News Column

TENET HEALTHCARE CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 4, 2014

INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS

The purpose of this section, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), is to provide a narrative explanation of our financial statements that enables investors to better understand our business, to enhance our overall financial disclosures, to provide the context within which our financial information may be analyzed, and to provide information about the quality of, and potential variability of, our financial condition, results of operations and cash flows. Our core business is hospital operations and other, which is focused on owning and operating acute care hospitals and outpatient facilities. We also operate revenue cycle management, patient communications and engagement services and management services businesses under our Conifer Health Solutions, LLC ("Conifer") subsidiary, which is a separate reportable business segment. MD&A, which should be read in conjunction with the accompanying Condensed Consolidated Financial Statements, includes the following sections: Management Overview Forward-Looking Statements Sources of Revenue Results of Operations Liquidity and Capital Resources Off-Balance Sheet Arrangements Critical Accounting Estimates Unless otherwise indicated, all financial and statistical information included in MD&A relates to our continuing operations, with dollar amounts expressed in millions (except per share, per admission, per adjusted patient admission, per patient day, per adjusted patient day and per visit amounts). Continuing operations information includes the results of (i) our same-hospital operations, as described below, (ii) Vanguard Health Systems, Inc. ("Vanguard") and its consolidated subsidiaries, which we acquired effective October 1, 2013, but only for the three and six months ended June 30, 2014, and (iii) Resolute Health Hospital, a newly constructed facility, and Texas Regional Medical Center at Sunnyvale, in which we recently acquired a majority interest, in each case as described below, but only for the three months ended June 30, 2014. Continuing operations information excludes the results of our hospitals and other businesses that have previously been classified as discontinued operations for accounting purposes. Same-hospital information includes the results of our operations for all periods presented, including the same 49 hospitals operated during the three and six months ended June 30, 2014 and 2013, but excludes the results of (i) legacy Vanguard operations (ii) Resolute Health Hospital and Texas Regional Medical Center, and (iii) our hospitals and other businesses that have previously been classified as discontinued operations for accounting purposes. We present same-hospital data because we believe it provides investors with useful information regarding the performance of our hospitals and other operations that are comparable for the periods presented. MANAGEMENT OVERVIEW RECENT DEVELOPMENTS Hospital Acquisition Completed. On August 1, 2014, we completed our previously announced acquisition of Emanuel Medical Center, a 209-bed hospital in Turlock, California, located approximately 100 miles southeast of San Francisco. Emanuel Medical Center is a comprehensive community hospital with services that include emergency, critical care, labor and delivery, pediatrics, cardiology and surgery. Newly Constructed Hospital Opened. On June 24, 2014, we opened the newly constructed Resolute Health Hospital in New Braunfels, Texas, which is located northeast of San Antonio. The 365,000 square-foot hospital has 128 beds in all-private rooms, as well as an emergency department, and offers a broad range of specialty care, including cardiovascular, orthopedics, oncology, imaging, wound care, rehabilitation, obstetrics and level III neonatal intensive care. Resolute Health's 56-acre wellness campus is designed to draw community members for needs beyond acute healthcare, with services such as a fitness center, health-oriented restaurants, walking trails and an integrative medicine center, which provides complementary therapies such as nutrition counseling, fitness instruction and lifestyle coaching. Majority Interest in Hospital Acquired. On June 3, 2014, we acquired a majority interest in Texas Regional Medical Center at Sunnyvale, a 70-bed hospital in Sunnyvale, Texas, a suburban community east of Dallas. Open since 2009, Texas Regional Medical Center is a comprehensive community hospital with services that include a cardiovascular center, spine program, obstetrics program and neonatal intensive care unit, surgical weight loss program and an emergency department. Physician owners continue to retain a minority interest in the hospital. National Brand of Urgent Care Centers Launched. On May 19, 2014, we launched a new national brand for our existing and future urgent care centers called MedPost Urgent Care. There are currently 23 MedPost Urgent Care centers operating in Arizona, California, Florida, Georgia, Mississippi, Missouri, Tennessee and Texas. These centers are part of a growing national network of walk-in urgent care facilities that are open seven days a week, with extended hours, to care for residents in their communities. Joint Venture Announced. On May 6, 2014, we announced a joint venture with Texas Tech University Health Sciences Center at El Paso ("TTUHSC") to develop a new teaching hospital for TTUHSC's Paul L. Foster School of Medicine, as well as an 110,000 square foot medical office building in west El Paso, Texas. The new hospital is expected to have up to 140 beds and will operate as a part of the Sierra Providence Health Network, our system of hospitals and outpatient centers in El Paso. Construction on the new teaching hospital is scheduled to begin in 2014 and is expected to be completed in the fall of 2016. 20 --------------------------------------------------------------------------------

Table of Contents STRATEGIES AND TRENDS We are committed to providing the communities our hospitals, outpatient centers and other healthcare facilities serve with high quality, cost-effective healthcare while growing our business, increasing our profitability and creating long-term value for our shareholders. We believe that our success in increasing our profitability depends in part on our success in executing the strategies and managing the trends discussed below. Core Business Strategy-We are focused on providing high quality care to patients through our hospitals and outpatient centers, and offering an array of business process solutions primarily to healthcare providers through Conifer. With respect to our hospitals and outpatient business, we seek to offer superior quality and patient services to meet community needs, to make capital and other investments in our facilities and technology to remain competitive, to recruit and retain physicians, to increase the number of outpatient centers we own, and to negotiate favorable contracts with managed care and other private payers. With respect to business process services, we provide comprehensive operational management for revenue cycle functions, including patient access, health information management, revenue integrity and patient financial services. We also offer communication and engagement solutions to optimize the relationship between providers and patients. In addition, our management services offerings have expanded to support value-based performance through clinical integration, financial risk management and population health management. Commitment to Quality-We have made significant investments in the last decade in equipment, technology, education and operational strategies designed to improve clinical quality at our hospitals and outpatient centers. As a result of our efforts, our Hospital Compare Core Measures scores from the Centers for Medicare and Medicaid Services ("CMS") have consistently exceeded the national average since the end of 2005, and major national private payers have also recognized our achievements relative to quality. These designations are expected to become increasingly important as governmental and private payers move to pay-for-performance models, and the commercial market moves to more narrow networks and other methods designed to encourage covered individuals to use certain facilities over others. Through our Commitment to Quality and Performance Excellence Program initiatives, we continually collaborate with physicians to implement the most current evidence-based medicine techniques to improve the way we provide care, while using labor management tools and supply chain initiatives to reduce variable costs. We believe the use of these practices will promote the most effective and efficient utilization of resources and result in shorter lengths of stay, as well as reductions in redundant ancillary services and readmissions for hospitalized patients. In general, we believe that quality of care improvements may have the effect of reducing costs, increasing payments from Medicare and certain managed care payers for our services, and increasing physician and patient satisfaction, which may improve our volumes.



Development Strategies-We remain focused on opportunities to increase our hospital and outpatient revenues through organic growth and acquisitions, and to expand our Conifer services business.

From time to time, we build new facilities, make strategic acquisitions of healthcare assets and companies, and enter into joint venture arrangements or affiliations with healthcare businesses - in each case in markets where we believe our operating strategies can improve performance and create shareholder value. Most recently, as described in greater detail above, we purchased Emanuel Medical Center, a 209-bed hospital located in Northern California, we opened a newly constructed 128-bed hospital and wellness campus in New Braunfels, Texas, and we acquired a majority interest in a 70-bed regional medical center in a suburban community east of Dallas. In addition, in May 2014, we announced a joint venture with Texas Tech University Health Sciences Center at El Paso to develop and build a new 140-bed teaching hospital and a medical office building in west El Paso, Texas. In the six months ended June 30, 2014, we also acquired three ambulatory surgery centers, three urgent care centers, one diagnostic imaging center and various physician practice entities. Historically, our outpatient services have generated significantly higher margins for us than inpatient services. During the six months ended June 30, 2014, we derived approximately 37% of our net patient revenues from outpatient services. By expanding our outpatient business, we expect to increase our profitability over time. We believe that growth by strategic acquisitions, when and if opportunities are available, can supplement the growth we believe we can generate organically in our existing markets. In addition, we expect that our new national MedPost brand will assist us in growing our urgent care business as part of our broader strategy to offer more services to patients and to expand into faster-growing, less capital intensive, higher-margin businesses. Furthermore, we continually evaluate collaboration opportunities with outpatient facilities, healthcare providers, physician groups and others in our markets to maximize effectiveness, reduce costs and build clinically integrated networks that provide quality service across the care continuum. 21 --------------------------------------------------------------------------------



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We intend to continue expanding Conifer's revenue cycle management, patient communications and engagement services, and management services businesses by marketing these services to non-Tenet hospitals and other healthcare-related entities. Conifer provides services to more than 700 Tenet and non-Tenet hospital and other clients nationwide. We believe this business has the potential over time to generate high margins and improve our results of operations. Conifer's service offerings have also expanded to support value-based performance through clinical integration, financial risk management and population health management, which are integral parts of the healthcare industry's movement toward accountable care organizations ("ACOs") and similar risk-based or capitated contract models. In addition to hospitals, clients for these services include health plans, self-insured employees and other entities. Realizing HIT Incentive Payments and Other Benefits-Beginning in the year ended December 31, 2011, we achieved compliance with certain of the health information technology ("HIT") requirements under the American Recovery and Reinvestment Act of 2009 ("ARRA"). In 2013, we recognized approximately $96 million of Medicare electronic health record ("EHR") and Medicaid ARRA HIT incentives. During the six months ended June 30, 2014, we recognized approximately $67 million of Medicare and Medicaid EHR ARRA incentives. These incentives partially offset the operating expenses and capital costs we have incurred and continue to incur to invest in HIT systems. We expect to recognize additional incentives in the future. Furthermore, we believe that the operational benefits of HIT, including improved clinical outcomes and increased operating efficiencies, will contribute to our long-term ability to grow our business. General Economic Conditions-We believe that high unemployment rates in some of the markets our hospitals serve and other adverse economic conditions are continuing to have a negative impact on our bad debt expense levels and payer mix. However, as the economy recovers, we expect to experience improvements in these metrics relative to current levels. In the six months ended June 30, 2014, we believe our volumes were positively impacted by incremental market share as a result of improved physician alignment and service line expansion, insurance coverage for a greater number of individuals as a result of the Affordable Care Act, and a strengthening economy. Improving Operating Leverage-We believe targeted capital spending on critical growth opportunities for our hospitals, emphasis on higher demand clinical service lines (including outpatient lines), focus on expanding our outpatient business, implementation of new payer contracting strategies, and improved quality metrics at our hospitals will improve our patient volumes. Increases in patient volumes have been constrained by the slow pace of the current economic recovery, increased competition, utilization pressure by managed care organizations, the effects of higher patient co-pays and deductibles, and demographic trends. We continue to pursue integrated contracting models that maximize our system-wide skills and capabilities in conjunction with our strong market positions to accommodate new payment models. In several markets, we have formed clinical integration organizations, which are collaborations with independent physicians and hospitals to develop ongoing clinical initiatives designed to control costs and improve the quality of care delivered to patients. Most recently, in January 2014, our Abrazo Health network of hospitals in the Phoenix, Arizona area entered into a joint venture with Dignity Health to fund and expand the Arizona Care Network, a physician-led, physician-governed ACO and clinically integrated network focused on improved quality through shared resources, advanced technology and clinical best practices that align with emerging models of care delivery. Arrangements like these provide a foundation for negotiating with plans under an ACO structure or other risk-sharing model. Impact of Affordable Care Act-We anticipate that we will benefit over time from the provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 ("Affordable Care Act" or "ACA") that have begun to extend insurance coverage through Medicaid or private insurance to a broader segment of the U.S. population. Although we are unable to predict the ultimate net effect of the Affordable Care Act on our future results of operations, and while there have been and will continue to be some reductions in reimbursement rates by governmental payers, we have begun to receive reimbursement for caring for previously uninsured and underinsured patients in 2014. Through collaborative efforts with local community organizations, we have launched a campaign under the banner "Path to Health" to assist our hospitals in educating and enrolling uninsured patients in insurance plans. Effective January 1, 2014, four of the states in which we operate (Arizona, California, Illinois and Massachusetts) expanded their Medicaid programs under the ACA. A fifth state (Michigan) expanded its Medicaid program effective April 1, 2014. Our ability to execute on these strategies and manage these trends is subject to a number of risks and uncertainties that may cause actual results to be materially different from expectations. In addition, it is critical that we continue to make steady and measurable progress in 2014 in successfully integrating Vanguard's business and operations into our business processes. For information about risks and uncertainties that could affect our results of operations, see the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report. 22

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RESULTS OF OPERATIONS-OVERVIEW

Selected Operating Statistics for All Continuing Operations Hospitals-The following table shows certain selected operating statistics for our continuing operations on a total hospital basis, which includes the results of the 28 hospitals we acquired from Vanguard on October 1, 2013, Texas Regional Medical Center, in which we acquired a majority interest on June 3, 2014, and Resolute Health Hospital, which we opened on June 24, 2014, in each case only for the period of time from such acquisition or opening to June 30, 2014. We believe this information is useful to investors because it reflects our current portfolio of hospitals and the significant increase to the scale of our operations as a result of our acquisition activity. Total Hospital Continuing Operations Three Months Ended June 30, Increase 2014 2013 (Decrease) Total admissions 194,641 120,722 61.2 % Adjusted patient admissions(1) 337,509 195,440 72.7 % Paying admissions (excludes charity and uninsured) 183,714 111,891 64.2 % Charity and uninsured admissions 10,927 8,831 23.7 % Admissions through emergency department 122,086 75,608 61.5 % Emergency department visits 702,009 399,702 75.6 % Total emergency department admissions and visits 824,095 475,310 73.4 % Surgeries - inpatient 53,271 34,340 55.1 % Surgeries - outpatient 120,393 74,329 62.0 % Total surgeries 173,664 108,669 59.8 % Patient days - total 907,093 567,390 59.9 % Adjusted patient days(1) 1,563,681 909,720 71.9 % Average length of stay (days) 4.66 4.70 (0.9 )% Average licensed beds 20,370 13,180 54.6 % Utilization of licensed beds(2) 48.9 % 47.3 % 1.6 %(3) Total visits 2,066,051 1,072,712 92.6 % Paying visits (excludes charity and uninsured) 1,896,285 958,379 97.9 % Charity and uninsured visits 169,766 114,333 48.5 % Net inpatient revenues $ 2,393$ 1,542 55.2 % Net outpatient revenues $ 1,448$ 844 71.6 % Net inpatient revenue per admission $ 12,294$ 12,773 (3.8 )% Net inpatient revenue per patient day $ 2,638$ 2,718 (2.9 )% Net outpatient revenue per visit $ 701 $ 787 (10.9 )% Net patient revenue per adjusted patient admission(1) $ 11,380$ 12,208 (6.8 )% Net patient revenue per adjusted patient day(1) $ 2,456$ 2,623 (6.4 )%

-------------------------------------------------------------------------------- (1) Adjusted patient admissions/days represents actual patient admissions/days adjusted to include outpatient services by multiplying actual patient admissions/days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.



(2) Utilization of licensed beds represents patient days divided by number of days in the period divided by average licensed beds.

(3) The change is the difference between the amounts shown for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Operating Statistics on a Same-Hospital Basis-Our results of operations have been and continue to be influenced by industry-wide and company-specific challenges, including constrained volume growth and high levels of bad debt, that have affected our revenue growth and operating expenses. We believe our results of operations for our most recent fiscal quarter best reflect recent trends we are experiencing with respect to volumes, revenues and expenses; therefore, we have provided below information about these metrics for the three months ended June 30, 2014 and 2013 on a same-hospital basis, where noted, excluding the results of the 28 hospitals we acquired from Vanguard on October 1, 2013, Texas Regional Medical Center, in which we acquired a majority interest on June 3, 2014, and Resolute Health Hospital, which we opened on June 24, 2014. 23

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Table of Contents Same-Hospital Continuing Operations Three Months Ended June 30, Increase



Admissions, Patient Days and Surgeries 2014 2013 (Decrease) Total admissions

124,720 120,722 3.3 % Adjusted patient admissions(1) 204,637 195,440 4.7 % Paying admissions (excludes charity and uninsured) 116,801 111,891 4.4 % Charity and uninsured admissions 7,919 8,831 (10.3 )% Admissions through emergency department 80,529 75,608 6.5 % Paying admissions as a percentage of total admissions 93.7 % 92.7 % 1.0 %(2) Charity and uninsured admissions as a percentage of total admissions 6.3 % 7.3 % (1.0 )%(2) Emergency department admissions as a percentage of total admissions 64.6 % 62.6 % 2.0 %(2) Surgeries - inpatient 34,369 34,340 0.1 % Surgeries - outpatient 89,783 74,329 20.8 % Total surgeries 124,152 108,669 14.2 % Patient days - total 584,251 567,390 3.0 % Adjusted patient days(1) 948,144 909,720 4.2 % Average length of stay (days) 4.68 4.70 (0.4 )% Number of acute care hospitals (at end of period) 49 49



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Licensed beds (at end of period) 13,231 13,180 0.4 % Average licensed beds 13,196 13,180 0.1 % Utilization of licensed beds(3) 48.7 % 47.3 % 1.4 %(2)

-------------------------------------------------------------------------------- (1) Adjusted patient admissions/days represents actual patient admissions/days adjusted to include outpatient services by multiplying actual patient admissions/days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.



(2) The change is the difference between the amounts shown for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

(3) Utilization of licensed beds represents patient days divided by number of days in the period divided by average licensed beds.

Total same-hospital admissions increased by 3,998, or 3.3%, in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Total surgeries increased by 14.2% in the three months ended June 30, 2014 compared to the same period in 2013, comprised of a 20.8% increase in outpatient surgeries primarily due to our outpatient development strategies and a 0.1% increase in inpatient surgeries. Our emergency department admissions increased 6.5% in the three months ended June 30, 2014 compared to the same period in the prior year. We believe our volumes were positively impacted by incremental market share as a result of improved physician alignment and service line expansion, insurance coverage for a greater number of individuals as a result of the Affordable Care Act, and a strengthening economy. Charity and uninsured admissions decreased 10.3% in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to Medicaid expansion in California and health insurance exchange coverage under the ACA. Same-Hospital Continuing Operations Three Months Ended June 30, Increase Outpatient Visits 2014 2013 (Decrease) Total visits 1,140,595 1,072,712 6.3 % Paying visits (excludes charity and uninsured) 1,031,920 958,379 7.7 % Charity and uninsured visits 108,675 114,333 (4.9 )% Emergency department visits 432,858 399,702 8.3 % Surgery visits 89,783 74,329 20.8 % Paying visits as a percentage of total visits 90.5 % 89.3 % 1.2 %(1) Charity and uninsured visits as a percentage of total visits 9.5 % 10.7 % (1.2 )%(1)



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(1) The change is the difference between the amounts shown for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Total same-hospital outpatient visits increased 67,883, or 6.3%, in the three months ended June 30, 2014 compared to the three months ended June 30, 2013, which included 7.7% growth for paying visits. Approximately 69% of the growth in outpatient visits was organic.



Outpatient surgery visits increased by 20.8% in the three months ended June 30, 2014 compared to the same period in 2013. Charity and uninsured outpatient visits decreased by 4.9% in the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

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Table of Contents Same-Hospital Continuing Operations Three Months Ended June 30, Increase Revenues 2014 2013 (Decrease) Net operating revenues $ 2,578$ 2,422 6.4 % Revenues from the uninsured $ 147$ 170 (13.5 )% Net inpatient revenues(1) $ 1,540$ 1,542 (0.1 )% Net outpatient revenues(1) $ 927$ 844 9.8 %

-------------------------------------------------------------------------------- (1) Net inpatient revenues and net outpatient revenues are components of net operating revenues. Net inpatient revenues include self-pay revenues of $52 million and $69 million for the three months ended June 30, 2014 and 2013, respectively. Net outpatient revenues include self-pay revenues of $95 million and $101 million for the three months ended June 30, 2014 and 2013, respectively. Net operating revenues increased by $156 million, or 6.4%, on a same-hospital basis in the three months ended June 30, 2014 compared to the same period in 2013, primarily due to increases in inpatient and outpatient volumes, improved managed care pricing, and increased revenues from services provided by our Conifer subsidiary to third parties. Revenues from the uninsured decreased 13.5% in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to Medicaid expansion in California and health insurance exchange coverage under the ACA. Net operating revenues in the three months ended June 30, 2014 included $51 million of Medicaid disproportionate share hospital ("DSH") and other state-funded subsidy revenues compared to $119 million in the same period in 2013 on a same-hospital basis. During the three months ended June 30, 2013, we recognized $66 million of net revenues related to the California provider fee program; we did not recognize any revenues related to this program during the three months ended June 30, 2014 because the current program has not been approved by CMS yet. Net patient revenues increased by 3.4% in the three months ended June 30, 2014 compared to the same period in 2013. Same-Hospital Continuing Operations Three Months Ended June 30, Increase



Revenues on a Per Admission, Per Patient Day and Per Visit Basis 2014

2013 (Decrease) Net inpatient revenue per admission $ 12,348$ 12,773 (3.3 )% Net inpatient revenue per patient day $ 2,636$ 2,718 (3.0 )% Net outpatient revenue per visit $ 813$ 787 3.3 % Net patient revenue per adjusted patient admission(1) $ 12,055$ 12,208 (1.3 )% Net patient revenue per adjusted patient day(1) $ 2,602$ 2,623 (0.8 )%

-------------------------------------------------------------------------------- (1) Adjusted patient admissions/days represents actual patient admissions/days adjusted to include outpatient services by multiplying actual patient admissions/days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues. Net inpatient revenue per admission decreased 3.3% in the three months ended June 30, 2014 compared to the same period in 2013. The decrease is primarily due to the $66 million of net revenues related to the California provider fee program that were recognized during the three months ended June 30, 2013 compared to no revenues under this program in the 2014 period. The 3.3% increase in net outpatient revenue per visit was primarily due to the improved terms of our managed care contracts. Same-Hospital Continuing Operations Three Months Ended June 30, Increase Provision for Doubtful Accounts 2014 2013



(Decrease)

Provision for doubtful accounts $ 209 $ 207 1.0 % Provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts 7.5 % 7.9 % (0.4 )%(1) Collection rate on self-pay accounts(2) 27.8 % 28.7 % (0.9 )%(1) Collection rate on commercial managed care accounts 98.3 % 98.2 % 0.1 %(1)



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(1) The change is the difference between the amounts shown for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

(2) Self-pay accounts receivable are comprised of both uninsured and balance after insurance receivables.

Provision for doubtful accounts increased by $2 million, or 1.0%, in the three months ended June 30, 2014 compared to the same period in 2013. The increase in the provision for doubtful accounts primarily related to the 90 basis point decrease in our self-pay collection rate, as well higher patient co-pays and deductibles, partially offset by the decrease in revenues from the uninsured. Our self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 27.8% at June 30, 2014 and 28.7% at June 30, 2013. 25 --------------------------------------------------------------------------------

Table of Contents Same-Hospital Continuing Operations Three Months Ended June 30, Increase Selected Operating Expenses 2014 2013 (Decrease) Hospital Operations and other Salaries, wages and benefits $ 1,103$ 1,026 7.5 % Supplies 413 387 6.7 % Other operating expenses 601 514 16.9 % Total $ 2,117$ 1,927 9.9 % Conifer Salaries, wages and benefits $ 178$ 140 27.1 % Other operating expenses 63 53 18.9 % Total $ 241$ 193 24.9 % Total Salaries, wages and benefits $ 1,281$ 1,166 9.9 % Supplies 413 387 6.7 % Other operating expenses 664 567 17.1 % Total $ 2,358$ 2,120 11.2 % Rent/lease expense(1) Hospital Operations and other $ 35 $ 39 (10.3 )% Conifer 5 3 66.7 % Total $ 40 $ 42 (4.8 )% Hospital Operations and other(2) Salaries, wages and benefits per adjusted patient day $ 1,161$ 1,128 2.9 % Supplies per adjusted patient day 436 425 2.6 % Other operating expenses per adjusted patient day 615 565 8.8 % Total per adjusted patient day $ 2,212$ 2,118 4.4 % Salaries, wages and benefits per adjusted patient admission $ 5,380$ 5,250 2.5 % Supplies per adjusted patient admission 2,018 1,980 1.9 % Other operating expenses per adjusted patient admission 2,849 2,630 8.3 % Total per adjusted patient admission $ 10,247$ 9,860 3.9 %



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(1) Included in other operating expenses.

(2) Adjusted patient days/admissions represents actual patient days/admissions adjusted to include outpatient services by multiplying actual patient days/admissions by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues. These metrics exclude the expenses related to the provider network based in Southern California that includes contracted independent physicians, ancillary providers and hospitals, which we acquired during the three months ended September 30, 2013. Total selected operating expenses, which is defined as salaries, wages and benefits, supplies and other operating expenses, increased by 4.4% and 3.9% on a per adjusted patient day and per adjusted patient admission basis, respectively, in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Salaries, wages and benefits per adjusted patient admission increased by approximately 2.5% in the three months ended June 30, 2014 compared to the same period in 2013. This change is primarily due to a greater number of employed physicians, annual merit increases for certain of our employees, increased incentive compensation expense, an increase in the 401(k) plan maximum matching percentage for certain employee populations and increased health benefits costs in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Supplies expense per adjusted patient admission increased by 1.9% in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The change in supplies expense was primarily attributable to higher costs for pharmaceuticals and volume growth in our supply-intensive surgical services. Other operating expenses per adjusted patient admission increased by 8.3% in the three months ended June 30, 2014 compared to the same period in 2013. This change is primarily due to higher medical fees related to a greater number of employed and contracted physicians, increased costs of contracted services and increased malpractice expense. Malpractice expense in the 2014 period included an unfavorable adjustment of approximately $1 million due to a 17 basis point decrease in the interest rate used to estimate the discounted present value of projected future malpractice liabilities compared to a favorable adjustment of approximately $6 million as a result of a 72 basis point increase in the interest rate in the 2013 period. 26 --------------------------------------------------------------------------------



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Salaries, wages and benefits expense for Conifer increased by $38 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 due to an increase in employee headcount as a result of the growth in Conifer's business primarily attributable to the integration of the Vanguard facilities' revenue cycle operations now managed by Conifer.



Other operating expenses for Conifer increased by $10 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to higher costs related to the integration of the Vanguard facilities' revenue cycle operations now managed by Conifer.

The table below shows the pre-tax and after-tax impact on continuing operations for the three and six months ended June 30, 2014 and 2013 of the following items: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (Expense) Income Impairment and restructuring charges, and acquisition-related costs $ (32 )$ (11 )$ (53 )$ (25 ) Litigation and investigation costs (12 ) (2 ) (15 ) (2 ) Loss from early extinguishment of debt (0 ) (171 ) (0 ) (348 ) Pre-tax impact $ (44 )$ (184 )$ (68 )$ (375 ) Total after-tax impact $ (27 )$ (122 )$ (42 )$ (242 ) Diluted per-share impact of above items $ (0.28 )$ (1.18 )$ (0.43 )$ (2.31 ) Diluted earnings per share, including above items $ (0.11 )$ (0.52 )$ (0.38 )$ (1.34 )



LIQUIDITY AND CAPITAL RESOURCES OVERVIEW

Cash and cash equivalents were $406 million at June 30, 2014, an increase of $265 million from $141 million at March 31, 2014.

Significant cash flow items in the three months ended June 30, 2014 included:

Capital expenditures of $242 million; Purchases of businesses for $33 million; Interest payments of $255 million;



$170 million net repayments under our revolving credit facility; and

$500 million of net proceeds from the issuance of 5% senior notes due 2019.



Net cash provided by operating activities was $247 million in the six months ended June 30, 2014 compared to $128 million in the six months ended June 30, 2013. Key positive and negative factors contributing to the change between the 2014 and 2013 periods include the following:

Increased income from continuing operations before income taxes of $237 million, excluding loss from early extinguishment of debt, interest expense, investment earnings, litigation and investigation costs, impairment and restructuring charges, and acquisition-related costs, and depreciation and amortization, in the six months ended June 30, 2014 compared to the six months ended June 30, 2013;



The favorable impact of a reduction of approximately $44 million in net amounts we are owed under Medicaid supplemental programs in the 2014 period;

$5 million more cash used in operating activities from discontinued operations;

Income tax payments of $19 million in the six months ended June 30, 2014 compared to $8 million in the six months ended June 30, 2013;

An increase of $65 million in payments on reserves for restructuring charges, acquisition-related costs, and litigation costs and settlements; and

Higher interest payments of $134 million. 27 --------------------------------------------------------------------------------

Table of Contents FORWARD-LOOKING STATEMENTS The information in this report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended. All statements, other than statements of historical or present facts, that address activities, events, outcomes, business strategies and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements represent management's current belief, based on currently available information, as to the outcome and timing of future events. They involve known and unknown risks, uncertainties and other factors - many of which we are unable to predict or control - that may cause our actual results, performance or achievements, or healthcare industry results, to be materially different from those expressed or implied by forward-looking statements. Such factors include, but are not limited to, the risks described in the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report. When considering forward-looking statements, a reader should keep in mind the risk factors and other cautionary statements in our Annual Report and in this report. Should one or more of the risks and uncertainties described in our Annual Report or this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim any obligation to update any information contained in a forward-looking statement or any forward-looking statement in its entirety and, therefore, disclaim any resulting liability for potentially related damages.



All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

SOURCES OF REVENUE We receive revenues for patient services from a variety of sources, primarily managed care payers and the federal Medicare program, as well as state Medicaid programs, indemnity-based health insurance companies and self-pay patients (that is, patients who do not have health insurance and are not covered by some other form of third-party arrangement). The table below shows the sources of net patient revenues before provision for doubtful accounts for our continuing general hospitals, expressed as percentages of net patient revenues before provision for doubtful accounts from all sources: Three Months Ended June 30, Six Months Ended June 30, Increase Increase Net Patient Revenues from: 2014 2013 (Decrease)(1) 2014 2013 (Decrease)(1) Medicare 22.5 % 21.0 % 1.5 % 22.6 % 22.0 % 0.6 % Medicaid 9.9 % 9.9 % - % 8.8 % 9.0 % (0.2 )% Managed care 58.0 % 58.1 % (0.1 )% 57.9 % 58.0 % (0.1 )% Indemnity, self-pay and other 9.6 % 11.0 % (1.4 )% 10.7 % 11.0 % (0.3 )%



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(1) The increase (decrease) is the difference between the 2014 and 2013 percentages shown.

Our payer mix on an admissions basis for our continuing general hospitals, expressed as a percentage of total admissions from all sources, is shown below: Three Months Ended June 30, Six Months Ended June 30, Increase Increase Admissions from: 2014 2013 (Decrease)(1) 2014 2013 (Decrease)(1) Medicare 27.3 % 27.9 % (0.6 )% 28.1 % 28.7 % (0.6 )% Medicaid 11.6 % 12.0 % (0.4 )% 11.3 % 11.9 % (0.6 )% Managed care 53.5 % 49.6 % 3.9 % 52.8 % 49.0 % 3.8 % Indemnity, self-pay and other 7.6 % 10.5 % (2.9 )% 7.8 % 10.4 % (2.6 )%



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(1) The increase (decrease) is the difference between the 2014 and 2013 percentages shown.

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Table of Contents GOVERNMENT PROGRAMS The Medicare program, the nation's largest health insurance program, is administered by the Centers for Medicare and Medicaid Services of the U.S. Department of Health and Human Services ("HHS"). Medicare is a health insurance program primarily for individuals 65 years of age and older, certain younger people with disabilities, and people with end-stage renal disease, and is provided without regard to income or assets. Medicaid is a program that pays for medical assistance for certain individuals and families with low incomes and resources, and is jointly funded by the federal government and state governments. Medicaid is the largest source of funding for medical and health-related services for the nation's poor and most vulnerable individuals. The Affordable Care Act is changing how healthcare services in the United States are covered, delivered and reimbursed. One key provision of the ACA is the individual mandate, which requires most Americans to maintain "minimum essential" health insurance coverage. For individuals who are not exempt from the individual mandate, and who do not receive health insurance through an employer or government program, the means of satisfying the requirement is to purchase insurance from a private company or a health insurance exchange. Beginning in 2014, individuals who are enrolled in a health benefits plan purchased through an exchange may be eligible for a premium credit or cost-sharing subsidy. Recently, two federal appeals court panels issued conflicting rulings on whether the government could subsidize health insurance premiums under the ACA; pending further review of the issue by the courts, the government has stated that it will continue paying the subsidies to insurance companies on behalf of consumers in the 36 states that use the federal exchange. Also beginning in 2014, those who do not comply with the individual mandate must make a "shared responsibility payment" to the federal government in the form of a tax penalty. The "employer mandate" provision of the ACA requires the imposition of penalties on employers having 50 or more employees who do not offer affordable health insurance coverage to those working 30 or more hours per week. In July 2013, the U.S. Treasury Department announced a one-year delay (to January 1, 2015) in the imposition of penalties and the reporting requirements of the employer mandate. On February 10, 2014, the requirements of the employer mandate were further delayed until January 1, 2016. Based on the Congressional Budget Office's most recent estimates, we do not believe that the delays in the employer mandate will have a discernible effect on insurance coverage. Another key provision of the ACA is the expansion of Medicaid coverage. Prior to the passage of the ACA, the Medicaid program offered federal funding to states to assist only limited categories of low-income individuals (including children, pregnant women, the blind and the disabled) in obtaining medical care. The ACA expanded eligibility under existing Medicaid programs to virtually all individuals under 65 years old with incomes up to 138% of the federal poverty level beginning in 2014. Under the ACA, the federal government will pay 100% of the costs of Medicaid expansion in 2014, 2015 and 2016; federal funding will be reduced to 90% over the course of the four-year period from 2017 through 2020, and it will remain at 90% for 2021 and beyond. The expansion of the Medicaid program in each state will require state legislative or regulatory action and the approval by CMS of a state Medicaid plan amendment. As of June 30, 2014, 26 states and the District of Columbia have taken action to expand Medicaid and three others are considering action to expand in the near future. We currently operate hospitals in five of the states that are expanding in 2014 and two of the states that are considering expansion. We cannot provide any assurances as to whether or when the other states in which we operate might choose to expand their Medicaid programs. We anticipate that healthcare providers will generally benefit over time from insurance coverage provisions of the ACA; however, the ACA also contains a number of provisions designed to significantly reduce Medicare and Medicaid program spending, including: (1) negative adjustments to the annual market basket updates for Medicare inpatient, outpatient, long-term acute and inpatient rehabilitation prospective payment systems, which began in 2010, as well as additional "productivity adjustments" that began in 2011; and (2) reductions to Medicare and Medicaid DSH payments beginning, with respect to Medicare payments, in federal fiscal year ("FFY") 2014 and, with respect to Medicaid payments, in FFY 2017, as the number of uninsured individuals declines. We are unable to predict the net effect of the ACA on our future revenues and operations at this time due to uncertainty regarding the ultimate number of uninsured patients who will obtain insurance coverage, uncertainty regarding future negotiations with payers, uncertainty regarding Medicaid expansion, and gradual and, in some cases, delayed implementation. Furthermore, we are unable to predict the outcome of legal challenges to certain provisions (including the provisions regarding subsidies) of the ACA, what action, if any, Congress might take with respect to the ACA or the actions individual states might take with respect to expanding Medicaid coverage. For a discussion of the risks and uncertainties associated with the Affordable Care Act, including the future course of related legislation and regulations, see Item 1A, Risk Factors, of Part I of our Annual Report. The Medicare and Medicaid programs are also subject to statutory and regulatory changes, administrative and judicial rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities. We are unable to predict the effect of future government healthcare funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, or if we or one or more of our subsidiaries' hospitals are excluded from participation in the Medicare or Medicaid program or any other government healthcare program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows. 29 --------------------------------------------------------------------------------

Table of Contents MedicareMedicare offers its beneficiaries different ways to obtain their medical benefits. One option, the Original Medicare Plan (which includes "Part A" and "Part B"), is a fee-for-service payment system. The other option, called Medicare Advantage (sometimes called "Part C" or "MA Plans"), includes health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), private fee-for-service Medicare special needs plans and Medicare medical savings account plans. The major components of our net patient revenues, including our general hospitals and other operations, for services provided to patients enrolled in the Original Medicare Plan for the three and six months ended June 30, 2014 and 2013 are set forth in the following table: Three Months Ended Six Months Ended June 30, June 30, Revenue Descriptions 2014(1) 2013 2014(1) 2013 Medicare severity-adjusted diagnosis-related group - operating $ 404$ 264$ 841$ 555Medicare severity-adjusted diagnosis-related group - capital 37 23 77 48 Outliers 16 11 36 25 Outpatient 246 134 476 270 Disproportionate share 95 52 191 106 Direct Graduate and Indirect Medical Education(2) 67 27 131 52 Other(3) 21 (4 ) 25 13 Adjustments for prior-year cost reports and related valuation allowances 18 15



19 16 Total Medicare net patient revenues $ 904$ 522$ 1,796$ 1,085

-------------------------------------------------------------------------------- (1) Includes revenues related to the 28 hospitals we acquired from Vanguard on October 1, 2013, as well as Texas Regional Medical Center and Resolute Health Hospital.



(2) Includes Indirect Medical Education revenues earned by our children's hospitals under the Children's Hospitals Graduate Medical Education Payment Program administered by the Health Resources and Services Administration of HHS.

(3) The other revenue category includes inpatient psychiatric units, inpatient rehabilitation units, one long-term acute care hospital, other revenue adjustments, and adjustments related to the estimates for current-year cost reports and related valuation allowances.

A general description of the types of payments we receive for services provided to patients enrolled in the Original Medicare Plan is provided in our Annual Report. Recent regulatory and legislative updates to the terms of these payment systems and their estimated effect on our revenues can be found under "Regulatory and Legislative Changes" below.



Disproportionate Share Hospital Payments

As previously disclosed, the statutes and regulations that govern Medicare DSH payments have been the subject of various administrative appeals and lawsuits, and our hospitals have been participating in such appeals, including challenges to the inclusion of the Medicare Advantage days used in the DSH calculation as set forth in the Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates ("FFY 2005 Final Rule"). During the three months ended December 31, 2012, the federal district court in the District of Columbia ruled in Allina Health Services v. Sebelius that the Secretary of HHS ("Secretary") failed to follow the Administrative Procedures Act when promulgating the regulation requiring the inclusion of the Medicare Advantage days in the DSH calculation. The court vacated the regulation and remanded the matter to the Secretary to recalculate the DSH reimbursement without using the interpretation set forth in the FFY 2005 Final Rule. The Secretary appealed the district court's decision to the U.S. Court of Appeals for the D.C. Circuit ("Circuit Court"). On April 1, 2014, the Circuit Court: (1) affirmed the district court's order to vacate the regulation; (2) reversed the district court's order regarding the manner in which the reimbursement should be calculated; and (3) remanded the matter to HHS. During the three months ended June 30, 2014, the Secretary announced that HHS would not seek a rehearing at the Circuit Court or petition the U.S. Supreme Court to review the Circuit Court's decision. We are not able to predict what action the Secretary might take with respect to the DSH calculation; however, a favorable outcome of our DSH appeals could have a material impact on our future revenues and cash flows. MedicaidMedicaid programs and the corresponding reimbursement methodologies are administered by the states and vary from state to state and from year to year. Estimated revenues under various state Medicaid programs, including state-funded managed care Medicaid programs, constituted approximately 16.9% and 15.7% of net patient revenues before provision for doubtful accounts at our continuing general hospitals for the six months ended June 30, 2014 and 2013, respectively. We also receive DSH payments under various state Medicaid programs. For the six months ended June 30, 2014 and 2013, our revenues attributable to DSH payments and other state-funded subsidy payments for our continuing operations were approximately $311 million and $186 million, respectively. 30 --------------------------------------------------------------------------------



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Several states in which we operate continue to face budgetary challenges due to the slow economic recovery and other factors that have resulted, and likely will continue to result, in reduced Medicaid funding levels to hospitals and other providers. Because most states must operate with balanced budgets, and the Medicaid program is generally a significant portion of a state's budget, states can be expected to adopt or consider adopting future legislation designed to reduce their Medicaid expenditures. In addition, some states delay issuing Medicaid payments to providers to manage state expenditures. As an alternative means of funding provider payments, many of the states in which we operate have adopted broad-based provider taxes to fund the non-federal share of Medicaid programs. Continuing pressure on state budgets and other factors could result in future reductions to Medicaid payments, payment delays or additional taxes on hospitals. Because we cannot predict what actions the federal government or the states may take under existing legislation and future legislation to address budget gaps, deficits, Medicaid expansion or Medicaid section 1115 waivers, we are unable to assess the effect that any such legislation might have on our business, but the impact on our future financial position, results of operations or cash flows could be material. Medicaid-related patient revenues recognized by our continuing general hospitals from Medicaid-related programs in the states in which they are located, as well as from Medicaid programs in neighboring states, for the six months ended June 30, 2014 and 2013 are set forth in the table below: Six Months Ended June 30, 2014(1) 2013 Managed Managed Hospital Location Medicaid Medicaid Medicaid Medicaid Michigan $ 166$ 125 $ - $ - Texas 135 110 53 61 Florida 92 36 86 31 California 70 107 136 84 Illinois 44 15 - - Georgia 41 17 40 16 Pennsylvania 38 94 36 96 Missouri 32 3 32 3 Massachusetts 17 23 - - North Carolina 14 3 16 2 South Carolina 8 16 13 12 Alabama 6 - 7 - Arizona 6 56 - - Tennessee 3 13 5 14 $ 672$ 618$ 424$ 319

-------------------------------------------------------------------------------- (1) Includes revenues related to the 28 hospitals we acquired from Vanguard on October 1, 2013, as well as Texas Regional Medical Center and Resolute Health Hospital.



Regulatory and Legislative Changes

Material updates to the information set forth in our Annual Report about the Medicare and Medicaid payment systems are provided below.

Proposed Payment and Policy Changes to the Medicare Inpatient Prospective Payment Systems

Under Medicare law, CMS is required to annually update certain rules governing the inpatient prospective payment systems ("IPPS"). The updates generally become effective October 1, the beginning of the federal fiscal year. On April 30, 2014, CMS issued Proposed Changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2015 Rates ("Proposed IPPS Rule"). The Proposed IPPS Rule includes the following proposed payment and policy changes: A market basket increase of 2.7% for Medicare severity-adjusted diagnosis-related group ("MS-DRG") operating payments for hospitals reporting specified quality measure data and that are meaningful users of EHR technology (hospitals that do not report specified quality measure data and/or are not meaningful users of EHR technology would receive a reduced market basket increase); CMS is also proposing certain adjustments to the estimated 2.7% market basket increase that result in a net market basket update of 1.3% (before budget neutrality adjustments), including:



Market basket index and multifactor productivity reductions required by the ACA of 0.2% and 0.4%, respectively; and

A documentation and coding recoupment reduction of 0.8% as part of the recoupment required by the American Taxpayer Relief Act of 2012;

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Updates to the factors used to determine the amount and distribution of Medicare uncompensated care disproportionate share ("UC-DSH") payments;

Implementation of a 1% payment decrease for hospitals that rank in the top 25% of CMS' measurement of hospital acquired conditions;

Updates to the Core Based Statistical Areas that affect the wage index used to adjust MS-DRG payments for geographic differences;

A 0.86% net increase in the capital federal MS-DRG rate; and An increase in the cost outlier threshold from $21,748 to $25,799. CMS projects that the combined impact of the payment and policy changes in the Proposed IPPS Rule will yield an average 0.9% decrease in payments for hospitals in large urban areas (populations over one million). Using the impact percentages in the Proposed IPPS Rule as applied to our IPPS payments for the nine months ended June 30, 2014, the estimated annual impact for all changes in the Proposed IPPS Rule on our hospitals is a decrease in our Medicare inpatient revenues of approximately $21 million, most of which is related to an expected decrease in UC-DSH reimbursement. Because of the uncertainty regarding the proposals and other factors that may influence our future IPPS payments by individual hospital, including admission volumes, length of stay and case mix, we cannot provide any assurances regarding our estimate.



Payment and Policy Changes to the Medicare Inpatient Psychiatric Facility Prospective Payment System

On July 31, 2014, CMS issued a final rule updating Medicare payment policies and rates for the Medicare inpatient psychiatric facility ("IPF") prospective payment system for FFY 2015 ("IPF-PPS Final Rule"). The IPF-PPS Final Rule includes the following payment and policy change for IPFs:

A net payment increase for IPFs of 2.1%, which reflects a market basket increase of 2.9% reduced by market basket index and multifactor productivity adjustments required by the ACA of 0.3% and 0.5%, respectively; and

A decrease in the outlier fixed-dollar loss threshold from $10,245 to $8,755.

At June 30, 2014, 21 of our general hospitals operated IPF units. CMS projects that the payment changes in the IPF-PPS Final Rule will result in an estimated total increase in aggregate IPF payments of 2.5%, which includes an average 2.7% increase for IPF units in hospitals located in urban areas for FFY 2015. Using the urban IPF unit impact percentage as applied to our Medicare IPF payments for the nine months ended June 30, 2014, the annual impact of the payment and policy changes in the IPF-PPS Final Rule may result in an estimated increase in our Medicare revenues of approximately $1 million. Because of the uncertainty associated with various factors that may influence our future IPF payments, including legislative action, admission volumes, length of stay and case mix, we cannot provide any assurances regarding our estimate of the impact of these changes.



Payment and Policy Changes to the Medicare Inpatient Rehabilitation Facility Prospective Payment System

On July 31, 2014, CMS issued a final rule updating Medicare payment policies and rates for the Medicare inpatient rehabilitation facility ("IRF") prospective payment system for FFY 2015 ("IRF-PPS Final Rule"). The IRF-PPS Final Rule includes the following payment and policy changes for IRFs:



A net payment increase for IRFs of 2.2%, which reflects a market basket increase of 2.9% reduced by market basket index and multifactor productivity adjustments required by the ACA of 0.2% and 0.5%, respectively; and

An additional 0.2% aggregate payment increase due to updated outlier threshold results.

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At June 30, 2014, we operated one freestanding IRF, and 14 of our general hospitals operated IRF units. CMS projects that the payment changes in the IRF-PPS Final Rule will result in an estimated total increase in aggregate IRF payments of 2.4%, which includes an average 2.2% increase for freestanding IRFs, and an average 2.6% increase for IRF units in hospitals located in urban areas for FFY 2015. Using the applicable freestanding and urban IRF unit impact percentages as applied to our Medicare IRF payments for the nine months ended June 30, 2014, the annual impact of the payment and policy changes in the IRF-PPS Final Rule may result in an estimated increase in our Medicare revenues of approximately $1 million. Because of the uncertainty associated with various factors that may influence our future IRF payments, including legislative action, admission volumes, length of stay and case mix, and the impact of compliance with admission criteria, we cannot provide any assurances regarding our estimate of the impact of these changes.



Proposed Payment and Policy Changes to the Medicare Outpatient Prospective Payment System

On July 3, 2014, CMS released the Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems proposed changes for calendar year 2015 ("Proposed OPPS Rule"). The Proposed OPPS Rule includes the following proposed payment and policy changes: An estimated market basket increase of 2.7%, minus market basket index and multifactor productivity reductions required by the ACA of 0.2% and 0.4%, respectively; and



An expansion of the items and services that are packaged into the outpatient prospective payment system ("OPPS") payments.

CMS projects that the combined impact of the payment and policy changes in the Proposed OPPS Rule will yield an average 2.2% increase in OPPS payments for all hospitals and an average 2.3% increase in OPPS payments for hospitals in large urban areas (populations over one million). According to CMS' estimates, the projected annual impact of the payment and policy changes in the Proposed OPPS Rule on our hospitals is a $14 million increase in Medicare outpatient revenues. Because of the uncertainty associated with the proposals, and the other factors that may influence our future OPPS payments by individual hospital, including legislative action, patient volumes and case mix, we cannot provide any assurances regarding this estimate.



Proposed Payment and Policy Changes to the Medicare Physician Fee Schedule

On July 3, 2014, CMS released the proposed update to the Medicare Physician Fee Schedule ("MPFS"). The MPFS is the schedule of rates Medicare pays for physician and other professional services and is updated annually. The MPFS update is determined by the "sustainable growth rate" ("SGR") formula in accordance with the Balanced Budget Act of 1997. The Protecting Access to Medicare Act of 2014 ("PAMA"), described below, includes a zero percent update to the 2015 MPFS through March 31, 2015. However, the SGR takes effect on April 1, 2015 unless the Congress intervenes. In March 2014 (prior to the enactment of the PAMA), CMS estimated that the MPFS SGR-based update for CY 2015 would be a reduction of 20.9%. In most prior years, Congress has taken action to avert a large reduction in MPFS rates before it went into effect. These actions have often resulted in payment reductions to other health care providers (including hospitals) to maintain budget neutrality. Although the historical pattern suggests that the Congress will override the SGR formula for the nine months commencing April 1, 2015, we cannot provide any assurances in that regard. In addition, we cannot predict the level or type of payment reductions affecting our hospitals that might be used to offset a temporary override or permanent replacement of the SGR formula.



The Protecting Access to Medicare Act of 2014

On April 1, 2014, President Obama signed into law the Protecting Access to Medicare Act of 2014. This new law prevented a scheduled payment reduction for physicians and other practitioners who treat Medicare patients from taking effect on April 1, 2014. The law includes the following provisions:

An extension of the 0.5% update for services reimbursed under



the

MPFS that applied from January 1, 2014 through March 31, 2014 for the period April 1, 2014 through December 31, 2014;

A zero percent update to the 2015 MPFS through March 31, 2015; A delay in the implementation of ICD-10 (as discussed in our Annual



Report) from October 1, 2014 until at least October 1, 2015 (based on recent CMS announcements, we expect the use of ICD-10 to begin on October 1, 2015);

An additional one-year delay of the ACA Medicaid DSH reduction to October 1, 2016 (funding of this delay will be achieved by a net increase in the FFY 2017 through 2023 ACA Medicaid DSH reductions); A one-year extension of the ACA Medicaid DSH reduction through FFY 2024; A six-month partial extension of the moratorium on



enforcement of the "two-midnight rule" (as discussed in our Annual Report) through March 31, 2015; and

Modification of the FFY 2024 Medicare sequestration consisting of a 4% increase to the sequestration reduction for the first six months of FFY 2024, and then a decrease of the reduction to zero percent for the second six months of that FFY. 33

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Table of Contents PRIVATE INSURANCE Managed Care We currently have thousands of managed care contracts with various HMOs and PPOs. HMOs generally maintain a full-service healthcare delivery network comprised of physician, hospital, pharmacy and ancillary service providers that HMO members must access through an assigned "primary care" physician. The member's care is then managed by his or her primary care physician and other network providers in accordance with the HMO's quality assurance and utilization review guidelines so that appropriate healthcare can be efficiently delivered in the most cost-effective manner. HMOs typically provide reduced benefits or reimbursement (or none at all) to their members who use non-contracted healthcare providers for non-emergency care. PPOs generally offer limited benefits to members who use non-contracted healthcare providers. PPO members who use contracted healthcare providers receive a preferred benefit, typically in the form of lower co-pays, co-insurance or deductibles. As employers and employees have demanded more choice, managed care plans have developed hybrid products that combine elements of both HMO and PPO plans, including high-deductible healthcare plans that may have limited benefits, but cost the employee less in premiums. The amount of our managed care net patient revenues during the six months ended June 30, 2014 and 2013 was $4.4 billion and $2.7 billion, respectively. Approximately 62% of our managed care net patient revenues for the six months ended June 30, 2014 was derived from our top ten managed care payers. National payers generated approximately 47% of our total net managed care revenues. The remainder comes from regional or local payers. At June 30, 2014 and December 31, 2013, approximately 61% and 58%, respectively, of our net accounts receivable related to continuing operations were due from managed care payers. Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers, which can take several years before they are completely resolved. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable contract terms. We believe it is reasonably likely for there to be an approximately 3% increase or decrease in the estimated contractual allowances related to managed care plans. Based on reserves as of June 30, 2014, a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately $13 million. Some of the factors that can contribute to changes in the contractual allowance estimates include: (1) changes in reimbursement levels for procedures, supplies and drugs when threshold levels are triggered; (2) changes in reimbursement levels when stop-loss or outlier limits are reached; (3) changes in the admission status of a patient due to physician orders subsequent to initial diagnosis or testing; (4) final coding of in-house and discharged-not-final-billed patients that change reimbursement levels; (5) secondary benefits determined after primary insurance payments; and (6) reclassification of patients among insurance plans with different coverage levels. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. Although we do not separately accumulate and disclose the aggregate amount of adjustments to the estimated reimbursement for every patient bill, we believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised. We do not believe there were any adjustments to estimates of patient bills that were material to our operating income. In addition, on a corporate-wide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans. We expect managed care governmental admissions to continue to increase as a percentage of total managed care admissions over the near term. However, the managed Medicare and Medicaid insurance plans typically generate lower yields than commercial managed care plans, which have been experiencing an improved pricing trend. Although we have had improved year-over-year managed care pricing, we expect some moderation in the pricing percentage increases in future years. It is not clear what impact, if any, the increased obligations on managed care and other payers imposed by the Affordable Care Act will have on our commercial managed care volumes and payment rates. In the six months ended June 30, 2014, our commercial managed care net inpatient revenue per admission from our acute care hospitals was approximately 74% higher than our aggregate yield on a per admission basis from governmental payers, including managed Medicare and Medicaid insurance plans. Indemnity



An indemnity-based agreement generally requires the insurer to reimburse an insured patient for healthcare expenses after those expenses have been incurred by the patient, subject to policy conditions and exclusions. Unlike an HMO member, a patient with indemnity insurance is free to control his or her utilization of healthcare and selection of healthcare providers.

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Table of Contents SELF-PAY PATIENTS Self-pay patients are patients who do not qualify for government programs payments, such as Medicare and Medicaid, do not have some form of private insurance and, therefore, are responsible for their own medical bills. A significant portion of our self-pay patients is admitted through our hospitals' emergency departments and often requires high-acuity treatment that is more costly to provide and, therefore, results in higher billings, which are the least collectible of all accounts. We believe that our level of self-pay patients has been higher in the last several years than previous periods due to a combination of broad economic factors, including increased unemployment rates, reductions in state Medicaid budgets, increasing numbers of individuals and employers who choose not to purchase insurance, and an increased burden of co-pays and deductibles to be made by patients instead of insurers. Self-pay accounts pose significant collectability problems. At June 30, 2014 and December 31, 2013, approximately 8% and 7%, respectively, of our net accounts receivable related to continuing operations were due from self-pay patients. Further, a significant portion of our provision for doubtful accounts relates to self-pay patients, as well as co-pays and deductibles owed to us by patients with insurance. We provide revenue cycle management services through our Conifer subsidiary, which has performed systematic analyses to focus our attention on the drivers of bad debt for each hospital. While emergency department use is the primary contributor to our provision for doubtful accounts in the aggregate, this is not the case at all hospitals. As a result, we have been increasing our focus on targeted initiatives that concentrate on non-emergency department patients as well. These initiatives are intended to promote process efficiencies in collecting self-pay accounts, as well as co-pay and deductible amounts owed to us by patients with insurance, that we deem highly collectible. We are dedicated to modifying and refining our processes as needed, enhancing our technology and improving staff training throughout the revenue cycle process in an effort to increase collections and reduce accounts receivable. Over the longer term, several other initiatives we have previously announced should also help address this challenge. For example, our Compact with Uninsured Patients ("Compact") is designed to offer managed care-style discounts to certain uninsured patients, which enables us to offer lower rates to those patients who historically have been charged standard gross charges. A significant portion of those charges had previously been written down in our provision for doubtful accounts. Under the Compact, the discount offered to uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the self-pay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value through provision for doubtful accounts based on historical collection trends for self-pay accounts and other factors that affect the estimation process. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), a new Consumer Financial Protection Bureau ("CFPB") was formed within the U.S. Federal Reserve to promote transparency, simplicity, fairness, accountability and equal access in the market for consumer financial products or services, including debt collection services. The Dodd-Frank Act gives significant discretion to the CFPB in establishing regulatory requirements and enforcement priorities. We believe that the CFPB regulatory and enforcement processes will have a significant impact on Conifer's operations. For additional information, see Item 1, Business - Regulations Affecting Conifer, of Part I of our Annual Report and Item 1, Legal Proceedings, in Part II of this report. Our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for our self-pay patients for the three months ended June 30, 2014 and 2013 were approximately $167 million and $122 million, respectively, and for the six months ended June 30, 2014 and 2013 were approximately $353 million and $226 million, respectively. (All 2014 amounts in this paragraph include the 28 hospitals we acquired from Vanguard on October 1, 2013, as well as Texas Regional Medical Center and Resolute Health Hospital.) We also provide charity care to patients who are financially unable to pay for the healthcare services they receive. Most patients who qualify for charity care are charged a per-diem amount for services received, subject to a cap. Except for the per-diem amounts, our policy is not to pursue collection of amounts determined to qualify as charity care; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital's eligibility for Medicaid DSH payments. Revenues attributable to DSH payments and other state-funded subsidy payments for the three months ended June 30, 2014 and 2013 were approximately $157 million and $119 million, respectively, and for the six months ended June 30, 2014 and 2013 were approximately $311 million and $186 million, respectively. These payments are intended to mitigate our cost of uncompensated care, as well as reduced Medicaid funding levels. Our estimated costs (based on 35 --------------------------------------------------------------------------------



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the selected operating expenses described above) of caring for charity care patients for the three months ended June 30, 2014 and 2013 were $55 million and $31 million, respectively, and for the six months ended June 30, 2014 and 2013 were approximately $95 million and $63 million, respectively. Generally, our method of measuring the estimated costs uses adjusted self-pay/charity patient days multiplied by selected operating expenses per adjusted patient day. The adjusted self-pay/charity patient days represents actual self-pay/charity patient days adjusted to include self-pay/charity outpatient services by multiplying actual self-pay/charity patient days by the sum of gross self-pay/charity inpatient revenues and gross self-pay/charity outpatient revenues and dividing the results by gross self-pay/charity inpatient revenues. The expansion of health insurance coverage under the Affordable Care Act may result in a material increase in the number of patients using our facilities who have either health insurance exchange or government healthcare insurance program coverage. However, because of the many variables involved, we are unable to predict with certainty the net impact on us of the expected increase in revenues and expected decrease in bad debt expense from providing care to previously uninsured and underinsured individuals, and numerous other provisions in the law that may affect us. In addition, even after implementation of the ACA, we may continue to experience a high level of bad debt expense and have to provide uninsured discounts and charity care due to the failure of states to expand Medicaid coverage under the ACA and for undocumented aliens who will not be permitted to enroll in a health insurance exchange or government healthcare insurance program. RESULTS OF OPERATIONS The following two tables summarize our net operating revenues, operating expenses and operating income from continuing operations, both in dollar amounts and as percentages of net operating revenues, for the three and six months ended June 30, 2014 and 2013: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net operating revenues: General hospitals $ 3,859$ 2,358$ 7,664$ 4,735 Other operations 503 271 1,004 488 Net operating revenues before provision for doubtful accounts 4,362 2,629 8,668 5,223 Less provision for doubtful accounts 320 207 700 414 Net operating revenues 4,042 2,422 7,968 4,809 Operating expenses: Salaries, wages and benefits 1,956 1,166 3,877 2,327 Supplies 649 387 1,277 771 Other operating expenses, net 1,035 567 2,034 1,135 Electronic health record incentives (58 ) (34 ) (67 ) (34 ) Depreciation and amortization 209 121 402 235 Impairment and restructuring charges, and acquisition-related costs 32 11 53 25 Litigation and investigation costs 12 2 15 2 Operating income $ 207$ 202$ 377$ 348 Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Salaries, wages and benefits 48.4 % 48.1 % 48.7 % 48.4 % Supplies 16.1 % 16.0 % 16.0 % 16.0 % Other operating expenses, net 25.5 % 23.4 % 25.5 % 23.6 % Electronic health record incentives (1.4 )% (1.4 )% (0.8 )% (0.7 )% Depreciation and amortization 5.2 % 5.0 % 5.0 % 4.9 % Impairment and restructuring charges, and acquisition-related costs 0.8 % 0.5 % 0.7 % 0.5 % Litigation and investigation costs 0.3 % 0.1 % 0.2 % 0.1 % Operating income 5.1 % 8.3 % 4.7 % 7.2 % Net operating revenues of our general hospitals include inpatient and outpatient revenues, as well as nonpatient revenues (rental income, management fee revenue, and income from services such as cafeterias, gift shops and parking) and other miscellaneous revenue. Net operating revenues of other operations primarily consist of revenues from (1) physician practices, (2) a long-term acute care hospital, (3) services provided by our Conifer subsidiary to third parties and (4) our health plans recently acquired from Vanguard. Revenues from our general hospitals represented approximately 88% and 90% of our total net operating revenues before provision for doubtful accounts for the three months ended June 30, 2014 and 2013, respectively, and approximately 88% and 91% for the six months ended June 30, 2014 and 2013, respectively. 36 --------------------------------------------------------------------------------



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Net operating revenues from our other operations were $503 million and $271 million in the three months ended June 30, 2014 and 2013, respectively, and $1.004 billion and $488 million in the six months ended June 30, 2014 and 2013, respectively. The increase in net operating revenues from other operations during 2014 primarily relates to revenue cycle services provided by our Conifer subsidiary, as well as revenues from our recently acquired health plans and additional physician practices. Equity earnings of unconsolidated affiliates included in our net operating revenues from other operations were $4 million and $1 million for the three months ended June 30, 2014 and 2013, respectively, and $5 million and $12 million in the six months ended June 30, 2014 and 2013, respectively. Included in 2013 equity earnings of unconsolidated affiliates is $10 million of earnings associated with stepping up our basis in a previously held investment in an ambulatory surgery center in which we acquired a controlling interest and are now consolidating. The following table shows certain selected operating statistics for our continuing operations on a total hospital basis, which includes the results of the 28 hospitals we acquired from Vanguard on October 1, 2013, Texas Regional Medical Center, in which we acquired a majority interest on June 3, 2014, and Resolute Health Hospital, which we opened on June 24, 2014, in each case only for the period of time from such acquisition or opening to June 30, 2014. We believe this information is useful to investors because it reflects our current portfolio of hospitals and the significant increase to the scale of our operations as a result of our acquisition activity. Total Hospital Continuing Operations Three Months Ended June 30, Six Months Ended June 30, Increase Increase 2014 2013 (Decrease) 2014 2013 (Decrease) Total admissions 194,641 120,722 61.2 % 388,914 246,651 57.7 % Adjusted patient admissions(1) 337,509 195,440 72.7 % 661,319 393,105 68.2 % Paying admissions (excludes charity and uninsured) 183,714 111,891 64.2 % 365,457 229,217 59.4 % Charity and uninsured admissions 10,927 8,831 23.7 % 23,457 17,434 34.5 % Admissions through emergency department 122,086 75,608 61.5 % 244,687 155,816 57.0 % Emergency department visits 702,009 399,702 75.6 % 1,367,011 801,780 70.5 % Total emergency department admissions and visits 824,095 475,310 73.4 % 1,611,698 957,596 68.3 % Surgeries - inpatient 53,271 34,340 55.1 % 104,847 67,544 55.2 % Surgeries - outpatient 120,393 74,329 62.0 % 231,099 142,538 62.1 % Total surgeries 173,664 108,669 59.8 % 335,946 210,082 59.9 % Patient days - total 907,093 567,390 59.9 % 1,836,257 1,170,675 56.9 % Adjusted patient days(1) 1,563,681 909,720 71.9 % 3,089,060 1,849,560 67.0 % Average length of stay (days) 4.66 4.70 (0.9 )% 4.72 4.75 (0.6 )% Average licensed beds 20,370 13,180 54.6 % 20,313 13,180 54.1 % Utilization of licensed beds(2) 48.9 % 47.3 % 1.6 %(3) 49.9 % 49.1 % 0.8 %(3) Total visits 2,066,051 1,072,712 92.6 % 4,013,738 2,127,501 88.7 % Paying visits (excludes charity and uninsured) 1,896,285 958,379 97.9 % 3,678,724 1,902,928 93.3 % Charity and uninsured visits 169,766 114,333 48.5 % 335,014 224,573 49.2 % Net inpatient revenues $ 2,393$ 1,542 55.2 % $ 4,833$ 3,078 57.0 % Net outpatient revenues $ 1,448$ 844 71.6 % $ 2,794$ 1,657 68.6 % Net inpatient revenue per admission $ 12,294$ 12,773 (3.8 )% $ 12,427$ 12,479 (0.4 )% Net inpatient revenue per patient day $ 2,638$ 2,718 (2.9 )% $ 2,632$ 2,629 0.1 % Net outpatient revenue per visit $ 701$ 787 (10.9 )% $ 696$ 779 (10.7 )% Net patient revenue per adjusted patient admission(1) $ 11,380$ 12,208 (6.8 )% $ 11,533$ 12,045 (4.3 )% Net patient revenue per adjusted patient day(1) $ 2,456$ 2,623 (6.4 )% $ 2,469$ 2,560 (3.6 )%

-------------------------------------------------------------------------------- (1) Adjusted patient admissions/days represents actual patient admissions/days adjusted to include outpatient services by multiplying actual patient admissions/days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.



(2) Utilization of licensed beds represents patient days divided by number of days in the period divided by average licensed beds.

(3) The change is the difference between the 2014 and 2013 amounts shown.

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The tables below show certain selected historical operating statistics of our continuing hospitals on a same-hospital basis, where noted, excluding the results of the 28 hospitals we acquired from Vanguard on October 1, 2013, Texas Regional Medical Center, in which we acquired a majority interest on June 3, 2014, and Resolute Health Hospital, which we opened on June 24, 2014: Same-Hospital Continuing Operations Three Months Ended June 30, Six Months Ended June 30, Increase Increase



Admissions, Patient Days and Surgeries 2014 2013 (Decrease) 2014 2013 (Decrease) Total admissions

124,720 120,722 3.3 % 249,171 246,651 1.0 % Adjusted patient admissions(1) 204,637 195,440 4.7 % 401,492 393,105 2.1 % Paying admissions (excludes charity and uninsured) 116,801 111,891 4.4 % 232,865 229,217 1.6 % Charity and uninsured admissions 7,919 8,831



(10.3 )% 16,306 17,434 (6.5 )% Admissions through emergency department

80,529 75,608 6.5 % 161,439 155,816 3.6 % Paying admissions as a percentage of total admissions 93.7 % 92.7 %



1.0 %(2) 93.5 % 92.9 % 0.6 %(2) Charity and uninsured admissions as a percentage of total admissions

6.3 % 7.3 %



(1.0 )%(2) 6.5 % 7.1 % (0.6 )%(2) Emergency department admissions as a percentage of total admissions

64.6 % 62.6 % 2.0 %(2) 64.8 % 63.2 % 1.6 %(2) Surgeries - inpatient 34,369 34,340 0.1 % 67,898 67,544 0.5 % Surgeries - outpatient 89,783 74,329 20.8 % 170,988 142,538 20.0 % Total surgeries 124,152 108,669 14.2 % 238,886 210,082 13.7 % Patient days - total 584,251 567,390 3.0 % 1,189,293 1,170,675 1.6 % Adjusted patient days(1) 948,144 909,720 4.2 % 1,897,547 1,849,560 2.6 % Average length of stay (days) 4.68 4.70 (0.4 )% 4.77 4.75 0.4 % Number of acute care hospitals (at end of period) 49 49 - 49 49 - Licensed beds (at end of period) 13,231 13,180 0.4 % 13,231 13,180 0.4 % Average licensed beds 13,196 13,180 0.1 % 13,187 13,180 0.1 % Utilization of licensed beds(3) 48.7 % 47.3 % 1.4 %(2) 49.8 % 49.1 % 0.7 %(2)

-------------------------------------------------------------------------------- (1) Adjusted patient admissions/days represents actual patient admissions/days adjusted to include outpatient services by multiplying actual patient admissions/days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.



(2) The change is the difference between 2014 and 2013 amounts shown.

(3) Utilization of licensed beds represents patient days divided by number of days in the period divided by average licensed beds.

Same-Hospital Continuing Operations Three Months Ended June 30, Six Months Ended June 30, Increase Increase Outpatient Visits 2014 2013 (Decrease) 2014 2013 (Decrease) Total visits 1,140,595 1,072,712 6.3 % 2,221,269 2,127,501 4.4 % Paying visits (excludes charity and uninsured) 1,031,920 958,379 7.7 % 2,000,737 1,902,928 5.1 % Charity and uninsured visits 108,675 114,333 (4.9 )% 220,532 224,573 (1.8 )% Emergency department visits 432,858 399,702 8.3 % 847,051 801,780 5.6 % Surgery visits 89,783 74,329 20.8 % 170,988 142,538 20.0 % Paying visits as a percentage of total visits 90.5 % 89.3 % 1.2 %(1) 90.1 % 89.4 % 0.7 %(1) Charity and uninsured visits as a percentage of total visits 9.5 % 10.7 % (1.2 )%(1) 9.9 % 10.6 % (0.7 )%(1)



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(1) The change is the difference between 2014 and 2013 amounts shown. 38

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Table of Contents Same-Hospital Continuing Operations Three Months Ended June 30, Six Months Ended June 30, Increase Increase Revenues 2014 2013 (Decrease) 2014 2013 (Decrease) Net operating revenues $ 2,578$ 2,422 6.4 % $ 5,091$ 4,809 5.9 % Revenues from the uninsured $ 147$ 170 (13.5 )% $ 317$ 335 (5.4 )% Net inpatient revenues(1) $ 1,540$ 1,542 (0.1 )% $ 3,109$ 3,078 1.0 % Net outpatient revenues(1) $ 927$ 844 9.8 % $ 1,786$ 1,657 7.8 %

-------------------------------------------------------------------------------- (1) Net inpatient revenues and net outpatient revenues are components of net operating revenues. Net inpatient revenues include self-pay revenues of $52 million and $69 million for the three months ended June 30, 2014 and 2013, respectively, and $125 million and $139 million for the six months ended June 30, 2014 and 2013, respectively. Net outpatient revenues include self-pay revenues of $95 million and $101 million for the three months ended June 30, 2014 and 2013, respectively, and $192 million and $196 million for the six months ended June 30, 2014 and 2013, respectively. Same-Hospital Continuing Operations Three Months Ended June 30, Six Months Ended June 30, Revenues on a Per Admission, Per Patient Day Increase Increase and Per Visit Basis 2014 2013



(Decrease) 2014 2013 (Decrease) Net inpatient revenue per admission

$ 12,348$ 12,773 (3.3 )% $ 12,477$ 12,479 - % Net inpatient revenue per patient day $ 2,636$ 2,718



(3.0 )% $ 2,614$ 2,629 (0.6 )% Net outpatient revenue per visit

$ 813$ 787 3.3 % $ 804$ 779 3.2 % Net patient revenue per adjusted patient admission(1) $ 12,055$ 12,208 (1.3 )% $ 12,192$ 12,045 1.2 % Net patient revenue per adjusted patient day(1) $ 2,602$ 2,623 (0.8 )% $ 2,580$ 2,560 0.8 %

-------------------------------------------------------------------------------- (1) Adjusted patient admissions/days represents actual patient admissions/days adjusted to include outpatient services by multiplying actual patient admissions/days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues. Same-Hospital Continuing Operations Three Months Ended June 30,



Six Months Ended June 30,

Increase Increase



Provision for Doubtful Accounts 2014 2013 (Decrease)

2014 2013 (Decrease) Provision for doubtful accounts $ 209$ 207 1.0 % $ 438$ 414 5.8 % Provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts 7.5 % 7.9 % (0.4 )%(1) 7.9 % 7.9 % - %(1) Collection rate on self-pay accounts(2) 27.8 % 28.7 % (0.9 )%(1) 27.8 % 28.7 % (0.9 )%(1) Collection rate on commercial managed care accounts 98.3 % 98.2 % 0.1 %(1) 98.3 % 98.2 % 0.1 %(1)



--------------------------------------------------------------------------------

(1) The change is the difference between the 2014 and 2013 amounts shown.

(2) Self-pay accounts receivable are comprised of both uninsured and balance after insurance receivables.

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Table of Contents Same-Hospital Continuing Operations Three Months Ended June 30, Six Months Ended June 30, Increase Increase Selected Operating Expenses 2014 2013 (Decrease) 2014 2013 (Decrease) Hospital Operations and other Salaries, wages and benefits $ 1,103$ 1,026 7.5 % $ 2,180$ 2,060 5.8 % Supplies 413 387 6.7 % 816 771 5.8 % Other operating expenses 601 514 16.9 % 1,153 1,032 11.7 % Total $ 2,117$ 1,927 9.9 % $ 4,149$ 3,863 7.4 % Conifer Salaries, wages and benefits $ 178$ 140 27.1 % $ 349$ 267 30.7 % Other operating expenses 63 53 18.9 % 129 103 25.2 % Total $ 241$ 193 24.9 % $ 478$ 370 29.2 % Total Salaries, wages and benefits $ 1,281$ 1,166 9.9 % $ 2,529$ 2,327 8.7 % Supplies 413 387 6.7 % 816 771 5.8 % Other operating expenses 664 567 17.1 % 1,282 1,135 13.0 % Total $ 2,358$ 2,120 11.2 % $ 4,627$ 4,233 9.3 % Rent/lease expense(1) Hospital Operations and other $ 35$ 39 (10.3 )% $ 68$ 77 (11.7 )% Conifer 5 3 66.7 % 11 7 57.1 % Total $ 40$ 42 (4.8 )% $ 79$ 84 (6.0 )% Hospital Operations and other(2) Salaries, wages and benefits per adjusted patient day $ 1,161$ 1,128 2.9 % $ 1,147$ 1,114 3.0 % Supplies per adjusted patient day 436 425 2.6 % 430 417 3.1 % Other operating expenses per adjusted patient day 615 565 8.8 % 589 558 5.6 % Total per adjusted patient day $ 2,212$ 2,118 4.4 % $ 2,166$ 2,089 3.7 % Salaries, wages and benefits per adjusted patient admission $ 5,380$ 5,250 2.5 % $ 5,420$ 5,240 3.4 % Supplies per adjusted patient admission 2,018 1,980 1.9 % 2,032 1,961 3.6 % Other operating expenses per adjusted patient admission 2,849 2,630 8.3 % 2,787 2,626 6.1 % Total per adjusted patient admission $ 10,247$ 9,860 3.9 % $ 10,239$ 9,827 4.2 %



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(1) Included in other operating expenses.

(2) Adjusted patient days/admissions represents actual patient days/admissions adjusted to include outpatient services by multiplying actual patient days/admissions by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues. These metrics exclude the expenses related to the provider network based in Southern California that includes contracted independent physicians, ancillary providers and hospitals, which we acquired during the three months ended September 30, 2013.



THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO THREE MONTHS ENDED JUNE 30, 2013

Revenues During the three months ended June 30, 2014, same-hospital net operating revenues after provision for doubtful accounts increased 6.4% compared to the three months ended June 30, 2013, primarily due to improved terms of our managed care contracts, higher inpatient and outpatient volumes, and an increase in our other operations revenues. Our same-hospital net outpatient revenues and total outpatient visits increased 9.8% and 6.3%, respectively, during the three months ended June 30, 2014 compared to the same period in 2013. Outpatient revenues and volume growth was primarily driven by improved terms of our managed care contracts, increased outpatient volume levels and our outpatient acquisition program. Net outpatient revenue per visit increased 3.3% primarily due to the improved terms of our managed care contracts. Our Conifer subsidiary generated net operating revenues of $285 million and $219 million for the three months ended June 30, 2014 and 2013, respectively, a portion of which was eliminated in consolidation as described in Note 15 to the Condensed Consolidated Financial Statements. The increase in the portion that was not eliminated in consolidation is primarily due to new clients and expanded service offerings. 40

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Same-hospital patient days increased by 3.0% during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. We believe our volumes were positively impacted by incremental market share as a result of improved physician alignment and service line expansion, insurance coverage for a greater number of individuals as a result of the Affordable Care Act, and a strengthening economy. We believe our growth in inpatient volume levels continues to be constrained by an increase in patients with high-deductible health insurance plans and industry trends reflecting the shift of certain clinical procedures being performed in an outpatient setting rather than in an inpatient setting.



Provision for Doubtful Accounts

The provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts was 7.5% for the three months ended June 30, 2014 compared to 7.9% for the three months ended June 30, 2013. The decrease in the provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts primarily related to the decrease in uninsured patient revenues, partially offset by the 90 basis point decrease in our self-pay collection rate, as well as higher patient co-pays and deductibles. The table below shows the net accounts receivable and allowance for doubtful accounts by payer at June 30, 2014 and December 31, 2013: June 30, 2014 December 31, 2013 Accounts Accounts Receivable Receivable Before Before Allowance Allowance Allowance Allowance for Doubtful for Doubtful for Doubtful for Doubtful Accounts Accounts Net Accounts Accounts Net Medicare $ 353 $ - $ 353 $ 309 $ - $ 309 Medicaid 157 - 157 141 - 141 Net cost report settlements payable and valuation allowances (118 ) - (118 ) (77 ) - (77 ) Managed care 1,403 80 1,323 1,240 69 1,171 Self-pay uninsured 516 429 87 344 290 54 Self-pay balance after insurance 221 135 86 224 141 83 Estimated future recoveries from accounts assigned to our Conifer subsidiary 90 - 90 91 - 91 Other payers 299 109 190 279 89 190 Total continuing operations 2,921 753 2,168 2,551 589 1,962 Total discontinued operations 3 - 3 3 - 3 $ 2,924 $ 753 $ 2,171$ 2,554 $ 589 $ 1,965 We provide revenue cycle management and patient communications services, among others, through our Conifer subsidiary, which has performed systematic analyses to focus our attention on the drivers of bad debt for each hospital. While emergency department use is the primary contributor to our provision for doubtful accounts in the aggregate, this is not the case at all hospitals. As a result, we have increased our focus on targeted initiatives that concentrate on non-emergency department patients as well. These initiatives are intended to promote process efficiencies in collecting self-pay accounts, as well as co-pay and deductible amounts owed to us by patients with insurance, that we deem highly collectible. We are dedicated to modifying and refining our processes as needed, enhancing our technology, and improving staff training throughout the revenue cycle process in an effort to increase collections and reduce accounts receivable. A significant portion of our provision for doubtful accounts relates to self-pay patients, as well as co-pays and deductibles owed to us by patients with insurance. Collection of accounts receivable has been a key area of focus, particularly over the past several years, as we have experienced adverse changes in our business mix. At June 30, 2014, our same-hospital collection rate on self-pay accounts was approximately 27.8%. Our recent same-hospital self-pay collection rates were as follows: 28.8% at March 31, 2013; 28.7% at June 30, 2013; 28.8% at September 30, 2013; 28.7% at December 31, 2013; and 28.1% at March 31, 2014. These self-pay collection rates include payments made by patients, including co-pays and deductibles paid by patients with insurance. Based on our accounts receivable from self-pay patients and co-pays and deductibles owed to us by patients with insurance at June 30, 2014, a 10% decrease or increase in our self-pay collection rate, or approximately 3%, which we believe could be a reasonably likely change, would result in an unfavorable or favorable adjustment to provision for doubtful accounts of approximately $11 million. 41

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Payment pressure from managed care payers also affects our provision for doubtful accounts. We typically experience ongoing managed care payment delays and disputes; however, we continue to work with these payers to obtain adequate and timely reimbursement for our services. Our estimated same-hospital collection rate from managed care payers was approximately 98.3% at both June 30, 2014 and December 31, 2013. Conifer continues to focus on revenue cycle initiatives to improve our cash flow. These initiatives are focused on standardizing and improving patient access processes, including pre-registration, registration, verification of eligibility and benefits, liability identification and collection at point-of-service, and financial counseling. The goals of the effort are focused on reducing denials, improving service levels to patients and increasing the quality of accounts that end up in accounts receivable. Although we continue to focus on improving our methodology for evaluating the collectability of our accounts receivable, we may incur future charges if there are unfavorable changes in the trends affecting the net realizable value of our accounts receivable. We manage our provision for doubtful accounts using hospital-specific goals and benchmarks such as (1) total cash collections, (2) point-of-service cash collections, (3) accounts receivable days outstanding ("AR Days"), and (4) accounts receivable by aging category. The following tables present the approximate aging by payer of our net accounts receivable from continuing operations of $2.286 billion and $2.039 billion at June 30, 2014 and December 31, 2013, respectively, excluding cost report settlements payable and valuation allowances of $118 million and $77 million at June 30, 2014 and December 31, 2013, respectively: June 30, 2014 Indemnity, Managed Self-Pay Medicare Medicaid Care and Other Total 0-60 days 80 % 51 % 66 % 28 % 61 % 61-120 days 8 % 18 % 15 % 21 % 15 % 121-180 days 5 % 10 % 6 % 12 % 7 % Over 180 days 7 % 21 % 13 % 39 % 17 % Total 100 % 100 % 100 % 100 % 100 % December 31, 2013 Indemnity, Managed Self-Pay Medicare Medicaid Care and Other Total 0-60 days 76 % 58 % 73 % 32 % 65 % 61-120 days 9 % 21 % 13 % 17 % 14 % 121-180 days 4 % 9 % 5 % 7 % 6 % Over 180 days 11 % 12 % 9 % 44 % 15 % Total 100 % 100 % 100 % 100 % 100 % Our AR Days from continuing operations were 48.9 days at June 30, 2014 and 46.5 days at December 31, 2013, within our target of less than 55 days. AR Days are calculated as our accounts receivable from continuing operations on the last date in the quarter divided by our net operating revenues from continuing operations for the quarter ended on that date divided by the number of days in the quarter. As of June 30, 2014, we had a cumulative total of patient account assignments to our Conifer subsidiary dating back at least three years or older of approximately $3.0 billion related to our continuing operations, but excluding our newly acquired hospitals. These accounts have already been written off and are not included in our receivables or in the allowance for doubtful accounts; however, an estimate of future recoveries from all the accounts assigned to our Conifer subsidiary is determined based on our historical experience and recorded in accounts receivable. Patient advocates from Conifer's Medicaid Eligibility Program ("MEP") screen patients in the hospital to determine whether those patients meet eligibility requirements for financial assistance programs. They also expedite the process of applying for these government programs. Receivables from patients who are potentially eligible for Medicaid are classified as Medicaid pending, under the MEP, with appropriate contractual allowances recorded. At the present time, our new acquisitions are beginning to implement this program. Based on recent trends, approximately 94% of all accounts in the MEP are ultimately approved for benefits under a government program, such as Medicaid. The following table shows the approximate amount of accounts receivable in the MEP still awaiting determination of eligibility under a government program at June 30, 2014 and December 31, 2013 by aging category on a same-hospital basis: 42 --------------------------------------------------------------------------------

Table of Contents June 30, December 31, 2014 2013 0-60 days $ 84 $ 132 61-120 days 25 28 121-180 days 10 8 Over 180 days 19 18 Total $ 138 $ 186 Salaries, Wages and Benefits Salaries, wages and benefits expense as a percentage of net operating revenues increased 0.3% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Same-hospital salaries, wages and benefits per adjusted patient admission for our hospital operations and other segment increased by approximately 2.5% in the three months ended June 30, 2014 compared to the same period in 2013. This change is primarily due to a greater number of employed physicians, annual merit increases for certain of our employees, increased incentive compensation expense, an increase in the 401(k) plan maximum matching percentage for certain employee populations and increased health benefits costs. Salaries, wages and benefits expense for the three months ended June 30, 2014 and 2013 included stock-based compensation expense of $14 million and $9 million, respectively. Salaries, wages and benefits expense for Conifer increased by $38 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 due to an increase in employee headcount as a result of the growth in Conifer's business primarily attributable to the integration of the Vanguard facilities' revenue cycle operations now managed by Conifer. As of June 30, 2014, approximately 20% of our employees were represented by labor unions. These employees - primarily registered nurses and service and maintenance workers - are located at 39 of our hospitals, the majority of which are in California, Florida and Michigan. We currently have four expired contracts and are negotiating renewals under extension agreements. We are also negotiating a first contract at one of our hospitals where employees selected union representation. At this time, we are unable to predict the outcome of the negotiations, but increases in salaries, wages and benefits could result from these agreements. Furthermore, there is a possibility that strikes could occur during the negotiation process, which could increase our labor costs and have an adverse effect on our patient admissions and net operating revenues. Future organizing activities by labor unions could increase our level of union representation in 2014. Supplies Supplies expense as a percentage of net operating revenues increased 0.1% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Same-hospital supplies expense per adjusted patient admission for our hospital operations and other segment increased by 1.9% in the three months ended June 30, 2014 compared to the same period in 2013. The change in supplies expense per adjusted patient admission was primarily attributable to higher costs for pharmaceuticals and volume growth in our supply-intensive surgical services. We strive to control supplies expense through product standardization, contract compliance, improved utilization, bulk purchases and operational improvements. The items of current cost reduction focus continue to be cardiac stents and pacemakers, orthopedics and implants, and high-cost pharmaceuticals. We also utilize group-purchasing strategies and supplies-management services in an effort to reduce costs.



Other Operating Expenses, Net

Other operating expenses as a percentage of net operating revenues was 25.5% in the three months ended June 30, 2014 compared to 23.4% in the three months ended June 30, 2013. Same-hospital other operating expenses per adjusted patient admission for our hospital operations and other segment increased by 8.3% in the three months ended June 30, 2014 compared to the same period in 2013. The 16.9% increase in same-hospital other operating expenses in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 is primarily due to: increased costs of contracted services ($8 million); higher medical fees primarily related to a greater number of



employed and contracted physicians ($19 million); and

increased malpractice expense ($31 million). Malpractice expense in the three months ended June 30, 2014 included isolated unfavorable case reserve adjustments related to a small number of claims, as well as an unfavorable adjustment of approximately $1 million due to a 17 basis point decrease in the interest rate used to estimate the discounted present value of projected future malpractice liabilities compared to favorable adjustment of approximately $6 million as a result of a 72 basis point increase in the interest rate in the 2013 period.



Other operating expenses for Conifer increased by $10 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to higher costs related to the integration of the Vanguard facilities' revenue cycle operations now managed by Conifer.

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Impairment and Restructuring Charges, and Acquisition-Related Costs

During the three months ended June 30, 2014, we recorded impairment and restructuring charges and acquisition-related costs of $32 million, consisting of $3 million of employee severance costs, $13 million of restructuring costs, and $16 million in acquisition-related costs, which include both transaction costs and acquisition integration charges. During the three months ended June 30, 2013, we recorded impairment and restructuring charges and acquisition-related costs of $11 million, consisting of $2 million of impairment of property, $3 million of employee severance costs and $6 million in acquisition-related costs.



Litigation and Investigation Costs

Litigation and investigation costs for the three months ended June 30, 2014 and 2013 were $12 million and $2 million, respectively, primarily related to costs associated with various legal proceedings and governmental reviews. Interest Expense



Interest expense for the three months ended June 30, 2014 was $190 million compared to $98 million for the three months ended June 30, 2013, primarily due to increased borrowings relating to our recent acquisitions.

Loss from Early Extinguishment of Debt

During the three months ended June 30, 2013, we recorded a loss from early extinguishment of debt of $171 million, related to the difference between the purchase prices and the par values of the $925 million aggregate principal amount of our 87/8% senior secured notes due 2019 that we purchased and called during the period, as well as the write-off of associated unamortized note discounts and issuance costs.



Income Tax (Benefit) Expense

During the three months ended June 30, 2014, we recorded income tax expense of $8 million compared to a benefit of $20 million, primarily related to the loss from early extinguishment of debt, during the three months ended June 30, 2013.



SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO SIX MONTHS ENDED JUNE 30, 2013

Revenues During the six months ended June 30, 2014, same-hospital net operating revenues after provision for doubtful accounts increased 5.9% compared to the six months ended June 30, 2013, primarily due to improved terms of our managed care contracts, higher inpatient and outpatient volumes, and an increase in our other operations revenues. Our same-hospital net outpatient revenues and total outpatient visits increased 7.8% and 4.4%, respectively, during the six months ended June 30, 2014 compared to the same period in 2013. Outpatient revenues and volume growth was primarily driven by improved terms of our managed care contracts, increased outpatient volume levels and our outpatient acquisition program. Net outpatient revenue per visit increased 3.2% primarily due to the improved terms of our managed care contracts. Our Conifer subsidiary generated net operating revenues of $570 million and $430 million for the six months ended June 30, 2014 and 2013, respectively, a portion of which was eliminated in consolidation as described in Note 15 to the Condensed Consolidated Financial Statements. The increase in the portion that was not eliminated in consolidation is primarily due to new clients and expanded service offerings. Same-hospital patient days increased by 1.6% during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. We believe our volumes were positively impacted by incremental market share as a result of improved physician alignment and service line expansion, insurance coverage for a greater number of individuals as a result of the Affordable Care Act, and a strengthening economy. We believe our growth in inpatient volume levels continues to be constrained by an increase in patients with high-deductible health insurance plans and industry trends reflecting the shift of certain clinical procedures being performed in an outpatient setting rather than in an inpatient setting. 44

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Provision for Doubtful Accounts

The provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts was 7.9% for both the six months ended June 30, 2014 and 2013. The provision for doubtful accounts was favorably impacted by decreased uninsured patient revenues, offset by the unfavorable impact of the 90 basis point decrease in our self-pay collection rate, as well as higher patient co-pays and deductibles.



Salaries, Wages and Benefits

Salaries, wages and benefits expense as a percentage of net operating revenues increased 0.3% for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Same-hospital salaries, wages and benefits per adjusted patient admission for our hospital operations and other segment increased by approximately 3.4% in the six months ended June 30, 2014 compared to the same period in 2013. This change is primarily due to a greater number of employed physicians, annual merit increases for certain of our employees, increased incentive compensation expense, an increase in the 401(k) plan maximum matching percentage for certain employee populations and increased health benefits costs. Salaries, wages and benefits expense for the six months ended June 30, 2014 and 2013 included stock-based compensation expense of $26 million and $20 million, respectively. Salaries, wages and benefits expense for Conifer increased by $82 million in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 due to an increase in employee headcount as a result of the growth in Conifer's business primarily attributable to the integration of the Vanguard facilities' revenue cycle operations now managed by Conifer. Supplies Supplies expense as a percentage of net operating revenues remained flat for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Same-hospital supplies expense per adjusted patient admission for our hospital operations and other segment increased by 3.6% in the six months ended June 30, 2014 compared to the same period in 2013. The change in supplies expense per adjusted patient admission was primarily attributable to higher costs for pharmaceuticals and volume growth in our supply-intensive surgical services.



Other Operating Expenses, Net

Other operating expenses as a percentage of net operating revenues was 25.5% in the six months ended June 30, 2014 compared to 23.6% in the six months ended June 30, 2013. Same-hospital other operating expenses per adjusted patient admission for our hospital operations and other segment increased by 6.1% in the six months ended June 30, 2014 compared to the same period in 2013. The 11.7% increase in same-hospital other operating expenses in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 is primarily due to: increased costs of contracted services ($15 million); higher medical fees primarily related to a greater number of



employed and contracted physicians ($36 million);

increased malpractice expense ($37 million); and decreased rent and lease expense ($9 million). Malpractice expense in the six months ended June 30, 2014 included isolated unfavorable case reserve adjustments related to a small number of claims, as well as an unfavorable adjustment of approximately $2 million due to a 32 basis point decrease in the interest rate used to estimate the discounted present value of projected future malpractice liabilities compared to favorable adjustment of approximately $7 million as a result of a 78 basis point increase in the interest rate in the 2013 period. Other operating expenses for Conifer increased by $26 million in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to higher costs related to the integration of the Vanguard facilities' revenue cycle operations now managed by Conifer.



Impairment and Restructuring Charges, and Acquisition-Related Costs

During the six months ended June 30, 2014, we recorded impairment and restructuring charges and acquisition-related costs of $53 million, consisting $9 million of employee severance costs, $18 million of restructuring costs, and $26 million in acquisition-related costs, which include $4 million of transaction costs and $22 million of acquisition integration charges. During the six months ended June 30, 2013, we recorded impairment and restructuring charges and acquisition-related costs of $25 million, consisting of $2 million of impairment of property, $7 million of restructuring costs, $5 million of employee severance costs, $1 million of lease termination costs, and $10 million in acquisition-related costs. 45 --------------------------------------------------------------------------------



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Litigation and Investigation Costs

Litigation and investigation costs for the six months ended June 30, 2014 and 2013 were $15 million and $2 million, respectively, primarily related to costs associated with various legal proceedings and governmental reviews. Interest Expense Interest expense for the six months ended June 30, 2014 was $372 million compared to $201 million for the six months ended June 30, 2013, primarily due to increased borrowings relating to our recent acquisitions and $400 million of share repurchases during 2013.



Loss from Early Extinguishment of Debt

During the six months ended June 30, 2013, we recorded a loss from early extinguishment of debt of $348 million consisting of $177 million related to the difference between the purchase prices and the par values of the $714 million aggregate principal amount of our $10% senior secured notes due 2018 that we purchased and called during the period, as well as the write-off of associated unamortized note discounts and issuances costs, and $171 million related to the difference between the purchase prices and the par values of the $925 million aggregate principal amount of our 87/8% senior secured notes due 2019 that we purchased and called during the period, as well as the write-off of associated unamortized note discounts and issuance costs. Income Tax (Benefit) Expense During the six months ended June 30, 2014, we recorded income tax expense of $7 million compared to a benefit of $73 million, primarily related to the loss from early extinguishment of debt, during the six months ended June 30, 2013.



ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES

The financial information provided throughout this report, including our Condensed Consolidated Financial Statements and the notes thereto, has been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). However, we use certain non-GAAP financial measures defined below in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding the impact of various items on our financial statements, some of which are recurring or involve cash payments. In addition, from time to time we use these measures to define certain performance targets under our compensation programs. "Adjusted EBITDA" is a non-GAAP measure that we use in our analysis of the performance of our business, which we define as net income (loss) attributable to our common shareholders before: (1) the cumulative effect of changes in accounting principle, net of tax; (2) net loss (income) attributable to noncontrolling interests; (3) preferred stock dividends; (4) income (loss) from discontinued operations, net of tax; (5) income tax benefit (expense); (6) investment earnings (loss); (7) gain (loss) from early extinguishment of debt; (8) net gain (loss) on sales of investments; (9) interest expense; (10) litigation and investigation benefit (costs), net of insurance recoveries; (11) hurricane insurance recoveries, net of costs; (12) impairment and restructuring charges and acquisition-related costs; and (13) depreciation and amortization. As is the case with all non-GAAP measures, investors should consider the limitations associated with this metric, including the potential lack of comparability of this measure from one company to another, and should recognize that Adjusted EBITDA does not provide a complete measure of our operating performance because it excludes many items that are included in our financial statements. Accordingly, investors are encouraged to use GAAP measures when evaluating our financial performance. 46 --------------------------------------------------------------------------------



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The table below shows the reconciliation of Adjusted EBITDA to net loss attributable to our common shareholders (the most comparable GAAP term) for the three and six months ended June 30, 2014 and 2013:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net loss attributable to Tenet Healthcare Corporation common shareholders $ (26 )$ (50 )$ (58 )$ (138 ) Less: Net income attributable to noncontrolling interests (19 ) (7 ) (35 ) (12 ) Income (loss) from discontinued operations, net of tax (16 ) 3 (21 ) 1 Income (loss) from continuing operations 9 (46 ) (2 ) (127 ) Income tax benefit (expense) (8 ) 20 (7 ) 73 Investment earnings - 1 - 1 Loss from early extinguishment of debt - (171 ) - (348 ) Interest expense (190 ) (98 ) (372 ) (201 ) Operating income 207 202 377 348 Litigation and investigation costs (12 ) (2 ) (15 ) (2 ) Impairment and restructuring charges, and acquisition-related costs (32 ) (11 ) (53 ) (25 ) Depreciation and amortization (209 ) (121 ) (402 ) (235 ) Adjusted EBITDA $ 460$ 336$ 847$ 610 Net operating revenues $ 4,042$ 2,422$ 7,968$ 4,809 Adjusted EBITDA as % of net operating revenues (Adjusted EBITDA margin) 11.4 % 13.9 % 10.6 % 12.7 %



LIQUIDITY AND CAPITAL RESOURCES

CASH REQUIREMENTS There have been no material changes to our obligations to make future cash payments under contracts and under contingent commitments, such as standby letters of credit and minimum revenue guarantees, as disclosed in our Annual Report, except for (i) a $286 million aggregate commitment for a long-term arrangement we entered into during the three months ended June 30, 2014 for future professional services to be provided to us and licensed software fees related to our health information technology initiatives and future ongoing information technology services for the 28 Vanguard hospitals we acquired in October 2013, and (ii) our recently issued 5% senior notes discussed under the caption "Debt Instruments, Guarantees and Related Covenants" below. As part of our long-term objective to manage our capital structure, we may from time to time seek to retire, purchase, redeem or refinance some of our outstanding debt or equity securities subject to prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. These actions are part of our strategy to manage our leverage and capital structure over time, which is dependent on our total amount of debt, our cash and our operating results. At June 30, 2014, using the last 12 months of Adjusted EBITDA, including Vanguard's last 12 months of Adjusted EBITDA, our ratio of total long-term debt, net of cash and cash equivalent balances, to Adjusted EBITDA was 6.6x. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance and other factors, including acquisitions that involve the assumption of long-term debt. We intend to manage this ratio by following our business plan, managing our cost structure and through other changes in our capital structure, including, if appropriate, the issuance of equity or convertible securities. Our ability to achieve our leverage and capital structure objectives is subject to numerous risks and uncertainties, many of which are described in the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report. Our capital expenditures primarily relate to the expansion and renovation of existing facilities (including amounts to comply with applicable laws and regulations), equipment and information systems additions and replacements (including those required to achieve compliance with the HIT requirements under ARRA), introduction of new medical technologies, design and construction of new buildings, and various other capital improvements. Capital expenditures were $523 million and $256 million in the six months ended June 30, 2014 and 2013, respectively. We anticipate that our capital expenditures for continuing operations for the year ending December 31, 2014 will total approximately $900 million to $1 billion, including $193 million that was accrued as a liability at December 31, 2013. Our budgeted 2014 capital expenditures include approximately $18 million to improve disability access at certain of our facilities pursuant to the terms of a negotiated consent decree. We expect to spend approximately $18 million more on such improvements over the next two years. 47

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During the six months ended June 30, 2014, we acquired a majority interest in Texas Regional Medical Center at Sunnyvale, a 70-bed hospital in Sunnyvale, Texas, a suburban community east of Dallas. We also acquired three ambulatory surgery centers, three urgent care centers, one diagnostic imaging center and various physician practice entities in the same period. The fair value of the consideration conveyed in the acquisitions was $42 million.



Interest payments, net of capitalized interest, were $360 million and $226 million in the six months ended June 30, 2014 and 2013, respectively.

Income tax payments, net of tax refunds, were approximately $19 million in the six months ended June 30, 2014 compared to $8 million in the six months ended June 30, 2013. SOURCES AND USES OF CASH Our liquidity for the six months ended June 30, 2014 was primarily derived from net cash provided by operating activities, cash on hand, issuance of long term debt and borrowings under our revolving credit facility. We had approximately $406 million of cash and cash equivalents on hand at June 30, 2014 to fund our operations and capital expenditures, and our borrowing availability under our credit facility was $994 million based on our borrowing base calculation as of June 30, 2014. Our primary source of operating cash is the collection of accounts receivable. As such, our operating cash flow is impacted by levels of cash collections and levels of bad debt due to shifts in payer mix and other factors.



Net cash provided by operating activities was $247 million in the six months ended June 30, 2014 compared to $128 million in the six months ended June 30, 2013. Key positive and negative factors contributing to the change between the 2014 and 2013 periods include the following:

Increased income from continuing operations before income taxes of $237 million, excluding loss from early extinguishment of debt, interest expense, investment earnings, litigation and investigation costs, impairment and restructuring charges, and acquisition-related costs, and depreciation and amortization, in the six months ended June 30, 2014 compared to the six months ended June 30, 2013;



The favorable impact of a reduction of approximately $44 million in net amounts we are owed under Medicaid supplemental programs in the 2014 period;

$5 million more cash used in operating activities from discontinued operations;

Income tax payments of $19 million in the six months ended June 30, 2014 compared to $8 million in the six months ended June 30, 2013;

An increase of $65 million in payments on reserves for restructuring charges, acquisition-related costs, and litigation costs and settlements; and

Higher interest payments of $134 million.



We continue to seek further initiatives to increase the efficiency of our balance sheet by generating incremental cash. These initiatives may include the sale of excess land, buildings or other underutilized or inefficient assets.

Capital expenditures were $523 million and $256 million in the six months ended June 30, 2014 and 2013, respectively.

We record our investments that are available-for-sale at fair market value. As shown in Note 13 to the Condensed Consolidated Financial Statements, the majority of our investments are valued based on quoted market prices or other observable inputs. We believe we have no investments that will be negatively affected by the slow economic recovery such that they will materially impact our financial condition, results of operations or cash flows. 48 --------------------------------------------------------------------------------



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DEBT INSTRUMENTS, GUARANTEES AND RELATED COVENANTS

We have a senior secured revolving credit facility (as amended, "Credit Agreement") that provides, subject to borrowing availability, for revolving loans in an aggregate principal amount of up to $1 billion, with a $300 million subfacility for standby letters of credit. The Credit Agreement has a scheduled maturity date of November 29, 2016. We are in compliance with all covenants and conditions in our Credit Agreement. At June 30, 2014, we had no cash borrowings outstanding under the revolving credit facility; however, we had approximately $6 million of standby letters of credit outstanding. Based on our eligible receivables, approximately $994 million was available for borrowing under the revolving credit facility at June 30, 2014. Standby letters of credit are required principally by our insurers and various states to collateralize our workers' compensation programs pursuant to statutory requirements and as security to collateralize the deductible and self-insured retentions under certain of our professional and general liability insurance programs. The amount of collateral required is primarily dependent upon the level of claims activity and our creditworthiness. The insurers require the collateral in case we are unable to meet our obligations to claimants within the deductible or self-insured retention layers. On March 7, 2014, we entered into a new letter of credit facility agreement ("LC Facility") that provides for the issuance of standby and documentary letters of credit (including certain letters of credit issued under our existing Credit Agreement, which we transferred to the LC Facility), from time to time, in an aggregate principal amount of up to $180 million (subject to increase to up to $200 million). The LC Facility has a scheduled maturity date of March 7, 2017, and obligations thereunder are guaranteed by and secured by a first priority pledge of the capital stock and other ownership interests of certain of our hospital subsidiaries on an equal ranking basis with our existing senior secured notes. At June 30, 2014, we had approximately $133 million of standby letters of credit outstanding under the LC Facility. In June and March 2014, we sold $500 million and $600 million aggregate principal amount, respectively, of 5% senior notes, which will mature on March 1, 2019. We will pay interest on the notes semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2014. The net proceeds from the sale of the notes in June 2014 were used to redeem our 91/4% senior notes due 2015 in July 2014. The proceeds from the sale of the notes in March 2014 were used for general corporate purposes, including the repayment of borrowings under our Credit Agreement. For information regarding our long-term debt and capital lease obligations, see Note 5 to our Condensed Consolidated Financial Statements. LIQUIDITY From time to time, we expect to engage in additional capital markets, bank credit and other financing activities depending on our needs and financing alternatives available at that time. We believe our existing debt agreements, the significant recent changes to which are described above, provide significant flexibility for future secured or unsecured borrowings. Our cash on hand fluctuates day-to-day throughout the year based on the timing and levels of routine cash receipts and disbursements, including our book overdrafts, and required cash disbursements, such as interest and income tax payments. These fluctuations result in material intra-quarter net operating and investing uses of cash that has caused, and in the future could cause, us to use our senior secured revolving credit facility as a source of liquidity. We believe that existing cash and cash equivalents on hand, availability under our revolving credit facility, anticipated future cash provided by operating activities, and our investments in marketable securities of our captive insurance companies classified as noncurrent investments on our balance sheet should be adequate to meet our current cash needs. These sources of liquidity should also be adequate to finance planned capital expenditures, payments on the current portion of our long-term debt and other presently known operating needs. Long-term liquidity for debt service will be dependent on improved cash provided by operating activities and, given favorable market conditions, future borrowings or refinancings. However, our cash requirements could be materially affected by the use of cash in acquisitions of businesses and repurchases of securities, and also by a deterioration in our results of operations, as well as the various uncertainties discussed in this and other sections of this report, which could require us to pursue any number of financing options, including, but not limited to, additional borrowings, debt refinancings, asset sales or other financing alternatives. The level, if any, of these financing sources cannot be assured. We do not rely on commercial paper or other short-term financing arrangements nor do we enter into repurchase agreements or other short-term financing arrangements not otherwise reported in our period-end balance sheets. We do not have any significant European sovereign debt exposure. We continue to aggressively identify and implement further actions to control costs and enhance our operating performance, including cash flow. Among the areas being addressed are volume growth, including the acquisition of outpatient businesses, physician recruitment and alignment strategies, expansion of our services businesses within Conifer, managed care payer contracting, procurement efficiencies, cost standardization, bad debt expense reduction initiatives, underperforming hospitals and health plans, and certain hospital and overhead costs not related to patient care. Although these initiatives may result in improved performance, our performance may remain somewhat below our hospital management peers because of geographic and other differences in hospital portfolios. 49

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OFF-BALANCE SHEET ARRANGEMENTS

Our consolidated operating results for the six months ended June 30, 2014 and 2013 include $218 million and $485 million, respectively, of net operating revenues and $36 million and $70 million, respectively, of operating income generated from general hospitals operated by us under operating lease arrangements (two hospitals as of June 30, 2014 and four hospitals as of June 30, 2013). In accordance with GAAP, the applicable buildings and the future lease obligations under these arrangements are not recorded on our consolidated balance sheet. The current terms of these leases expire in 2027 and 2029. If we are unable to extend these leases or purchase the hospitals, we would no longer generate revenues or expenses from such hospitals. We have no other off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, except for $236 million of standby letters of credit outstanding and guarantees as of June 30, 2014. CRITICAL ACCOUNTING ESTIMATES In preparing our Condensed Consolidated Financial Statements in conformity with GAAP, we must use estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable, given the particular circumstances in which we operate. Actual results may vary from those estimates. We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different outcomes under different conditions or when using different assumptions.



Our critical accounting estimates have not changed from the description provided in our Annual Report.

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