News Column

HCA HOLDINGS, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 26, 2014

The selected financial data and the accompanying consolidated financial statements present certain information with respect to the financial position, results of operations and cash flows of HCA Holdings, Inc. which should be read in conjunction with the following discussion and analysis. The terms "HCA," "Company," "we," "our," or "us," as used herein, refer HCA Inc. and our affiliates prior to the Corporate Reorganization and to HCA Holdings, Inc. and our affiliates after the Corporate Reorganization unless otherwise stated or indicated by context. The term "affiliates" means direct and indirect subsidiaries of HCA Holdings, Inc. and partnerships and joint ventures in which such subsidiaries are partners.



Forward-Looking Statements

This annual report on Form 10-K includes certain disclosures which contain "forward-looking statements." Forward-looking statements include statements regarding estimated EHR incentive income and related EHR operating expenses, expected capital expenditures and expected net claim payments and all other statements that do not relate solely to historical or current facts, and can be identified by the use of words like "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan," "initiative" or "continue." These forward-looking statements are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control, which could significantly affect current plans and expectations and our future financial position and results of operations. These factors include, but are not limited to, (1) the impact of our substantial indebtedness and the ability to refinance such indebtedness on acceptable terms, (2) the effects related to the implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the "Health Reform Law"), possible delays in or complications related to implementation of the Health Reform Law, the possible enactment of additional federal or state health care reforms and possible changes to the Health Reform Law and other federal, state or local laws or regulations affecting the health care industry, (3) the effects related to the continued implementation of the sequestration spending reductions required under the Budget Control Act of 2011 (the "BCA") and the potential for future deficit reduction legislation that may alter BCA-mandated spending reductions, which include cuts to Medicare payments, or create additional spending reductions, (4) increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts, (5) the ability to achieve operating and financial targets, and attain expected levels of patient volumes and control the costs of providing services, (6) possible changes in the Medicare, Medicaid and other state programs, including Medicaid upper payment limit ("UPL") programs or Waiver Programs, that may impact reimbursements to health care providers and insurers, (7) the highly competitive nature of the health care business, (8) changes in service mix, revenue mix and surgical volumes, including potential declines in the population covered under managed care agreements, the ability to enter into and renew managed care provider agreements on acceptable terms and the impact of consumer driven health plans and physician utilization trends and practices, (9) the efforts of insurers, health care providers and others to contain health care costs, (10) the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures, (11) increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel, (12) the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities, (13) changes in accounting practices, (14) changes in general economic conditions nationally and regionally in our markets, (15) future divestitures which may result in charges and possible impairments of long-lived assets, (16) changes in business strategy or development plans, (17) delays in receiving payments for services provided, (18) the outcome of pending and any future tax audits, appeals and litigation associated with our tax positions, (19) potential adverse impact of known and unknown government investigations, litigation and other claims that may be made against us, (20) our ongoing ability to demonstrate meaningful use of certified EHR technology and 58



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Forward-Looking Statements (continued)

recognize income for the related Medicare or Medicaid incentive payments, and (21) other risk factors described in this annual report on Form 10-K. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report. 2013 Operations Summary Net income attributable to HCA Holdings, Inc. totaled $1.556 billion, or $3.37 per diluted share, for 2013, compared to $1.605 billion, or $3.49 per diluted share, for 2012. The 2013 results include net losses on sales of facilities of $10 million (pretax), or $0.02 per diluted share, and a loss on retirement of debt of $17 million (pretax), or $0.02 per diluted share. The 2012 results include legal claim costs of $175 million (pretax), or $0.24 per diluted share, and net gains on sales of facilities of $15 million (pretax), or $0.02 per diluted share. All "per diluted share" disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 461.913 million shares and 459.403 million shares for the years ended December 31, 2013 and 2012, respectively. Revenues increased to $34.182 billion for 2013 from $33.013 billion for 2012. Revenues increased 3.5% and 3.1%, respectively, on a consolidated basis and on a same facility basis for 2013, compared to 2012. The consolidated revenues increase can be primarily attributed to the combined impact of a 3.1% increase in revenue per equivalent admission and a 0.4% increase in equivalent admissions. The same facility revenues increase resulted primarily from a 3.0% increase in same facility revenue per equivalent admission and a 0.1% increase in same facility equivalent admissions. During 2013, consolidated admissions increased 0.2% and same facility admissions increased 0.1%, compared to 2012. Inpatient surgical volumes increased 0.5% on a consolidated basis and increased 0.3% on a same facility basis during 2013, compared to 2012. Outpatient surgical volumes increased 0.9% on a consolidated basis and declined 0.5% on a same facility basis during 2013, compared to 2012. Emergency room visits increased 0.8% on a consolidated basis and increased 0.7% on a same facility basis during 2013, compared to 2012. For 2013, the provision for doubtful accounts increased $88 million, compared to 2012. The self-pay revenue deductions for charity care and uninsured discounts increased $404 million and $1.232 billion, respectively, for 2013, compared to 2012. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, the provision for doubtful accounts, uninsured discounts and charity care, was 31.3% for 2013, compared to 29.5% for 2012. Same facility uninsured admissions increased 7.6% and same facility uninsured emergency room visits increased 2.2% for 2013, compared to 2012. Interest expense totaled $1.848 billion for 2013, compared to $1.798 billion for 2012. The $50 million increase in interest expense for 2013 was due primarily to an increase in the average debt balance. Cash flows from operating activities declined $495 million, from $4.175 billion for 2012 to $3.680 billion for 2013. The decline in cash flows from operating activities was primarily related to net negative changes in working capital items of $521 million. 59



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Table of Contents HCA HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Business Strategy



We are committed to providing the communities we serve with high quality, cost-effective health care while growing our business, increasing our profitability and creating long-term value for our stockholders. To achieve these objectives, we align our efforts around the following growth agenda:

Grow Our Presence in Existing Markets. We believe we are well positioned in a number of large and growing markets that will allow us the opportunity to generate long-term, attractive growth through the expansion of our presence in these markets. We plan to continue recruiting and strategically collaborating with the physician community and adding attractive service lines such as cardiology, emergency services, oncology and women's services. Additional components of our growth strategy include expanding our footprint through developing various outpatient access points, including surgery centers, rural outreach, freestanding emergency departments and walk-in clinics. Achieve Industry-Leading Performance in Clinical and Satisfaction Measures. Achieving high levels of patient safety, patient satisfaction and clinical quality are central goals of our business model. To achieve these goals, we have implemented a number of initiatives including infection reduction initiatives, hospitalist programs, advanced health information technology and evidence-based medicine programs. We routinely analyze operational practices from our best-performing hospitals to identify ways to implement organization-wide performance improvements and reduce clinical variation. We believe these initiatives will continue to improve patient care, help us achieve cost efficiencies, grow our revenues and favorably position us in an environment where our constituents are increasingly focused on quality, efficacy and efficiency. Recruit and Employ Physicians to Meet Need for High Quality Health Services. We depend on the quality and dedication of the health care providers and other team members who serve at our facilities. We believe a critical component of our growth strategy is our ability to successfully recruit and strategically collaborate with physicians and other professionals to provide high quality care. We attract and retain physicians by providing high quality, convenient facilities with advanced technology, by expanding our specialty services and by building our outpatient operations. We believe our continued investment in the employment, recruitment and retention of physicians will improve the quality of care at our facilities. Continue to Leverage Our Scale and Market Positions to Enhance Profitability. We believe there is significant opportunity to continue to grow the profitability of our company by fully leveraging the scale and scope of our franchise. We are currently pursuing next generation performance improvement initiatives such as contracting for services on a multistate basis and expanding our support infrastructure for additional clinical and support functions, such as physician credentialing, medical transcription and electronic medical recordkeeping. We believe our centrally managed business processes and ability to leverage cost-saving practices across our extensive network will enable us to continue to manage costs effectively. We continue to invest in our Parallon subsidiary group to leverage key components of our support infrastructure, including revenue cycle management, health care group purchasing, supply chain management and staffing functions and are offering these services to other hospital companies. Selectively Pursue a Disciplined Development Strategy. We continue to believe there are significant growth opportunities in our markets. We will continue to provide financial and operational resources to analyze and develop our in-market opportunities. To complement our in-market growth agenda, we intend to focus on selectively developing and acquiring new hospitals, outpatient facilities and other health care service providers. We believe the challenges faced by the hospital industry may spur consolidation and we believe our size, scale, national presence and access to capital will position us well to participate in any such consolidation. We have a 60



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Business Strategy (continued)

strong record of successfully acquiring and integrating hospitals and entering into joint ventures and intend to continue leveraging this experience.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from these estimates.



We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenues Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from payers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The estimated reimbursement amounts are made on a payer-specific basis and are recorded based on the best information available regarding management's interpretation of the applicable laws, regulations and contract terms. 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 resulting from contract renegotiations and renewals. We have invested significant resources to refine and improve our computerized billing systems and the information system data used to make contractual allowance estimates. We have developed standardized calculation processes and related training programs to improve the utility of our patient accounting systems. The Emergency Medical Treatment and Labor Act ("EMTALA") requires any hospital participating in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital's emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual's ability to pay for treatment. Federal and state laws and regulations, including but not limited to EMTALA, require, and our commitment to providing quality patient care encourages, the provision of services to patients who are financially unable to pay for the health care services they receive. The Health Reform Law requires health plans to reimburse hospitals for emergency services provided to enrollees without prior authorization and without regard to whether a participating provider contract is in place. Further, the Health Reform Law contains provisions that seek to decrease the number of uninsured individuals, including requirements or incentives, which become effective during 2014, for individuals to obtain, and large employers to provide, insurance coverage. These mandates may reduce the financial impact of screening for and stabilizing emergency medical conditions. However, many factors are unknown regarding the impact of the Health Reform Law, including how many previously uninsured individuals will obtain coverage as a result of the law, the change, if any, in the volume of inpatient and outpatient hospital services that are sought by and provided to previously uninsured individuals and overall changes in the payer mix. 61



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Critical Accounting Policies and Estimates (continued)

Revenues (continued)

We do not pursue collection of amounts related to patients who meet our guidelines to qualify as charity care; therefore, they are not reported in revenues. Patients treated at our hospitals for nonelective care, who have income at or below 200% of the federal poverty level, are eligible for charity care. The federal poverty level is established by the federal government and is based on income and family size. We provide discounts from our gross charges to uninsured patients who do not qualify for Medicaid or charity care. These discounts are similar to those provided to many local managed care plans. After the discounts are applied, we are still unable to collect a significant portion of uninsured patients' accounts, and we record significant provisions for doubtful accounts (based upon our historical collection experience) related to uninsured patients in the period the services are provided. Due to the complexities involved in the classification and documentation of health care services authorized and provided, the estimation of revenues earned and the related reimbursement are often subject to interpretations that could result in payments that are different from our estimates. Adjustments to estimated Medicare and Medicaid reimbursement amounts and disproportionate-share funds, which resulted in net increases to revenues, related primarily to cost reports filed during the respective year were $41 million, $50 million and $40 million in 2013, 2012 and 2011, respectively. The adjustments to estimated reimbursement amounts, which resulted in net increases to revenues, related primarily to cost reports filed during previous years were $68 million, $242 million and $30 million in 2013, 2012 and 2011, respectively. The 2012 amount related to cost reports filed during previous years includes two adjustments to Medicare revenues that affected multiple annual cost report periods for the majority of our hospitals (the Rural Floor Provision Settlement which increased revenues by approximately $271 million and the implementation of revised Supplemental Security Income ("SSI") ratios which reduced revenues by approximately $75 million). Excluding the effect of these Medicare adjustments, the 2012 amount related to previous years would have been $46 million. We expect adjustments during the next 12 months related to Medicare and Medicaid cost report filings and settlements and disproportionate-share funds will result in increases to revenues within generally similar ranges.



Provision for Doubtful Accounts and the Allowance for Doubtful Accounts

The collection of outstanding receivables from Medicare, managed care payers, other third-party payers and patients is our primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to amounts due directly from patients. An estimated allowance for doubtful accounts is recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed. Our collection policies include a review of all accounts against certain standard collection criteria, upon completion of our primary internal collection efforts. Accounts determined to possess positive collectibility attributes are forwarded to a secondary internal or external collection agency and the other accounts are written off. The accounts that are not collected by the secondary collection agency are written off when secondary collection efforts are completed (usually within 12 months). Writeoffs are based upon specific identification and the writeoff process requires a writeoff adjustment entry to the patient accounting system. We do not pursue collection of amounts related to patients that meet our guidelines to qualify as charity care. The amount of the provision for doubtful accounts is based upon management's assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal, state, and private 62



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Critical Accounting Policies and Estimates (continued)

Provision for Doubtful Accounts and the Allowance for Doubtful Accounts (continued)

employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical writeoffs and recoveries at facilities that represent a majority of our revenues and accounts receivable (the "hindsight analysis") as a primary source of information in estimating the collectibility of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and writeoff data. We believe our quarterly updates to the estimated allowance for doubtful accounts at each of our hospital facilities provide reasonable valuations of our accounts receivable. These routine, quarterly changes in estimates have not resulted in material adjustments to our allowance for doubtful accounts, provision for doubtful accounts or period-to-period comparisons of our results of operations. At both December 31, 2013 and 2012, the allowance for doubtful accounts represented approximately 93%, of the $5.927 billion and $5.228 billion, respectively, patient due accounts receivable balance. The patient due accounts receivable balance represents the estimated uninsured portion of our accounts receivable. The estimated uninsured portion of Medicaid pending and uninsured discount pending accounts is included in our patient due accounts receivable balance. To quantify the total impact of and trends related to uninsured accounts, we believe it is beneficial to view the revenue deductions related to uninsured accounts (charity care and uninsured discounts) and provision for doubtful accounts in combination, rather than each separately. A summary of these amounts for the years ended December 31, follows (dollars in millions): 2013 2012 2011 Charity care $ 3,497$ 3,093$ 2,683 Uninsured discounts 8,210 6,978 5,707 Provision for doubtful accounts 3,858 3,770 2,824 Totals $ 15,565$ 13,841$ 11,214 The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, the provision for doubtful accounts, uninsured discounts and charity care increased from 27.4% for 2011, to 29.5% for 2012 and to 31.3% for 2013. Days revenues in accounts receivable were 54 days, 51 days and 52 days at December 31, 2013, 2012 and 2011, respectively. Management expects a continuation of the challenges related to the collection of the patient due accounts. Adverse changes in the percentage of our patients having adequate health care coverage, general economic conditions, patient accounting service center operations, payer mix, or trends in federal, state, and private employer health care coverage could affect the collection of accounts receivable, cash flows and results of operations. 63



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Critical Accounting Policies and Estimates (continued)

Provision for Doubtful Accounts and the Allowance for Doubtful Accounts (continued)

The approximate breakdown of accounts receivable by payer classification as of December 31, 2013 and 2012 is set forth in the following table:

% of Accounts Receivable Under 91 Days 91 - 180 Days Over 180 Days Accounts receivable aging at December 31, 2013: Medicare and Medicaid 12 % 2 % 1 % Managed care and other insurers 21 4 5 Uninsured 20 8 27 Total 53 % 14 % 33 % Accounts receivable aging at December 31, 2012: Medicare and Medicaid 13 % 1 % 1 % Managed care and other insurers 22 4 4 Uninsured 18 9 28 Total 53 % 14 % 33 %



Professional Liability Claims

We, along with virtually all health care providers, operate in an environment with professional liability risks. Our facilities are insured by our 100% owned insurance subsidiary for losses up to $50 million per occurrence, subject to a $5 million per occurrence self-insured retention. We purchase excess insurance on a claims-made basis for losses in excess of $50 million per occurrence. Provisions for losses related to professional liability risks were $314 million, $331 million and $244 million for the years ended December 31, 2013, 2012 and 2011, respectively. Reserves for professional liability risks represent the estimated ultimate cost of all reported and unreported losses incurred through the respective consolidated balance sheet dates. The estimated ultimate cost includes estimates of direct expenses and fees paid to outside counsel and experts, but does not include the general overhead costs of our insurance subsidiary or corporate office. Individual case reserves are established based upon the particular circumstances of each reported claim and represent our estimates of the future costs that will be paid on reported claims. Case reserves are reduced as claim payments are made and are adjusted upward or downward as our estimates regarding the amounts of future losses are revised. Once the case reserves for known claims are determined, information is stratified by loss layers and retentions, accident years, reported years, and geographic location of our hospitals. Several actuarial methods are employed to utilize this data to produce estimates of ultimate losses and reserves for incurred but not reported claims, including: paid and incurred extrapolation methods utilizing paid and incurred loss development to estimate ultimate losses; frequency and severity methods utilizing paid and incurred claims development to estimate ultimate average frequency (number of claims) and ultimate average severity (cost per claim); and Bornhuetter-Ferguson methods which add expected development to actual paid or incurred experience to estimate ultimate losses. These methods use our company-specific historical claims data and other information. Company-specific claim reporting and settlement data collected over an approximate 20-year period is used in our reserve estimation process. This company-specific data includes information regarding our business, including historical paid losses and loss adjustment expenses, historical and current case loss reserves, actual and projected hospital statistical data, professional liability retentions for each policy year, geographic information and other data. 64



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Critical Accounting Policies and Estimates (continued)

Professional Liability Claims (continued)

Reserves and provisions for professional liability risks are based upon actuarially determined estimates. The estimated reserve ranges, net of amounts receivable under reinsurance contracts, were $1.137 billion to $1.359 billion at December 31, 2013 and $1.130 billion to $1.346 billion at December 31, 2012. Our estimated reserves for professional liability claims may change significantly if future claims differ from expected trends. We perform sensitivity analyses which model the volatility of key actuarial assumptions and monitor our reserves for adequacy relative to all our assumptions in the aggregate. Based on our analysis, we believe the estimated professional liability reserve ranges represent the reasonably likely outcomes for ultimate losses. We consider the number and severity of claims to be the most significant assumptions in estimating reserves for professional liabilities. A 2% change in the expected frequency trend could be reasonably likely and would increase the reserve estimate by $18 million or reduce the reserve estimate by $17 million. A 2% change in the expected claim severity trend could be reasonably likely and would increase the reserve estimate by $73 million or reduce the reserve estimate by $67 million. We believe adequate reserves have been recorded for our professional liability claims; however, due to the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes, our ultimate liability for professional liability claims could change by more than the estimated sensitivity amounts and could change materially from our current estimates. The reserves for professional liability risks cover approximately 2,600 individual claims and 2,700 individual claims at December 31, 2013 and 2012, respectively, and estimates for unreported potential claims. The time period required to resolve these claims can vary depending upon the jurisdiction and whether the claim is settled or litigated. The average time period between the occurrence and payment of final settlement for our professional liability claims is approximately five years, although the facts and circumstances of each individual claim can result in an occurrence-to-settlement timeframe that varies from this average. The estimation of the timing of payments beyond a year can vary significantly. Reserves for professional liability risks were $1.279 billion and $1.297 billion at December 31, 2013 and 2012, respectively. The current portion of these reserves, $331 million and $324 million at December 31, 2013 and 2012, respectively, is included in "other accrued expenses." Obligations covered by reinsurance and excess insurance contracts are included in the reserves for professional liability risks, as we remain liable to the extent reinsurers and excess insurance carriers do not meet their obligations. Reserves for professional liability risks (net of $24 million and $49 million receivable under reinsurance and excess insurance contracts at December 31, 2013 and 2012, respectively) were $1.255 billion and $1.248 billion at December 31, 2013 and 2012, respectively. The estimated total net reserves for professional liability risks at December 31, 2013 and 2012 are comprised of $710 million and $789 million, respectively, of case reserves for known claims and $545 million and $459 million, respectively, of reserves for incurred but not reported claims. 65



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Critical Accounting Policies and Estimates (continued)

Professional Liability Claims (continued)

Changes in our professional liability reserves, net of reinsurance recoverable, for the years ended December 31, are summarized in the following table (dollars in millions): 2013 2012 2011 Net reserves for professional liability claims, January 1 $ 1,248$ 1,252$ 1,248 Provision for current year claims 343 324 298 Unfavorable (favorable) development related to prior years' claims (29 ) 7 (54 ) Total provision 314 331 244 Payments for current year claims 7 6 7 Payments for prior years' claims 300 329 233 Total claim payments 307 335 240 Net reserves for professional liability claims, December 31 $ 1,255$ 1,248$ 1,252 Income Taxes We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences that arise from the recognition of items in different periods for tax and accounting purposes. Deferred tax assets generally represent the tax effects of amounts expensed in our income statement for which tax deductions will be claimed in future periods. Although we believe we have properly reported taxable income and paid taxes in accordance with applicable laws, federal, state or international taxing authorities may challenge our tax positions upon audit. Significant judgment is required in determining and assessing the impact of uncertain tax positions. We report a liability for unrecognized tax benefits from uncertain tax positions taken or expected to be taken in our income tax return. During each reporting period, we assess the facts and circumstances related to uncertain tax positions. If the realization of unrecognized tax benefits is deemed probable based upon new facts and circumstances, the estimated liability and the provision for income taxes are reduced in the current period. Final audit results may vary from our estimates.



Results of Operations

Revenue/Volume Trends

Our revenues depend upon inpatient occupancy levels, the ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charge and negotiated payment rates for such services. Gross charges typically do not reflect what our facilities are actually paid. Our facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from gross charges. We do not pursue collection of amounts related to patients who meet our guidelines to qualify for charity care; therefore, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care that are similar to the discounts provided to many local managed care plans. 66



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Results of Operations (continued)

Revenue/Volume Trends (continued)

Revenues increased 3.5% to $34.182 billion for 2013 from $33.013 billion for 2012 and increased 11.2% for 2012 from $29.682 billion for 2011. The increase in revenues in 2013 can be primarily attributed to the combined impact of a 3.1% increase in revenue per equivalent admission and a 0.4% increase in equivalent admissions compared to the prior year. The increase in revenues in 2012 can be primarily attributed to the combined impact of a 2.0% increase in revenue per equivalent admission and a 9.1% increase in equivalent admissions compared to 2011. The increase in revenues (and volume metrics) for 2012 compared to 2011 related primarily to the impact of the financial consolidation of the HCA-HealthONE LLC venture for periods subsequent to our acquisition of controlling interests during October 2011 (HealthONE revenues and related volume metrics are not included in our same facility amounts). HealthONE revenues included in our consolidated revenues increased from $347 million for 2011 to $2.203 billion in 2012. Same facility revenues increased 3.1% for the year ended December 31, 2013 compared to the year ended December 31, 2012 and increased 4.5% for the year ended December 31, 2012 compared to the year ended December 31, 2011. The 3.1% increase for 2013 can be primarily attributed to the combined impact of a 3.0% increase in same facility revenue per equivalent admission and a 0.1% increase in same facility equivalent admissions. The 4.5% increase for 2012 can be primarily attributed to the combined impact of a 0.3% increase in same facility revenue per equivalent admission and a 4.1% increase in same facility equivalent admissions. Consolidated admissions increased 0.2% in 2013 compared to 2012 and increased 7.4% in 2012 compared to 2011. Consolidated inpatient surgeries increased 0.5% and consolidated outpatient surgeries increased 0.9% during 2013 compared to 2012. Consolidated inpatient surgeries increased 4.5% and consolidated outpatient surgeries increased 9.3% during 2012 compared to 2011. Consolidated emergency room visits increased 0.8% during 2013 compared to 2012 and increased 12.5% during 2012 compared to 2011. Same facility admissions increased 0.1% in 2013 compared to 2012 and increased 3.0% in 2012 compared to 2011. Same facility inpatient surgeries increased 0.3% and same facility outpatient surgeries declined 0.5% during 2013 compared to 2012. Same facility inpatient surgeries declined 0.1% and same facility outpatient surgeries increased 0.9% during 2012 compared to 2011. Same facility emergency room visits increased 0.7% during 2013 compared to 2012 and increased 8.6% during 2012 compared to 2011. Same facility uninsured emergency room visits increased 2.2% and same facility uninsured admissions increased 7.6% during 2013 compared to 2012. Same facility uninsured emergency room visits increased 8.9% and same facility uninsured admissions increased 9.7% during 2012 compared to 2011. 67



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Results of Operations (continued)

Revenue/Volume Trends (continued)

The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the years ended December 31, 2013, 2012 and 2011 are set forth below. Years Ended December 31, 2013 2012 2011 Medicare 32 % 33 % 34 % Managed Medicare 13 12 11 Medicaid 8 8 9 Managed Medicaid 9 9 8 Managed care and other insurers 30 30 31 Uninsured 8 8 7 100 % 100 % 100 %



The approximate percentages of our inpatient revenues, before provision for doubtful accounts, related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care plans and other insurers and the uninsured for the years ended December 31, 2013, 2012 and 2011 are set forth below.

Years Ended December 31, 2013 2012 2011 Medicare 29 % 30 % 31 % Managed Medicare 10 10 9 Medicaid 6 6 8 Managed Medicaid 4 4 4 Managed care and other insurers 46 45 45 Uninsured 5 5 3 100 % 100 % 100 % At December 31, 2013, we owned and operated 42 hospitals and 32 surgery centers in the state of Florida. Our Florida facilities' revenues totaled $7.545 billion, $7.336 billion and $6.989 billion for the years ended December 31, 2013, 2012 and 2011, respectively. At December 31, 2013, we owned and operated 36 hospitals and 24 surgery centers in the state of Texas. Our Texas facilities' revenues totaled $8.192 billion, $8.012 billion and $7.829 billion for the years ended December 31, 2013, 2012 and 2011, respectively. During 2013, 2012 and 2011, respectively, 55%, 55% and 57% of our admissions and 46%, 47% and 50% of our revenues were generated by our Florida and Texas facilities. Uninsured admissions in Florida and Texas represented 62%, 61% and 63% of our uninsured admissions during 2013, 2012 and 2011, respectively. We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. In 2011, the Centers for Medicare and Medicaid Services ("CMS") approved a Medicaid waiver that allows Texas to continue receiving supplemental Medicaid reimbursement while expanding its Medicaid managed care program. Thus, Texas is operating pursuant to a Waiver Program. The Texas Waiver Program includes two primary components: the continuation of an indigent care component and the establishment of a Delivery System Reform Incentive 68



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Results of Operations (continued)

Revenue/Volume Trends (continued)

Payment ("DSRIP") component. Initiatives under the DSRIP program are designed to provide incentive payments to hospitals and other providers for their investments in delivery system reforms that increase access to health care, improve the quality of care and enhance the health of patients and families they serve. We provide indigent care services in several communities in the state of Texas, in affiliation with other hospitals. The state of Texas has been involved in efforts to increase the indigent care provided by private hospitals. As a result of additional indigent care being provided by private hospitals, public hospital districts or counties in Texas have available funds that were previously devoted to indigent care. The public hospital districts or counties are under no contractual or legal obligation to provide such indigent care. The public hospital districts or counties have elected to transfer some portion of these available funds to the state's Medicaid program. Such action is at the sole discretion of the public hospital districts or counties. It is anticipated that these contributions to the state will be matched with federal Medicaid funds. The state then may make supplemental payments to hospitals in the state for Medicaid services rendered. Hospitals receiving Medicaid supplemental payments may include those that are providing additional indigent care services. Our Texas Medicaid revenues included $393 million ($76 million DSRIP related and $317 million indigent care related), $387 million (all indigent care related) and $540 million (all indigent care related) during 2013, 2012 and 2011, respectively, of Medicaid supplemental payments. In addition, we receive supplemental payments in several other states. We are aware these supplemental payment programs are currently being reviewed by certain state agencies and some states have made waiver requests to the CMS to replace their existing supplemental payment programs. It is possible these reviews and waiver requests will result in the restructuring of such supplemental payment programs and could result in the payment programs being reduced or eliminated. Because deliberations about these programs are ongoing, we are unable to estimate the financial impact the program structure modifications, if any, may have on our results of operations.



Electronic Health Record Incentive Payments

The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments, beginning in 2011, for eligible hospitals and professionals that adopt and meaningfully use certified electronic health record ("EHR") technology. We recognize income related to Medicare and Medicaid incentive payments using a gain contingency model that is based upon when our eligible hospitals have demonstrated meaningful use of certified EHR technology for the applicable period and the cost report information for the full cost report year that will determine the final calculation of the incentive payment is available. During 2013, 2012 and 2011, respectively, we recognized $216 million, $336 million and $210 million of electronic health record incentive income related to Medicare ($183 million, $252 million and $123 million) and Medicaid ($33 million, $84 million and $87 million) incentive programs. At December 31, 2013, we have $78 million of deferred EHR incentive income, which represents initial incentive payments received for which EHR incentive income has not been recognized. We have incurred and will continue to incur both capital costs and operating expenses in order to implement our certified EHR technology and meet meaningful use requirements. These expenses are ongoing and are projected to continue over all stages of implementation of meaningful use. The timing of recognizing the expenses may not correlate with the receipt of the incentive payments and the recognition of incentive income. During 2013, 2012 and 2011, respectively, we incurred $113 million, $80 million and $77 million of operating expenses to implement our certified EHR technology and meet meaningful use. 69



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Results of Operations (continued)

Electronic Health Record Incentive Payments (continued)

For 2014, we estimate EHR incentive income will be recognized in the range of $110 million to $130 million and that related EHR operating expenses will be in the range of $110 million to $130 million. Actual incentive payments and EHR operating expenses could vary from these estimates due to certain factors such as availability of federal funding for both Medicare and Medicaid incentive payments and our ability to continue to demonstrate meaningful use of certified EHR technology. The failure of our ability to continue to demonstrate meaningful use of EHR technology could have a material, adverse effect on our results of operations. 70



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Results of Operations (continued)

Operating Results Summary

The following are comparative summaries of operating results for the years ended December 31, 2013, 2012 and 2011 (dollars in millions):

2013 2012 2011 Amount Ratio Amount Ratio Amount Ratio Revenues before provision for doubtful accounts $ 38,040$ 36,783$ 32,506 Provision for doubtful accounts 3,858 3,770 2,824 Revenues 34,182 100.0 33,013 100.0 29,682 100.0 Salaries and benefits 15,646 45.8 15,089 45.7 13,440 45.3 Supplies 5,970 17.5 5,717 17.3 5,179 17.4 Other operating expenses 6,237 18.2 6,048 18.3 5,470 18.5 Electronic health record incentive income (216 ) (0.6 ) (336 ) (1.0 ) (210 ) (0.7 ) Equity in earnings of affiliates (29 ) (0.1 ) (36 ) (0.1 ) (258 ) (0.9 ) Depreciation and amortization 1,753 5.1 1,679 5.1 1,465 4.9 Interest expense 1,848 5.4 1,798 5.4 2,037 6.9 Losses (gains) on sales of facilities 10 - (15 ) - (142 ) (0.5 ) Losses on retirement of debt 17 0.1 - - 481 1.6 Legal claim costs - - 175 0.5 - - Gain on acquisition of controlling interest in equity investment - - - - (1,522 ) (5.1 ) Termination of management agreement - - - - 181 0.6 31,236 91.4 30,119 91.2 26,121 88.0 Income before income taxes 2,946 8.6 2,894 8.8 3,561 12.0 Provision for income taxes 950 2.8 888 2.7 719 2.4 Net income 1,996 5.8 2,006 6.1 2,842 9.6 Net income attributable to noncontrolling interests 440 1.2 401 1.2 377 1.3 Net income attributable to HCA Holdings, Inc. $ 1,556 4.6 $



1,605 4.9 $ 2,465 8.3

% changes from prior year: Revenues 3.5 % 11.2 % 5.9 % Income before income taxes 1.8 (18.7 ) 59.6 Net income attributable to HCA Holdings, Inc. (3.1 ) (34.9 ) 104.3 Admissions(a) 0.2 7.4 4.2 Equivalent admissions(b) 0.4 9.1 5.2 Revenue per equivalent admission 3.1 2.0 0.7 Same facility % changes from prior year(c): Revenues 3.1 4.5 3.3 Admissions(a) 0.1 3.0 2.3 Equivalent admissions(b) 0.1 4.1 3.0 Revenue per equivalent admission 3.0 0.3 0.3



(a) Represents the total number of patients admitted to our hospitals and is used

by management and certain investors as a general measure of inpatient volume.

(b) Equivalent admissions are used by management and certain investors as a

general measure of combined inpatient and outpatient volume. Equivalent

admissions are computed by multiplying admissions (inpatient volume) by the

sum of gross inpatient revenue and gross outpatient revenue and then dividing

the resulting amount by gross inpatient revenue. The equivalent admissions

computation "equates" outpatient revenue to the volume measure (admissions)

used to measure inpatient volume, resulting in a general measure of combined

inpatient and outpatient volume.

(c) Same facility information excludes the operations of hospitals and their

related facilities that were either acquired, divested or removed from service during the current and prior year. 71



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Results of Operations (continued)

Years Ended December 31, 2013 and 2012

Net income attributable to HCA Holdings, Inc. totaled $1.556 billion, or $3.37 per diluted share, for the year ended December 31, 2013 compared to $1.605 billion, or $3.49 per diluted share, for the year ended December 31, 2012. Financial results for 2013 include net losses on sales of facilities of $10 million (pretax), or $0.02 per diluted share, and a loss on retirement of debt of $17 million (pretax), or $0.02 per diluted share. Financial results for 2012 include legal claim costs of $175 million (pretax), or $0.24 per diluted share, and net gains on sales of facilities of $15 million (pretax), or $0.02 per diluted share. All "per diluted share" disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 461.913 million shares and 459.403 million shares for the years ended December 31, 2013 and 2012, respectively. During 2013, consolidated admissions increased 0.2% and same facility admissions increased 0.1% for 2013 compared to 2012. Consolidated inpatient surgical volumes increased 0.5%, and same facility inpatient surgeries increased 0.3% during 2013 compared to 2012. Consolidated outpatient surgical volumes increased 0.9%, and same facility outpatient surgeries declined 0.5% during 2013 compared to 2012. Emergency room visits increased 0.8% on a consolidated basis and increased 0.7% on a same facility basis during 2013 compared to 2012. Revenues before provision for doubtful accounts increased 3.4% to $38.040 billion for 2013 from $36.783 billion for 2012. Provision for doubtful accounts increased $88 million from $3.770 billion in 2012 to $3.858 billion in 2013. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients, including copayment and deductible amounts for patients who have health care coverage. The self-pay revenue deductions for charity care and uninsured discounts increased $404 million and $1.232 billion, respectively, during 2013 compared to 2012. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, the provision for doubtful accounts, uninsured discounts and charity care, was 31.3% for 2013 compared to 29.5% for 2012. At December 31, 2013, our allowance for doubtful accounts represented approximately 93% of the $5.927 billion total patient due accounts receivable balance, including accounts, net of estimated contractual discounts, related to patients for which eligibility for Medicaid coverage or uninsured discounts was being evaluated. Revenues increased 3.5% to $34.182 billion for 2013 from $33.013 billion for 2012. The increase in revenues was due primarily to the combined impact of a 3.1% increase in revenue per equivalent admission and a 0.4% increase in equivalent admissions compared to 2012. Same facility revenues increased 3.1% due primarily to the combined impact of a 3.0% increase in same facility revenue per equivalent admission and a 0.1% increase in same facility equivalent admissions compared to 2012. Salaries and benefits, as a percentage of revenues, were 45.8% in 2013 and 45.7% in 2012. Salaries and benefits per equivalent admission increased 3.2% in 2013 compared to 2012. Same facility labor rate increases averaged 1.8% for 2013 compared to 2012. Share-based compensation expense increased from $56 million in 2012 to $113 million in 2013, and we expect the 2014 expense will increase by approximately $50 million to $60 million. Supplies, as a percentage of revenues, were 17.5% in 2013 and 17.3% in 2012. Supply costs per equivalent admission increased 4.0% in 2013 compared to 2012. Supply costs per equivalent admission increased 5.7% for medical devices, increased 0.3% for pharmacy supplies and 5.1% for general medical and surgical items in 2013 compared to 2012. 72



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Results of Operations (continued)

Years Ended December 31, 2013 and 2012 (continued)

Other operating expenses, as a percentage of revenues, declined to 18.2% in 2013 from 18.3% in 2012. Other operating expenses are primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Provisions for losses related to professional liability risks were $314 million and $331 million for 2013 and 2012, respectively. During 2013 and 2012, respectively, we recognized $216 million and $336 million of electronic health record incentive income related to Medicare ($183 million and $252 million) and Medicaid ($33 million and $84 million) incentive programs. We recognize income related to Medicare and Medicaid incentive payments using a gain contingency model that is based upon when our eligible hospitals have demonstrated meaningful use of certified EHR technology for the applicable period and the cost report information for the full cost report year that will determine the final calculation of the incentive payment is available.



Equity in earnings of affiliates declined from $36 million for 2012 to $29 million for 2013.

Depreciation and amortization, as a percentage of revenues, was 5.1% in 2013 and 2012. Depreciation expense was $1.733 billion for 2013 and $1.673 billion for 2012. Interest expense increased to $1.848 billion for 2013 from $1.798 billion for 2012. The increase in interest expense was due to an increase in the average debt balance. Our average debt balance was $28.377 billion for 2013 compared to $27.397 billion for 2012. The average interest rate for our long-term debt declined from 6.6% for 2012 to 6.5% for 2013. Net losses on sales of facilities were $10 million for 2013 and related to the sale of a hospital facility and other real estate investments. Net gains on sales of facilities were $15 million for 2012 and related to the sales of health care entity investments.



During 2013, we redeemed all $201 million aggregate principal amount of our 9 7/8% senior secured second lien notes due 2017, at a redemption price of 104.938% of the principal amount. The pretax loss on retirement of debt related to this redemption was $17 million.

During January 2013, a Missouri judge ruled in favor of a nonprofit health foundation in a lawsuit against HCA. In the case, the plaintiff alleged HCA did not make the full level of capital expenditures and uncompensated care agreed to in connection with its purchase of hospitals from Health Midwest in 2003. We recorded $175 million of legal claim costs during the fourth quarter of 2012 related to this ruling. The effective tax rate was 37.9% and 35.6% for 2013 and 2012, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provision for income taxes for 2012 was reduced by $33 million related to a reduction in interest expense related to taxing authority examinations. Excluding the effect of this adjustment, the effective tax rate for 2012 would have been 36.9%. Net income attributable to noncontrolling interests increased from $401 million for 2012 to $440 million for 2013. The increase in net income attributable to noncontrolling interests related primarily to growth in operating results of a hospital joint venture in one of our Texas markets. 73



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Results of Operations (continued)

Years Ended December 31, 2012 and 2011

Net income attributable to HCA Holdings, Inc. totaled $1.605 billion, or $3.49 per diluted share, for the year ended December 31, 2012 compared to $2.465 billion, or $4.97 per diluted share, for the year ended December 31, 2011. Financial results for 2012 include legal claim costs of $175 million (pretax), or $0.24 per diluted share, and net gains on sales of facilities of $15 million (pretax), or $0.02 per diluted share. Financial results for 2011 include net gains on sales of facilities of $142 million (pretax), or $0.16 per diluted share, a gain on the acquisition of controlling interest in an equity investment of $1.522 billion (pretax), or $2.87 per diluted share, losses on retirement of debt of $481 million (pretax), or $0.61 per diluted share, and termination of management agreement fees of $181 million (pretax), or $0.30 per diluted share. All "per diluted share" disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 459.403 million shares and 495.943 million shares for the years ended December 31, 2012 and 2011, respectively. During March 2011, we completed the initial public offering of 87.719 million shares of our common stock, and during September 2011, we repurchased 80.771 million shares of our common stock. During 2012, consolidated admissions increased 7.4% and same facility admissions increased 3.0% for 2012, compared to 2011. Consolidated inpatient surgical volumes increased 4.5%, and same facility inpatient surgeries declined 0.1% during 2012 compared to 2011. Consolidated outpatient surgical volumes increased 9.3%, and same facility outpatient surgeries increased 0.9% during 2012 compared to 2011. Emergency room visits increased 12.5% on a consolidated basis and increased 8.6% on a same facility basis during 2012 compared to 2011. Revenues before provision for doubtful accounts increased 13.2% to $36.783 billion for 2012 from $32.506 billion for 2011. Provision for doubtful accounts increased $946 million from $2.824 billion in 2011 to $3.770 billion in 2012. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients, including copayment and deductible amounts for patients who have health care coverage. The self-pay revenue deductions for charity care and uninsured discounts increased $410 million and $1.271 billion, respectively, during 2012 compared to 2011. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, the provision for doubtful accounts, uninsured discounts and charity care, was 29.5% for 2012 compared to 27.4% for 2011. At December 31, 2012, our allowance for doubtful accounts represented approximately 93% of the $5.228 billion total patient due accounts receivable balance, including accounts, net of estimated contractual discounts, related to patients for which eligibility for Medicaid coverage or uninsured discounts was being evaluated. Revenues increased 11.2% to $33.013 billion for 2012 from $29.682 billion for 2011. The increase in revenues was due primarily to the combined impact of a 2.0% increase in revenue per equivalent admission and a 9.1% increase in equivalent admissions compared to 2011. Same facility revenues increased 4.5% due primarily to the combined impact of a 0.3% increase in same facility revenue per equivalent admission and a 4.1% increase in same facility equivalent admissions compared to 2011. The increase in revenues (and volume metrics) for 2012 compared to 2011 related primarily to the impact of the financial consolidation of the HCA-HealthONE LLC venture for periods subsequent to our acquisition of controlling interests during October 2011 (HealthONE revenues and volume metrics are not included in our same facility amounts). HealthONE revenues included in our consolidated revenues increased from $347 million in 2011 to $2.203 billion in 2012. Two adjustments (Rural Floor Provision Settlement and SSI ratios) related to Medicare revenues for prior period cost reports and the current period resulted in a net increase of $188 million to 2012 revenues. Salaries and benefits, as a percentage of revenues, were 45.7% in 2012 and 45.3% in 2011. Salaries and benefits per equivalent admission increased 2.9% in 2012 compared to 2011. Same facility labor rate increases 74



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Results of Operations (continued)

Years Ended December 31, 2012 and 2011 (continued)

averaged 1.7% for 2012 compared to 2011. Share-based compensation expense increased from $26 million in 2011 to $56 million in 2012.

Supplies, as a percentage of revenues, were 17.3% in 2012 and 17.4% in 2011. Supply costs per equivalent admission increased 1.2% in 2012 compared to 2011. Supply costs per equivalent admission declined 2.0% for pharmacy supplies, and increased 1.6% for medical devices and 0.1% for general medical and surgical items in 2012 compared to 2011. Other operating expenses, as a percentage of revenues, declined to 18.3% in 2012 from 18.5% in 2011. Other operating expenses are primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Other operating expenses include $234 million and $317 million of indigent care costs in certain Texas markets during 2012 and 2011, respectively. Provisions for losses related to professional liability risks were $331 million and $244 million for 2012 and 2011, respectively. During 2012 and 2011, respectively, we recognized $336 million and $210 million of electronic health record incentive income related to Medicare ($252 million and $123 million) and Medicaid ($84 million and $87 million) incentive programs. We recognize income related to Medicare and Medicaid incentive payments using a gain contingency model that is based upon when our eligible hospitals have demonstrated meaningful use of certified EHR technology for the applicable period and the cost report information for the full cost report year that will determine the final calculation of the incentive payment is available.



Equity in earnings of affiliates declined from $258 million for 2011 to $36 million for 2012. Equity in earnings of affiliates during 2011 related primarily to our Denver, Colorado market joint venture, which effective November 1, 2011, we began consolidating due to our acquisition of the approximate 40% remaining ownership interest.

Depreciation and amortization increased, as a percentage of revenues, to 5.1% in 2012 from 4.9% in 2011. The consolidation of HealthONE for periods subsequent to November 1, 2011 represents $113 million of the increase in depreciation and amortization. Depreciation expense was $1.673 billion for 2012 and $1.461 billion for 2011. Interest expense declined to $1.798 billion for 2012 from $2.037 billion for 2011. The decline in interest expense was due to a decline in the average interest rate. Our average debt balance was $27.397 billion for 2012 compared to $26.588 billion for 2011. The average interest rate for our long-term debt declined from 7.7% for 2011 to 6.6% for 2012. Net gains on sales of facilities were $15 million for 2012 and related to the sales of health care entity investments. Net gains on sales of facilities were $142 million for 2011 and related to the sale of a hospital facility and other health care entity investments. During January 2013, a Missouri judge ruled in favor of a nonprofit health foundation in a lawsuit against HCA. In the case, the plaintiff alleged HCA did not make the full level of capital expenditures and uncompensated care agreed to in connection with its purchase of hospitals from Health Midwest in 2003. We recorded $175 million of legal claim costs during the fourth quarter of 2012 related to this ruling. 75



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Results of Operations (continued)

Years Ended December 31, 2012 and 2011 (continued)

During October 2011, we completed our acquisition of the Colorado Health Foundation's ("Foundation") approximate 40% remaining ownership interest in the HealthONE joint venture for $1.450 billion. We recorded a gain on the acquisition of a controlling interest in an equity investment of $1.522 billion related to the remeasurement of our previous equity investment in HealthONE based upon our acquisition of the Foundation's ownership interest and the resulting consolidation of the entire enterprise at estimated fair value. During 2011, we recorded losses on retirement of debt of $481 million related to the redemptions of all $1.000 billion aggregate principal amount of our 9 1/8% Senior Secured Notes due 2014, at a redemption price of 104.563% of the principal amount; $108 million aggregate principal amount of our 9 7/8% Senior Secured Notes due 2017, at a redemption price of 109.875% of the principal amount; all of our outstanding $1.578 billion 9 5/8%/10 3/8% second lien toggle notes due 2016, at a redemption price of 106.783% of the principal amount and all of our outstanding $3.200 billion 9 1/4% second lien notes due 2016, at a redemption price of 106.513% of the principal amount. There were no losses on retirement of debt during 2012. Our Investors provided management and advisory services to the Company, pursuant to a management agreement among HCA and the Investors executed in connection with the Investors' acquisition of HCA in November 2006. In March 2011, the management agreement was terminated pursuant to its terms upon completion of the initial public offering of our common stock, and the Investors were paid a final fee of $181 million. The effective tax rate was 35.6% and 22.6% for 2012 and 2011, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provision for income taxes for 2012 was reduced by $33 million related to a reduction in interest expense related to taxing authority examinations. Our income before income taxes for 2011 included $1.255 billion of nontaxable gain related to the reported gain on the acquisition of a controlling interest in an equity investment. Excluding the effect of these adjustments, the effective tax rate for 2012 and 2011 would have been 36.9% and 37.3%, respectively. Net income attributable to noncontrolling interests increased from $377 million for 2011 to $401 million for 2012. The increase in net income attributable to noncontrolling interests related primarily to growth in operating results of certain surgery center joint ventures.



Liquidity and Capital Resources

Our primary cash requirements are paying our operating expenses, servicing our debt, capital expenditures on our existing properties, acquisitions of hospitals and other health care entities, repurchases of our common stock, distributions to stockholders and distributions to noncontrolling interests. Our primary cash sources are cash flows from operating activities, issuances of debt and equity securities and dispositions of hospitals and other health care entities. Cash provided by operating activities totaled $3.680 billion in 2013 compared to $4.175 billion in 2012 and $3.933 billion in 2011. Working capital totaled $2.342 billion at December 31, 2013 and $1.591 billion at December 31, 2012. The $495 million decline in cash provided by operating activities for 2013, compared to 2012, was primarily related to net negative changes in working capital items of $521 million. The $242 million increase in cash provided by operating activities for 2012, compared to 2011, was primarily related to a positive 76



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Liquidity and Capital Resources (continued)

impact from changes in working capital items of $236 million, as cash benefits from income items were offset by increased tax payments. Cash payments for interest and income taxes increased $185 million for 2013 compared to 2012 and increased $610 million for 2012 compared to 2011. Cash used in investing activities was $2.346 billion, $2.063 billion and $2.995 billion in 2013, 2012 and 2011, respectively. Excluding acquisitions, capital expenditures were $1.943 billion in 2013, $1.862 billion in 2012 and $1.679 billion in 2011. We expended $481 million, $258 million and $1.682 billion for acquisitions of hospitals and health care entities during 2013, 2012 and 2011, respectively. Expenditures for acquisitions in 2013 included three hospitals, expenditures for acquisitions in 2012 included one hospital and expenditures for acquisitions in 2011 included eight hospital facilities, seven of which were related to the acquisition of the remaining interests in HealthONE. Planned capital expenditures are expected to approximate $2.2 billion in 2014. At December 31, 2013, there were projects under construction which had an estimated additional cost to complete and equip over the next five years of approximately $1.8 billion. We expect to finance capital expenditures with internally generated and borrowed funds. During 2013, we received cash of $33 million from sales of a hospital, real estate investments and other health care entities. We also received net cash proceeds of $36 million related to net changes in our investments. During 2012, we received cash of $30 million from sales of real estate investments and other health care entities. We also received net cash proceeds of $16 million related to net changes in our investments. During 2011, we received cash of $281 million from sales of one hospital, other health care entities and real estate investments. We also received net cash proceeds of $80 million related to net changes in our investments. Cash used in financing activities totaled $1.625 billion in 2013, $1.780 billion in 2012 and $976 million in 2011. During 2013, we had a decline of $692 million in our indebtedness and used cash of $500 million for repurchases of common stock. During 2012, we had a net increase of $1.724 billion in our indebtedness. During 2011, we received cash of $2.506 billion related to the issuance of common stock in conjunction with our initial public offering; we used cash of $1.503 billion for repurchases of common stock; and we used cash proceeds from issuance of common stock and available cash provided by operations to make net debt repayments of $1.589 billion. During 2013, 2012 and 2011, we paid $16 million, $3.148 billion and $31 million, respectively, in distributions to our stockholders. During 2013, 2012 and 2011, we made distributions to noncontrolling interests of $435 million, $401 million and $378 million, respectively. We paid debt issuance costs of $5 million, $62 million and $92 million for 2013, 2012 and 2011, respectively. During 2013, 2012 and 2011, we received income tax benefits of $113 million, $174 million and $63 million, respectively, for certain items (primarily the cash distributions to holders of our stock options and exercises of stock options) that were deductible expenses for tax purposes, but were recognized as adjustments to stockholders' deficit for financial reporting purposes. We or our affiliates, including affiliates of the Investors, may in the future repurchase portions of our debt or equity securities, subject to certain limitations, from time to time in either the open market or through privately negotiated transactions, in accordance with applicable SEC and other legal requirements. The timing, prices, and sizes of purchases depend upon prevailing trading prices, general economic and market conditions, and other factors, including applicable securities laws. Funds for the repurchase of debt or equity securities have, and are expected to, come primarily from cash generated from operations and borrowed funds. In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($2.002 billion as of December 31, 2013 and $1.972 billion as of January 31, 2014) and anticipated access to public and private debt and equity markets. 77



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Liquidity and Capital Resources (continued)

During 2012, our Board of Directors declared three distributions to our stockholders and holders of certain vested share-based awards. The distributions totaled $6.50 per share and vested share-based award, or $3.142 billion in the aggregate. The distributions were funded using funds available under our existing senior secured credit facilities and proceeds from the December 2012 issuance of $1.000 billion aggregate principal amount of 6.25% senior unsecured notes due 2021. There were no distributions declared during 2013 or 2011. Investments of our professional liability insurance subsidiaries, to maintain statutory equity and pay claims, totaled $510 million and $570 million at December 31, 2013 and 2012, respectively. The insurance subsidiary maintained net reserves for professional liability risks of $315 million and $352 million at December 31, 2013 and 2012, respectively. Our facilities are insured by our 100% owned insurance subsidiary for losses up to $50 million per occurrence; however, this coverage is subject to a $5 million per occurrence self-insured retention. Net reserves for the self-insured professional liability risks retained were $940 million and $896 million at December 31, 2013 and 2012, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $326 million. We estimate that approximately $264 million of the expected net claim payments during the next 12 months will relate to claims subject to the self-insured retention.



Financing Activities

We are a highly leveraged company with significant debt service requirements. Our debt totaled $28.376 billion and $28.930 billion at December 31, 2013 and 2012, respectively. Our interest expense was $1.848 billion for 2013 and $1.798 billion for 2012. During February 2012, we issued $1.350 billion aggregate principal amount of 5.875% senior secured first lien notes due 2022. After the payment of related fees and expenses, we used the net proceeds for general corporate purposes. During October 2012, we issued $2.500 billion aggregate principal amount of notes, comprised of $1.250 billion of 4.75% senior secured first lien notes due 2023 and $1.250 billion of 5.875% senior unsecured notes due 2023. After the payment of related fees and expenses, we used the net proceeds for general corporate purposes, which included the repayment of an existing term loan due November 2013. During December 2012, we issued $1.000 billion aggregate principal amount of 6.25% senior unsecured notes due 2021. After the payment of related fees and expenses, we used the net proceeds to pay a distribution to our stockholders and holders of certain vested stock awards. During March 2013, we redeemed all $201 million aggregate principal amount of our 9 7/8% senior secured second lien notes due 2017, at a redemption price of 104.938% of the principal amount. The pretax loss on retirement of debt related to this redemption was $17 million.



During November 2013, our $329 million senior secured European term loan facility matured.

Management believes that cash flows from operations, amounts available under our senior secured credit facilities and our anticipated access to public and private debt markets will be sufficient to meet expected liquidity needs during the next twelve months. 78



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Contractual Obligations and Off-Balance Sheet Arrangements

As of December 31, 2013, maturities of contractual obligations and other commercial commitments are presented in the table below (dollars in millions): Payments Due by Period Contractual Obligations(a) Total Current 2-3 Years 4-5 Years After 5 Years Long-term debt including interest, excluding the senior secured credit facilities(b) $ 31,302$ 2,122$ 4,674$ 3,108$ 21,398 Loans outstanding under the senior secured credit facilities, including interest(b) 9,184 435 4,382 4,367 - Operating leases(c) 1,822 293 482 307 740 Purchase and other obligations(c) 25 18 7 - - Total contractual obligations $ 42,333$ 2,868$ 9,545$ 7,782$ 22,138 Commitment Expiration by Period Other Commercial Commitments Not Recorded on the Consolidated Balance Sheet Total Current 2-3 Years 4-5 Years After 5 Years Surety bonds(d) $ 45$ 43$ 2 $ - $ - Letters of credit(e) 58 20 38 - - Physician commitments(f) 24 20 4 - - Guarantees(g) 2 - - - 2 Total commercial commitments $ 129$ 83$ 44 $ - $ 2



(a) We have not included obligations to pay net estimated professional liability

claims ($1.255 billion at December 31, 2013, including net reserves of

$315 million relating to the 100% owned insurance subsidiary) in this table.

The estimated professional liability claims, which occurred prior to 2007,

are expected to be funded by the designated investment securities that are

restricted for this purpose ($510 million at December 31, 2013). We also have

not included obligations related to unrecognized tax benefits of $462 million

at December 31, 2013, as we cannot reasonably estimate the timing or amounts

of cash payments, if any, at this time.

(b) Estimates of interest payments assume that interest rates and borrowing

spreads at December 31, 2013, remain constant during the period presented.

(c) Amounts relate to future operating lease obligations, purchase obligations

and other obligations and are not recorded in our consolidated balance sheet.

Amounts also include physician commitments that are recorded in our

consolidated balance sheet.

(d) Amounts relate primarily to instances in which we have agreed to indemnify

various commercial insurers who have provided surety bonds to cover

self-insured workers' compensation claims, utility deposits and damages for

malpractice cases which were awarded to plaintiffs by the courts. These cases

are currently under appeal and the bonds will not be released by the courts

until the cases are closed.

(e) Amounts relate primarily to various insurance programs and employee benefit

plan obligations for which we have letters of credit outstanding.

(f) In consideration for physicians relocating to the communities in which our

hospitals are located and agreeing to engage in private practice for the

benefit of the respective communities, we make advances to physicians,

normally over a period of one year, to assist in establishing the physicians'

practices. The actual amount of these commitments to be advanced often

depends upon the financial results of the physicians' private practice during

the recruitment agreement payment period. The physician commitments reflected

were based on our maximum exposure on effective agreements at December 31,

2013.

(g) We have entered into guarantee agreements related to certain leases.

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Table of Contents HCA HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Market Risk We are exposed to market risk related to changes in market values of securities. The investments in debt and equity securities of our 100% owned insurance subsidiaries were $506 million and $4 million, respectively, at December 31, 2013. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. At December 31, 2013, we had a net unrealized gain of $10 million on the insurance subsidiaries' investment securities. We are exposed to market risk related to market illiquidity. Investments in debt and equity securities of our 100% owned insurance subsidiaries could be impaired by the inability to access the capital markets. Should the 100% owned insurance subsidiaries require significant amounts of cash in excess of normal cash requirements to pay claims and other expenses on short notice, we may have difficulty selling these investments in a timely manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. We may be required to recognize other-than-temporary impairments on our investment securities in future periods should issuers default on interest payments or should the fair market valuations of the securities deteriorate due to ratings downgrades or other issue-specific factors. We are also exposed to market risk related to changes in interest rates, and we periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are designated as cash flow hedges, are included in other comprehensive income, and changes in the fair value of derivatives which have not been designated as hedges are recorded in operations. With respect to our interest-bearing liabilities, approximately $3.540 billion of long-term debt at December 31, 2013 was subject to variable rates of interest, while the remaining balance in long-term debt of $24.836 billion at December 31, 2013 was subject to fixed rates of interest. Both the general level of interest rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the federal funds rate plus 0.50% and (2) the prime rate of Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period. The applicable margin for borrowings under the senior secured credit facilities may fluctuate according to a leverage ratio. The average effective interest rate for our long-term debt declined from 6.6% for 2012 to 6.5% for 2013. The estimated fair value of our total long-term debt was $29.603 billion at December 31, 2013. The estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities. Based on a hypothetical 1% increase in interest rates, the potential annualized reduction to future pretax earnings would be approximately $35 million. To mitigate the impact of fluctuations in interest rates, we generally target a portion of our debt portfolio to be maintained at fixed rates.



Our international operations and the related market risks associated with foreign currencies are currently insignificant to our results of operations and financial position.

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Table of Contents HCA HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Market Risk (continued) Financial Instruments Derivative financial instruments are employed to manage risks, including foreign currency and interest rate exposures, and are not used for trading or speculative purposes. We recognize derivative instruments, such as interest rate swap agreements and foreign exchange contracts, in the consolidated balance sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders' equity, as a component of other comprehensive income, depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge. Gains and losses on derivatives designated as cash flow hedges, to the extent they are effective, are recorded in other comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. Changes in the fair value of derivatives not qualifying as hedges, and for any portion of a hedge that is ineffective, are reported in earnings.



The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses resulting from the early termination of interest rate swap agreements are deferred and amortized as adjustments to expense over the remaining period of the debt originally covered by the terminated swap.

Effects of Inflation and Changing Prices

Various federal, state and local laws have been enacted that, in certain cases, limit our ability to increase prices. Revenues for general, acute care hospital services rendered to Medicare patients are established under the federal government's prospective payment system. Total fee-for-service Medicare revenues were 23.3%, 25.1% and 25.8% of our revenues for 2013, 2012 and 2011, respectively.



Management believes hospital industry operating margins have been, and may continue to be, under significant pressure because of changes in payer and service mix and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. In addition, as a result of increasing regulatory and competitive pressures, our ability to maintain operating margins through price increases to non-Medicare patients is limited.

IRS Examinations

We expect the IRS Examination Division will begin an audit of HCA Holdings, Inc.'s 2011 federal income tax return in 2014.

Management believes HCA Holdings, Inc., its predecessors and affiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS and final resolution of any disputes will not have a material, adverse effect on our results of operations or financial position. However, if payments due upon final resolution of any issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position. 81



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Table of Contents

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Information with respect to this Item is provided under the caption "Market Risk" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."


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