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limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy and other general corporate purposes or to refinance our existing debt.

We, including our subsidiaries, can incur substantially more indebtedness, including senior secured indebtedness.

Subject to the restrictions in our Senior Secured Credit Facilities and the indenture governing the Senior Notes, we, including our subsidiaries, may incur significant additional indebtedness. As of September 30, 2014:

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we had $850.0 million of senior unsecured indebtedness under the Senior Notes;

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we had $989.4 million of senior secured debt outstanding under our Senior Secured Credit Facilities; and

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subject to compliance with customary conditions, we had available to us $219.0 million (after consideration of outstanding letters of credit totaling $81.0 million under our revolving credit facility) under the revolving credit portion of our Senior Secured Credit Facilities, which, if borrowed, would be senior secured indebtedness.

Although our Senior Secured Credit Facilities and the indenture governing the Senior Notes, contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to several important exceptions, and indebtedness incurred in compliance with these restrictions could be substantial. If we and our subsidiaries incur significant additional indebtedness, the related risks we face could increase.

Our indebtedness may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.

Agreements governing our indebtedness and the indenture governing the Senior Notes contain, and any future indebtedness may contain, several restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries, including restrictions on our or our subsidiaries’ ability to:

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incur additional indebtedness or issue disqualified stock or preferred stock;

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pay dividends or make other distributions on, redeem or repurchase our capital stock;

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sell certain assets;

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make certain loans and investments;

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enter into certain transactions with affiliates;

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incur liens on certain assets to secure debt;

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pay dividends or make payments or distributions to us and our subsidiaries; or

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consolidate, merge or sell all or substantially all of our assets.

Our ability to comply with these agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, mergers and acquisitions or other corporate opportunities. The breach of any of these restrictions could cause a default under the indenture governing the Senior Notes or under our Senior Secured Credit Facilities.

An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.

Borrowings under our Senior Secured Credit Facilities bear interest at variable rates. Interest rate changes could affect our interest payments, and our future earnings and cash flows, assuming other factors are held constant. We have, and may, enter into interest rate hedging instruments to reduce our exposure to interest rate volatility; however, any hedging instruments we enter into may not fully mitigate our interest rate risk. An increase in interest rates, whether because of an increase in market interest rates or an increase in our own cost of borrowing, would increase the cost of servicing our debt and could materially reduce our profitability.

Our failure by us or our subsidiaries to comply with the agreements relating to our outstanding indebtedness, including because of events beyond our control, could cause an event of default that could materially and adversely affect our results of operations and our financial condition.

If we or our subsidiaries defaulted under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding regarding that debt to be due immediately. Upon acceleration of certain of our other indebtedness, holders of the Senior Notes could declare all amounts outstanding under the Senior Notes immediately due and payable. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon

an event of default. Further, if we cannot repay, refinance or restructure our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. In addition, counterparties to some of our contracts material to our business may amend or terminate those contracts if we have an event of default or a declaration of acceleration under certain of our indebtedness, which could adversely affect our business, financial condition or results of operations.

Risks related to this offering and ownership of our common stock

An active, liquid trading market for our common stock may not develop.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the NYSE or otherwise or how active and liquid that market may become. If an active and liquid trading market does not develop, you may have difficulty selling any of our common stock you purchase. The initial public offering price for the shares will be determined by negotiations between us and the underwriters and may not indicate prices that will prevail in the open market following this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering for them.

You will incur immediate and substantial dilution.

If you invest in our common stock, your investment will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book deficit per share of our common stock after this offering. This dilution results from the fact that the initial public offering price of our common stock is substantially higher than the net tangible book deficit per share of our common stock attributable to our presently outstanding shares of common stock. Based on our net tangible book deficit as of September 30, 2014 and upon the issuance and sale of shares of common stock by us at an assumed initial public offering price of $ per share (the midpoint of the initial public offering price range indicated on the cover of this prospectus), if you purchase our common stock in this offering, you will suffer immediate dilution of approximately $ per share. We also have many outstanding stock options to purchase common stock with exercise prices below the estimated initial public offering price of our common stock. If these options are exercised, you will experience further dilution. In addition, to the extent our outstanding restricted stock units (“RSUs”) are settled in stock, upon issuance you will experience further dilution. See “Dilution.”

Our stock price may change significantly following the offering, and you could lose all or part of your investment.

We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price due to a number of factors such as those listed in “Risks related to our business” and the following, some of which are beyond our control:

•

quarterly variations in our results of operations;

•

results of operations that vary from the expectations of securities analysts and investors;

•

results of operations that vary from those of our competitors;

•

changes in expectations on our future financial performance, including financial estimates by securities analysts and investors;

•

announcements by us, our competitors or our vendors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

•

announcements by third parties or governmental entities of significant claims or proceedings against us;

•

new laws and governmental regulations applicable to the healthcare industry, including the Health Reform Law;

•

a default under the agreements governing our indebtedness;

•

future sales of our common stock by us, directors, executives and significant stockholders; and

•

changes in domestic and international economic and political conditions and regionally in our markets.

The stock market experiences volatility that, sometimes, has been unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance.

Following periods of market volatility, stockholders often have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.

If we or our existing investors sell additional shares of our common stock after this offering, the market price of our common stock could decline.

The market price of our common stock could decline because of sales of many shares of common stock in the market after this offering, or the perception that such sales could occur. These sales, or the possibility these sales may occur, also might make it more difficult for us to sell equity securities at a time and at a price we deem appropriate. After completing this offering, we will have shares of common stock outstanding. This number includes shares being sold in this offering, which may be resold immediately in the public market.

We and the selling stockholders, our executive officers and directors and the Sponsors have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 180 days after this prospectus without first obtaining the written consent of certain of the underwriters. In addition, under our stockholders’ agreements, we have granted certain stockholders the right to cause us, in certain instances, at our expense, to file registration statements under the Securities Act of 1933, as amended (the “Securities Act”) covering resales of our common stock held by them. These shares will represent approximately % of our outstanding common stock after this offering ( % if the underwriters’ option to purchase additional shares is exercised in full). These shares also may be sold under Rule 144 under the Securities Act, depending on their holding period and subject to restrictions for shares held by persons deemed our affiliates. As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our stock could decline if the holders of shares sell them or are perceived by the market as intending to sell them. See “Certain relationships and related party transactions” and “Shares eligible for future sale.”

As of September 30, 2014, shares of our common stock were outstanding, shares were issuable upon exercising outstanding vested stock options under our stock incentive plans, shares were subject to outstanding unvested stock options under our stock incentive plans, shares were issuable upon the vesting of outstanding RSUs and, effective upon the consummation of this offering, shares will be reserved for future grant under our stock incentive plans. Shares acquired upon exercising vested options under our stock incentive plan will first become eligible for resale after the date of this prospectus. Sales of many shares of our common stock following the vesting of outstanding stock options and RSUs could cause the market price of our common stock to decline.

Because we do not intend to pay cash dividends on our common stock for the foreseeable future, you may receive no return on your investment unless you sell your common stock for a price greater than that which you paid for it.

We intend to retain future earnings for future operation, expansion and debt repayment and do not intend to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends will be made at the discretion of our board of directors (“Board” or “Board of Directors”) and will depend on our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our senior secured credit facilities and the indenture governing our notes. You may receive no return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

Our failure to maintain adequate internal controls over our financial and management systems may cause errors in our financial reporting, which could cause a loss of investor confidence and result in a decline in the price of our common stock.

We are not currently required to comply with SEC rules that implement Section 404(b) of the Sarbanes-Oxley Act, and are therefore not required to obtain an auditor attestation report on the effectiveness of our internal controls over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. We would be required to obtain an auditor attestation report on the effectiveness of our internal controls over financial reporting no later than for our fiscal year ending September 30, 2016.

Evaluation by us of our internal controls over financial reporting may identify material weaknesses that may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of NYSE listing rules. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect our business, financial condition and results of operations and could also lead to a decline in the price of our common stock.

Some provisions of Delaware law and our governing documents could discourage a takeover that stockholders may consider favorable.

In addition to the Sponsors’ ownership of a controlling percentage of our common stock, our certificate of incorporation and bylaws and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. In addition, Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder.” While we have elected in our certificate of incorporation not to be subject to Section 203 of the DGCL, our certificate of incorporation contains provisions that have the same effect as Section 203 of the DGCL, except that they provide that neither IASIS Investment LLC (“IASIS Investment”) nor the Sponsors will not be deemed to be “interested stockholders,” and accordingly will not be subject to such restrictions.

Because our Board is responsible for appointing the members of our senior management, the foregoing provisions of our certificate of incorporation and bylaws may frustrate or prevent any attempts by our stockholders to replace or remove our current management, or otherwise change the strategic direction of the Company, by

making it more difficult for stockholders to replace members of our Board of Directors. In addition, certain of these provisions may limit your ability to sell your stock for a price in excess of the prevailing market price in a transaction that is not approved by our Board of Directors. See “Description of capital stock.”

The Sponsors will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of key transactions, including a change of control.

We are controlled, and after this offering is completed will continue to be controlled, by IASIS Investment, whose managing member is affiliated with TPG. The Sponsors will indirectly own through their investment in IASIS Investment approximately % of our common stock after completing this offering ( % if the underwriters’ option to purchase additional shares is exercised in full). In addition, TPG and JLL may designate a majority of the seats on our Board of Directors. The Sponsors will have control over our decisions to enter into any corporate transaction (and the terms thereof) and the ability to prevent any change in the composition of our Board of Directors and any transaction that requires stockholder approval whether others believe that such change or transaction is in our best interests. So long as the Sponsors continue to indirectly hold a majority of our outstanding common stock, they can control the vote in any election of directors, amend our amended and restated certificate of incorporation or amended and restated bylaws or take other actions requiring the vote of our stockholders. Even if such amount is less than 50%, the Sponsors will continue to strongly influence or control our decisions.

Our Sponsors make investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors also may pursue acquisition opportunities that may be complementary to our business and those acquisition opportunities may not be available to us.

We are a “controlled company” within the meaning of the NYSE rules and will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies subject to such requirements.

After completion of this offering, IASIS Investment will continue to control a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which over 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

•

the requirement that a majority of the board of directors comprise independent directors;

•

the requirement we have a nominating/corporate governance committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

•

the requirement we have a compensation committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

Following this offering, we intend to utilize these exemptions. Accordingly, in the event the Sponsors’ interests differ from those of other stockholders, and, for so long as we are a “controlled company,” you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

Our directors who have relationships with our Sponsors may have conflicts of interest with respect to matters involving our company.

Following this offering, and of our directors will be affiliated with TPG and JLL, respectively. Our Sponsor-affiliated directors have fiduciary duties to us and, in addition, will have duties to their respective Sponsors. additional directors will be Senior Advisors to TPG. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and the Sponsors, whose interests, in some circumstances, may be adverse to ours.

We are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay any dividends.

IASIS Healthcare Corporation is a holding company with nominal net worth. We do not have any material assets or conduct any business operations other than our investments in our subsidiaries. Our business operations are conducted primarily out of our operating subsidiary, IASIS Healthcare LLC and its subsidiaries. As a result, notwithstanding any restrictions on payment of dividends under our existing indebtedness, our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from our subsidiaries, including from IASIS Healthcare LLC. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

A ratings downgrade or other negative action by a ratings organization could adversely affect the trading price of the shares of our common stock.

Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations could lead to a ratings downgrade for us or our subsidiaries. Any such fluctuation in the rating of us or our subsidiaries may impact our ability to access debt markets in the future or increase our cost of future debt which could have a material adverse effect on our operations and financial condition, which in return may adversely affect the trading price of shares of our common stock.

Forward-looking statements

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and you can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “continue,” “initiative” or “anticipates” or similar expressions that concern our prospects, objectives, strategies, plans or intentions. Forward-looking statements including, among others, all statements relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates, operating and growth strategies, ability to repay or refinance our substantial existing indebtedness and financial results or to the impact of existing or proposed laws or regulations (including the Health Reform Law). These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe our assumptions are reasonable, it is very difficult to predict the impact of known factors, and, of course, it is impossible to anticipate all factors that could affect our actual results. These factors include, but are not limited to:

•

our Health Choice managed care business’ ability to effectively manage costs of care, maintain its governmental contracts and achieve its service line expansion strategies;

•

the effects of a shift in volume or payor mix from commercial managed-care payors to self-pay and Medicaid;

•

increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts;

•

a reduction in or withholding of government-sponsored supplemental payments to our hospitals;

•

the effects of any inability to retain and negotiate reasonable contracts with managed care plans or if insured patients switch from traditional commercial insurance plans to exchange plans;

•

industry trends towards value-based purchasing and narrow networks and related competitive challenges to our hospitals;

•

possible changes in the Medicare, Medicaid and other state programs, including Medicaid supplemental reimbursement programs or waiver programs, that may impact reimbursement to healthcare providers and insurers;

•

controls imposed by Medicare and third-party payors to reduce admissions and length of stay;

•

competition to attract and retain quality physicians, nurses, technicians and other personnel;

•

the generally competitive nature of the healthcare industry;

•

the possibility of health pandemics and the related impacts on our operations and financial results;

•

a failure of our information systems or breach of our cyber-security protections;

•

the costs and operational challenges associated with information technology and medical equipment upgrades;

•

challenges associated with the implementation of electronic health records and coding systems;

•

compliance with extensive healthcare industry laws, regulations and investigations, including those with respect to patient privacy and physician-owned hospitals;

•

reliance upon services provided by third-party vendors;

•

the effects of local or national economic downturns on our business lines;

•

increased lease rates and amended lease terms at certain of our facilities in connection with sale-leaseback transactions;

•

the effectiveness of our reinvestment of proceeds from sale-leaseback transactions and asset dispositions;

•

timely completion of under-construction facilities;

•

risks associated with environmental, health and safety laws;

•

risks associated with labor laws;

•

potential adverse accounting impacts associated with goodwill carrying value;

•

our dependence upon the services of key executive management personnel;

•

risks related to our indebtedness and capital structure; and

•

other risk factors described in this prospectus.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

Use of proceeds

We estimate that the net proceeds we will receive from the sale of shares of our common stock in this offering, after deducting underwriter discounts and commissions and estimated expenses payable by us, will be approximately $ million. This estimate assumes an initial public offering price of $ per share, the midpoint of the range on the cover page of this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. A share increase (decrease) in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the initial public offering price per share set forth on the cover page of this prospectus remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We will receive no proceeds from the sale of shares of our common stock by the selling stockholders if the underwriters exercise the option to purchase additional shares.

Dividend policy

Following completion of the offering, we do not intend to pay any cash dividends on our common stock for the foreseeable future and instead may retain earnings for future operation and expansion and debt repayment. Any decision to declare and pay dividends will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, because we are a holding company, our ability to pay dividends depends on our receipt of cash dividends and distributions from our subsidiaries, which is limited by covenants in our senior secured credit facilities and in the indenture governing our notes. See “Description of indebtedness” and Note 3, Long-term debt, capital leases and other obligations, to our consolidated financial statements for restrictions on our ability to pay dividends.

Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2014:

•

on an actual basis; and

•

on an as adjusted basis to give effect to (1) the issuance of shares of common stock by us in this offering and the receipt of approximately $ million in net proceeds from the sale of such shares, assuming an initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses, and (2) the application of proceeds from this offering as described in “Use of proceeds.”

You should read this table in conjunction with the information contained in “Use of proceeds,” “Selected financial data,” and “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and notes thereto, included elsewhere in this prospectus.


	As of September 30, 2014
(dollars in thousands)	Actual			As adjusted(1)
Cash and cash equivalents	$	341,739		$


Long-term debt, including current portions:
Senior secured term loan facility	$	986,815		$
Senior notes		846,479
Capital leases and other obligations		20,506

Total debt	$	1,853,800		$


Stockholders’ equity:
Common stock, par value $0.01 per share; 100,000,000 shares authorized and 15,016,097 shares issued and outstanding on an actual basis, shares authorized and shares issued and outstanding on an as adjusted basis	$	150		$
Additional paid-in capital		143,768
Accumulated other comprehensive loss		(2,344	)
Retained earnings (accumulated deficit)		(1,759	)

Total stockholder’s equity	$	139,815		$

Total capitalization	$	1,993,615		$

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the as adjusted amount of each of cash and cash equivalents, additional paid-in capital and total stockholders’ equity by approximately $ million after deducting underwriting discounts and estimated offering expenses payable by us.

Dilution

As of September 30, 2014, we had a historical net tangible book deficit of $ , or $ per share of common stock, based on shares of our common stock outstanding as of September 30, 2014. Dilution per share to new investors is calculated by subtracting the net tangible book deficit per share of our common stock from the assumed initial public offering price per share of our common stock.

Investors participating in this offering will incur immediate and substantial dilution. Without taking into account any other changes in such net tangible book deficit after September 30, 2014, after giving effect to the sale of shares of our common stock in this offering assuming an initial public offering price of $ per share (the midpoint of the offering range shown on the cover of this prospectus), less the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book deficit as of September 30, 2014 would have been approximately $ million, or $ per share of common stock. This amount represents an immediate increase in net tangible book deficit of $ per share of our common stock to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution on a per share basis:


Assumed initial public offering price per share		$
Net tangible book deficit per share as of September 30, 2014, before giving effect to this offering	$
Increase in net tangible book deficit per share attributable to investors purchasing shares in this offering	$

Pro forma as adjusted net tangible book deficit per share, after giving effect to this offering		$

Dilution per share to investors in this offering		$

If the underwriters exercise their option in full to purchase additional shares, the pro forma as adjusted net tangible book deficit per share of our common stock after giving effect to this offering would be $ per share of our common stock. This represents an increase in pro forma as adjusted net tangible book deficit of $ per share of our common stock to existing stockholders and dilution of $ per share of our common stock to new investors.

Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the pro forma as adjusted net tangible book deficit per share of our common stock after giving effect to this offering by $ , or by $ per share of our common stock, assuming no change to the number of shares of our common stock offered by us as set forth on the front cover page of this prospectus and after deducting the estimated underwriting discounts and expenses payable by us.

The following table summarizes, as of September 30, 2014, on the pro forma basis described above, the total number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share of our common stock paid by purchasers of such shares and by new investors purchasing shares of our common stock in this offering:

Shares purchased

Total consideration

Average price
per share

Number

Percent

Amount

Percent

Existing stockholders

New investors

Total

The number of shares of common stock to be outstanding after this offering is based on shares of common stock outstanding as of September 30, 2014 and excludes the following:

•

shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2014 at a weighted-average exercise price of $ per share;

•

shares of common stock issuable upon the vesting of outstanding RSUs as of September 30, 2014; and

•

shares of common stock reserved for future issuance under our equity incentive plans as of September 30, 2014.

Selected financial data

The following table sets forth selected financial data of IASIS Healthcare Corporation as of the dates and for the periods indicated. The selected financial data as of September 30, 2014 and 2013 and for each of the years ended September 30, 2014, 2013 and 2012 have been derived from IASIS Healthcare Corporation’s consolidated financial statements appearing elsewhere in this prospectus, which have been audited by Ernst & Young LLP. The selected financial data as of September 30, 2012, 2011 and 2010 and for each of the years ended September 30, 2011 and 2010 presented in this table have been derived from IASIS Healthcare Corporation’s consolidated financial statements that are not included in this prospectus and were not audited by Ernst & Young LLP.

Our historical results are not necessarily indicative of the results that may be expected in any future period, and our results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The selected financial data set forth below should be read with, and are qualified by reference to, “Management’s discussion and analysis of financial condition and results of operations,” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.


	Year ended September 30,
	2014			2013			2012			2011			2010

Statement of Operations Data
Total revenue	$	2,533,587		$	2,285,054		$	2,244,941		$	2,250,730		$	2,071,439

Costs and expenses
Salaries and benefits		892,714			848,010			790,080			679,760			558,860
Supplies		299,760			294,409			283,663			257,676			216,490
Medical claims		596,778			467,294			466,125			630,202			678,651
Rentals and leases		72,714			52,896			42,785			40,284			34,154
Other operating expenses		426,933			393,633			415,097			371,705			317,079
Medicare and Medicaid EHR incentives		(14,753	)		(20,723	)		(21,831	)		(9,042	)		—
Interest expense, net		130,818			133,154			137,687			109,867			89,412
Depreciation and amortization		95,312			94,026			101,264			92,265			83,002
Management fees		5,000			5,000			5,000			5,000			5,000
Loss on extinguishment of debt		—			—			—			27,311			—

Total costs and expenses		2,505,276			2,267,699			2,219,870			2,205,028			1,982,648

Earnings from continuing operations before gain (loss) on disposal of assets and income taxes		28,311			17,355			25,071			45,702			88,791
Gain (loss) on disposal of assets, net		3,402			(8,982	)		2,241			131			258

Earnings from continuing operations before income taxes		31,713			8,373			27,312			45,833			89,049
Income tax expense		8,424			3,504			2,108			16,359			33,004

Net earnings from continuing operations		23,289			4,869			25,204			29,474			56,045
Earnings (loss) from discontinued operations, net of income taxes		(14,005	)		5,708			6,560			5,044			320

Net earnings		9,284			10,577			31,764			34,518			56,365
Net earnings attributable to non-controlling interests		(11,668	)		(7,215	)		(8,712	)		(10,354	)		(8,279	)

Net earnings (loss) attributable to IASIS Healthcare Corporation		(2,384	)		3,362			23,052			24,164			48,086
Accrued dividends on preferred stock		—			—			(3,689	)		(4,706	)		(9,101	)

Net earnings (loss) attributable to common stockholders	$	(2,384	)	$	3,362		$	19,363		$	19,458		$	38,985

Net earnings from continuing operations per common share
Cash dividends declared per common share
Net earnings (loss) per share
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted


	Year ended September 30,
	2014		2013		2012		2011		2010

Balance Sheet Data
Cash and cash equivalents	$	341,739	$	553,487	$	164,186	$	377,327	$	144,511
Total assets	$	2,719,523	$	2,995,621	$	2,814,028	$	2,917,141	$	2,359,095
Long-term debt, capital leases and other obligations (including current portion)	$	1,853,800	$	1,866,043	$	1,866,494	$	1,878,769	$	1,439,814
Stockholders’ equity	$	139,815	$	257,799	$	257,452	$	306,553	$	276,676

Other Financial Data(1)
Adjusted EBITDA	$	269,770	$	253,390	$	279,099	$	254,515	$	268,692
Adjusted EBITDAR	$	287,720	$	253,703	$	279,099	$	254,515	$	268,692

Selected operating data

The following table sets forth certain unaudited operating data for each of the periods presented.


	Year ended September 30,
	2014		2013		2012		2011		2010

Acute Care Operations(2)
Number of acute care hospital facilities at end of period		15		15		15		15		14
Licensed beds at end of period(3)		3,604		3,626		3,603		3,499		2,707
Average length of stay (days)(4)		5.0		4.9		4.7		4.6		4.6
Occupancy rates(5)		48.5%		48.5%		49.0%		43.6%		51.3%
Admissions(6)		100,909		103,509		106,084		94,256		81,732
Adjusted admissions(7)		186,609		185,147		182,420		162,503		136,730
Patient days(8)		503,648		508,157		500,935		437,025		373,072
Adjusted patient days(7)		931,387		908,941		861,396		753,455		624,115
Surgeries		65,484		64,460		60,121		54,076		45,326
Emergency room visits		411,156		410,503		384,790		363,731		299,870
Net patient revenue per adjusted admission(9)	$	9,544	$	9,140	$	9,048	$	9,077	$	9,305
Outpatient revenue as a % of gross patient revenue		45.9%		44.1%		41.8%		42.0%		40.2%


	Year ended September 30,
	2014		2013		2012		2011		2010

Managed Care Operations
Health plan lives(10)		223,400		188,000		192,500		195,000		198,400
MSO lives(11)		83,400		—		—		—		—
Accountable care network lives(12)		20,800		—		—		—		—

Total lives		327,600		188,000		192,500		195,000		198,400
Medical loss ratio(13)		84.2%		84.1%		83.1%		84.6%		87.2%

(1)

Adjusted EBITDA, as we use it, represents net earnings from continuing operations before net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation and related expense, net loss (gain) on disposal of assets and management fees. Management fees represent monitoring and advisory fees paid to management companies affiliated with TPG and JLL. Adjusted EBITDAR, as we use it, is Adjusted EBITDA with an additional adjustment to exclude rent expense associated with our sale leaseback transaction, which closed in September 2013.

•

they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

•

they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

•

they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

•

they are not adjusted for the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

•

they do not reflect a deduction of net earnings (loss) attributable to non-controlling interests; and

•

other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

The following table presents a reconciliation of Adjusted EBITDA and Adjusted EBITDAR to earnings from continuing operations, determined in accordance with GAAP:


	Year ended September 30,														Quarter ended September 30,
	2014			2013		2012			2011			2010			2014			2013
Net earnings (loss) from continuing operations	$	23,289		$	4,869	$	25,204		$	29,474			56,045		$	16,297			(2,346	)
Interest expense, net		130,818			133,154		137,687			109,867			89,412			32,520			33,220
Income tax expense (benefit)		8,424			3,504		2,108			16,359			33,004			(5,609	)		(2,898	)
Depreciation and amortization		95,312			94,026		101,264			92,265			83,002			25,540			23,381
Stock-based compensation and related expenses		10,329			3,855		10,077			1,681			2,487			1,533			909
Loss (gain) on disposal of assets, net		(3,402	)		8,982		(2,241	)		(131	)		(258	)		(2,304	)		9,626
Management fees		5,000			5,000		5,000			5,000			5,000			1,250			1,250

Adjusted EBITDA		269,770			253,390		279,099			254,515			268,692			69,227			63,142
Sale-leaseback rent expense		17,950			313		—			—			—			4,709			313

Adjusted EBITDAR	$	287,720		$	253,703	$	279,099		$	254,515		$	268,692		$	73,936		$	63,455

(2)

Excludes the impact of our Nevada and Florida operations, which are reflected in discontinued operations.

(3)

Includes St. Luke’s Behavioral Hospital in Phoenix, Arizona.

(4)

Represents the average number of days that a patient stayed in our hospitals.

(5)

Calculated by dividing the average daily number of inpatients by the weighted-average number of beds in service.

(6)

Represents the total number of patients admitted to our hospitals that qualify for inpatient status. Management and investors use this number as a general measure of inpatient volume.

(7)

Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions/patient days by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.

(8)

Represents the number of days our beds were occupied by inpatients over the period.

(9)

Includes the impact of the provision for bad debts as a component of revenue.

(10)

Represents total lives enrolled across all health plan product lines. Includes dual-eligible lives, which are members eligible for Medicare and Medicaid benefits, under Health Choice’s contract with CMS to provide coverage as a MAPD SNP totaling 8,700 and 4,500 as of September 30, 2014 and 2013, respectively.

(11)

Represents lives enrolled in Health Choice’s MSO that provides management and administrative services to a large national insurer’s Medicaid plan members in the Tampa and Panhandle regions of Florida.

(12)

(13)

Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion of our results of operations and financial condition with “Selected financial data” and the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk factors” section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the “Forward-looking statements,” “Risk factors” and our audited consolidated financial statements and related notes appearing elsewhere in this prospectus. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes. It includes the following sections:

•

Executive Overview;

•

Results of Operations Summary;

•

Liquidity and Capital Resources; and

•

Critical Accounting Policies and Estimates.

Data for the years ended September 30, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements.

Executive overview

We are a healthcare services company delivering high-quality, cost-effective healthcare through a broad and differentiated set of capabilities and assets that includes acute care hospitals with related patient access points, and a diversified and growing managed care risk platform (“risk platform”). Our business model is centered on deploying our acute care expertise and risk platform, either separately or on an integrated basis, in attractive markets to manage population health, integrate the delivery and payment of healthcare services and ultimately expand our total market opportunities within our existing and new geographic markets. Our company is comprised of our acute care operations, which, as of September 30, 2014, included 16 acute care hospitals, one behavioral hospital and multiple other access points, including 134 physician clinics, multiple outpatient surgical units, imaging centers, and investments in urgent care centers and on-site employer-based clinics, and our diversified and growing risk platform, Health Choice.

Acute care operations

As of September 30, 2014, we owned or leased 16 acute care hospital facilities and one behavioral health hospital facility with a total of 3,781 licensed beds, several outpatient service facilities and 134 physician clinics. On September 26, 2014, we approved and committed to a plan to dispose of our Nevada operations, which included one hospital in the Las Vegas area and related physician operations. Accordingly, our Nevada operations have been included in discontinued operations for all periods presented. In January 2015, we closed on the sale of our Nevada operations.

We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans to develop quality and outcome driven, cost-efficient and innovative reimbursement models. Our major acute care geographic markets include Salt Lake City, Utah; Phoenix, Arizona; five cities in Texas, including Houston, San Antonio and Odessa; and West Monroe, Louisiana.

Since our company was founded in 1998, we believe we have developed a reputation for operating hospitals that deliver high quality care in our markets at rates that are often more affordable than many other hospitals in our markets with larger local market share than us. Our corporate and divisional infrastructure allows us to leverage savings in information technology services, revenue cycle, hospital supplies, and labor force costs.

Managed care operations

Health Choice, headquartered in Phoenix, Arizona, began providing managed Medicaid services under contract with AHCCCS in 1990, making it one of the nation’s first Medicaid managed care plans. Under our ownership beginning in 1999, Health Choice has evolved into a managed care organization and insurer that, while growing its core managed Medicaid business, has expanded to serve certain Medicare Advantage and Exchange members and is utilizing its population health management expertise to offer MSO-related services to other payors through its MSO-related services. In collaboration with our hospitals and affiliated physicians in certain of our markets, Health Choice also manages accountable care contracting networks.

Health Choice represents one of our company’s key strategic assets, which we believe provides the Company with the ability to engage in innovative value-based purchasing initiatives and opportunities. Its leadership team has considerable experience in population health management, physician relations and network development. We believe Health Choice also deploys state of the art disease management and claims processing technology. In light of the current healthcare industry trends toward integrated delivery and clinical integration, we are seeking to bring Health Choice’s expertise and technology to bear as part of the accountable provider networks we offer to other health plans.

As of September 30, 2014, Health Choice’s related entities delivered healthcare services to 327,600 members through multiple health plans, accountable care networks, MSO-related services and other managed care solutions. These members include 209,300 managed Medicaid members served primarily through Health Choice’s core health plan business in Arizona, 8,700 members participating in Health Choice’s MAPD SNP, 83,400 members of a large national insurer’s Florida managed Medicaid plan for whom Health Choice serves as a MSO, and 25,400 member lives managed through Health Choice’s accountable care networks and members of Health Choice’s Utah Managed Medicaid and Arizona health insurance exchange plans.

Our business consists of the two operating segments previously discussed: (1) our acute care segment comprised of our hospitals, outpatient service facilities and physician clinics and (2) our managed care operations, consisting of Health Choice and its various related service lines. The financial information for our reportable operating segments is presented in Note 15, Segment and geographic information, to our consolidated financial statements elsewhere in this prospectus.

Recent developments

Health Choice MSO contract with a large national insurer in Florida. In fiscal 2014, Health Choice’s MSO subsidiary and a large national insurer entered into an agreement under which Health Choice manages the healthcare benefits and utilization of the insurer’s 88,300 managed Medicaid plan members as of January 1, 2015 through the care management and administrative services of our MSO. Under this agreement, Health Choice provides numerous back office and managed care functions, including member services, claims adjudication, provider network services, prior authorization, utilization management, clinical care coordination, case management, disease management, and quality improvement programs.

Health Choice integrated behavioral health joint venture. On December 18, 2014, Health Choice and its joint venture partner NARBHA won a competitive bid to begin operating an integrated acute and behavioral health

plan in Northern Arizona in our 2016 fiscal year. The joint venture, Health Choice Integrated Care LLC, is expected to provide standalone behavioral health benefit for approximately 225,000 plan members in Northern Arizona, and acute and behavioral care on an integrated basis for approximately 6,000 members who are seriously mentally ill. Health Choice owns 52% of the joint venture and NARBHA owns 48% of the joint venture.

New hospital construction in Lehi, Utah. We are building a new expandable inpatient and outpatient health campus in fast-growing Lehi, Utah, called Mountain Point Medical Center, as a provider-based campus of Jordan Valley. The hospital will provide a full range of services including inpatient intensive care, obstetrics and surgical services. The hospital also will provide cardiology services, which includes a cardiac catheterization lab. Additional outpatient services will include emergency, imaging, lab and outpatient surgery. The hospital has been designed to serve the growing transition to outpatient-related services and is being constructed with the capability to expand depending on community need and demand for services in the Lehi area. A medical office building is being constructed immediately adjacent to, and connected with, the hospital to be occupied by primary care and multi-specialty physician groups practicing in the area. This new hospital, anticipated to cost in excess of $80.0 million, will serve eight cities in Northern Utah County and is in the fastest growing area within the state of Utah. This project is anticipated to be completed and open for business in the summer of 2015.

Sale of North Vista Hospital. In January 2015, we closed a transaction for the sale of our Nevada operations, which primarily included North Vista Hospital, a 177-bed general acute care facility located in Las Vegas, Nevada. We intend to use proceeds from the sale in a variety of strategic initiatives aimed at growth in existing markets and expansion into new markets.

Revenue and volume trends

Total revenue for the year ended September 30, 2014, increased $248.5 million or 10.9% compared to the prior year. Total revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts, and premium and service revenues. Acute care revenue increased $82.6 million or 4.8% compared to the prior year, while premium and service revenues in our managed care operations increased $165.9 million or 29.4% compared to the prior year.

Acute care revenue

Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Acute care revenue is reported net of the provision for doubtful accounts. Other revenue includes medical office building rental income and other miscellaneous revenue.

Admissions decreased 2.5% for the year ended September 30, 2014, compared to the prior year. This decrease reflects a decline in one-day stays, along with a corresponding increase in observation visits on the outpatient side of the business, an industry-wide decline in inpatient utilization and a continued shift towards outpatient services. In addition, respiratory or flu-related volumes declined for the year ended September 30, 2014, as compared to the prior year. Adjusted admissions increased 0.8% for the year ended September 30, 2014,

compared to prior year. For the year ended September 30, 2014, our outpatient volumes, along with an increase in observations, were positively impacted by increases in outpatient surgeries of 4.5% compared to the prior year. Additionally, emergency room visits increased 0.2% compared to the prior year.

The following table provides the sources of our hospitals’ gross patient revenue by payor before discounts, contractual adjustments and the provision for bad debts:


	Year ended September 30,
	2014		2013		2012
Medicare		27.0%		27.8%		27.6%
Managed Medicare		15.1		14.9		13.3
Medicaid and managed Medicaid		21.2		20.8		22.5
Managed care		30.8		29.6		30.0
Self-pay		5.9		6.9		6.6

Total		100.0%		100.0%		100.0%

The following table provides the sources of our hospitals’ net patient revenue by payor before the provision for bad debts:


	Year ended September 30,
	2014		2013		2012
Medicare		20.4%		21.1%		21.2%
Managed Medicare		10.8		10.6		9.7
Medicaid and managed Medicaid		12.8		11.8		13.5
Managed care		40.9		39.2		39.8
Self-pay		15.1		17.3		15.8

Total		100.0%		100.0%		100.0%

As noted in the above tables, our gross and net patient revenue by payor is experiencing a shift from self-pay to Medicaid and managed Medicaid and managed care payors. The shift to Medicaid and managed Medicaid is primarily a result of Arizona’s expansion of its Medicaid program, which became effective January 1, 2014, under the Health Reform Law, which also became effective January 1, 2014. Additionally, we have benefited from individuals enrolling in Exchange plans in our markets, as well improvements in employment and other economic factors in the markets we serve.

Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 4.4% for the year ended September 30, 2014, compared to the prior year.

See “Business—Sources of revenue—Acute care revenue” and “Business—Government regulation and other factors” included elsewhere in this prospectus for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In those sections, we also discuss the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by the CMS that impact reimbursement rates for services provided under the plan. We also discuss the future potential impact to reimbursement for certain of these payors under the Health Reform Law.

Premium and service revenues

Premium and service revenues generated by our managed care operations represented 28.8%, 24.7% and 25.4%, of our total revenue for the years ended September 30, 2014, 2013 and 2012, respectively.

Health Choice contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted healthcare providers. Most of its premium revenue is derived through a contract with AHCCCS, the state agency that administers Arizona’s Medicaid program. The contract requires Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Health Choice also contracts with CMS to provide coverage as a MAPD SNP. This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid). In accordance with CMS regulations, SNPs are now expected to meet additional requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

One notable provision of the Health Reform Law is the annual health insurer fee (“HIF”) that applies to most health plans, including commercial health plans and Medicaid managed care plans like Health Choice. While characterized as a “fee” in the text of the Health Reform Law, the intent of Congress was to impose a broad based health insurance industry excise tax, with the understanding that the tax could be passed on to consumers, most likely through higher commercial insurance premiums. However, because Medicaid is a government-funded program, Medicaid health plans have no alternative but to look to their respective state partners for payment to offset the impact of this tax. Arizona has agreed to reimburse all of the managed Medicaid plans, for the economic impact of this fee, which totaled $7.9 million for Health Choice in calendar 2014. In addition to the reimbursement of the fee, the state of Arizona has agreed to reimburse insurers for the impact resulting from these fees being treated as non-deductible for income tax purposes. For the year ended September 30, 2014, we recognized expense for the HIF totaling $6.0 million, which was offset by expected reimbursement from the state of Arizona of $8.2 million, which includes $2.9 million related to the reimbursement of the impact of tax related issues.

Other industry items impacting our company

Two midnight rule

In 2014, CMS issued the “two midnight rule,” which revised its longstanding guidance to hospitals and physicians relating to when hospital inpatient admissions are deemed to be reasonable and necessary for payment under Medicare Part A. Under the two midnight rule, in addition to services that are designated as inpatient-only, surgical procedures, diagnostic tests and other treatments are generally appropriate for inpatient hospital admission and payment under Medicare Part A when the physician (i) expects the beneficiary to require a stay that crosses at least two midnights and (ii) admits the beneficiary to the hospital based upon that expectation. Conversely, hospital stays in which the physician expects the beneficiary to require care that spans less than two midnights are generally inappropriate for payment under Medicare Part A, and should be treated and billed as outpatient services under Part B. The increased scrutiny regarding short-stay admissions by Medicare and other payors has contributed, in part, to the decline in 1-day stays and the increase in observation patients experienced during the year ended September 30, 2014.

As a result of legislative and regulatory actions, enforcement of the two midnight rule by recovery auditor and other Medicare review contractors has been delayed through March 31, 2015. However, MACs may review, on a pre-payment basis, a small sample of inpatient hospital claims relating to admissions that span less than two midnights and that occur between March 31, 2014, and March 31, 2015, in order to determine hospital compliance with the new inpatient admission and medical review criteria.

We cannot predict whether Congress or CMS will further delay the review of inpatient admissions of one midnight or less by recovery auditors or other Medicare review contractors, the impact that any such reviews will have on our business and results of operations, or when they are allowed by CMS. In addition, legislation

has been introduced in Congress that, among other things, would both generally prohibit Medicare review contractors from denying claims due to the length of a patient’s stay or a determination that services could have been provided in an outpatient setting and require CMS to develop a new payment methodology for services that are provided during short inpatient hospital stays. Federal lawsuits have also been filed challenging the two midnight rule primarily on the grounds that the implementation of the rule itself, and the payment reduction associated with the rule (i.e., 0.2% Inpatient Prospective Payment System (IPPS) payment reduction to hospitals) violate the Administrative Procedure Act. We cannot predict whether legislation will be adopted or, if adopted, the amount of reimbursement that would be paid under any alternative payment methodology that would be developed by CMS. We also cannot predict whether federal court challenges to the two midnight rule will be successful.

Budget Control Act and sequestration

The BCA increased the nation’s borrowing authority and takes steps to reduce federal spending and the deficit. The deficit reduction portion of the BCA imposes caps, which began in federal fiscal year 2012, that reduce discretionary spending by more than $900 billion over ten years. The BCA also requires automatic spending reductions of $1.2 trillion for federal fiscal years 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. The spending reductions have been extended through 2024. These automatic spending reductions are commonly referred to as “sequestration.” The spending reductions are split evenly between defense and non-defense discretionary spending, although certain programs (including Medicaid and CHIP), are exempt from these automatic spending reductions, and Medicare expenditures cannot be reduced by more than two percent. Sequestration began on March 1, 2013, with CMS imposing a two percent reduction on Medicare claims beginning April 1, 2013. We are unable to predict what other deficit reduction initiatives may be proposed by the President or Congress or whether the President and Congress will restructure or suspend sequestration. It is possible that changes in the law to end or restructure sequestration will result in greater spending reductions than currently required by the BCA.

State Medicaid budgets

Over recent years, the states in which we operate experienced budget constraints as a result of increased costs and lower than expected tax collections. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. In previous years, the states in which we operate responded to these budget concerns by decreasing funding for Medicaid and other healthcare programs, or by making structural changes that resulted in a reduction in hospital reimbursement and by imposing more restrictive Medicaid eligibility requirements. In addition, many states have received waivers from CMS in order to implement or expand managed Medicaid programs.

Texas

The Texas legislature and the THHSC recommended expanding Medicaid managed care enrollment in the state, and in December 2011, CMS approved a five-year Medicaid waiver that: (1) allows Texas to expand its Medicaid managed care program while preserving hospital funding; (2) provides incentive payments for improvements in healthcare delivery; and (3) directs more funding to hospitals that serve large numbers of uninsured patients. All of our acute care hospitals in Texas currently receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs, including amounts recognized under the Texas Medicaid DSH program

(“Texas Medicaid DSH”) for the year ended September 30, 2014, was $106.7 million compared to $98.8 million in the prior year. Under the Medicaid waiver, funds are distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities’ care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination will be controlled primarily by government-owned public hospitals that serve the surrounding geographic areas. Complexities of the underlying methodologies in determining the funding for the state’s Medicaid supplemental reimbursement programs, along with a lack of sufficient resources at THHSC to administer the programs, has resulted in a delay in related reimbursements. As of September 30, 2014 and 2013, we had $90.2 million and $66.8 million, respectively, in receivables due to our Texas hospitals in connection with these supplemental reimbursement programs, which includes $34.9 million and $30.1 million, respectively, of amounts due under Texas Medicaid DSH.

On October 1, 2014, the THHSC issued a notice to certain hospitals participating in the Texas waiver program. These hospitals operate in the surrounding areas of Dallas, Tarrant, Nueces and Travis counties (including the cities of Dallas/Fort Worth, Corpus Christi and Austin). According to the notice, a review conducted by CMS identified some of these affiliation agreements it believed may be inconsistent with the waiver. As a result of these findings, CMS temporarily deferred the federal portion of the Medicaid payments associated with these affiliations. CMS lifted the deferral on January 7, 2015, but has not yet made a final determination regarding the acceptability of the affiliations. None of our hospitals were included in the programs reviewed by CMS. We cannot assure you that CMS, THHSC and other similar agencies will not in the future audit or delay our programs in a manner that reduces the amount or slows the timing of our receipt of such funding.

The THHSC has adopted rules to change the Texas Medicaid DSH methodology for the state’s fiscal year 2014 and 2015. Texas has appropriated $160.0 million for fiscal year 2014 and $140.0 million for fiscal year 2015 to stabilize and improve the Texas Medicaid DSH program, including providing rate adjustments to recognize improvements in quality of patient care, the most appropriate use of care, and patient outcomes. Funds appropriated for in 2015 may not be spent before the plan is finalized. During the year ended September 30, 2014, we recognized $34.9 million in Texas Medicaid DSH revenue, compared to $30.1 million in the prior year.

Arizona

Beginning in July 2011, in an effort to control its budgeted expenditures and balance its budget, the state of Arizona implemented a plan to reduce its eligible Medicaid beneficiaries, particularly childless adults. Following implementation of this plan by the state of Arizona, Health Choice experienced a significant decline through the end of our fiscal year 2013 in its enrollees, premium revenue and related earnings.

Effective January 1, 2014, Arizona expanded its Medicaid program under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults. The expansion of the state’s Medicaid program under the Health Reform Law could potentially result in the addition of approximately 350,000 people to its Medicaid rolls. Primarily as a result of the Medicaid expansion, enrollment under Health Choice’s Medicaid product line increased 13.9% for the year ended September 30, 2014, compared to the prior year. In addition, in connection with the expanded Medicaid coverage, the state implemented a provider assessment effective January 1, 2014, to fund a portion of the expanded eligibility related to the childless adult population. During the year ended September 30, 2014, we incurred $4.5 million in provider tax assessments.

Arizona’s Medicaid expansion in 2014, and Health Choice’s related increase in enrolled members and premium revenue, followed a period of several years during which AHCCCS tightened Medicaid eligibility standards in

Arizona and decreased capitation rates paid to managed Medicaid contractors, reflecting state government budgetary pressures and a struggling state economy. If additional Medicaid program changes are implemented in the future in Arizona or other states in which we operate, our premium revenue and earnings could be significantly impacted.

Uncompensated care

While the amount of uncompensated care, including discounts to the uninsured, bad debts and charity care, we deliver to the communities we serve continues to remain high in comparison to historical levels, we have experienced a decrease during the year ended September 30, 2014. During the year ended September 30, 2014, our uncompensated care as a percentage of acute care revenue was 21.1%, compared to 23.0% in the prior year. During the year ended September 30, 2014, our self-pay admissions represented 6.9% of our total admissions, compared to 8.0% in the prior year. We believe the improvement in our uncompensated care as a percentage of acute care revenue and our self-pay admissions mix can be attributed primarily to the impact of Medicaid expansion in the state of Arizona, as well as improvements in employment and other economic factors in our markets, which has resulted in lower self-pay volume and revenue for the year ended September 30, 2014, compared to the prior year. The improvement in our uncompensated care as a percentage of acute care revenue has been offset somewhat by the higher acuity levels at which self-pay patients are presenting for treatment through our emergency rooms.

We anticipate uninsured volumes to continue to decline in the near future as the impact of the Health Reform Law is fully realized. However, if we were to experience growth in uninsured volume and revenue, our uncompensated care may increase and our results of operations would be adversely affected.

The percentages of our insured and uninsured net hospital receivables are summarized as follows (1):


	September 30, 2014		September 30, 2013
Insured receivables		84.4%		82.0%
Uninsured receivables		15.6		18.0

Total		100.0%		100.0%

The percentages of hospital receivables in summarized aging categories are as follows (1):


	September 30, 2014		September 30, 2013
0 to 90 days		63.2%		62.0%
91 to 180 days		18.0		20.8
Over 180 days		18.8		17.2

Total		100.0%		100.0%

(1)

Excludes hospital receivables related to our discontinued Florida and Nevada operations.

Results of operations summary

Consolidated

The following table sets forth, for the periods indicated, results of our consolidated operations expressed in dollar terms and as a percentage of total revenue. Such information has been derived from our audited, consolidated statements of operations.


	Year ended September 30, 2014						Year ended September 30, 2013						Year ended September 30, 2012
($ in thousands):	Amount			%			Amount			%			Amount			%

Revenues
Acute care revenue before provision for bad debts	$	2,140,675					$	2,047,880					$	1,917,576
Less: Provision for bad debts		(337,118	)					(326,978	)					(241,777	)

Acute care revenue		1,803,557			71.2%			1,720,902			75.3%			1,675,799			74.6%
Premium and service revenues		730,030			28.8%			564,152			24.7%			569,142			25.4%

Total revenue		2,533,587			100.0%			2,285,054			100.0%			2,244,941			100.0%

Costs and expenses
Salaries and benefits (includes stock-based compensation of $10,329, $3,855 and $10,055, respectively)		892,714			35.2%			848,010			37.1%			790,080			35.2%
Supplies		299,760			11.8%			294,409			12.9%			283,663			12.6%
Medical claims		596,778			23.6%			467,294			20.5%			466,125			20.8%
Rentals and leases		72,714			2.9%			52,896			2.3%			42,785			1.9%
Other operating expenses		426,933			16.8%			393,633			17.2%			415,097			18.5%
Medicare and Medicaid EHR incentives		(14,753	)		(0.6%	)		(20,723	)		(0.9%	)		(21,831	)		(1.0%	)
Interest expense, net		130,818			5.2%			133,154			5.8%			137,687			6.1%
Depreciation and amortization		95,312			3.8%			94,026			4.1%			101,264			4.5%
Management fees		5,000			0.2%			5,000			0.2%			5,000			0.2%

Total costs and expenses		2,505,276			98.9%			2,267,699			99.2%			2,219,870			98.9%
Earnings from continuing operations before gain (loss) on disposal of assets and income taxes		28,311			1.1%			17,355			0.8%			25,071			1.1%
Gain (loss) on disposal of assets, net		3,402			0.1%			(8,982	)		(0.4%	)		2,241			0.1%

Earnings from continuing operations before income taxes		31,713			1.2%			8,373			0.4%			27,312			1.2%
Income tax expense		8,424			0.3%			3,504			0.2%			2,108			0.1%

Net earnings from continuing operations		23,289			0.9%			4,869			0.2%			25,204			1.1%
Earnings (loss) from discontinued operations, net of income taxes		(14,005	)		(0.6%	)		5,708			0.2%			6,560			0.3%

Net earnings		9,284			0.3%			10,577			0.5%			31,764			1.4%
Net earnings attributable to non-controlling interests		(11,668	)		(0.4%	)		(7,215	)		(0.3%	)		(8,712	)		(0.4%	)

Net earnings (loss) attributable to IASIS Healthcare Corporation		(2,384	)		(0.1%	)		3,362			0.1%			23,052			1.0%
Accrued dividends on preferred stock		—			0.0%			—			0.0%			(3,689	)		(0.2%	)

Net earnings (loss) attributable to common stockholders	$	(2,384	)		(0.1%	)	$	3,362			0.1%		$	19,363			0.8%

With exception of the discussion on income taxes included below, see our following year-over-year segment analyses for more details regarding our operating and financial results.

Income taxes

The following discussion sets forth, for the periods indicated, the impact of income taxes on our consolidated results. Such information has been derived from our audited consolidated statements of operations.

Years ended September 30, 2014 and 2013

Income tax expense—We recorded a provision for income taxes from continuing operations of $8.4 million, resulting in an effective tax rate of 26.6% for the year ended September 30, 2014, compared to $3.5 million, for an effective tax rate of 41.8% in the prior year. During September 2014, the IRS issued final regulations related to compensation deduction limitations applicable to certain health insurance providers. Pursuant to these final regulations, we recognized an income tax benefit of $3.7 million during the year ended September 30, 2014, to reverse previously recorded tax expense related to this item. The effective tax rate was also reduced by the following: (1) a $1.1 million tax benefit resulting from a change in our estimate of the state impact of deferred tax assets and liabilities, and (2) the increase in net earnings from continuing operations, which reduced the rate impact of state income taxes, including the Texas margins tax. The decreases to the effective tax rate were partially offset by the following increases: (1) a $1.1 million charge related to an excess of cumulative compensation expense over the realized tax benefit upon the exercise of employee stock options, (2) the HIF imposed by the Health Reform Law beginning in 2014, which is treated as a nondeductible excise tax, and (3) the lower ratio of net earnings from non-controlling interests to net earnings from continuing operations, as compared to the prior year.

Years ended September 30, 2013 and 2012

Income tax expense—We recorded a provision for income taxes from continuing operations of $3.5 million, resulting in an effective tax rate of 41.8% for the year ended September 30, 2013, compared to $2.1 million, for an effective tax rate of 7.7% in the prior year. The increase in our effective tax rate was primarily the result of the following items impacting the year ended September 30, 2012: (1) a change in certain of our state tax filing positions, which resulted in a tax benefit totaling $4.0 million, and (2) the elimination of a reserve for an uncertain tax position totaling $5.0 million. In addition, the rate was impacted by the fact that net earnings from non-controlling interests, as well as state income taxes including the Texas margins tax, bore a higher ratio to net earnings from continuing operations for the year ended September 30, 2013, as compared to the prior year.

Acute care operations

The following table sets forth, for the periods indicated, results of our acute care operations expressed in dollar terms and as a percentage of total acute care revenue. Such information has been derived from our audited, consolidated statements of operations.


	Year ended September 30, 2014						Year ended September 30, 2013						Year ended September 30, 2012
($ in thousands):	Amount			%			Amount			%			Amount			%

Acute care revenue
Acute care revenue before provision for bad debts	$	2,140,675					$	2,047,880					$	1,917,576
Less: Provision for bad debts		(337,118	)					(326,978	)					(241,777	)

Acute care revenue		1,803,557			99.3%			1,720,902			99.6%			1,675,799			99.6%
Revenue between segments(1)		13,079			0.7%			7,092			0.4%			7,092			0.4%

Total acute care revenue		1,816,636			100.0%			1,727,994			100.0%			1,682,891			100.0%

Costs and expenses
Salaries and benefits		857,789			47.2%			824,025			47.7%			768,553			45.7%
Supplies		299,527			16.5%			294,226			17.0%			283,435			16.8%
Rentals and leases		71,016			3.9%			51,352			3.0%			41,252			2.5%
Other operating expenses		385,957			21.2%			370,185			21.4%			392,619			23.3%
Medicare and Medicaid EHR incentives		(14,753	)		(0.8%	)		(20,723	)		(1.2%	)		(21,831	)		(1.3%	)
Interest expense, net		130,818			7.2%			133,154			7.7%			137,687			8.2%
Depreciation and amortization		91,150			5.0%			89,878			5.2%			97,380			5.8%
Management fees		5,000			0.3%			5,000			0.3%			5,000			0.3%

Total costs and expenses		1,826,504			100.5%			1,747,097			101.1%			1,704,095			101.3%
Loss from continuing operations before gain (loss) on disposal of assets and income taxes		(9,868	)		(0.5%	)		(19,103	)		(1.1%	)		(21,204	)		(1.3%	)
Gain (loss) on disposal of assets, net		3,402			0.2%			(8,982	)		(0.5%	)		2,241			0.1%

Loss from continuing operations before income taxes	$	(6,466	)		(0.3%	)	$	(28,085	)		(1.6%	)	$	(18,963	)		(1.1%	)

(1)

Revenue between segments is eliminated in our consolidated results.

Years ended September 30, 2014 and 2013

Total acute care revenue—Total acute care revenue for the year ended September 30, 2014, was $1.82 billion, an increase of $88.6 million or 5.1% compared to $1.73 billion in the prior year. The increase in total acute care revenue is primarily due to an increase in net patient revenue per adjusted admission of 4.4% and an increase in adjusted admissions of 0.8%. The provision for bad debts for the year ended September 30, 2014, was $337.1 million, an increase of $10.1 million or 3.1% compared to $327.0 million in the prior year. The 3.1% increase in the provision for bad debts for the year ended September 30, 2014 represents a moderation resulting from declines in uninsured volume and revenue, primarily in the third and fourth quarters of fiscal 2014, resulting from Medicaid expansion associated with the Health Reform Law and improving economic factors in the markets in which we operate.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue of $3.9 million and $8.3 million for the years ended September 30, 2014 and 2013, respectively.

Salaries and benefits—Salaries and benefits expense for the year ended September 30, 2014, was $857.8 million, or 47.2% of total acute care revenue, compared to $824.0 million, or 47.7% of total acute care revenue in the prior year. Excluding the impact of stock-based compensation and $3.5 million of compensation expense associated with a special bonus paid to certain members of our leadership team in recognition of the execution of certain recent strategic initiatives, salaries and benefits expense as a percentage of total acute care revenue was 46.6% for the year ended September 30, 2014, compared to 47.5% in the prior year. Salaries and benefits expense as a percentage of total acute care revenue, excluding the impact of stock-based compensation and the special bonus, decreased primarily as a result of revenue growth and improvements in productivity.

Supplies—Supplies expense for the year ended September 30, 2014, was $299.5 million, or 16.5% of total acute care revenue, compared to $294.2 million, or 17.0% of total acute care revenue in the prior year. The improvement in supplies expense as a percentage of total acute care revenue is the result of a decline in supply intensive surgical procedures as evidenced by a 3.8% decline in inpatient surgeries, as well as the impact of supply cost initiatives that have included improved pricing and more effective utilization.

Rentals and leases—Rentals and leases expense for the year ended September 30, 2014, was $71.0 million, or 3.9% of total acute care revenue, compared to $51.4 million, or 3.0% of total acute care revenue in the prior year. The increase in rentals and leases expense is primarily due to $18.0 million of additional rent expense resulting from the sale-leaseback of certain hospital real estate, which closed on September 26, 2013.

Other operating expenses—Other operating expenses for the year ended September 30, 2014, were $386.0 million, or 21.2% of total acute care revenue, compared to $370.2 million, or 21.4% of total acute care revenue in the prior year. The decrease in other operating expenses as a percentage of total acute care revenue is primarily due to the result of a reduction in professional fees and other indigent care costs associated with our Texas hospitals’ participation in certain Medicaid supplemental reimbursement programs.

Interest expense—Interest expense for the year ended September 30, 2014, was $130.8 million, compared to $133.2 million in the prior year. The decrease in interest expense is due to the execution of an amendment to re-price our senior secured credit facility completed during the second quarter of fiscal year 2013.

Gain (loss) on disposal of assets, net—Loss on disposal of assets for the year ended September 30, 2013, included a $10.2 million loss associated with the sale-leaseback of certain hospital real estate, which closed on September 26, 2013.

Years ended September 30, 2013 and 2012

Total acute care revenue—Total acute care revenue for the year ended September 30, 2013, was $1.73 billion, an increase of $45.1 million or 2.7% compared to $1.68 billion in the prior year. The increase in total acute care revenue was primarily due to an increase in adjusted admissions of 1.5% and an increase in net patient revenue per adjusted admission of 1.0%. The provision for bad debts for the year ended September 30, 2013, was $327.0 million, an increase of $85.2 million or 35.2%, compared to $241.8 million in the prior year. The increase in the provision for bad debts was the result of increased uninsured volume, revenue and related acuity levels.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue of $8.3 million and $13.8 million for the years ended September 30, 2013 and 2012, respectively.

Salaries and benefits—Salaries and benefits expense for the year ended September 30, 2013, was $824.0 million, or 47.7% of total acute care revenue, compared to $768.6 million, or 45.7% of total acute care revenue in the prior year. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 47.5% for the year ended September 30, 2013, compared to 45.1% in the prior year. Salaries and benefits expense as a percentage of total acute care revenue, excluding the impact of stock-based compensation, increased primarily as a result of the expansion of our employed physician base, which requires additional investments in labor and other practice-related costs, including infrastructure and physician support staff.

Other operating expenses—Other operating expenses for the year ended September 30, 2013, were $370.2 million, or 21.4% of total acute care revenue, compared to $392.6 million, or 23.3% of total acute care revenue in the prior year. The decrease in other operating expenses as a percentage of total acute care revenue was primarily due to the result of a reduction in professional fees and other indigent care costs associated with our Texas hospitals’ participation in certain Medicaid supplemental reimbursement programs.

Interest expense—Interest expense for the year ended September 30, 2013, was $133.2 million, compared to $137.7 million in the prior year. The decrease in our interest expense is due to our refinancing transaction completed during the third quarter of fiscal year 2012.

Managed care operations

The following table sets forth, for the periods indicated, results of our Managed care operations expressed in dollar terms and as a percentage of premium and service revenues. Such information has been derived from our audited, consolidated statements of operations.


	Year ended September 30, 2014				Year ended September 30, 2013				Year ended September 30, 2012
($ in thousands):	Amount		%		Amount		%		Amount		%

Premium and service revenues
Premium revenue	$	724,338			$	564,152			$	569,142
Service revenue		5,692				—				—

Premium and service revenues		730,030		100.0%		564,152		100.0%		569,142		100.0%

Costs and expenses
Salaries and benefits		34,925		4.8%		23,985		4.3%		21,527		3.8%
Supplies		233		0.0%		183		0.0%		228		0.0%
Medical claims (1)		609,857		83.5%		474,386		84.1%		473,217		83.1%
Other operating expenses		40,976		5.6%		23,448		4.1%		22,478		4.0%
Rentals and leases		1,698		0.2%		1,544		0.3%		1,533		0.3%
Depreciation and amortization		4,162		0.6%		4,148		0.7%		3,884		0.7%

Total costs and expenses		691,851		95.5%		527,694		93.5%		522,867		91.9%

Earnings from continuing operations before income taxes	$	38,179		5.5%	$	36,458		6.5%	$	46,275		8.1%

(1)

Medical claims paid to our hospitals of $13.1 million, $7.1 million and $7.1 million for the years ended September 30, 2014, 2013 and 2012, respectively, are eliminated in our consolidated results.

Years ended September 30, 2014 and 2013

Premium and service revenues—Premium and service revenues were $730.0 million for the year ended September 30, 2014, an increase of $165.9 million or 29.4%, compared to $564.2 million in the prior year. The increase in premium and service revenues is attributable to an 81.3% increase in lives, driven by growth in all of our managed care product lines, including our MSO subsidiary. For the year ended September 30, 2014, enrollment in our Medicare and Medicaid product lines increased 92.4% and 16.8%, respectively, compared to the prior year. Our managed Medicaid product line has been impacted favorably by the state of Arizona’s expansion of the Medicaid program in connection with the Health Reform Law. Premium revenue on a per member per month basis for our Arizona Medicaid product line increased 14.1% compared to the prior year, as a result of a shift in the membership mix primarily attributable to the reinstatement of eligibility for the childless adult population. Additionally, premium revenue for the year ended September 30, 2014, compared to the prior year, increased as a result of additional reimbursement related to primary care physician Medicaid parity payments, which also includes a pass-through component impacting our medical expenses. We also recognized $8.2 million of revenue related to the new HIF as part of the Health Reform Law.

Medical claims—Medical claims expense was $609.9 million for the year ended September 30, 2014, compared to $474.4 million in the prior year. Medical claims expense as a percentage of premium revenue was 84.2% for the year ended September 30, 2014, compared to 84.1% in the prior year. Excluding the impact of the HIF revenue, medical claims as a percentage of premium and service revenues was 85.2% for the year ended September 30, 2014, compared to 84.1% in the prior year. This increase is primarily attributable to additional medical expenses associated with the growth in childless adult members, resulting from the recent expansion of the Medicaid program in Arizona, a population that typically experiences higher acuity levels. Additionally, we have incurred an increase in pharmacy costs during the year resulting from an increase in specialty drug utilization, including $3.8 million of additional costs associated with a new drug treatment used to cure Hepatitis C.

Other operating expenses—Other operating expenses for year ended September 30, 2014, were $41.0 million, or 5.6% of premium and service revenues, compared to $23.4 million, or 4.1% of premium and service revenues in the prior year. Other operating expenses increased primarily as a result of $4.8 million in start-up related costs associated with our new MSO-related business and $6.0 million in HIF expense.

Years ended September 30, 2013 and 2012

Premium and service revenues—Premium and service revenues were $564.2 million for the year ended September 30, 2013, a decrease of $4.9 million or 0.9%, compared to $569.1 million in the prior year. Member months declined 3.2% in the year ended September 30, 2013, compared the prior year. The decline in member months was attributable to the state of Arizona’s efforts to reduce Medicaid enrollment, particularly related to childless adults.

Medical claims—Medical claims expense was $474.4 million for the year ended September 30, 2013, compared to $473.2 million in the prior year. Medical claims expense as a percentage of premium revenues was 84.1% for the year ended September 30, 2013, compared to 83.1% in the prior year. The increase in medical claims as a percentage of premium revenue was primarily due to changes in prior period development that impacted prior year results.

Summary of operations by quarter

The following table presents unaudited quarterly operating results for the years ended September 30, 2014 and 2013. We believe that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the audited, consolidated financial statements.

Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.


	Quarter ended
	Sept. 30, 2014		June 30, 2014		March 31, 2014		Dec. 31, 2013
	(in thousands)
Total revenue	$	655,383	$	654,532	$	627,782	$	595,890
Earnings from continuing operations before income taxes		10,688		9,616		7,003		4,406
Net earnings from continuing operations		16,297		1,832		3,231		1,929


	Quarter ended
	Sept. 30, 2013			June 30, 2013		March 31, 2013			Dec. 31, 2012
	(in thousands)
Total revenue	$	562,961		$	576,236	$	577,251		$	568,606
Earnings (loss) from continuing operations before income taxes		(5,244	)		9,414		1,045			3,158
Net earnings (loss) from continuing operations		(2,346	)		5,377		(69	)		1,907

Liquidity and capital resources

Overview of cash flow activities for the years ended September 30, 2014 and 2013

Our cash flows are summarized as follows (in thousands):


	Year ended September 30,
	2014			2013
Cash flows from operating activities	$	59,074		$	98,204
Cash flows from investing activities	$	(122,415	)	$	311,972
Cash flows from financing activities	$	(148,407	)	$	(20,875	)

Operating activities

Cash flows provided by operating activities were $59.1 million for the year ended September 30, 2014, compared to $98.2 million in the prior year. Cash flows from operating activities were impacted by the payment of $22.3 million in income taxes, transaction fees and other costs, as well as $21.6 million of additional rent payments, associated with the sale-leaseback of certain hospital real estate, which closed at the end of fiscal 2013. In addition, cash flows from operating activities were impacted by the timing of payments related to primary care physician Medicaid parity and other program settlement amounts at Health Choice and delays in Texas supplemental Medicaid reimbursement.

At September 30, 2014, we had $549.2 million in net working capital, compared to $606.7 million at September 30, 2013, both excluding assets and liabilities held for sale. Net accounts receivable decreased $65.3 million to $305.7 million at September 30, 2014, from $371.0 million at September 30, 2013. Our days revenue in accounts receivable at September 30, 2014, were 55, compared to 63 at September 30, 2013.

Investing activities

Cash flows used in investing activities were $122.4 million for the year ended September 30, 2014, compared to cash provided by investing activities of $312.0 million in the prior year. The prior year included proceeds of $278.0 million (net of certain transaction costs) received from the sale-leaseback of certain hospital real estate during the year ended September 30, 2013, and the advanced proceeds of $144.8 million (net of certain

transaction costs) received in connection with the sale of our Florida operations, which was effective October 1, 2013. Included in investing activities for the year ended September 30, 2014, is $34.1 million in capital expenditures associated with our new greenfield hospital in Lehi, Utah, Mountain Point Medical Center.

Financing activities

Cash flows used in financing activities were $148.4 million for the year ended September 30, 2014, compared to $20.9 million in the prior year. On October 18, 2013, we distributed a $115.0 million cash dividend to our common stockholders. The prior year includes proceeds from borrowings on our revolving credit facilities of $165.0 million, along with subsequent debt payments of $178.5 million. The year ended September 30, 2014, includes regular debt payments of $13.4 million and distributions to non-controlling interests of $5.3 million associated with the sale-leaseback of certain hospital real estate.

Capital resources

As of September 30, 2014, we had the following debt arrangements through our operating subsidiary, IASIS Healthcare LLC (“IASIS Healthcare”):

•

up to $1.325 billion in senior secured credit facilities; and

•

$850.0 million in 8.375% senior notes due 2019.

At September 30, 2014, amounts outstanding under our senior secured credit facilities consisted of $989.4 million in term loans. In addition, we had $81.0 million in letters of credit outstanding under the revolving credit facility. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 4.6% for the year ended September 30, 2014, compared to 4.8% in the prior year.

$1.325 billion Senior Secured Credit Facilities

IASIS Healthcare, our operating subsidiary, is the borrower under a senior credit agreement (the “Amended and Restated Credit Agreement”) for which we and certain of our other subsidiaries serve as guarantors. The Amended and Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility maturing in May 2018 and (2) a $300.0 million senior secured revolving credit facility maturing in May 2016, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date, February 20, 2013, of a repricing amendment, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require principal installment payments prior to maturity. On September 12, 2014, the Amended and Restated Credit Agreement was amended to, among other things, extend the deadline by which we must reinvest the proceeds of certain assets sales from 12 months to 24 months.

Borrowings under the senior secured term loan facility (giving effect to the repricing amendment) bear interest at a rate per annum equal to, at our option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at our option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to

paying interest on outstanding principal under the Senior Secured Credit Facilities, we are required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

The Senior Secured Credit Facilities are unconditionally guaranteed by us and certain of our subsidiaries (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all of IASIS Healthcare’s future material wholly owned subsidiaries, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of IASIS Healthcare and the Credit Facility Guarantors, including (1) a pledge of 100% of IASIS Healthcare’s equity and that of the Credit Facility Guarantors other than us, (2) mortgage liens on all of IASIS Healthcare’s material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires IASIS Healthcare to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, certain borrowings or debt issuances, and from a percentage of annual excess cash flow.

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.

8.375% Senior Notes due 2019

IASIS Healthcare and IASIS Capital Corporation (together, the “Issuers”) issued an $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers’ wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the “Notes Guarantors”) (the “Indenture”). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and are unconditionally guaranteed on a senior unsecured basis by certain subsidiaries of IASIS Healthcare.

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year. The Issuers may redeem the Senior Notes in whole or in part, at anytime on or after May 15, 2014, at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions:


Date	Percentage
May 15, 2014		106.281	%
May 15, 2015		104.188	%
May 15, 2016		102.094	%
May 15, 2017 and thereafter		100.000	%

The Indenture contains covenants that limit the Issuers’ (and their restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase their capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose

restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to us and our restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If IASIS Healthcare experiences certain kinds of changes of control, they must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, IASIS Healthcare will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

Other

We executed interest rate swaps with Citibank, N.A. (“Citibank”) and Barclays Bank PLC (“Barclays”), as counterparties, with notional amounts totaling $350.0 million, of which $50.0 million expired on September 30, 2014. The remaining agreements were effective March 28, 2013 and expire September 30, 2015 and September 30, 2016. Under these remaining agreements, we are required to make quarterly fixed rate payments to the counterparties at annual rates ranging from 1.9% to 2.2%. The counterparties are obligated to make quarterly floating rate payments to us based on the three-month LIBOR rate, each subject to a floor of 1.25%.

Capital expenditures

We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our Senior Secured Credit Facilities and other capital sources that may become available. We expect our capital expenditures for fiscal 2015 to be $130.0 million to $140.0 million, including the following significant expenditures:

•

$65.0 million to $70.0 million for growth and new business projects, including approximately $30.0 million related to our new greenfield hospital in Lehi, Utah;

•

$45.0 million to $50.0 million in replacement or maintenance related projects at our hospitals; and

•

$20.0 million in hardware and software costs related to information systems projects, including healthcare IT stimulus initiatives.

Liquidity

We rely on cash generated from our operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, federal and state budget initiatives, weather-related

catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, leverage capacity and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see “Risk factors”.

Including available cash at September 30, 2014, we have available liquidity as follows (in millions):


Cash and cash equivalents	$	341.7
Available capacity under our senior secured revolving credit facility		219.0

Net available liquidity at September 30, 2014	$	560.7

Net available liquidity assumes 100% participation from all lenders currently participating in our senior secured revolving credit facility. In addition to our available liquidity, we expect to generate significant operating cash flows in fiscal 2015. We also will utilize proceeds from our financing activities as needed.

With respect to the disposition of our Florida operations, the sale-leaseback of certain hospital real estate and the sale of our Nevada hospital operations that closed in January 2015, we received aggregate gross proceeds of approximately $472 million. The Amended and Restated Credit Agreement requires us to prepay borrowings under the senior credit agreement with net cash proceeds, after taxes and other related transaction costs, of certain asset dispositions unless such proceeds are reinvested within 12 months in existing facilities or 24 months in a greenfield construction project (36 months if there is a binding commitment for such investment within such 12 or 24 month periods). In September 2014, pursuant to an amendment to our Amended and Restated Credit Agreement, our lenders extended for one year the deadlines related to the reinvestment of the net proceeds received from both the disposition of our Florida operations and the sale-leaseback of our three hospital properties. The Indenture similarly requires us to use the net cash proceeds of certain asset dispositions to offer to repurchase notes or to make prepayments under the Amended and Restated Credit Agreement unless such proceeds have been reinvested within 365 days (an additional 180 days exists if there is a binding commitment for such investment). In October 2014, we satisfied these obligations under the indenture with respect to our September 2013 transactions by conducting such an offer to repurchase the Senior Notes. We are also required to comply with these obligations with respect to the proceeds from the sale of our Nevada facilities in January 2015. While we currently plan to reinvest all of the net proceeds noted above, we are unable to make assurances that our plans to invest such proceeds will be achieved or that they will be on acceptable terms to our debt investors within the prepayment grace period or at all.

Based upon our current level of operations and anticipated growth, we believe we have sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over the next three years. In evaluating the sufficiency of our liquidity for both the short-term and long-term, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our Senior Secured Credit Facilities, compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities.

We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our Senior Secured Credit Facilities, or otherwise, to enable us to grow our business, service our indebtedness, or make anticipated capital expenditures and tax payments. For more information, see “Risk factors.”

One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence of, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including

debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For more information, see “Risk factors.”

We do not have any relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Off-balance sheet arrangements

As of September 30, 2014, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We do not typically enter into off-balance sheet arrangements, except for arrangements related to operating lease commitments and letters of credit, as disclosed in the contractual obligations table below. Neither we nor our subsidiaries typically guarantee the obligations of unrelated parties.

Tabular disclosure of contractual obligations

The following table reflects a summary of obligations and commitments outstanding including both the principal and interest portions of long-term debt, capital leases and other obligations at September 30, 2014.


	Payments due by period
	1 year		2-3 years		4-5 years		More than 5 years		Total
	(in millions)

Contractual Cash Obligations
Long-term debt, with interest(1)	$	125.6	$	249.9	$	1,946.5	$	—	$	2,322.0
Capital lease obligations, with interest		1.9		1.7		1.3		3.0		7.9
Medical claims		79.4		—		—		—		79.4
Operating leases		49.0		87.9		78.0		192.9		407.8
Estimated self-insurance liabilities		15.3		22.8		17.7		25.2		81.0
Purchase obligations		40.3		23.5		15.3		4.9		84.0

Subtotal	$	311.5	$	385.8	$	2,058.8	$	226.0	$	2,982.1


	Amount of commitment expiration per period
	1 year		2-3 years		4-5 years		More than 5 years		Total
	(in millions)

Other Commitments(2)
Guarantees of surety bonds	$	0.5	$	—	$	—	$	—	$	0.5
Letters of credit		—		81.0		—		—		81.0
Other commitments		15.7		16.8		0.6		—		33.1

Subtotal		16.2		97.8		0.6		—		114.6

Total obligations and commitments	$	327.7	$	483.6	$	2,059.4	$	226.0	$	3,096.7

(1)

We applied an interest rate of 4.5% to our Senior Secured Credit Facilities and 8.375% to our Senior Notes.

(2)

Excludes $10.2 million of unrecognized tax benefits and related interest that could result in a cash settlement, of which $7.6 million relates to timing differences between book and taxable income that may be offset by a reduction of cash tax obligations in future periods. We have not included these amounts in the above table as we cannot reliably estimate the amount and timing of payments related to these liabilities.

Seasonality

The patient volumes and total revenue at our healthcare operations are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures and patient deductibles and co-insurance limits.

Critical accounting policies and estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our financial statements, we make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

We have determined an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and (2) changes in the estimate would have a material impact on our financial condition or results of operations. There are other items within our financial statements that require estimation but are not deemed critical as defined herein. Changes in estimates used in these and other items could have a material impact on our financial statements.

The estimates, judgments and assumptions used by us under “Allowance for doubtful accounts,” “Allowance for contractual discounts and settlement estimates,” “Insurance reserves,” “Medical claims payable,” “Goodwill and other intangibles,” “Income taxes” and “Stock-based compensation” are, we believe, reasonable, but involve inherent uncertainties as described below, which may or may not be controllable by management. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods.

Allowance for doubtful accounts. Our ability to collect outstanding receivables from third-party payors and patients is critical to our operating performance and cash flows. The primary collection risk lies with uninsured patient accounts or patient accounts for which primary insurance has paid but a patient portion remains outstanding. The provision for bad debts and the allowance for doubtful accounts relate primarily to amounts due directly from patients. Our estimation of the allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of our collection efforts. Our policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. We monitor our accounts receivable balances and the effectiveness of our reserve policies on a regular basis and review various analytics to support the basis for our estimates. These efforts primarily consist of reviewing the following:

•

Cash collections as a percentage of net patient revenue less bad debts;

•

Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

•

Revenue and volume trends by payor, particularly the self-pay components;

•

Trending of days revenue in accounts receivable;

•

Various allowance coverage statistics; and

•

Historical write-off and collection experience using a hindsight or look-back approach.

We regularly perform hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of our process for estimating the allowance for doubtful accounts. We do not pursue collection of amounts related to patients who qualify for charity care under our guidelines. Charity care accounts are deducted from gross revenue and do not affect the provision for bad debts.

At September 30, 2014 and 2013, our self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $264.6 million and $336.2 million, respectively, while our allowance for doubtful accounts was $220.8 million and $255.7 million, respectively. Same-facility days revenue in accounts receivable were 55 at September 30, 2014, compared to 63 days at September 30, 2013. For the year ended September 30, 2014, the provision for bad debts was 15.7% of acute care revenue before provision for bad debts, compared to 16.0% in the prior year. Significant changes in payor mix or business office operations could have a significant impact on the provision for bad debts, as well as our results of operations and cash flows.

Allowance for contractual discounts and settlement estimates. We derive a significant portion of our net patient revenue from Medicare, Medicaid and managed care payors that receive discounts from our standard charges. For the years ended September 30, 2014, 2013 and 2012, Medicare, Medicaid and managed care revenue together accounted for 84.9%, 82.7% and 84.2%, respectively, of our hospitals’ net patient revenue before the provision for bad debts.

We estimate contractual discounts and allowances based upon payment terms outlined in our managed care contracts, by federal and state regulations for the Medicare and various Medicaid programs, and in accordance with terms of our uninsured discount program. Contractual discounts for most of our patient revenue are determined by an automated process that establishes the discount on a patient-by-patient basis. The payment terms or fee schedules for most payors have been entered into our patient accounting systems. Automated (system-generated) contractual discounts are recorded, at the time a patient account is billed, based upon the system-loaded payment terms. In certain instances for payors that are not significant or who have not entered into a contract with us, we make manual estimates in determining contractual allowances based upon historical collection rates. At the end of each month, we estimate contractual allowances for all unbilled accounts based on payor-specific six-month average contractual discount rates.

For governmental payors such as Medicare and Medicaid, we determine contractual discounts or allowances based upon the program’s reimbursement (payment) methodology (i.e., either prospectively determined or retrospectively determined based on costs as defined by the government payor). These contractual discounts are determined by an automated process in a manner similar to the process used for managed care revenue. Under prospective payment programs, we record contractual discounts based upon predetermined reimbursement rates. For retrospective cost-based revenues, which are less prevalent, we estimate contractual allowances based upon historical and current factors which are adjusted as necessary in future periods, when final settlements of filed cost reports are received. Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, excluding the $9.3 million net impact of an industry-wide rural floor wage settlement and the newly issued Supplemental Security Income ratios in fiscal year 2012, resulted in an increase in acute care revenue of $3.9 million, $8.3 million and $4.5 million for the years ended September 30, 2014, 2013 and 2012, respectively.

Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and renewals. All contractual adjustments, regardless of type of payor or method of calculation, are reviewed and compared to actual payment experience on an individual patient account basis. Discrepancies between expected and actual payments are reviewed, and as necessary, appropriate corrections to the patient accounts are made to reflect actual payments received. If a discrepancy exists between the payment terms loaded into the contract management system and the actual discount based on payments received, the system is updated accordingly to ensure appropriate discounting of future charges.

Additionally, we rely on other analytical tools to ensure our contractual discounts are reasonably estimated. These include, but are not limited to, monitoring of collection experience by payor, reviewing total patient collections as a percentage of net patient revenue (adjusted for the provision for bad debts) on a trailing twelve-month basis, gross to net patient revenue comparisons, contractual allowance metrics, etc. As well, patient accounts are continually reviewed to ensure all patient accounts reflect either system-generated discounts or estimated contractual allowances, as necessary.

Medicare and Medicaid regulations and various managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our healthcare facilities, requiring complex calculations and assumptions which are subject to interpretation. Additionally, the services authorized and provided and resulting reimbursement are often subject to interpretation. These interpretations sometimes result in payments that differ from our estimates. Additionally, updates to regulations and contract renegotiations occur frequently, necessitating continual review and assessment of the estimation process by management. We have made significant investments in our patient accounting information systems, human resources and internal controls, which we believe greatly reduces the likelihood of a significant variance occurring between the recorded and estimated contractual discounts. Given that most of our contractual discounts are pre-defined or contractually based, and as a result of continual internal monitoring processes and our use of analytical tools, we believe the aggregate differences between amounts recorded for initial contractual discounts and final contractual discounts resulting from payments received are not significant. Finally, we believe that having a wide variety and large number of managed care contracts that are subject to review and administration on a hospital-by-hospital basis minimizes the impact on our total revenue of any imprecision in recorded contractual discounts caused by the system-load of payment terms of a particular payor. We believe that our systems and processes, as well as other items discussed, provide reasonable assurance that any change in estimate related to contractual discounts is immaterial to our financial position, results of operations and cash flows.

Insurance reserves. Given the nature of our operating environment, we may become subject to medical malpractice or workers’ compensation claims or lawsuits. We maintain third-party insurance coverage for individual malpractice and workers’ compensation claims to mitigate a portion of this risk. In addition, we maintain excess coverage limiting our exposure to an aggregate annual amount for claims. We estimate our reserve for self-insured professional and general liability and workers’ compensation risks using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At September 30, 2014 and 2013, our professional and general liability accrual for asserted and unasserted claims was $66.5 million and $68.2 million, respectively. For the years ended September 30, 2014, 2013 and 2012, our total premiums and self-insured retention cost for professional and general liability insurance was $17.4 million, $14.8 million and $21.5 million, respectively.

The estimated accrual for medical malpractice and workers’ compensation claims could be significantly affected should current and future occurrences differ from historical claims trends. The estimation process also is complicated by the complexity and changing nature of tort reform in the states in which we operate. While we

monitor current claims closely and consider outcomes when estimating our insurance accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in the estimates.

Valuations from our independent actuary for professional and general liability losses resulted in a change in related estimates for prior years which decreased professional and general liability expense by the following amounts (in millions):


Year ended September 30, 2014	$	(4.1	)
Year ended September 30, 2013	$	(9.4	)
Year ended September 30, 2012	$	(0.9	)

Our estimate of the reserve for professional and general liability claims is based upon actuarial calculations that are completed semi-annually. The changes in estimates noted above were recognized in the periods in which the independent actuarial calculations were received. The key assumptions underlying the development of our estimate (loss development, trends and increased limits factors) have not changed materially, as they are largely based upon professional liability insurance industry data published by the Insurance Services Office, a leading provider of data, underwriting, risk management and legal/regulatory services. The reductions in professional and general liability expense related to changes in prior year estimates reflected above for the years ended September 30, 2014, 2013 and 2012, are the result of better than expected claims experience as compared to the industry benchmarks for loss development included in the original actuarial estimate.

Sensitivity in the estimate of our professional and general liability claims reserve is reflected in various actuarial confidence levels. We utilize a statistical confidence level of 50% in developing our best estimate of the reserve for professional and general liability claims. Higher statistical confidence levels, while not representative of our best estimate, provide a range of reasonably likely outcomes upon resolution of the related claims. The following table outlines our reported reserve amounts compared to reserve levels established at the higher statistical confidence levels (in millions):


As reported at September 30, 2014	$	66.5
75% Confidence Level	$	71.1
90% Confidence Level	$	83.6

Valuations from our independent actuary for workers’ compensation losses resulted in a change in related estimates for prior years which decreased workers’ compensation expense by the following amounts (in millions):


Year ended September 30, 2014	$	(1.2	)
Year ended September 30, 2013	$	(1.2	)
Year ended September 30, 2012	$	(1.1	)

Medical claims payable. Medical claims expense, including claims paid to our hospitals, was $609.9 million, $474.4 million and $473.2 million, or 83.5%, 84.1% and 83.1% of premium and service revenues for the years ended September 30, 2014, 2013 and 2012, respectively. For the years ended September 30, 2014, 2013 and 2012, $13.1 million, $7.1 million and $7.1 million, respectively, of health plan payments made to hospitals and other healthcare entities owned by us for services provided to our enrollees were eliminated in consolidation.

The following table shows the components of the change in medical claims payable (in thousands):


	Year ended September 30, 2014			Year ended September 30, 2013			Year ended September 30, 2012
Medical claims payable as of October 1	$	57,514		$	61,142		$	85,723
Medical claims expense incurred during the year
Related to current year		605,721			476,217			489,387
Related to prior years		4,136			(1,831	)		(16,170	)

Total expenses		609,857			474,386			473,217


Medical claims payments during the year
Related to current year		(525,706	)		(421,120	)		(430,788	)
Related to prior years		(62,216	)		(56,894	)		(67,010	)
Total payments		(587,922	)		(478,014	)		(497,798	)

Medical claims payable as of September 30	$	79,449		$	57,514		$	61,142

As reflected in the table above, medical claims expense for the year ended September 30, 2014, includes $4.1 million in increases in medical costs related to prior years resulting from unfavorable development in the Medicaid product line of $4.1 million. The unfavorable development in the Medicaid product line for the year ended September 30, 2014, is attributable to higher than anticipated medical costs resulting from a general increase in medical utilization. Medical claims expense for the years ended September 30, 2013 and 2012, includes $1.8 million and $16.2 million, respectively, of reductions in medical costs related to prior years resulting from favorable development in the Medicaid product line of $1.5 million and $16.5 million, respectively. The favorable development in the Medicaid product line for the years ended September 30, 2013 and 2012, is attributable to lower than anticipated medical costs resulting from a general decline in medical utilization, the loss of member lives due to changes in Arizona’s Medicaid eligibility structure, AHCCCS provider payment reductions and improvements in care management and other operational initiatives. Medical claims expense was impacted by unfavorable development in the Medicare product line of $0.1 million and $0.4 million for the years ended September 30, 2014 and 2012, respectively. Medical expense was impacted by favorable development in the Medicare product line of $0.3 million for the year ended September 30, 2013.

We estimate our medical claims payable using historical claims experience (including severity and payment lag time) and other actuarial analysis including number of enrollees, age of enrollees and certain enrollee health indicators to predict the cost of healthcare services provided to enrollees during any given period. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from our estimates given changes in healthcare costs or adverse experience. For example, our medical claims payable is primarily composed of estimates related to the most recent three months and periods prior to the most recent three months. The claims trend factor, which is developed through a comprehensive analysis of claims incurred in prior months, is the most significant component used in developing the claims liability estimates for the most recent three months. The completion factor is an actuarial estimate, based upon historical experience, of the percentage of incurred claims during a given period that have been adjudicated as of the date of estimation. The completion factor is the most

significant component used in developing the claims liability estimates for the periods prior to the most recent three months. The following table illustrates the sensitivity of our medical claims payable at September 30, 2014, and the estimated potential impact on our results of operations, to changes in these factors that management believes are reasonably likely based upon our historical experience and currently available information (dollars in thousands):


Claims trend factor						Completion factor
Increase (decrease) in factor			Increase (decrease) in medical claims payable			Increase (decrease) in factor			Increase (decrease) in medical claims payable
	(3.0%	)	$	(3,559	)		1.0%		$	(2,755	)
	(2.0	)		(2,373	)		0.5			(1,574	)
	(1.0	)		(1,186	)		(0.5	)		2,707
	1.0			1,186			(1.0	)		5,670

Goodwill and other intangibles. The accounting policies and estimates related to goodwill and other intangibles are considered critical because of the significant impact that impairment could have on our financial results. We record all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair value as required by Accounting Standards Codification (“ASC”) 350—Intangibles. The initial recording of goodwill and other intangibles requires subjective judgments concerning estimates of the fair value of the acquired assets. Goodwill, which was $814.5 million at September 30, 2014, is not amortized but is subject to tests for impairment annually or more often if events or circumstances indicate it may be impaired. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. We did not record an impairment loss during the years ended September 30, 2014, 2013 or 2012, in association with continuing operations. Other identifiable intangible assets, net of accumulated amortization, were $23.3 million at September 30, 2014, compared to $26.0 million at September 30, 2013. These are amortized over their estimated useful lives and are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow projections. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions. Other key judgments in accounting for intangible assets include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles which require amortization. See “Goodwill and other intangible assets” in the notes to our consolidated financial statements included elsewhere in this prospectus for additional information regarding intangible assets. The impact of a 5% impairment charge to goodwill or intangible assets would result in a reduction in pre-tax income of $41.9 million.

Income taxes. We estimate and record a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized in future periods based on all relevant information. We believe that future income as well as the reversal of deferred tax liabilities will enable us to realize the deferred tax assets we have recorded, net of the valuation allowance we have established.

Certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. Significant judgment is required in determining and assessing the impact of such tax-related contingencies. We apply the provisions of ASC 740—Income Taxes, which prescribe a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Only tax positions that meet the more-likely-than-not recognition threshold have been recognized in connection with these provisions.

The provisions regarding accounting for uncertainty in income taxes permit interest and penalties on underpayments of income taxes to be classified as interest expense, income tax expense, or another appropriate expense classification based on the accounting election of our company. Our policy is to classify interest and penalties as a component of income tax expense.

Stock-based compensation. We account for stock-based compensation awards in accordance with ASC 718—Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. Our stock-based compensation plans include programs for stock options and RSU awards.

We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:

Expected term—The expected term represents the period that stock-based awards are expected to be outstanding. We used the simplified method to determine the expected term, which is calculated as the average of the time-to-vesting and the contractual life of the awards.

Expected volatility—Since we are currently privately held and do not have any trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded peer companies over a period equal to the expected term of the awards. When selecting comparable publicly traded peer companies on which we based our expected stock price volatility, we selected companies with comparable characteristics to us, including enterprise value, risk profiles, and with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the award.

Expected dividend—No recurring dividends have been authorized and we do not expect to pay cash dividends in the foreseeable future. Therefore, we used an expected dividend yield of zero.

In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from our estimates, we might be required to record adjustments to stock-based compensation in future periods. These assumptions represent our best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future.

Recent accounting pronouncements

Newly adopted

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 requires entities to report the effect of significant reclassifications

out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. ASU No. 2013-02 is required to be applied prospectively and is effective for fiscal years beginning after December 15, 2012, and interim periods within those years. The Company has adopted ASU No. 2013-02 effective October 1, 2013. At September 30, 2014, the Company’s only component of accumulated other comprehensive loss relates to unrecognized changes in the fair value of interest rate swaps. No reclassifications out of accumulated other comprehensive loss into net earnings were made during the year ended September 30, 2014, as the Company determined that these cash flow hedges were highly effective.

In July 2011, the FASB issued ASU No. 2011-06, “Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers”. Effective January 1, 2014, the Company adopted this ASU No. 2011-06 relating to the recognition and income statement reporting of the mandated HIF to be paid to the federal government by health insurers, as part of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, or collectively, Health Reform Law, which is imposed for calendar years beginning after December 31, 2013. The HIF is based on a company’s share of the industry’s net premiums written during the preceding calendar year, and is payable on September 30 of each year. The Company estimates Health Choice’s portion of the HIF for the 2014 calendar year to be $7.9 million. The HIF is non-deductible for federal income tax purposes. ASU No. 2011-06 addresses how the HIF should be recognized and classified in the financial statements of health insurers. In accordance with ASU No. 2011-06, the Company recorded the estimated liability for the HIF in full with a corresponding deferred asset that is being amortized to expense on a straight-line basis during the 2014 calendar year. The Company’s estimated liability for the HIF is recorded within other accrued expenses and current liabilities in the accompanying consolidated balance sheet. The corresponding deferred asset is recorded within prepaid expenses and other current assets in the accompanying consolidated balance sheet. During the year ended September 30, 2014, the Company recognized $6.0 million in other operating expenses related to amortization of the HIF, with a remaining deferred cost asset balance of $1.9 million. No such amounts were recorded at September 30, 2013. Because Health Choice primarily serves individuals in government-sponsored programs, Health Choice must secure additional reimbursement from state partners for this added cost. The Company recognizes HIF revenue when there is a contractual commitment from the state to reimburse Health Choice for the full economic impact of the health insurer fee. HIF revenue is recognized ratably throughout the year. During the year ended September 30, 2014, HIF revenue totaling $8.2 million was recognized as a result of the contractual commitment from Arizona, which included $2.9 million related to a contractual commitment to reimburse Health Choice for the impact of the non-deductibility of this fee for income tax purposes.

Recently issued

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment—Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Among other provisions and in addition to expanded disclosures, ASU No. 2014-08 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, ASU No. 2014-08 requires disclosure about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale. The disclosure of this information is required for all of the same

periods that are presented in the entity’s results of operations for the period. The provisions of ASU No. 2014-08 are effective prospectively for all disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted. The Company did not adopt ASU No. 2014-08 in the year ended September 30, 2014.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. In addition, ASU No. 2014-09 will require new and enhanced disclosures. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. ASU No. 2014-09 will become effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the effect of the new revenue recognition guidance.

Quantitative and qualitative disclosures about market risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At September 30, 2014, the following components of our Senior Secured Credit Facilities bear interest at variable rates at specified margins above either the agent bank’s alternate base rate or the LIBOR rate: (i) a $1.025 billion, seven-year term loan; and (ii) a $300.0 million, five-year revolving credit facility. As of September 30, 2014, we had outstanding variable rate debt of $989.4 million.

We have managed our market exposure to changes in interest rates by implementing a comprehensive interest rate hedging strategy that includes converting variable rate debt to fixed rate debt. We have executed interest rate swaps for non-trading and non-speculative purposes with Citibank and Barclays, as counterparties, with notional amounts totaling $350.0 million, of which $50.0 million expired on September 30, 2014. The remaining agreements were effective March 28, 2013 and expire between September 30, 2015 and September 30, 2016, and have annual rates ranging from 1.9% to 2.2%. Our interest rate hedging agreements expose us to credit risk in the event of non-performance by our counterparties, Citibank and Barclays. However, we do not anticipate non-performance by either of our counterparties.

Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness, a 0.125% increase in current interest rates would have no estimated impact on pre-tax earnings and cash flows for the next twelve month period given the 1.25% LIBOR floor that exists in our Senior Secured Credit Facilities.

We currently believe we have adequate liquidity to fund operations during the near term through the generation of operating cash flows, cash on hand and access to our senior secured revolving credit facility. Our ability to borrow funds under our senior secured revolving credit facility is subject to, among other things, the financial viability of the participating financial institutions. While we do not anticipate any of our current lenders defaulting on their obligations, we are unable to provide assurance that any particular lender will not default at a future date.

Business

Our company

We are a healthcare services company delivering high-quality, cost-effective healthcare through a broad and differentiated set of capabilities and assets that includes acute care hospitals with related patient access points, and a diversified and growing managed care risk platform (“risk platform”). Our business model is centered on deploying our acute care expertise and risk platform, either separately or on an integrated basis, in attractive markets to manage population health, integrate the delivery and payment of healthcare services and ultimately expand our total market opportunities within our existing and new geographic markets. Our company is comprised of our acute care operations, which include 15 acute care hospitals, one behavioral hospital and multiple other access points, including 132 physician clinics, multiple outpatient surgical units, imaging centers, and investments in urgent care centers and on-site employer-based clinics, and our diversified and growing risk platform, Health Choice. Our facilities served 1.1 million patients and had adjusted admissions growth of 1.9% in calendar year 2014, while our risk platform managed 336,700 covered lives as of January 1, 2015.

Our business strategy and geographic market focus are designed to capitalize on the transition towards value-based care, the expansion of integrated healthcare delivery models, growth in managed care in government-sponsored health insurance programs, the growing need for cost-effective healthcare delivery models and the consolidation of physician groups and health systems. We believe that the growth of value-based care programs is accelerating and providers will assume increasing financial risk for the quality of care they deliver. We also believe traditional fee-for-service (“FFS”) reimbursement will become less prominent over time as the regulatory and business environment incentivizes better patient outcomes and increased cost efficiency. For Medicare spending alone, the Department has targeted 30% of all payments to be made through value-based care programs by 2016 and 50% of all payments by 2018. According to the Department, Medicare expenditures excluding Medicare Advantage and Part D totaled $362 billion in 2014. The nature of our presence in our existing markets, and how we have leveraged our delivery and risk platform in multiple markets, are reflective of our business strategy, as follows:

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Utah: We have built on the strength of our facility assets and physician relationships to expand our delivery and risk platform. Our integrated delivery network includes four acute care hospital campuses in the Salt Lake City metropolitan area and a new expandable inpatient and outpatient health campus in fast-growing Lehi, Utah, that is under construction, each supported by a diverse ambulatory footprint. Our growing Health Choice presence includes approximately 6,200 managed Medicaid lives and an accountable care network, called Health Choice Preferred Utah, that includes more than 18,500 attributed lives and aligns approximately 700 physicians as of January 1, 2015.

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Arizona: Our risk platform, Health Choice, is headquartered in Phoenix, Arizona. Its managed Medicaid business continues to grow and expand and currently manages approximately 219,000 total Medicaid lives and Duals state-wide. Health Choice, together with a joint venture partner, recently won a competitive bid to begin operating an integrated acute and behavioral health plan in Northern Arizona with an estimated 225,000 behavioral health lives expected to be covered in our 2016 fiscal year. We also expect to enroll more than 5,000 covered lives through the 2015 open enrollment process under our Exchange plan in Arizona, which predominantly serves the Phoenix market.

We have leveraged our delivery assets in conjunction with Health Choice’s risk platform to develop an accountable care network with more than 40,000 attributed lives and 1,000 aligned physicians as of January 1, 2015. Our delivery assets located in the cities of Phoenix and Mesa are core to our local accountable care network and include three acute care hospitals and a full-service, high-acuity behavioral hospital, a growing number of patient access points and an employed physician group.

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Colorado: We provide high-quality care through a critical access hospital in the Pikes Peak area of Woodland Park, Colorado.

We believe we are well-positioned for the expected growth in value-based care because of our diverse and growing Health Choice risk platform, which is comprised of health plans, an MSO and accountable care networks that are enabled by our provider and patient-centric risk and integrated care model. Health Choice has been accredited by URAC, an independent healthcare accreditation agency that seeks to promote continuous improvement in the quality and efficiency of healthcare management. In calendar year 2014, we experienced 59% growth in Health Choice plan members as total covered lives managed on our risk platform grew from 212,000 to 336,700. We believe our risk platform is well-positioned to respond to the healthcare industry’s migration to cost efficiency and value-based reimbursement due to its breadth, ability to manage third-party, risk-based covered lives at scale, ability to deliver integrated care with owned and aligned hospitals and ambulatory assets, and ability to facilitate value-based physician alignment. Our Health Choice risk platform includes the following capabilities:

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Geographic and product diversification: Our 336,700 covered lives across three states as of January 1, 2015 include 216,000 managed Medicaid lives, 9,400 Duals, 58,500 lives attributed to our networks from multiple payors whose care is managed by our network providers, more than 3,300 Exchange lives and 88,300 MSO lives. We recently won a competitive bid for an integrated and acute behavioral health contract that we expect to commence in fiscal 2016. Under this contract, we expect to manage the standalone behavioral health benefit for an estimated 225,000 plan members and acute and behavioral care on an integrated basis for approximately 6,000 members who are seriously mentally ill.

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Risk-based, physician-centric managed care model: Our Health Choice risk platform, which includes Health Choice Preferred, allows us to align with physicians, build provider networks, integrate care across the delivery system and engage in value-based contracting. Health Choice Preferred organizes and partners with physicians to manage population health, enabling them to participate in the transition from FFS towards value-based payments. Through Health Choice Preferred, we have aligned with approximately 1,100 physicians as of January 1, 2015 through accountable care networks that coordinate care for 58,500 attributed patient lives in two states, consisting of managed Medicaid, Medicare and commercial lives.

We leverage common management, systems infrastructure and processes across our business operations to produce scale efficiencies, increase the consistency of clinical outcomes, and respond to existing market dynamics and new market opportunities. We believe our growing risk platform enables us to: (1) enter new markets by utilizing our managed care and risk capabilities without expending capital in facility assets, such as our recent MSO expansion into the Florida market; (2) grow our physician network and patient lives base through an organized response to the growth of value-based reimbursement; (3) increase our overall growth opportunity in risk-based contracting and government-sponsored programs; and (4) enter new markets on an integrated basis through investment in acute care facility assets and the deployment of our risk platform.

In recent years, we have centered our growth strategy on a narrower set of geographies and the total healthcare services opportunity in each of our core markets. In support of this strategy, we have rationalized our business operations through the divestiture of non-core hospital operations and other related assets in Florida and Nevada and by raising capital for investment in our core markets. In our core markets, we seek to provide high-quality, cost-effective clinical care by expending capital on a disciplined basis to support and grow our delivery assets and using our risk platform where we believe it will enhance patient care. At the same time, we have also considered new market expansion that would be accretive to our core businesses. We have expanded our risk capabilities to cover new and emerging populations such as those covered by accountable care networks and Exchanges, broadened our facility portfolio to include a wider array of outpatient lines of business and access points, and created an MSO business to support new and existing market expansion. Our multi-pronged approach to the total healthcare services opportunity in a market is demonstrated in the following examples:

Coordinated expansion of risk platform and delivery assets

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collaborative, coordinated care delivery model among our healthcare delivery assets, aligned physicians and risk platform, to position us to achieve incremental growth for both our network providers and the payors who contract with them. Since the beginning of our 2012 fiscal year, our Utah acute care revenues on average have grown faster than our company-wide acute care revenues.

New market expansion with our MSO

Growing lines of business

Since Health Choice was established in 1990, we have consistently grown our core Arizona managed Medicaid plan membership while building a statewide provider network. We have leveraged this core managed Medicaid experience to expand our risk platform in Arizona to cover approximately 40,000 attributed accountable care network lives, establish an Exchange plan, and form an integrated behavioral health joint venture that recently won a competitive bid for a three-year contract with two two-year state renewal options, under which we expect to manage the standalone behavioral health benefit for an estimated 225,000 plan members and acute and behavioral care on an integrated basis for approximately 6,000 members who are seriously mentally ill. We are also managing a growing number of complex care lives in Arizona through our Duals special needs plan, which grew from 6,500 lives to 9,400 lives in calendar year 2014.

Our multi-pronged approach has enabled us to accelerate our growth, as reflected in: (a) 10.9% annual revenue growth in fiscal 2014 as compared to fiscal 2013 and 16.4% quarter over quarter growth in revenue in the fourth quarter of fiscal 2014 as compared to the fourth quarter of fiscal 2013; (b) 13.4% annual growth in Adjusted EBITDAR for fiscal 2014 as compared to fiscal 2013 and 16.5% growth in Adjusted EBITDAR in the fourth quarter of fiscal 2014 as compared to the fourth quarter of fiscal 2013; (c) 0.8% growth in adjusted admissions for fiscal 2014 as compared to fiscal 2013 and 2.6% quarter over quarter growth in adjusted admissions in the fourth quarter of fiscal 2014 as compared to the fourth quarter of fiscal 2013; (d) 74% growth in Health Choice covered lives in fiscal 2014 as total covered lives managed on our risk platform grew from 188,000 to 327,600; and (e) new types of contracts with governmental and other third-party payors, such as the integrated acute care and behavioral health contract for which our joint venture in Northern Arizona recently won a competitive bid, and our Florida MSO relationship. In fiscal 2014 and fiscal 2013, our net earnings from continuing operations were $23.3 million and $4.9 million (which take into account $18.0 million and $0.3 million of rent expense from our 2013 sale-leaseback transaction), respectively. Our net earnings (loss) from continuing operations in the fourth quarters of fiscal 2014 and fiscal 2013 were $16.3 million and ($2.3) million (which take into account $4.7 million and $0.3 million of rent expense from our 2013 sale-leaseback transaction), respectively.

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For fiscal 2014, we generated revenues of $2.53 billion, net earnings (loss) from continuing operations of $23.3 million and Adjusted EBITDA of $269.8 million. For additional information regarding this non-GAAP measure, including a reconciliation of Adjusted EBITDA and Adjusted EBITDAR to the most directly comparable measure presented in accordance with U.S. GAAP, see “Selected financial data” included elsewhere in this prospectus. Approximately $1.8 billion, or 71.2%, of our revenue for fiscal 2014 was derived from our acute care segment and approximately $730.0 million, or 28.8%, of our revenue for this period was derived from our Health Choice segment.

Healthcare industry overview and trends

Cost-conscious healthcare environment and shift towards value-based healthcare

Growth of healthcare spending

CMS estimates that U.S. healthcare expenditures were $2.9 trillion in 2013, or more than 17% of the total U.S. GDP. CMS projects that total U.S. healthcare expenditures are expected to grow by 5.6% in 2014 and by an average of 6.0% annually from 2015 to 2023. Because of this growth, total U.S. healthcare expenditures are estimated by CMS to be $5.2 trillion, or 19.3% of the total GDP, by 2023.

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Growth in government-sponsored healthcare

We believe that the enrollment in government-sponsored programs will continue to increase, driven by an aging population and expanded coverage from the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”). As a result, we expect that government value-based models will also expand to manage costs and incentivize providers to deliver high quality, cost-effective care. The programs that utilize these value-based models include Medicare Advantage, Managed Medicaid, Medicare ACOs, Dual Eligible Pilot Programs and Medicare Value Based Purchasing. We believe our experience in managing government-insured lives positions us to benefit from the expected growth of these programs.

Impact of health reform law

We believe that the Health Reform Law’s expansion of healthcare coverage through the growth of Exchanges, private sector coverage and expanded Medicaid coverage will, over time, reduce the level of uncompensated care we provide to uninsured individuals. The reductions in the growth in Medicare payments and the decreases in disproportionate share hospital (“DSH”) payments, however, will adversely affect our government reimbursement, which is offset by the benefits realized from expanded healthcare coverage under the Health Reform Law. Because of the many variables, including the law’s complexity, continued delays or exceptions to employer mandates, possible amendments or changes, court challenges to the law, uncertainty regarding the success of Exchanges in enrolling uninsured individuals and possible reductions in funding by Congress and future reductions in Medicare and Medicaid reimbursement, the long-term effect of the Health Reform Law on our company, including how individuals and businesses will respond to the new choices and obligations, is not yet fully known. For example, SCOTUS has agreed to hear a case known as King v. Burwell during its 2015 judicial session. The plaintiffs are challenging the extension of premium subsidies to health insurance policies purchased through federally operated Exchanges, arguing that subsidies must be limited to state-operated Exchanges. If decided in favor of the plaintiffs, this case could make it more difficult for uninsured individuals in states that do not operate an Exchange to purchase coverage and otherwise significantly affect implementation of the Health Reform Law, in a manner that may result in less than projected numbers of newly insured individuals. We cannot predict the impact on our Company of these continuing developments with respect to the Health Reform Law.

Our competitive strengths

High-quality, cost-effective care

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initiatives and information technology solutions that enable us to track and trend the quality of patient care, increase patient safety and increase the time our hospital staffs interact face-to-face with patients. In addition, we believe that our experience in operating and seeking to integrate delivery networks, including acute care hospitals, physician clinics and patient access points, enables us to provide our patients with the right level of care, in the right setting at the right time. As a result of our focus on the patient and delivering high quality, cost-effective care, we have achieved scores better than the national average across a broad variety of healthcare industry benchmarks, including CMS Core Measures and readmission rates. In addition, as of the date of this prospectus, all of our hospitals have met the Stage 2 “meaningful use” criteria specified by CMS for adoption and meaningful use of certified integrated EHR technology, and all of our hospitals have received ISO-9001 certification relating to the quality of our management systems and processes.

Multi-pronged growth strategy that maximizes total market opportunity

We believe our multi-pronged growth strategy enables us to pursue the total services opportunities in our existing geographic markets and provides us with greater optionality to enter new markets. The breadth of our services platform, including our acute care hospitals and a broad array of inpatient and outpatient lines of business and access points and a diversified and growing risk platform, is the key enabler of this strategy. We can offer delivery, health plan and risk management services on an individual or combined basis to each of our new and existing markets. Our MSO expansion in Florida to provide administrative and care management services for a national insurer’s Medicaid beneficiaries highlights our ability to leverage our provider-centric, payor-agnostic platform to enter new markets quickly on a services-only basis. In Utah, we built on the strength of our facility assets and physician relationships to establish a managed Medicaid health plan and an accountable care network, which together cover 24,700 lives as of January 1, 2015, significantly increasing our presence in that market and enabling us to further align with local physician networks.

A diversified and growing risk platform

We have built a risk platform that we believe positions us to pursue the broad and growing risk and value-based care opportunity. The breadth of capabilities of our platform is reflected in the lives and relationships we manage, including: 216,000 managed Medicaid, 9,400 Duals, 58,500 accountable care network, 3,300 Exchange and 88,300 MSO lives. In addition, our behavioral health joint venture recently won a competitive bid to manage beginning in fiscal 2016. Under the contract awarded to our joint the standalone behavioral health benefit for an estimated 225,000 plan members and acute and behavioral care on an integrated basis for approximately 6,000 members who are seriously mentally ill.

Positions in higher-growth markets

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Medicaid, which has measurably improved our payor mix in those states. Overall, we believe we are differentiated in our markets through our integrated care capabilities, creating opportunities to strategically deploy capital in projects that we believe will expand our capabilities and drive additional growth and market penetration.

Experience with managing government-insured lives

Our risk platform was launched in 1990, when our predecessor company began a managed Medicaid health plan in Arizona. We have extensive experience in working to contain medical costs of Medicaid and Duals populations, including the use of systems and processes intended to enable healthcare providers to improve efficiency and lower costs while increasing quality of care. We believe we benefit from an understanding of and experience with the cultural and linguistic needs of Medicaid populations and have developed specialized skills to manage their care. For instance, we communicate with Medicaid plan members who do not speak English or are hearing-impaired, coordinate plan member transportation, engage in extensive member outreach programs, and build relationships with schools and city and county health departments. We believe that our success in caring for the intensive needs of such government-insured populations gives our Health Choice operations deep, long-standing capabilities in care coordination and cost-effectiveness that are required of all health plans, regardless of member demographics. We believe our experience operating in a competitive and mature managed Medicaid and Duals market positions us to expand the types and number of governmental risk arrangements we offer. According to CMS, the number of total lives covered by government-sponsored healthcare programs is estimated to grow from approximately 134.4 million covered lives in 2014 to approximately 147.7 million covered lives by 2020. To service this growing number of government-insured lives, we have developed a cost-effective administrative structure, which benefits our entire risk platform. Our experience in managing government-insured lives and administrative efficiencies has created differentiated opportunities, such as our MSO expansion in Florida, and ability to obtain capitated government contracts after competitive bid processes, such as the integrated acute care and behavioral risk contract for which our joint venture in Northern Arizona recently won a competitive bid.

Our growth strategy

Capture growth opportunities in existing markets

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On December 18, 2014, we and our joint venture partner, NARBHA, won a competitive bid for an integrated acute care and behavioral healthcare contract for six counties in Northern Arizona. Under this contract, we

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expect to manage the standalone behavioral health benefit for an estimated 225,000 plan members and acute and behavioral healthcare on an integrated basis for approximately 6,000 members who are seriously mentally ill.

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Given the growth in covered lives we have experienced in Utah and fast-growing demographics in parts of this market, we are completing construction of a new integrated inpatient and outpatient health campus and medical office building, south of Salt Lake City in Lehi, Utah. The new health campus is designed to be expandable based on community need and is scheduled to open in the summer of 2015. We also have recently expanded our patient access points in Utah to include multiple ambulatory sites, including a free-standing emergency department, urgent care centers and on-site employer-based health clinics.

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Expand MSO relationships

We are in the early stages of deploying our MSO services. We have been able to expand our capabilities and markets in multiple ways, including:

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Accountable care networks—Our accountable care networks in Arizona and Utah cover more than 58,500 Medicare, Medicaid and commercial managed care enrollees and have allowed us to align with approximately 1,700 physicians as of January 1, 2015. Through Health Choice Preferred, we believe we have the opportunity to expand our physician network and grow our attributed lives.

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We believe that an increasing number of health systems have begun adopting value-based care models to create increased financial stability by receiving more value for the coordinated care they deliver while maintaining and growing their patient volumes. Our expanded capabilities, including MSO services and risk-based reimbursement aligned with both hospitals and physicians, allow us to benefit from the growth of provider-led population health management. According to industry sources, the MSO market, was $34 billion in 2014. In addition, the number of people in the United States covered by risk-based payment programs is expected by industry sources to grow from approximately 108 million at the start of 2014 to approximately 155 million by 2019, many under new accountable care network and population health models.

Capture growth opportunities in government-sponsored lives

We have used our experience in managed Medicaid to cover new populations, including Medicare, Exchanges, behavioral health and Duals. According to CMS, government-sponsored coverage is expected to continue to grow significantly, from 134.4 million persons and $1.2 trillion in 2014 to 147.7 million persons and more than $1.8 trillion in 2020. Through our diversified risk platform, we believe we will be able to capitalize on the multiple forms of growth in government-insured lives, such as increased penetration of Medicare Advantage, expansion of Medicaid, including where states use federal Medicaid money to purchase private insurance on the Exchanges for eligible enrollees, and additional risk arrangements such as accountable care networks and MSSPs. As the trend towards managing government-sponsored lives increases, we believe our care management capabilities, clinical integration, quality measures and demonstrated ability to implement value-based programs positions us to benefit from large scale government contracts.

Selectively enter new markets

We believe that through our broad and differentiated set of capabilities and assets, there are multiple ways for us to enter markets, including by way of acute care hospitals, health plans, risk services or any combination of the three. For instance, our risk platform enables us to enter new markets to develop accountable care networks, launch health plans or provide MSO services, either in support of newly acquired provider assets or solely as a health insurer or MSO contracting with third-party payors and providers in the market. As a result, in addition to the acquisition or construction approaches pursued most often by pure acute care hospital systems, we have greater flexibility to enter new markets in a capital-efficient manner.

Selectively pursue acquisitions

Our markets

The following includes a discussion of the acute care operations for certain of our markets and the geographic markets where Health Choice lines of business currently operate.

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Salt Lake City, Utah

We operate four acute care hospital facilities with 700 licensed beds in the Salt Lake City area, which has been a very competitive environment. We believe that our hospitals in this market benefit from attractive locations and participate in a more favorable demographic and economic environment relative to other markets. For fiscal 2014 we generated 28.5% of our total acute care revenue in this market.

Our Salt Lake City market strategy focuses on high-quality patient care, disciplined capital deployment and the expansion of our footprint by developing a more extensive network of services, including a comprehensive physician alignment strategy and development of outpatient services and other patient access points around our hospitals.

We currently are building a new integrated inpatient and outpatient healthcare campus in Lehi, Utah, called Mountain Point Medical Center, as a provider-based campus of Jordan Valley. This healthcare campus will include 40 inpatient beds and full service outpatient capabilities in a 124,000 square foot hospital and an attached 60,000 square foot medical office building, which will be occupied by primary care and multi-specialty physician groups practicing in the area. The hospital will provide a full range of services including inpatient intensive care, obstetrics and surgical services. The hospital also will provide cardiology services, which includes a cardiac catheterization lab. Additional outpatient services will include emergency, imaging, lab and outpatient surgery. The hospital has been designed and is being constructed with the capability to expand depending on community need and demand for services in the Lehi area. This new hospital, anticipated to cost more than $80.0 million (approximately $30.0 million of which will be expended in the current fiscal year to complete construction and equip the new facility), will serve eight cities in Northern Utah County and is in the fastest growing area within the state of Utah. This project is anticipated to be completed and open for business by summer 2015. In recent years, we expanded our hospitals’ access points through, among other things, the acquisition of a new hospital surgery center, the expansion of our emergency room capacity at several hospitals and the addition of new inpatient beds at Jordan Valley, Davis Hospital and Medical Center and Salt Lake Regional Medical Center. In June 2013, we opened a free-standing emergency department and helped develop a medical office building in Roy, Utah, which has increased the emergency, primary care and specialty capacity of Davis. We also have made investments in urgent care clinics and on-site industrial medicine clinics within our Salt Lake City market.

We also have expanded our Health Choice business in Utah. Health Choice operates a managed Medicaid plan in Utah. Additionally, Health Choice also has led the development of our local Health Choice Preferred provider network that enhances our hospitals’ abilities to coordinate care and contract with payors. This network and the related Health Choice Preferred physician association includes approximately 700 physicians and represents part of our overall physician alignment strategy, which we also pursue through direct employment, professional services arrangements and other avenues. We believe that these physician alignment and related clinical integration efforts are laying the foundation for a high-quality, well-coordinated Salt Lake City area healthcare delivery network.

Texas

We operate five acute care hospital facilities with 1,943 licensed beds that serve the areas of Houston, San Antonio, Odessa, Texarkana and Port Arthur, Texas. For fiscal 2014, we generated 42.2% of our total acute care revenue in this market.

Our strategic focus, throughout our Texas market, centers on integration of our hospitals and physician operations through developing a more extensive network of primary care physicians, including the expansion of

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our physician alignment strategies and extending the reach of our outpatient business, including both surgical and imaging services. We also seek to expand profitable product lines within our higher acuity service lines, including neurosurgery, cardiology and cardio-thoracic services and neonatology.

In recent years, our presence in Texas has increased through acquiring St. Joseph Medical Center (“St. Joseph”) in downtown Houston and Wadley Regional Medical Center (“Wadley)” in Texarkana. Since acquiring these hospitals, we have made strategic investments in various physician alignment and integration opportunities focused on expanding profitable service lines, such as cardiology. Also, in the most recent two fiscal years, we have expanded the geographic footprints of St. Joseph and Wadley through additional access point strategies. In Houston, this includes the addition of a new St. Joseph campus in the growing Heights area of Houston. With respect to Texarkana, we acquired Medical Park Hospital in Hope, Arkansas, about 30 miles from Wadley, which now operates as Wadley Regional Medical Center—Hope and recently acquired an outpatient radiology clinic in a high growth area of Texarkana.

Phoenix, Arizona

We operate three acute care hospital facilities and one behavioral health hospital facility, with a total of 589 licensed beds in the Phoenix area. Our strategic investments in this market have focused on capturing market share through expansion of various service lines and bed capacity. For the year ended September 30, 2014, we generated 19.4% of our total acute care revenue in this market.

Our physician alignment and access point strategy in our Arizona market focuses on enhancing our physician specialty and emergency room coverage to allow our hospitals to better meet community needs. We continue to grow our employed physician base in the Phoenix area and, additionally, we have leveraged Health Choice’s expertise to establish a comprehensive accountable care network.

We also seek to make strategic capital investments in our Arizona hospitals and adapt to our service lines to meet local market needs. In fiscal 2013, for example, we expanded our geropsychiatry services in the Phoenix market by adding beds for these services at both our St. Luke’s Medical Center in downtown Phoenix and Mountain Vista Medical Center in Mesa.

Health Choice bases its operations in Phoenix, Arizona, where it employs approximately 550 managed care professionals and operates its core Health Choice Arizona managed Medicaid plan. As with our Utah market, Health Choice’s managed care and provider networking professionals have established a Health Choice accountable care network and related physician association, which consists of approximately 1,000 aligned physicians, including those who participate in our network through our alliance with Phoenix Children’s Hospital. This network allows our Arizona hospitals and participating physicians to coordinate care and collaborate with respect to patient populations and to enter into value-based arrangements with commercial payors that reward effective population health management.

In connection with the Health Reform Law, Arizona expanded Medicaid coverage beginning January 1, 2014, which includes the restoration of eligibility to childless adults who have been without coverage since 2011. This expanded coverage has and is expected to continue to provide relief for the uncompensated care incurred by our Arizona hospitals. Additionally, this expansion has contributed to an increase in Health Choice’s Medicaid health plan membership.

West Monroe, Louisiana

We operate Glenwood Regional Medical Center (“Glenwood”) with 278 licensed beds, in West Monroe, Louisiana, which benefits from a strong market position, and opportunities for strategic growth of profitable product lines. For fiscal 2014, we generated 8.5% of our total acute care revenue in this market.

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Since acquiring Glenwood in 2007, our focus on capital spending at this facility has included renovations and capacity expansion, with an emphasis on creating additional inpatient capacity with a 25 bed-expansion, growing the hospital’s cardiovascular program, expanding and renovating operating rooms and purchasing new diagnostic imaging equipment, automated laboratory systems and other equipment. We also have invested in the facility’s hospitalist program, expanded emergency room coverage, re-opened the inpatient psychiatric program and acquired an imaging center. Glenwood also owns Ouachita Community Hospital, a ten-bed surgical hospital in West Monroe that, since its acquisition, has provided additional surgical capacity and allowed us to expand our market presence.

To build on our capital investments in Glenwood and to serve our growing patient volume, we continue to seek opportunities to expand the hospital’s patient access points, including acquisitions, or new development, of other ancillary facilities around Glenwood. We believe our focus on providing high-quality patient care and our efforts to expand the reach of our physician network in this market will provide opportunities to capture additional market share and improve our relationships with managed care payors.

Health Choice geographic markets

Health Choice’s Phoenix-based managed Medicaid plan, which serves 209,700 members in Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal counties in Arizona, represents its core business. Along with its managed Medicaid plan, Health Choice operates a MAPD SNP in the same Arizona counties that serves 9,400 members. Health Choice also operates a Phoenix-area Health Insurance Exchange plan and leads our provider networking efforts in the Phoenix area that organize our hospitals and local physicians through our Health Choice Preferred network, which serves as a contracting vehicle with commercial payors.

In our Salt Lake City market, Health Choice operates a managed Medicaid plan under a contract with the state of Utah, serving 6,200 members. Health Choice, in conjunction with our Utah hospitals and local physicians, has also established an accountable care network, in the Salt Lake City area, which allows participating providers to contract with commercial health insurers.

In the state of Florida, Health Choice operates Health Choice Florida, which does business as IASIS Integrated Care Solutions, a MSO that serves 88,300 members enrolled in a large national insurer’s Florida managed Medicaid plan. The members covered under this relationship primarily reside either in counties included in the Florida panhandle or the greater Tampa area. Health Choice Florida’s offices that serve these enrollees are headquartered in the Tampa area. While Health Choice has always maintained the expertise and core competencies required to successfully provide these services outside of its core business, this is the first contract of its nature for our company.

Given Health Choice’s medical management expertise and our reputation as an operator and manager of risk, we intend to pursue other opportunities for growth. As we continue to pursue new areas for expansion and growth in our managed care operations, we expect that our recent efforts, including investment in our managed care and administrative services capabilities, a full year of experience with Medicaid expansion in Arizona, successful enrollment efforts in our other health plans and the continued growth in accountable care networks, will continue to provide growth opportunities in our Health Choice business segment in the near term.

Our properties

Our principal executive offices in Franklin, Tennessee are located in approximately 61,000 square feet of office space. Our office space is leased pursuant to a lease contract, which expires on December 31, 2020.

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Our principal executive offices, hospitals and other facilities are suitable for their respective uses and generally are adequate for our present needs. Our obligations under our Senior Secured Credit Facilities are secured by, among other things, mortgage liens on all of our material real property and that of certain of our subsidiaries, including the properties listed below. Also, our properties are subject to various federal, state and local statutes and ordinances regulating their operation. Our management does not believe that maintaining compliance with such statutes and ordinances will materially affect our financial position or results of operations.

As of January 1, 2015, we operated 15 acute care hospital facilities and one behavioral health hospital facility. Each of our hospitals is included in the acute care operations of our business, as discussed in Note 15, Segment and geographic information, to our consolidated financial statements located elsewhere in this prospectus. We own nine and lease six of our hospital facilities. Nine of our acute care hospitals are partially owned by unaffiliated third-party investors. The following table contains information concerning our hospitals.


Hospitals	City		Licensed beds

Utah
Davis Hospital and Medical Center(1)		Layton		220
Jordan Valley Medical Center(2)		West Jordan		183
Pioneer Valley Hospital(3)		West Valley City		139
Salt Lake Regional Medical Center(4)		Salt Lake City		158
Arizona
Mountain Vista Medical Center(5)		Mesa		178
St. Luke’s Medical Center(6)		Phoenix		200
St. Luke’s Behavioral Health Center		Phoenix		124
Tempe St. Luke’s Hospital(7)		Tempe		87
Texas
Odessa Regional Medical Center(8)		Odessa		230
Southwest General Hospital(9)		San Antonio		327
St. Joseph Medical Center(10)		Houston		792
The Medical Center of Southeast Texas(11)		Port Arthur		224
Wadley Regional Medical Center(12)		Texarkana		370
Louisiana
Glenwood Regional Medical Center(13)		West Monroe		278
Arkansas
Wadley Regional Medical Center at Hope(14)		Hope		79
Colorado
Pikes Peak Regional Hospital(15)		Woodland Park		15

Total				3,604

(1)

Owned by a limited partnership in which we own a 96.2% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(2)

On July 1, 2007, Jordan Valley acquired Pioneer Valley Hospital, a wholly-owned subsidiary of IASIS. The combined entity is owned by a limited partnership in which we own a 95.9% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(3)

A separate campus of Jordan Valley, which is leased under an agreement that expires on September 30, 2028. We have options to extend the term of the lease, which includes two renewal options of five years each.

(4)

Owned by a limited partnership in which we own a 98.4% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(5)

Mountain Vista Medical Center is leased under an agreement that expires on September 30, 2028, and includes two renewal options of five years each. The operations are owned by a limited partnership in which we own a 93.4% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

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(6)

On September 28, 2007, St. Luke’s Medical Center acquired Tempe St. Luke’s Hospital, a wholly-owned subsidiary of IASIS.

(7)

A separate campus of St. Luke’s Medical Center.

(8)

Owned by a limited partnership in which we own an 88.4% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(9)

Owned by a limited partnership in which we own a 94.3% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(10)

Owned by a limited liability company in which we own a 79.6% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(11)

The Medical Center of Southeast Texas is leased under an agreement that expires on September 30, 2028, and includes two renewal options of five years each. The operations are owned by a limited partnership in which we own an 88.2% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(12)

Wadley Regional Medical Center is leased under an agreement that expires on March 31, 2017, with up to 51 automatic two year renewal periods. The operations are owned by a limited liability company in which we own a 73.8% interest; a “physician-owned hospital” as defined under 42 U.S.C. §1395nn.

(13)

Glenwood is leased under an agreement that expires on September 30, 2028, and includes two renewal options for a total of seven years. This facility includes Ouachita, a surgical hospital with 10 licensed beds, which is owned by Glenwood.

(14)

Owned by Brim Healthcare of Texas, LLC, the same wholly-owned subsidiary of IASIS that owns a majority equity interest in Wadley.

(15)

Pikes Peak Regional Hospital is leased under an agreement that expires on September 11, 2017, and is subject to three five-year renewal periods at our option.

The limited partnership agreements for our physician-owned hospitals provide the limited partners with put rights which allow the units to be sold back to us, subject to certain limitations, at the fair value of the units. See Note 2, Significant accounting policies, to our consolidated financial statements included elsewhere in this prospectus.

We also operate and lease medical office buildings which are occupied primarily by physicians who practice at our hospitals.

We lease office space in the states where our managed care business operates. Health Choice currently maintains business offices in the Phoenix, Arizona, Salt Lake City, Utah and Tampa, Florida markets. We believe these lease arrangements are adequate to meet our managed care services operational needs for the foreseeable future.

Hospital operations

At each of our hospitals, we have implemented policies and procedures to enhance patient safety and quality of care, and to improve the hospital’s operating and financial performance. A hospital’s local management team is comprised of a chief executive officer, chief financial officer and chief nursing officer. Local management teams, in consultation with our corporate staff, develop annual operating plans setting forth quality and patient satisfaction goals, revenue growth and operating profit strategies. These strategies can include the expansion of services offered by the hospital, market development to improve community access to care, the recruitment and employment of physicians, plans to enhance quality of care and improvements in operating efficiencies to reduce costs. The competence, skills and experience of the management team at each hospital is critical to the hospital’s successful execution of its operating plan. Our performance-based compensation program for each local management team is based upon the achievement of qualitative and quantitative goals in the annual operating plan. Our hospital management teams are advised by boards of trustees that include members of hospital medical staffs, and community leaders. Each board of trustees establishes policies concerning medical, professional and ethical practices, monitors such practices and is responsible for ensuring these practices conform to established standards.

Factors that affect demand for our services include:

•

local economic conditions;

•

the geographic location of our hospital facilities and other access points of care and their convenience for patients and physicians;

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•

our participation in managed care programs, including managed care contracts on the Exchanges;

•

utilization management practices of managed care plans;

•

consolidation of managed care payors;

•

strategic investment and improvements in healthcare access points;

•

capital investment at our facilities;

•

the quality of our medical staff;

•

competition from other healthcare providers;

•

the size of and growth in the local population; and

•

improved treatment protocols because of advances in medical technology and pharmacology.

The ability of our hospitals to meet the healthcare needs of their communities is determined by the:

•

level of physician support;

•

availability of nurses and other healthcare professionals;

•

quality, skills and compassion of our employees;

•

scope, breadth and quality of our services; and

•

physical capacity and level of technological advancement at our facilities.

We continually evaluate our services with the goal of improving quality of care, expanding our profitable lines of business and improving our business mix. We use our advanced information systems to perform detailed clinical process and care quality reviews, to review product line margin analyses, and to monitor the profitability of the services provided at our facilities. We employ these analyses to capitalize on price and volume trends through the expansion and improvement of certain services.

Health Choice operations

Health Choice is the managed care risk platform through which we manage 336,700 covered lives as of January 1, 2015 under our Health Choice branded Medicaid, Duals and Exchange health plans, accountable care networks, MSO services and other managed care solutions. With its headquarters and primary operations in Phoenix, Arizona, Health Choice employs more than 600 managed care professionals in Phoenix, Arizona, Salt Lake City, Utah and Tampa, Florida. Health Choice’s senior management team operates out of Phoenix, Arizona with an additional east coast operations hub in Tampa, Florida and is supported by medical directors, case management and utilization management nurses, care coordinators, provider network professionals, medical economics analysts, actuaries, an internal compliance group and other administrative personnel. The Health Choice senior management team provides general oversight over the health plan products and management services that Health Choice offers. Health Choice’s business divisions, including its Arizona and Utah managed Medicaid plans, its Florida MSO office and accountable care network division, each have dedicated management teams who report to Health Choice’s senior executives.

Competition

Our facilities and related businesses operate in competitive environments. Several factors affect our competitive position, including:

•

the local economies in which we operate;

•

the level of tourism in our service areas;

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•

our managed care contracting relationships;

•

the number, availability, quality and specialties of physicians, nurses and other healthcare professionals;

•

the scope, breadth and quality of services;

•

the reputation of our facilities and physicians;

•

ability to develop, expand or participate in accountable care networks in certain markets;

•

growth in hospital capacity and healthcare access points for patients in the markets we serve;

•

the physical condition of our facilities and medical equipment;

•

the location of our facilities and availability of physician office space;

•

federal and state restrictions;

•

the availability of parking or proximity to public transportation;

•

accumulation, access and interpretation of publicly reported quality indicators;

•

growth in outpatient service providers;

•

the charges we can set for our services and the growing demand for transparency of such charges; and

•

the geographic coverage of our hospitals in the regions in which we operate.

We face competition from established, tax-exempt healthcare companies and systems, investor-owned hospital companies, large tertiary care centers, specialty hospitals and outpatient service providers, such as surgery centers and imaging centers. In addition, some of our hospitals operate in regions with vertically integrated healthcare providers that include health plans, physician groups and facilities, which could affect our ability to obtain managed care contracts. We continue to encounter increased competition from specialty hospitals, outpatient service providers, not-for-profit healthcare providers and companies, like ours, that consolidate hospitals and healthcare companies in specific geographic markets.

Our competitiveness depends heavily on obtaining and maintaining contracts with managed care organizations, which seek to control healthcare costs through utilization policies and procedures. Most of our markets have experienced significant managed care penetration, along with consolidation of major managed care plans. The revenue and operating results of our hospitals are affected by our ability to negotiate reasonable contracts with managed care plans. Health maintenance organizations and preferred provider organizations use managed care contracts to encourage patients to utilize certain hospitals for discounts from the hospitals’ established charges. Traditional health insurers also contain costs through similar contracts with hospitals.

Our managed care relationships also depend upon whether one of our hospitals is part of a local hospital network, and the scope and quality of services offered by the network compared to competing networks. We believe that our hospitals are better positioned for the transition to higher quality, more affordable networks being established by managed care organizations. On an ongoing basis, we evaluate circumstances in each geographic area in which we operate. We may position ourselves to compete in these managed care markets by forming our own, or joining with others to form, local hospital networks. Where strategically advantageous, we seek to participate in or form accountable care networks comprising hospitals and physicians that can deliver clinically integrated, coordinated care.

As we continue to focus on our physician alignment strategies, we face significant competition for skilled physicians in certain of our markets, as more providers are adopting a physician staffing model approach, coupled with a general shortage of physicians across most specialties, particularly primary care. This increased competition has resulted in efforts by managed care organizations to align with certain provider networks in the markets in which we operate. While we anticipate that our physician alignment strategies, including provider network development efforts, will help us compete more effectively in our markets, we can provide no assurance regarding the success of our strategy.

We believe physician alignment promotes clinical integration, enhances quality of care and makes us more efficient and competitive in a healthcare environment trending toward value-based purchasing and pay-for-

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performance. To meet community needs and address healthcare coverage issues, we have made significant investments to align with physicians through various recruitment and employment strategies, as well as alternative means of alignment such as our formation of provider networks in certain markets. We have formed our own accountable care networks in certain markets that include both employed and non-affiliated physicians, providing the infrastructure through which we can contract more efficiently with commercial payors, position ourselves for value-based reimbursement and promote clinical integration. While we expect that employing physicians should provide relief on cost pressures associated with on-call coverage and other professional fees, we anticipate incurring additional labor and other start-up related costs as we continue the integration of recently employed physicians and their related support staff.

We also face risk from competition for outpatient business. We expect to mitigate this risk through continued focus on our physician alignment strategies, developing new access points of care, our commitment to capital investment in our hospitals, including updated technology and equipment, and our commitment to our quality of care initiatives that some competitors, including individual physicians or physician groups, may not be equipped to implement.

The health insurance market and MSO markets are generally highly competitive. As a whole, the managed care industry is fragmented, and the competitive landscape is subject to ongoing changes as a result of the Health Reform Law, business consolidations and new strategic alliances. Health Choice competes with a large number of national, regional and local managed Medicaid, Duals and MSO service providers, some of whom have prominent national brands and greater capital resources than us.

We compete for government contracts, renewals of government contracts, members and providers. State agencies consider many factors in awarding contracts to health plans. Among such factors are the health plan’s provider network, medical management, degree of member satisfaction, timeliness of claims payment and financial resources. Potential members typically choose a health plan based on a specific provider being a part of the network, the quality of care and services available, accessibility of services and reputation or name recognition of the health plan. We believe factors that providers consider in deciding whether to contract with a health plan include potential member volume, payment methods, timeliness and accuracy of claims payment, and administrative service capabilities. We face competition from other health insurers and MSOs in establishing relationships with state agencies, plan members and network providers.

Sources of revenue

Acute care revenue

Acute care revenue is comprised of net patient revenue, which represents gross charges for our inpatient and outpatient services less contractual adjustments and discounts based upon negotiated rates. Contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. Discounts and contractual adjustments also result from our uninsured discount and charity care programs. Acute care revenue also includes other revenue, consisting of medical office building rental income and other miscellaneous revenue.

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The following table provides the sources of our hospitals’ gross patient revenue by payor before discounts, contractual adjustments and the provision for bad debts:


	Year ended September 30,
	2014		2013		2012
Medicare		27.0%		27.8%		27.6%
Managed Medicare		15.1		14.9		13.3
Medicaid and managed Medicaid		21.2		20.8		22.5
Managed care		30.8		29.6		30.0
Self-pay		5.9		6.9		6.6

Total		100.0%		100.0%		100.0%

A large percentage of our hospitals’ net patient revenue consists of fixed payments from discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, various managed care companies with which we contract reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided.

We receive payment for patient services primarily from:

•

the federal government, primarily under the Medicare program;

•

state Medicaid programs, including managed Medicaid plans;

•

managed care payors, including health maintenance organizations, preferred provider organizations and managed Medicare plans; and

•

individual patients and private insurers.

Medicare is a federal program that provides hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with Lou Gehrig’s Disease and end-stage renal disease. All of our hospitals are certified as providers of Medicare services. Under the Medicare program, acute care hospitals receive reimbursement under a prospective payment system that pays fixed rates for inpatient and outpatient hospital services. Certain types of facilities are exempt or partially exempt from the prospective payment system methodology, including children’s hospitals, cancer hospitals and critical access hospitals. Hospitals and units exempt from the prospective payment system are reimbursed on a reasonable cost-based system, subject to cost limits.

Our hospitals offer discounts from established charges to managed care plans if they are large group purchasers of healthcare services. We offer discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity care. These discount programs limit our ability to increase net patient revenue in response to increasing costs. Patients are not responsible for any difference between established hospital charges and amounts reimbursed for such services under Medicare, Medicaid, health maintenance organizations, preferred provider organizations or private insurance plans. Patients are responsible for services not covered by these plans, with exclusions, deductibles or co-insurance features of their coverage. Collecting amounts due from patients is more difficult than collecting from governmental programs, managed care plans or private insurers. Increases in the population of uninsured individuals, and the acuity levels of such patients seeking care in our emergency rooms, changes in the states’ indigent and Medicaid eligibility requirements, continued efforts by employers to pass more out-of-pocket healthcare costs to employees in increased co-payments and deductibles and the

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effects of an uncertain, low-growth economic environment have historically resulted in increased levels of uncompensated care. However, our hospitals have recently experienced a decline in bad debts and other uncompensated care, primarily as a result of the impact of the Health Reform Law since its effective date of January 1, 2014.

The following table provides the sources of our hospitals’ net patient revenue before the provision for bad debts by payor:


	Year ended September 30,
	2014		2013		2012
Medicare		20.4%		21.1%		21.2%
Managed Medicare		10.8		10.6		9.7
Medicaid and managed Medicaid		12.8		11.8		13.5
Managed care		40.9		39.2		39.8
Self-pay		15.1		17.3		15.8

Total		100.0%		100.0%		100.0%

Medicare

Inpatient acute care

Under the inpatient prospective payment system, a hospital receives a fixed payment based on the patient’s assigned MS-DRG. The MS-DRG system classifies categories of illnesses according to the estimated intensity of hospital resources to furnish care for each principal diagnosis. The MS-DRG rates for acute care hospitals are based upon a statistically normal distribution of severity. The MS-DRG payments consider no specific hospital’s actual costs but are adjusted for geographic area wage differentials. Inpatient capital costs for acute care hospitals are reimbursed on a prospective system based on diagnosis related group weights multiplied by geographically adjusted federal weights. When treatments for patients fall well outside the normal distribution, providers may receive additional payments known as outlier payments. For federal fiscal year 2015, CMS has established an outlier threshold of $24,758 per case.

The MS-DRG rates are adjusted each federal fiscal year and have been affected by federal legislation. The index used to adjust the MS-DRG rates, known as the “market basket index,” gives consideration to the inflation experienced by hospitals and entities outside of the healthcare industry in purchasing goods and services. In past years, the percentage increases to the MS-DRG rates have been lower than the percentage increases in the costs of goods and services purchased by hospitals. For federal fiscal year 2014, CMS issued a final rule that resulted in a net increase in operating payment rates of 0.7%. This increase reflected a 2.5% market basket increase, a prospective documentation and coding adjustment of negative 0.8%, a multi-factor productivity adjustment of negative 0.5%, a 0.3% reduction as required by the Health Reform Law and a 0.2% reduction to offset projected spending increases associated with proposed new admission and medical review criteria for inpatient services. For federal fiscal year 2015, CMS issued a final rule that results in a net increase in operating payment rates of 1.4%. This increase reflects a 2.9% market basket increase, a multi-factor productivity adjustment of negative 0.5%, a 0.2% reduction as required by the Health Reform Law and a prospective documentation and coding adjustment of negative 0.8%. The Health Reform Law provides for additional reductions to the inpatient prospective payment system market basket update, and other payment adjustments, in future years as discussed below and in the section entitled “Government regulation and other factors—Healthcare reform.”

Quality of care provided is becoming an increasingly important factor in Medicare reimbursement. Hospitals must submit data for certain patient care indicators to the Secretary of the Department to receive MS-DRG

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increases at the full market basket. In federal fiscal year 2014, those hospitals that did not submit the required data received an increase in payment equal to the market basket minus two percentage points. Beginning in federal fiscal year 2015, hospitals that do not participate will lose one-quarter of the percentage increase in their payment updates. In addition, the market basket update for any hospital that is not a meaningful EHR user will be reduced each federal fiscal year as follows: 2015: one-quarter; 2016: one-half; 2017 and later years: three fourths. We monitor our compliance with the quality indicators and intend to submit the quality data required to receive the full market basket pricing update when appropriate.

Medicare does not pay hospitals additional amounts to treat certain preventable adverse events, also known as hospital acquired conditions or HACs, unless the conditions were present at admission. There are 11 categories of conditions on the list of HACs. DEFRA provides that CMS may revise the list of conditions from time to time. In 2009, CMS announced three National Coverage Determinations that prohibit Medicare reimbursement for erroneous surgical procedures performed on an inpatient or outpatient basis. These three erroneous surgical procedures are in addition to the HACs designated by regulation. The Health Reform Law contains additional measures to further tie Medicare payments to performance and quality as discussed below in the section entitled “Government regulation and other factors—Healthcare reform.”

CMS has issued regulations that modified and clarified CMS’ policy on how Medicare Administrative Contractors (“MACs”) review inpatient hospital admissions for payment purposes. The two-midnight presumption outlined by CMS specifies that hospital stays spanning two or more midnights after the beneficiary is formally admitted as an inpatient under a physician order are presumed to be reasonable and necessary for inpatient status if the stay at the hospital is medically necessary. CMS has directed MACs to not focus their medical review efforts on stays spanning at least two midnights after admission absent evidence of systematic gaming, abuse, or delays in the provision of care to qualify for the two-midnight presumption. However, MACs may review these claims as part of routine monitoring activity or as part of other targeted reviews. Inpatient stays spanning less than two midnights after the beneficiary is formally admitted as an inpatient are not subject to the presumption and may be selected for review. When a patient enters a hospital for a procedure not specified by Medicare as inpatient only, a diagnostic test, or any other treatment, and the physician expects to keep the patient in the hospital for less than two midnights, the services are generally inappropriate for inpatient admission and inpatient payment under Medicare Part A. CMS has directed MACs to deny these inappropriate admissions unless unforeseen circumstances shortened the stay or there are other rare or unusual circumstances that necessitate an inpatient admission. Effective for admissions on or after October 1, 2013, CMS has directed the MACs to conduct probe reviews and deny claims found to be out of compliance. Based on the results of these initial reviews, MACs are conducting educational outreach efforts. CMS has instructed MACs to deny each non-compliant claim and to outline the reasons for denial in their communication to providers. Besides educational outreach efforts, for those providers identified as having moderate, significant or major concerns, the MACs are conducting additional probe reviews on claims with dates of admission through March 2015.

Outpatient

CMS reimburses hospital outpatient services and certain Medicare Part B services furnished to hospital inpatients that have no Part A coverage on a prospective payment system basis. CMS uses fee schedules to pay for physical, occupational and speech therapies, durable medical equipment, clinical diagnostic laboratory services and nonimplantable orthotics and prosthetics.

All services paid under the prospective payment system for hospital outpatient services are classified into groups called ambulatory payment classifications (“APCs”). Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. CMS increased the market basket for calendar year 2014 by 1.7%, which includes the full market basket of 2.5%, a negative 0.5% multifactor productivity adjustment and a negative 0.3% adjustment required by the Health Reform Law. For

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calendar year 2015, CMS has issued a proposed rule to increase the market basket for calendar year 2015 by 2.1%, which includes the full market basket of 2.7%, a negative 0.4% multifactor productivity adjustment and a negative 0.2% adjustment required by the Health Reform Law. The Health Reform Law provides for additional reductions to the outpatient prospective payment system market basket update, and other payment adjustments, in future years as discussed below in the section entitled “Government regulation and other factors—Healthcare reform.”

CMS requires hospitals to submit quality data regarding certain measures relating to outpatient care in each calendar year to receive the full market basket increase under the outpatient prospective payment system in the following calendar year. Hospitals that fail to submit such data will receive the market basket update minus two percentage points for the outpatient prospective payment system.

Rehabilitation

Inpatient rehabilitation hospitals and designated units are reimbursed under a prospective payment system. Under this prospective payment system, patients are classified into case mix groups based upon impairment, age, co-morbidities and functional capability. Inpatient rehabilitation facilities are paid a predetermined amount per discharge that reflects the patient’s case mix group and is adjusted for area wage levels, low-income patients, rural areas and high-cost outliers. For federal fiscal year 2014, CMS updated inpatient rehabilitation payment rates by 1.8%, which reflected a 2.6% market basket increase, a negative 0.5% productivity adjustment and a 0.3% reduction required by the Health Reform Law. For federal fiscal year 2015, CMS has issued a final rule updating inpatient rehabilitation rates by 2.2%, which reflects a 2.9% market basket increase, a negative 0.5% productivity adjustment and a 0.2% reduction required by the Health Reform Law. The Health Reform Law provides for additional reductions to the inpatient rehabilitation facility prospective payment system market basket update, and other payment adjustments, in future years as discussed below in the section entitled “Government regulation and other factors—Healthcare reform.”

To qualify for classification as an inpatient rehabilitation facility, at least 60% of the facility’s inpatient population during the most recent 12-month cost reporting period must have required intensive rehabilitation services for one or more of 13 specified conditions. Inpatient rehabilitation facilities must meet additional coverage criteria, including patient selection and care requirements relating to pre-admission screenings, post-admission evaluations, ongoing coordination of care and involvement of rehabilitation physicians. As of January 1, 2015, we operate nine inpatient rehabilitation units within our hospitals.

Psychiatric

Inpatient psychiatric facilities are paid based on a prospective payment system. Under this prospective payment system, inpatient psychiatric facilities receive a federal per diem base rate that is based on the sum of the average routine operating, ancillary and capital costs for each patient day of psychiatric care in an inpatient psychiatric facility. The federal per diem base rate is then adjusted for budget neutrality, such that total payments under the prospective payment system are projected to be equal to the total estimated payments that would have been made to inpatient psychiatric facilities under the previous cost-based system of payment. This federal per diem base rate is further adjusted to reflect certain patient and facility characteristics, including patient age, certain diagnostic related groups, facility wage index adjustment, and facility rural location. For federal fiscal year 2014, CMS increased inpatient psychiatric payment rates by 2%, which included a market basket increase of 2.6%, reduced by a 0.5% productivity adjustment and a reduction of 0.1% as required by the Health Reform Law. For federal fiscal year 2015, CMS has issued a final rule updating inpatient psychiatric payment rates by 2.1%, which includes a market basket update of 2.9%, reduced by a 0.3% productivity adjustment and a reduction of 0.5% as required by the Health Reform Law. Inpatient psychiatric facilities also receive additional outlier payments for cases in which estimated costs for the case exceed an

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adjusted threshold amount plus the total adjusted payment amount for the stay. The Health Reform Law provides for reductions to the inpatient psychiatric facility prospective payment system market basket update, and other payment adjustments, in future years as discussed below in the section entitled “Government regulation and other factors—Healthcare reform.” As of January 1, 2015, we operate one behavioral health hospital facility and fourteen specially designated psychiatric units subject to these rules.

Physician services reimbursement

Physician services are reimbursed under the physician fee schedule (“PFS”) system, under which CMS has assigned a national relative value unit (“RVU”) to most medical procedures and services that reflects the resources required by a physician to provide the services relative to all other services. Each RVU is calculated based on work required in time and intensity of effort for the service, practice expense (overhead) attributable to the service and malpractice insurance expense attributable to the service. These three elements are each modified by a geographic adjustment factor to account for local practice costs then aggregated. The aggregated amount is multiplied by a conversion factor that accounts for inflation and targeted growth in Medicare expenditures (as calculated by the sustainable growth rate (“SGR”)) to arrive at the payment amount for each service. While RVUs for various services may change in a year, any alterations are required by statute to be virtually budget neutral, such that total payments made under the PFS may not differ by more than $20 million from what payments would have been if adjustments were not made.

The PFS rates are adjusted each year, and reductions in both current and future payments are anticipated. The SGR formula, mandated by statute, should control growth in aggregate Medicare expenditures for physicians’ services. Since 2003, Congress has passed multiple legislative acts delaying application of the SGR to the PFS. We cannot predict whether Congress will intervene to prevent this reduction to payments. Barring delay or repeal of the SGR by Congress, Medicare payments to physicians are scheduled to be cut by approximately 24% effective March 1, 2015.

Ambulatory surgery centers

CMS reimburses ambulatory surgical centers using a predetermined fee schedule. Reimbursements for ambulatory surgery center overhead costs are limited to no more than the overhead costs paid to hospital outpatient departments under the Medicare hospital outpatient prospective payment system. All surgical procedures, other than those that pose a significant safety risk or generally require an overnight stay, are payable as ambulatory surgery center procedures. From time to time, CMS considers expanding the services that may be performed in ambulatory surgery centers, which may result in more Medicare procedures that historically have been performed in hospitals, such as ours, being moved to ambulatory surgery centers, potentially reducing surgical volume in our hospitals. For calendar year 2014, CMS increased ambulatory surgery center payment rates by 1.2%, which included a market basket update of 1.7% and a negative 0.5% productivity adjustment. For calendar year 2015, CMS has issued a proposed rule which would increase ambulatory surgery center payment rates by 2.1%, reflecting a market basket update of 2.7%, a negative 0.4% productivity adjustment and an additional negative 0.2% adjustment. The Health Reform Law provides for additional reductions to the ambulatory surgery center prospective payment system in future years as discussed below in the section entitled “Government regulation and other factors—Healthcare reform.” CMS has also established a quality reporting program for ambulatory surgery centers under which those that fail to report on certain quality measures will receive a two percentage point reduction in reimbursement.

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Managed Medicare

Managed Medicare plans represent arrangements where CMS contracts with private companies to provide members with Medicare Part A, Part B and Part D benefits. Managed Medicare plans can be structured as health maintenance organizations, preferred provider organizations, or private fee-for-service plans. The Medicare program allows beneficiaries to choose enrollment in certain managed Medicare plans. Legislative changes in 2003 increased reimbursement to managed Medicare plans and limited, to some extent, the financial risk to the companies offering the plans. Following these changes, the number of beneficiaries choosing to receive their Medicare benefits through such plans has increased. However, the Health Reform Law provides for reductions to managed Medicare plan payments, which began in 2010, that will cause managed Medicare per capita premium payments becoming equal, on average, to traditional Medicare payments.

Medicaid

Medicaid programs are jointly funded by federal and state governments and are administered by states under an approved plan that provides hospital and other healthcare benefits to qualifying individuals who cannot afford care. All of our hospitals are certified as providers of Medicaid services. State Medicaid programs may use a prospective payment system, cost-based payment system or other payment methodology for hospital services. However, Medicaid reimbursement is often less than a hospital’s cost of services.

The federal government and many states from time to time consider altering the level of Medicaid funding or expanding Medicaid benefits in a manner that could adversely affect future levels of Medicaid reimbursement received by our hospitals. In recent years, the states in which we operate experienced budget constraints because of increased costs and lower than expected tax collections. Many states experienced or projected shortfalls in their budgets, and deteriorating economic conditions increased these budget pressures. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. The states in which we operate responded to these budget concerns by decreasing funding for healthcare programs or making structural changes that resulted in a reduction to Medicaid hospital revenues. Additional Medicaid spending cuts or other program changes may be implemented in the states in which we operate. However, the Health Reform Law generally requires states to at least maintain the Medicaid eligibility standards established prior to the enactment of the law for children until October 1, 2019. The Health Reform Law also includes provisions allowing states to significantly expand their Medicaid program coverage. Effective January 1, 2014, the state of Arizona expanded its Medicaid program in response to the Health Reform Law, which effectively increased the number of eligible enrollees, including the reinstatement of coverage for a significant portion of the state’s population who lost coverage in previous years. However, states that elect not to implement the law’s Medicaid expansion provisions may do so without the loss of existing federal Medicaid funding. As a result, a number of state governors and legislatures, including Texas and Louisiana, have chosen not to participate in the expanded Medicaid program. It is unclear how many states will ultimately implement the Medicaid expansion.

The Health Reform Law prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat certain provider-preventable conditions. CMS has implemented this prohibition for services with dates beginning July 1, 2012. Each state Medicaid program must deny payments to providers to treat healthcare-acquired conditions and provider-preventable conditions designated by CMS and any other provider-preventable conditions designated by the state.

Private supplemental Medicaid reimbursement programs

Certain of our acute care hospitals receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated

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hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Participation in indigent care affiliation agreements by our Texas hospitals has resulted in an increase in acute care revenue by the hospitals’ entitlement to supplemental Medicaid inpatient reimbursement. In December 2011, CMS approved a five-year Texas Medicaid waiver that allows Texas to continue receiving supplemental Medicaid reimbursement while expanding its managed Medicaid programs. During fiscal years 2013 and 2014, we experienced significant delays in funding under these Texas supplemental reimbursement programs as the state continued to finalize rules and regulations governing the distribution of such funds. On October 1, 2014, THHSC issued a notice to certain hospitals participating in the Texas waiver program. These hospitals operate in the surrounding areas of Dallas, Tarrant, Nueces and Travis counties (including the cities of Dallas/Fort Worth, Corpus Christi and Austin). According to the notice, a review conducted by CMS identified some affiliation agreements in these areas that CMS believes may be inconsistent with the approved waiver. As a result of these findings, CMS temporarily deferred the federal portion of the Medicaid payments associated with these affiliations. CMS lifted the deferral on January 7, 2015, but has not yet made a final determination regarding the acceptability of the affiliations. None of our hospitals were included in the programs reviewed by CMS. We cannot assure you that in the future that CMS, THHSC and other similar agencies will not audit or delay our operations in a manner that reduces the amount or slows the timing of our receipt of such funding.

Supplemental payment programs are being reviewed by certain other state agencies, and some states have made or may make waiver requests to CMS to replace their existing supplemental payment programs. These reviews and waiver requests will cause restructuring of such supplemental payment programs and could cause the payments to be reduced or eliminated. It also is unclear whether our revenues from these programs will be adversely affected as the Health Reform Law continues to be implemented.

Managed Medicaid

Managed Medicaid programs represent arrangements in which states contract with one or more entities for patient enrollment, care management and claims adjudication. The states rarely give up program responsibilities for financing, eligibility criteria and core benefit plan design. Our hospitals contract directly with the designated entities, which usually are managed care organizations. These programs are state-specific.

As state governments seek to control the cost of their Medicaid programs, enrollment in managed Medicaid plans, including states in which we operate, has increased in recent years. In 2011 the Texas legislature and the THHSC expanded Medicaid managed care enrollment in the state under a CMS approved five-year Medicaid waiver that allows Texas to expand its Medicaid managed care program while preserving hospital funding, provides incentive payments for healthcare improvements and directs more funding to hospitals that serve large numbers of uninsured patients. There may be additional expansion of managed Medicaid plans in the states in which we operate, and economic conditions or budgetary pressures may cause reductions in premium payments to these plans.

Disproportionate share hospital payments

Besides making payments for services provided directly to beneficiaries, Medicare makes additional payments to hospitals that treat a disproportionately large number of low-income patients (Medicaid and Medicare patients eligible to receive Supplemental Security Income). DSH payments are determined annually based on certain statistical information required by the Department and are calculated as a percentage addition to MS-DRG payments. The primary method used by a hospital to qualify for Medicare DSH payments is a complex statutory formula that results in a DSH percentage that is applied to payments on MS-DRGs. Under the Health

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Reform Law, beginning in federal fiscal year 2014, Medicare DSH payments are reduced to 25% of the amount they would have been absent the law. The remaining 75% are effectively pooled, and this pool is reduced further each year by a formula that reflects reductions in the national level of uninsured who are under age 65. Thus, the greater the level of coverage for the uninsured increases nationally, the more the Medicare DSH payment pool is reduced. Each hospital is then paid, out of the reduced DSH payment pool, an amount allocated based upon its level of uncompensated care. As a result of the Health Reform Law’s impact in reducing the population of uninsured individuals, and based on final rules issued by CMS for federal fiscal 2015 Medicare inpatient rates, we expect our Medicare DSH payments to decrease in our fiscal year 2015.

Hospitals that provide care to a disproportionately high number of low-income patients may also receive Medicaid DSH payments. The federal government distributes federal Medicaid DSH funds to each state based on a statutory formula. The states then distribute the DSH funding among qualifying hospitals. States have broad discretion to define which hospitals qualify for Medicaid DSH payments and the amount of such payments. The Health Reform Law, as modified by the Bipartisan Budget Act of 2013, provides for reductions to the Medicaid DSH hospital program in federal fiscal years 2016 through 2020 by the following amounts: 2016 ($1.2 billion); 2017 ($1.8 billion); 2018 ($5 billion); 2019 ($5.6 billion); and 2020 ($4 billion). The Jobs Creation Act, the American Taxpayer Relief Act of 2012 and the Bipartisan Budget Act of 2013 provide for additional Medicaid DSH reductions in federal fiscal years 2021, 2022 and 2023 estimated at $4.1 billion, $4.2 billion and $4.3 billion, respectively. CMS has issued a final rule establishing the methodology for allocating the cuts among the states based on the volume of Medicaid inpatients and levels of uncompensated care in each state. States largely retain the ability to manage the reduced allotments and to allocate these cuts among providers within the state. The majority of our Medicaid DSH is recognized by our Texas hospital operations.

Annual cost reports

All hospitals participating in the Medicare and Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, must meet specific financial reporting requirements. Federal regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. These annual cost reports are subject to routine audits, which may cause adjustments to the amounts ultimately determined to be due to us under these reimbursement programs. The audit process may take several years to reach the final determination of allowable amounts under the programs. Providers also have the right of appeal, and it is common to contest issues raised in audits of prior years’ reports.

Cost reports filed by our facilities remain open for three years after the notice of program reimbursement date. If any of our facilities are found to have violated federal or state laws relating to preparing and filing of Medicare or Medicaid cost reports, whether prior to or after our ownership of these facilities, we and our facilities could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs.

Recovery audit contractors and other reviews

Under the statutorily required RAC program, CMS contracts with third-parties to conduct post-payment reviews of Medicare providers and suppliers. RACs are paid on a contingency fee basis to detect and correct improper payments in the Medicare program. Medicare RACs utilize a post-payment targeted review process employing data analysis techniques to identify those Medicare claims most likely to contain overpayments, such as incorrectly coded services, incorrect payment amounts, non-covered services and duplicate payments. CMS has given RACs the authority to look back at claims up to three years old. The Health Reform Law expanded the RAC program to include managed Medicare.

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CMS also has established the Recovery Audit Prepayment Review (“RAPR”) demonstration, that allows RACs to review claims before they are paid to ensure that the provider complied with all Medicare payment rules. Under the RAPR demonstration, RACs conduct prepayment reviews on certain types of claims that historically result in high rates of improper payments, beginning with those involving short stay inpatient hospital services. These reviews focus on seven states (Florida, California, Michigan, Texas, New York, Louisiana and Illinois) with high populations of fraud and error-prone providers and four states (Pennsylvania, Ohio, North Carolina, and Missouri) with high claims volumes of short inpatient hospital stays. The RAPR demonstration began on August 27, 2012 and runs for a three year period.

The Health Reform Law expands the RAC program’s scope to include Medicaid claims. States may coordinate with Medicaid RACs regarding recoupment of overpayments and refer suspected fraud and abuse to appropriate law enforcement agencies. In addition, under the Medicaid Integrity Program, CMS employs private contractors, referred to as MIC, to perform reviews and post-payment audits of Medicaid claims and identify overpayments. MICs are assigned to five geographic jurisdictions and have commenced audits of Medicaid providers in each jurisdiction. The Health Reform Law has increased federal funding for the MIC program. Besides MICs, several other contractors and state Medicaid agencies have increased their review activities.

The Department announced a suspension of the assignment of new Medicare appeals to administrative law judges beginning July 16, 2013, and lasting at least two years so the Department may work through a backlog of appeals. Thus, we will experience a significant delay in appealing any RAC payment denials that occur during the suspension period. The Department has recently given hospitals the option to settle disputed claims, offering to pay 68% of the net allowable amount in exchange for a hospital’s withdrawal of all medical claims appealed. Effective October 31, 2014, we accepted the Department’s settlement offer, and executed copies of all necessary paperwork, which we believe will provide for resolution of the disputed claims in a more timely manner.

Managed care

Managed care payors, including health maintenance organizations and preferred provider organizations, are organizations that provide insurance coverage and a network of healthcare providers to members for a fixed monthly premium. To control costs, these organizations typically contract with hospitals and other providers for discounted prices, review medical services to ensure that no unnecessary services are provided, and market providers within their networks to health plan members. A significant percentage of our overall payor mix is commercial managed care. We generally receive lower payments from commercial managed care payors than from traditional commercial/indemnity insurers for similar services.

Commercial insurance

Our hospitals provide services to a decreasing number of individuals covered by traditional private healthcare insurance as managed care plans grow in prominence. Private insurance carriers make direct payments to hospitals or, sometimes, reimburse their policy holders, based upon negotiated discounts from the particular hospital’s established charges and the particular coverage provided in the insurance policy.

Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment mechanisms, including prospective payment or diagnosis related group-based payment systems, for more inpatient and outpatient services. In addition, commercial insurers increasingly are implementing quality requirements and refusing to pay for serious adverse events, similar to Medicare. If these efforts succeed, hospitals may receive reduced levels of reimbursement.

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Charity care

In the ordinary course of business, we provide care without charge to patients financially unable to pay for the healthcare services they receive. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in acute care revenue. We record revenue deductions for patient accounts that meet our guidelines for charity care. We provide charity care to patients with income levels below 200% of the federal poverty level (“FPL”). At all of our hospitals, a sliding scale of reduced rates is offered to all uninsured patients who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the FPL.

Uninsured

In the ordinary course of business, we provide care to patients who do not have insurance coverage to pay for the healthcare services they receive, nor do they qualify for charity care, or other federal, state or county indigent care programs. These patients include those for whom we are required to provide treatment under the federal Emergency Medical Treatment and Labor Act (“EMTALA”), which imposes requirements upon physicians, hospitals and other facilities to provide certain emergency care regardless of a patient’s ability to pay for his or her care. We provide discounts for these patients to eliminate some of this financial burden. These patients often do not have the financial resources to fully reimburse our hospitals for the discounted services provided. While we typically pursue collection of these account balances, the patient’s lack of financial resources can cause reduced collection rates and increased bad debts.

Premium and service revenues

The following table provides the sources of Health Choice’s premium and service revenues by major product line:


	Year ended September 30,
	2014		2013		2012
Medicaid and Medicaid MSO		87.2%		90.1%		90.3%
MAPD SNP		12.6		9.9		9.7
Other		0.2		—		—

Total		100.0%		100.0%		100.0%

Premium revenue is generated through capitated contracts, under which Health Choice provides healthcare services to enrollees for fixed periodic payments, based upon negotiated per capita member rates, and certain supplemental payments from the state of Arizona’s Medicaid agency, or AHCCCS, the state of Utah’s Medicaid agency and CMS. All capitation payments received by Health Choice are recognized as revenue in the month that members are eligible for healthcare services.

Medicaid health plans

Health Choice’s primary source of revenue is derived from contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted healthcare providers.

Effective October 1, 2013, Health Choice entered into a new contract with AHCCCS with an initial term of three years, and includes two one-year renewal options at the discretion of AHCCCS. The contract is terminable without cause on 90 days written notice or for cause upon written notice if the Company fails to comply with

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any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate the contract in the event of the unavailability of state or federal funding.

In our 2014 fiscal year, Health Choice’s enrollment grew significantly as a result of Arizona’s expansion of its Medicaid program under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults that were previously eliminated. The expansion of the state’s Medicaid program, effective January 1, 2014, under the Health Reform Law is expected to result in the addition of approximately 350,000 people to its Medicaid rolls over the next few years. This increase in enrolled members and premium revenue followed a period of several years in which AHCCCS tightened Medicaid eligibility standards in Arizona and decreased capitation rates paid to managed Medicaid contractors, reflecting state government budgetary pressures and a struggling state economy. If additional changes to the Arizona Medicaid program are implemented, our revenue and earnings could be significantly impacted.

AHCCCS has implemented a tiered profit sharing plan on managed Medicaid plans, thereby limiting the amount of profit that may be retained by health plans serving the Medicaid population. These changes implemented by AHCCCS followed a movement by the agency to a risk-based or severity-adjusted payment methodology for all health plans, under which capitation rates for each health plan and geographic service area are adjusted annually based on the severity of treatment episodes experienced by each plan’s membership compared to the average over a specified 12-month period. AHCCCS’ changes in its payment structure have placed limits on Health Choice’s profitability.

Medicare advantage prescription drug special needs plan

Health Choice provides coverage as a MAPD SNP provider pursuant to a contract with CMS. The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual eligible members (i.e., those that are eligible for Medicare and Medicaid). The contract with CMS includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days written notice or for cause upon written notice if Health Choice fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Health Choice has received notification that CMS is exercising its option to extend its contract through December 31, 2015.

Healthcare exchange insurance plan

Effective October 1, 2013, Health Choice began offering insurance plans on the Arizona state insurance exchange through Health Choice Insurance Company, a wholly-owned subsidiary of Health Choice. This enables us to enroll members in our Exchange plan as they move between the Arizona state insurance exchange and Medicaid eligibility under AHCCCS.

Management and administrative services

Health Choice provides management and administrative services, primarily through a contract with a large national insurer to cover 88,300 members as of January 1, 2015 in the state of Florida’s managed Medicaid program. These services include member services, claims adjudication, provider network services, prior authorization, utilization management, clinical care coordination, case management, disease management and quality improvement programs. Revenue under this contract is generated by performing these services in exchange for a contracted service fee, which is paid on a monthly basis.

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Accountable care networks

Health Choice has continued to lead our provider network development efforts in Arizona, Utah and other markets through its Health Choice Preferred accountable care network operations. These networks serve as contracting vehicles that allow our hospitals and affiliated network physicians to enter into risk and other performance-based contracts with third-party payors.

Government regulation and other factors

A framework of complex federal and state laws, rules and regulations governs the healthcare industry and, for many provisions, there is little history of regulatory or judicial interpretation upon which to rely. The Health Reform Law significantly increases this complexity. Because we operate in a heavily regulated industry subject to shifts in political and regulatory dynamics, we devote significant time and resources to regulatory compliance, including compliance with those laws and regulations described below.

Healthcare reform

The Health Reform Law changes how healthcare services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to clinical integration and quality of care. In addition, the Health Reform Law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality and contains provisions intended to strengthen fraud and abuse enforcement. The most significant provisions of the Health Reform Law that seek to decrease the number of uninsured individuals mostly became effective January 1, 2014. However, the employer mandate which requires companies with 50 or more employees to provide health insurance or pay fines, and insurer reporting requirements, will not be fully implemented until January 1, 2016. In addition, there were significant problems during the initial implementation of the federal online Exchange and certain state Exchanges that negatively affected the ability of individuals to enroll in Medicaid and to purchase health insurance. Further implementation issues, especially if not corrected in a timely manner, could lead to the federal government suspending the individual mandate tax penalties, further delays in uninsured individuals obtaining health insurance and an increase in the number of individuals who pay the tax mandates rather than to purchase health insurance. States may choose, without losing existing federal Medicaid funding, not to implement the Medicaid expansion provisions of the Health Reform Law, and in those states, the penalty for not carrying insurance will be waived for low-income residents. Because of the many variables, including the law’s complexity, continued delays or exceptions to employer mandates, possible amendments, changes or court challenges to the law, uncertainty regarding the success of Exchanges enrolling uninsured individuals, and possible reductions in funding by Congress and future reductions in Medicare and Medicaid reimbursement, the impact of the Health Reform Law, including how individuals and businesses will respond to the new choices and obligations is not yet fully known. For example, the SCOTUS has agreed to hear a case known as King v. Burwell during its 2015 judicial session. The plaintiffs are challenging the extension of premium subsidies to health insurance policies purchased through federally operated Exchanges, arguing that subsidies must be limited to state-operated Exchanges. If decided in favor of the plaintiffs, this case could make it more difficult for uninsured individuals in states that do not operate an Exchange to purchase coverage and otherwise significantly affect implementation of the Health Reform Law, in a manner that may result in less than projected numbers of newly insured individuals. We cannot predict the impact on our Company of these continuing developments with respect to the Health Reform Law.

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Expanded coverage

Based on the Congressional Budget Office (“CBO”) April 2014 estimates, the Health Reform Law will expand coverage to 26 million additional individuals by 2022. This increased coverage will occur through a combination of public program expansion and private sector health insurance and other reforms.

Medicaid expansion. The primary public program coverage expansion is occurring through changes in Medicaid, and to a lesser extent, expansion of CHIP. The most significant changes expand the categories of individuals eligible for Medicaid coverage and permit individuals with relatively higher incomes to qualify. Since January 1, 2014, the Health Reform Law requires all state Medicaid programs to provide, and the federal government to subsidize, Medicaid coverage to virtually all adults under 65 years old with incomes at or under 133% of the FPL. However, states may opt out of the expansion without losing existing federal Medicaid funding. For those states that expand Medicaid coverage, the Health Reform Law also requires those states to apply a “5% income disregard” to the Medicaid eligibility standard, so that Medicaid eligibility will effectively be extended to those with incomes up to 138% of the FPL. A number of state governors and legislatures, including in Texas and Louisiana, have chosen not to participate in the expanded Medicaid program at this time; however, these states could choose to implement the expansion at a later date.

As Medicaid is a joint federal and state program, the federal government provides states with “matching funds” in a defined percentage, known as the federal medical assistance percentage (“FMAP”). Beginning in 2014, states began receiving an enhanced FMAP for the individuals enrolled in Medicaid pursuant to the Medicaid expansion provisions of the Health Reform Law. The FMAP percentage is as follows: 100% for calendar years 2014 through 2016; 95% for 2017; 94% in 2018; 93% in 2019; and 90% in 2020 and thereafter.

The Health Reform Law also provides that the federal government will subsidize states that create non-Medicaid plans for residents whose incomes are greater than 133% of the FPL but do not exceed 200% of the FPL. Approved state plans will be eligible to receive federal funding. The amount of that funding per individual will be equal to 95% of subsidies that would have been provided for that individual had he or she enrolled in a health plan offered through one of the Exchanges, as discussed below.

Historically, states often have attempted to reduce Medicaid spending by limiting benefits and tightening Medicaid eligibility requirements. For states that do not participate in Medicaid expansion, the maximum income level required for individuals and families to qualify for Medicaid varies widely from state to state. However, the Health Reform Law requires states to at least maintain the Medicaid eligibility standards established prior to the enactment of the law for children until October 1, 2019.

Private sector expansion. The expansion of health coverage through the private sector as a result of the Health Reform Law is occurring through new requirements applicable to health insurers, employers and individuals. Each health plan must now keep its annual non-medical costs lower than 15% of premium revenue for the group market and lower than 20% in the small group and individual markets or rebate its enrollees the amount spent in excess of the percentage. In addition, health insurers are not permitted to deny coverage to children based upon a pre-existing condition and must allow dependent care coverage for children up to 26 years old. Since January 1, 2014, health insurance companies are prohibited from imposing annual coverage limits, dropping coverage, excluding persons based upon pre-existing conditions or denying coverage for any individual who is willing to pay the premiums for such coverage.

Larger employers will be subject to new requirements and incentives to provide health insurance benefits to their full-time employees. Employers with 50 or more employees that do not offer health insurance will be subject to a penalty if an employee obtains government-subsidized coverage through an Exchange. The employer penalties will range from $2,000 to $3,000 per employee, subject to certain thresholds and conditions. This requirement will not be fully implemented until January 1, 2016.

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The Health Reform Law uses various means to induce individuals who do not have health insurance to obtain coverage. As of January 1, 2014, individuals are required to maintain health insurance for a minimum defined set of benefits or pay a tax penalty. The Internal Revenue Service (“IRS”), in consultation with the Department, is responsible for enforcing the tax penalty, although the Health Reform Law limits the availability of certain IRS enforcement mechanisms. In addition, for individuals and families below 400% of the FPL, the cost of obtaining health insurance will be subsidized by the federal government. Those with lower incomes will be eligible to receive greater subsidies. It is anticipated that those at the lowest income levels will have the majority of their premiums subsidized by the federal government, in some cases in excess of 95% of the premium amount.

Since January 1, 2014, to facilitate the purchase of health insurance by individuals and small employers, the Health Reform Law mandated that each state establish or participate in an Exchange or default to a federally operated Exchange. Based on CBO estimates issued in April 2014, approximately 25 million individuals will obtain their health insurance coverage through an Exchange by 2021. This amount will include individuals who were previously uninsured and individuals who have switched from their prior insurance coverage to a plan obtained through the Exchange. The Health Reform Law requires that the Exchanges be designed to make the process of evaluating, comparing and acquiring coverage simple for consumers. For example, each state’s Exchange must maintain an internet website through which consumers may access health plan ratings that are assigned by the state based on quality and price, view governmental health program eligibility requirements and calculate the actual cost of health coverage. Health insurers participating in the Exchange must offer a set of minimum benefits to be defined by the Department and may offer more benefits. Health insurers must offer at least two, and up to five, levels of plans that vary by the percentage of medical expenses that must be paid by the enrollee. These levels are referred to as platinum, gold, silver, bronze and catastrophic plans, with gold and silver being the two mandatory levels of plans. Each level of plan must require the enrollee to share the following percentages of medical expenses up to the deductible/co-payment limit: platinum, 10%; gold, 20%; silver, 30%; bronze, 40%; and catastrophic, 100%. Health insurers may establish varying deductible/co-payment levels, up to the statutory maximum. The health insurers must cover 100% of the amount of medical expenses in excess of the deductible/co-payment limit. For example, an individual making 100% to 200% of the FPL will have co-payments and deductibles reduced to about one-third of the amount payable by those with the same plan with incomes at or above 400% of the FPL.

Public program spending

The Health Reform Law provides for Medicare, Medicaid and other federal healthcare program spending reductions between 2010 and 2019. In July 2012, the CBO estimated that from 2013-2022, the Health Reform Law reductions would include $415 billion in Medicare fee-for-service market basket and productivity reimbursement reductions, the majority of which will come from hospitals. The CBO estimate included an additional $56 billion in reductions in Medicare and Medicaid DSH funding.

Payments for hospitals and ambulatory surgery centers

Inpatient market basket and productivity adjustment. Under the Medicare program, hospitals receive reimbursement under a prospective payment system for general, acute care hospital inpatient services. CMS establishes fixed prospective payment system payment amounts per inpatient discharge based on the patient’s assigned MS-DRG. These MS-DRG rates are updated each federal fiscal year, which begins October 1, using the market basket, which takes into account inflation experienced by hospitals and other entities outside the healthcare industry in purchasing goods and services.

The Department has implemented three types of annual reductions in the market basket. The first is a general reduction of a specified percentage each federal fiscal year that began in 2010 and extends through 2019. The remaining reductions are as follows: 2015, 0.2%; 2016, 0.2%; 2017, 0.75%; 2018, 0.75%; and 2019, 0.75%.

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The second type of reduction to the market basket is a “productivity adjustment” that began in federal fiscal year 2012. The amount of the reduction is equal to the projected average nationwide productivity gains over the preceding 10 years. To determine the projection, the Department will use the U.S. Bureau of Labor Statistics 10-year moving average of changes in specified economy-wide productivity. For federal fiscal year 2015, CMS announced a negative 0.5% productivity adjustment to the market basket. At the time of enactment, CMS estimated that the combined market basket and productivity adjustments would reduce Medicare payments under the inpatient prospective payment system by $112.6 billion from 2010 to 2019.

The third type of reduction began in federal fiscal year 2013 and is in connection with the value-based purchasing program discussed in more detail below. For each federal fiscal year, CMS will reduce the inpatient prospective payment system payment amount for all discharges by the following: 1.25% for 2014; 1.5% for 2015; 1.75% for 2016; and 2% for 2017 and subsequent years. For each federal fiscal year, the total amount collected from these reductions will be pooled and used to fund payments to hospitals that satisfy certain quality metrics. While some or all of these reductions may be recovered if a hospital satisfies these quality metrics, the recovery amounts may be delayed.

If the aggregate of the three market basket reductions described above is more than the annual market basket adjustments made to account for inflation, there will be an overall reduction in the MS-DRG rates paid to hospitals.

Quality-based payment adjustments and reductions for inpatient services. The Health Reform Law establishes or expands three provisions to promote value-based purchasing and to link payments to quality and efficiency. First, in federal fiscal year 2013, the Department implemented a value-based purchasing program for inpatient hospital services. This program rewards hospitals that meet certain quality performance standards established by the Department. The Health Reform Law provides the Department considerable discretion over the value-based purchasing program. Under the value-based purchasing program for hospital inpatient services, CMS will distribute an estimated $1.4 billion in federal fiscal year 2015 to hospitals based on their overall performance on a set of quality measures that have been linked to improved clinical processes of care and patient satisfaction. Hospitals are scored based on a weighted average of patient experience scores using the Hospital Consumer Assessment of Healthcare Providers and Systems survey and certain clinical measures. In federal fiscal year 2015, there are 19 measures by which hospitals are scored for payments. CMS scores each hospital based on achievement (relative to other hospitals) and improvement ranges (relative to the hospital’s own past performance) for each applicable measure. Because the Health Reform Law provides that the pool will be fully distributed, hospitals that meet or exceed the quality performance standards set by the Department will receive greater reimbursement under the value-based purchasing program than they would have otherwise. On the other hand, hospitals that do not achieve the necessary quality performance will receive reduced Medicare inpatient hospital payments.

Second, beginning in federal fiscal year 2013, inpatient payments are reduced each fiscal year if a hospital experiences “excess readmissions” within the 30-day period from the date of discharge for heart attack, heart failure, pneumonia. CMS expanded this list to include chronic obstructive pulmonary disease, total hip arthroplasty and total knee arthroplasty in federal fiscal year 2015 and may designate additional conditions at a future time. Hospitals with what CMS defines as “excess readmissions” for these conditions receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excess readmissions standard. Each hospital’s performance is publicly reported by CMS.

Third, reimbursement is reduced based on a facility’s HAC rates. A HAC is a condition that is acquired by a patient while admitted as an inpatient in a hospital, such as a surgical site infection. Beginning in federal fiscal year 2015, hospitals that rank in the worst 25% nationally of HACs for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments. In addition, the Health Reform Law prohibits the use

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of federal funds under the Medicaid program to reimburse providers for medical services provided to treat certain healthcare-acquired conditions. Each state Medicaid program must deny payments to providers for the treatment of healthcare-acquired conditions and provider-preventable conditions designated by CMS as well as any other provider-preventable conditions designated by the state.

Outpatient market basket and productivity adjustment. Hospital outpatient services paid under the prospective payment system are classified into APCs. The APC payment rates are updated each calendar year based on the market basket. The first two market basket changes outlined above—the general reduction and the productivity adjustment—apply to outpatient services as well as inpatient services, although these are applied on a calendar year basis. The percentage changes specified in the Health Reform Law summarized above as the general reduction for inpatients—e.g., 0.2% in 2015—are the same for outpatients. At the time of enactment, CMS estimated that the combined market basket and productivity adjustments would reduce Medicare payments under the outpatient prospective payment system by $26.3 billion from 2010 to 2019.

Inpatient rehabilitation hospitals and units. The first two market basket changes outlined above for inpatient services—the general reduction and the productivity adjustment—also apply to inpatient rehabilitation services. The percentage changes specified in the Health Reform Law summarized above as the general reduction for inpatients—e.g., 0.2% in 2015—are the same for rehabilitation inpatients. At the time of enactment, CMS estimated that the combined market basket and productivity adjustments would reduce Medicare payments under the inpatient rehabilitation facilities prospective payment system by $5.7 billion from 2010 to 2019. The Health Reform Law requires each inpatient rehabilitation facility to report certain quality measures to the Department or receive a two percentage point reduction to the market basket update beginning with the market basket update for federal fiscal year 2014. CMS has implemented this requirement by requiring facilities to report two quality measures to receive the full market basket update in federal fiscal year 2015. CMS has indicated that facilities will be required to report additional quality measures to receive the full market basket update in federal fiscal years 2016 and 2017 payments determinations.

Inpatient psychiatric facilities. The first two market basket changes outlined above for inpatient services—the general reduction and the productivity adjustment—also apply to inpatient psychiatric services. The percentage changes specified in the Health Reform Law summarized above as the general reduction for inpatients—e.g., 0.2% in 2015—are the same for psychiatric inpatients. At the time of enactment, CMS estimated that the combined market basket and productivity adjustments would reduce Medicare payments under the inpatient psychiatric facilities prospective payment system by $4.3 billion from 2010 to 2019.

Medicare and Medicaid DSH payments. The Health Reform Law provides for certain reductions to both the Medicare and Medicaid DSH payment systems beginning in federal fiscal year 2014 as discussed above in the section entitled “Sources of acute care revenue—Disproportionate share hospital payments.” Though it is difficult to predict the full impact of the Medicare DSH reductions beyond 2014, based on final rules from CMS, we expect our Medicare DSH payments to decrease in fiscal 2015. In July 2012, the CBO estimated that the Health Reform Law would result in $56 billion in reductions to Medicare and Medicaid DSH payments between 2013 and 2022.

Accountable care organizations. Pursuant to the Health Reform Law, the Department established MSSPs, which seek to promote accountability and coordination of care through the creation of Medicare ACOs. The program allows certain providers, including hospitals, physicians and other designated professionals, to voluntarily form Medicare ACOs and work together along with other Medicare ACO participants to invest in infrastructure and redesign delivery processes to achieve high quality and efficient delivery of services. The program is intended to produce savings as a result of improved quality and operational efficiency. Medicare ACOs that achieve quality performance standards established by the Department will be eligible to share in a portion of the amounts saved by the Medicare program. As authorized by the Health Reform Law, certain waivers are available from fraud and

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abuse laws for Medicare ACOs. CMS has approved over 300 to participate as Medicare ACOs. We have applied for Medicare ACO status in certain markets. We are also pursuing similar initiatives with commercial insurers, with a focus on building clinically integrated high performance provider networks intended to compete in an environment where commercial insurers increasingly are implementing pay for performance and value-based purchasing reimbursement models similar to those contemplated by the Health Reform Law.

Bundled payment pilot programs. The Health Reform Law created the Center for Medicare and Medicaid Innovation (the “CMS Innovation Center”) with responsibility for establishing demonstration projects and other initiatives in order to identify, develop, test and encourage the adoption of new methods of delivering and paying for healthcare that create savings under the Medicare and Medicaid programs, while improving quality of care. One initiative announced by the CMS Innovation Center is the Bundled Payments for Care Improvement initiative, a voluntary initiative through which participating providers receive a single negotiated payment for services provided during an episode of care. In addition, the Department established a separate five-year voluntary, national pilot program on payment bundling for Medicare services known as the Bundled Payments for Care Improvement (“BPCI”) initiative. Under the BPCI initiative, organizations may enter into payment arrangements that include financial and performance accountability for episodes of care, and these models are intended to lead to higher quality, more coordinated care at a lower cost to the Medicare program. The Health Reform Law also provides a bundled payment demonstration project for Medicaid services, but CMS has not yet implemented this project. The Department will select up to eight states to participate based on the potential to lower costs under the Medicaid program while improving care. State programs may target particular categories of beneficiaries, selected diagnoses or geographic regions of the state. The selected state programs will provide one payment for both hospital and physician services provided to Medicaid patients for certain episodes of inpatient care.

Ambulatory surgery centers. The Health Reform Law reduces reimbursement for ambulatory surgery centers through a productivity adjustment to the market basket similar to the productivity adjustment for inpatient and outpatient hospital services. In addition, CMS has established a quality reporting program for ambulatory surgery centers under which those that fail to report on required quality measures receive a two percentage point reduction in reimbursement.

Medicare managed care (Medicare Advantage or “MA”). Under the MA program, the federal government contracts with private health plans to provide inpatient and outpatient benefits to beneficiaries who enroll in such plans. Nationally, approximately 26% of Medicare beneficiaries have elected to enroll in MA plans. Effective in 2014, the Health Reform Law requires MA plans to keep annual administrative costs lower than 15% of annual premium revenue. The Health Reform Law reduces, over a three year period starting in 2012, premium payments to the MA Plans such that CMS’ managed care per capita premium payments are, on average, equal to traditional Medicare. In the spring of 2010, the CBO and CMS, respectively, estimated that payments to MA plans would be reduced by $138 billion to $145 billion between 2010 and 2019. These reductions to MA plan premium payments may cause some plans to raise premiums or limit benefits, which in turn might cause some Medicare beneficiaries to terminate their MA coverage and enroll in traditional Medicare. CMS has indicated that MA premium rates charged to beneficiaries are expected to increase slightly in 2015 relative to 2014 and that enrollment in MA plans is forecast to increase in 2015.

Physician-owned hospitals. The Health Reform Law effectively prohibits the formation of physician-owned hospitals that participate in Medicare or Medicaid after December 31, 2010. While the Health Reform Law grandfathers existing physician-owned hospitals, including our facilities that have physician ownership, it does not allow these hospitals to increase the percentage of physician ownership and significantly restricts our ability to add beds, operating rooms and procedure rooms at such physician-owned facilities.

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The Health Reform Law also imposes additional disclosure requirements on physician-owned hospitals. For example, a grandfathered physician-owned hospital is required to submit periodic reports listing each investor in the hospital, including all physician owners. In addition, grandfathered physician-owned hospitals must have procedures in place that require each referring physician owner to disclose to patients, with enough notice for the patient to make a meaningful decision regarding receipt of care, the physician’s ownership interest and, if applicable, any ownership interest held by the treating physician. A grandfathered physician-owned hospital also must disclose on its website and in any public advertising the fact that it has physician ownership. The Health Reform Law requires the Department to audit grandfathered physician-owned hospitals’ compliance with these requirements.

Program integrity and fraud and abuse

The Health Reform Law changes healthcare fraud and abuse laws, provides additional enforcement tools to the government, increases cooperation between agencies by establishing mechanisms for sharing information and enhances criminal and administrative penalties for non-compliance. The Health Reform Law: (1) provides $350 million in increased federal funding over 10 years to fight healthcare fraud, waste and abuse; (2) expands the RAC program to include MA plans and Medicaid; (3) authorizes the Department, in consultation with the OIG, to suspend Medicare and Medicaid payments to a provider of services or a supplier pending an investigation of a credible allegation of fraud; (4) provides Medicare contractors with additional flexibility to conduct random prepayment reviews; and (5) tightens the requirements for returning overpayments made by governmental health programs and expands the federal FCA liability to include failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due, whichever is later.

Impact of health reform law on our company

The expansion of health insurance coverage under the Health Reform Law may cause a material increase in the number of patients using our facilities who have either private or public program coverage. In addition, a disproportionately large percentage of the new Medicaid coverage is likely to be in states that have relatively low income eligibility requirements. Further, the Health Reform Law provides for a value-based purchasing program, the establishment of Medicare ACOs and bundled payment pilot programs, which will create possible sources of additional revenue.

However, it is difficult to predict the potential amount of additional revenue resulting from these elements of the Health Reform Law, because of uncertainty surrounding several material factors, including:

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how many states will eventually implement the Medicaid expansion and under what terms;

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the potential for further delays during open enrollment in or complications related to implementation of Exchanges and other parts of the Health Reform Law, which would continue to delay the anticipated overall expansion of insured individuals resulting from federal healthcare reform;

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the possibility of enactment of additional federal or state healthcare reforms and possible amendments, changes or court challenges to the Health Reform Law;

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how many previously uninsured individuals will obtain coverage because of the Health Reform Law (based on the CBO April 2014 estimates, by 2022, the Health Reform Law will expand coverage to 26 million additional individuals);

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what percentage of the newly insured patients will be covered under the Medicaid program and what percentage will be covered by private health insurers;

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the extent to which states will enroll new Medicaid participants in managed care programs;

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the pace at which insurance coverage expands, including the pace of different coverage expansion;

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the change in the volume of inpatient and outpatient hospital services sought by and provided to previously uninsured individuals;

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the potential that adverse selection and high acuity levels associated with newly insured individuals may negatively impact the operations of Health Choice;

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the rate paid to hospitals by private payors and state governments for newly covered individuals, and individuals with existing coverage, including those covered through the Exchanges and those who might be covered under the Medicaid program;

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the effect of the value-based purchasing provisions of the Health Reform Law on our hospitals’ revenue and the effects of other quality programs implemented;

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the percentage of individuals in the Exchanges who select the high deductible plans, since health insurers offering those kinds of products have traditionally sought to pay lower rates to hospitals;

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the extent to which employers will drop existing coverage of employees and their dependents, potentially resulting in those individuals purchasing coverage through the Exchange or enrolling in Medicaid;

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uncertainty regarding future EHR incentives;

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uncertainty regarding pending court challenges to elements of the Health Reform Law; and

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whether the net effect of the Health Reform Law, including the prohibition on excluding individuals based on pre-existing conditions, the requirement to keep medical costs lower than a specified percentage of premium revenue, other health insurance reforms and the annual fee applied to all health insurers, will put pressure on the profitability of health insurers, which might cause them to reduce payments to hospitals regarding both newly insured individuals and their existing business.

The Health Reform Law provides for significant reductions in the growth of Medicare spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to quality of care and clinical integration. Reductions in Medicare and Medicaid spending may significantly affect our business and could offset any positive effects of the Health Reform Law. It is difficult to predict potential revenue reductions resulting from reduced Medicare and Medicaid spending because of uncertainty regarding several material factors, including the following:

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overall revenues we will generate from Medicare and Medicaid business when the reductions are implemented;

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whether reductions required by the Health Reform Law will be changed by statute or judicial decision prior to becoming effective;

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the size of the Health Reform Law’s annual productivity adjustment to the market basket in future years;

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the Medicare DSH reductions made, beyond federal fiscal year 2015;

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the allocation to our hospitals of the Medicaid DSH reductions, beyond federal fiscal year 2015;

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what the losses in revenues will be from the Health Reform Law’s quality initiatives;

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how successful Medicare ACOs will be at coordinating care and reducing costs;

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the scope and nature of potential changes to Medicare reimbursement methods, such as an emphasis on bundling payments or coordination of care programs;

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whether our revenues from private supplemental Medicaid reimbursement programs will be adversely affected because there may be fewer indigent, non-Medicaid patients for whom we provide services under these programs; and

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reductions to Medicare payments that CMS may impose for “excess readmissions.”

Because of the many variables, we cannot predict with certainty the net effect of the expected increases in insured individuals using our facilities, the reductions in Medicare spending, including Medicare and Medicaid DSH funding, and numerous other provisions in the Health Reform Law that may affect our business. Further, it is unclear how efforts to revise the Health Reform Law and remaining or new lawsuits will be resolved or what the impact would be of any resulting changes to the law. For example, the SCOTUS has agreed to hear a case known as King v. Burwell during its 2015 judicial session. The plaintiffs are challenging the extension of premium subsidies to health insurance policies purchased through federally operated Exchanges, arguing that subsidies must be limited to state-operated Exchanges. If decided in favor of the plaintiffs, this case could make it more difficult for uninsured individuals in states that do not operate an Exchange to purchase coverage and otherwise significantly affect implementation of the Health Reform Law, in a manner that may result in less than projected numbers of newly insured individuals. We cannot predict the impact on our Company of these continuing developments with respect to the Health Reform Law.

Licensure, certification and accreditation

Healthcare facility construction and operation is subject to federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Our facilities also are subject to periodic inspection by governmental and other authorities to assure continued compliance with the standards necessary for licensing and accreditation. We believe that all of our operating healthcare facilities are properly licensed under state healthcare laws, but we cannot assure you that government agencies or other entities enforcing licensure requirements would find our facilities in compliance with such requirements.

All of our operating hospitals are certified under the Medicare program and are accredited by either Det Norske Veritas (“DNV”) or The Joint Commission, the effect of which is to permit the facilities to participate in the Medicare and Medicaid programs. If any facility loses its accreditation, the facility would be subject to state surveys, potentially be subject to increased scrutiny by CMS and likely lose payment from non-government payors. We intend to conduct our operations in compliance with current applicable federal, state, local and independent review body regulations and standards, but we cannot assure you that government agencies or other entities enforcing such requirements would find our facilities in compliance with such requirements. Licensure, certification, or accreditation requirements also may require notification or approval if certain transfers or changes in ownership or organization occur. Requirements for licensure, certification and accreditation are subject to change and, to remain qualified, we may need to change our facilities, equipment, personnel and services.

CMS announced an initiative to require all Medicare-certified providers and suppliers that enrolled prior to March 25, 2011, to revalidate their Medicare enrollment records by March 2015 for CMS to implement new screening criteria mandated by the Health Reform Law. Pursuant to this initiative, Medicare contractors have

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begun and will continue to send mandatory revalidation requests to all affected providers and suppliers, including to our facilities, and our facilities will have a limited time to respond to the requests. We believe that we can promptly comply with any mandatory revalidation requests, but failure to timely revalidate Medicare enrollment records for our facilities could cause deactivation or termination of our facilities’ Medicare enrollment, which could adversely affect our business.

Utilization review

Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions require that a sampling of admissions of Medicare and Medicaid patients be reviewed by quality improvement organizations that analyze the appropriateness of Medicare and Medicaid patient admissions and discharges, quality of care, validity of diagnosis-related group classifications and appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided, assess fines and recommend to the Department that a provider not in substantial compliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. Most non-governmental managed care organizations also require utilization review.

Federal and state fraud and abuse provisions

Participation in any federal healthcare program, like Medicare, is regulated heavily by statute and regulation. If a hospital provider fails to substantially comply with the numerous conditions of participation in the Medicare or Medicaid program or performs specific prohibited acts, the hospital’s participation in the Medicare and Medicaid programs may be terminated or civil or criminal penalties may be imposed upon it under provisions of the Social Security Act and other statutes.

Among these statutes is a section of the Social Security Act, known as the federal anti-kickback statute. This law prohibits provide

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