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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-175188
PROSPECTUS
Capella Healthcare, Inc.
Offer to Exchange
up to $500,000,000 91/4% Senior Notes due 2017
for up to $500,000,000 91/4% Senior Notes due 2017
that have been registered under the Securities Act of 1933
          We are offering to exchange up to $500,000,000 aggregate principal amount of our 91/4% Senior Notes due 2017 and the related guarantees that have been registered under the Securities Act of 1933, as amended (the “Securities Act”), or the “exchange notes,” for our currently outstanding 91/4% Senior Notes due 2017 and the related guarantees that have not been registered under the Securities Act, or the “outstanding notes.” We sometimes refer to the outstanding notes and the exchange notes collectively as the “notes.”
Terms of the exchange notes offered in the exchange offer:
    The terms of the exchange notes are substantially identical to the terms of the outstanding notes, except that the exchange notes have been registered under the Securities Act and will not contain restrictions on transfer or any registration rights.
 
    The exchange notes will represent the same debt as the outstanding notes, and we will issue the exchange notes under the same indenture.
Terms of the exchange offer:
    All outstanding notes that you validly tender and do not validly withdraw before the exchange offer expires will be exchanged for an equal principal amount of the exchange notes.
 
    The exchange offer expires at 5:00 p.m., New York City time, on November 1, 2011, unless extended.
 
    You may withdraw tenders of outstanding notes at any time prior to the expiration date of the exchange offer.
 
    The exchange of exchange notes for outstanding notes will not be a taxable event for U.S. federal income tax purposes. Please read the discussion under the caption “Certain Material U.S. Federal Income Tax Considerations” for more information.
 
    We will not receive any proceeds from the exchange offer.
 
    We issued the outstanding notes in a transaction not requiring registration under the Securities Act, and as a result, their transfer is restricted. We are making the exchange offer to satisfy the registration rights of holders of the outstanding notes.
          There is no established trading market for the exchange notes or the outstanding notes, and we do not intend to apply for listing of the exchange notes on any securities exchange.
          Any broker-dealer who holds outstanding notes that were acquired for its own account as a result of market-making activities or other trading activities (other than outstanding notes acquired directly from us) may exchange such outstanding notes pursuant to this exchange offer; however, such broker-dealer may be deemed to be an “underwriter” within the meaning of the Securities Act and must, therefore, deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of the exchange notes received by such broker-dealer in the exchange offer, which prospectus delivery requirements may be satisfied by the delivery by such broker-dealer of a copy of this prospectus. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for outstanding notes where such outstanding notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of 180 days from the date on which the exchange offer registration statement is declared , we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”
          You should carefully consider the Risk Factors beginning on page 19 of this prospectus before participating in the exchange offer.
          Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is September 30, 2011

 


 

          You should rely only on the information contained in this prospectus and the accompanying letter of transmittal. We have not authorized any person to provide you with any information or represent anything about us or this exchange offer that is not contained or specifically referred to in this prospectus. If given or made, any such other information or representation should not be relied upon as having been authorized by us. We are not making an offer to sell these exchange notes in any jurisdiction where an offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.
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INDUSTRY AND MARKET DATA
     Market and industry data used throughout this prospectus, including information relating to our market position and population data, consists of good faith estimates based on data and reports compiled by industry professional organizations, such as Centers for Medicare & Medicaid Services (“CMS”) and the American Hospital Association (“AHA”) who may also rely on other third-party sources for their information, as well as the U.S. Census Bureau and on our management’s knowledge of our business and markets. We refer herein to our primary service areas (each, a “PSA”), which are generally determined by aggregating our inpatient admissions data to identify the zip codes in which 75% of our patients reside.

 


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PROSPECTUS SUMMARY
     This prospectus summary highlights significant aspects of our business and this exchange offer, but it is not complete and does not contain all of the information that you should consider before deciding whether to exchange your outstanding notes for exchange notes. You should carefully read the entire prospectus, including the information presented under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making a decision to participate in this exchange offer. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors, including those set forth in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
     Unless otherwise noted, the term “Capella” refers to Capella Healthcare, Inc. and the terms the “Company,” “we,” “us” and “our” refer to Capella and its consolidated subsidiaries.
Our Company
     We are a provider of general and specialized acute care, outpatient and other medically necessary services in our primarily non-urban communities. We provide these services through a portfolio of acute care hospitals and complementary outpatient facilities and clinics. As of June 30, 2011, we operated 13 acute care hospitals (12 of which we own and one of which we lease pursuant to a long-term lease) comprised of 1,745 licensed beds in Arkansas, Alabama, Missouri, Oklahoma, Oregon, Tennessee and Washington. We are focused on enabling our facilities to maximize their potential to deliver high quality care in a patient-friendly environment. We invest our financial and operational resources to establish and support services that meet the needs of our communities. We seek to achieve our objectives by (i) providing exceptional quality care to our patients, (ii) establishing strong local management teams, physician leadership groups and hospital boards, (iii) developing deep physician and employee relationships and (iv) working closely with our communities.
     Our hospitals offer a broad range of general acute care services, including, for example, internal medicine, general surgery, cardiology, oncology, orthopedics, women’s services, neurology and emergency services. In addition, our facilities also offer other specialized and ancillary services, including, for example, psychiatric, diagnostic, rehabilitation, home health and outpatient surgery.
     Capella was formed in April 2005 by four former executives of Province Healthcare Company, formerly a publicly-traded operator of non-urban acute care hospitals (“Province Healthcare”), with the support of a significant equity commitment by certain investment funds affiliated with GTCR Golder Rauner II, L.L.C. (collectively with GTCR Golder Rauner, L.L.C. and certain other affiliated entities, referred to as “GTCR”). Since 2005, we have completed three significant acquisitions resulting in our current operation of 13 acute care hospitals and have added multiple ancillary outpatient centers and clinics. See “Business — Company Overview.”
     For the six months ended June 30, 2011, we generated net revenue and adjusted EBITDA of $422.2 million and $50.5 million, respectively. For the year ended December 31, 2010, we generated net revenue and adjusted EBITDA of $869.5 million and $95.7 million, respectively. For the year ended December 31, 2009, our first full calendar year of operations of all 13 current hospitals, we generated net revenue and adjusted EBITDA of $813.9 million and $95.7 million, respectively. For the three-year period ended December 31, 2010, our compounded annual net revenue and adjusted EBITDA growth were 11.3% and 8.0%, respectively. See page 16 within the subheading entitled “—Summary Historical Consolidated Financial and Operating Data” for a discussion and reconciliation of adjusted EBITDA.
Our Industry
     The U.S. healthcare industry is large and growing. According to CMS, total annual U.S. healthcare expenditures grew 4.0% in 2009 to $2.5 trillion, representing 17.6% of the U.S. gross domestic product. CMS projects total U.S. healthcare spending to grow by an average annual growth rate of 6.1% from 2009 through 2019.
     According to the AHA, in 2009 there were approximately 5,000 inpatient hospitals in the United States. The U.S. hospital industry is broadly defined to include acute care, rehabilitation and psychiatric facilities that are either

 


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public (government owned and operated), not-for-profit (private, religious or secular) or for-profit institutions (investor owned). Ownership of hospitals is dominated by not-for-profit hospitals, which, in 2009, controlled 58% of the market, followed by state and local governments with 26% and for-profit hospitals with 16%.
     We believe well-capitalized and operations-focused providers of healthcare services will benefit from the current industry trends, some of which include:
     Demographics and Disease Trends. According to the U.S. Census Bureau, the demographic age group of persons aged 65 and over is expected to experience compounded annual growth of 3.0% over the next 20 years, and constitute 19.3% of the total U.S. population by 2030. CMS projects continued increases in hospital services based on the aging of the U.S. population, advances in medical procedures, expansion of health coverage, increasing consumer demand for expanded medical services and increased prevalence of chronic conditions such as diabetes, heart disease and obesity. We believe these factors will continue to drive increased utilization of healthcare services and the need for comprehensive, integrated hospital networks that can provide a wide array of essential and sophisticated healthcare.
     Quality-Driven Reimbursement. We believe the U.S. healthcare system is continuing to evolve in ways that favor large-scale, comprehensive and integrated providers that provide high levels of quality care. Specifically, we believe there are a number of initiatives that will continue to gain importance in the foreseeable future, including introduction of value-based payment methodologies tied to performance, quality and coordination of care, implementation of integrated electronic health records and information, and an increasing ability for patients and consumers to make choices about all aspects of healthcare. We have developed key processes and infrastructure that we believe enable us to meet or exceed the current established quality guidelines. We plan to continue to invest in quality initiatives and technology in order to meet the quality demands of our payors in the future. Based on our compliance with reporting requirements, we received full market basket reimbursement rates from Medicare in all of our facilities in 2009 and 2010.
     Specialized Services. We believe patients are gaining increased access to medical information and statistics and, as a result, are better informed when seeking specialized care and treatment alternatives. We believe facilities that provide specialized patient care in areas such as cardiology, oncology, orthopedics, women’s services and neurology, among others, will benefit from the increased demand for these services. We continually assess our markets and engage community and hospital leadership to develop specialized services to meet the demands of our patients. Examples of the services we developed, enhanced and/or expanded over the past several years include, among others, cardiology, oncology, orthopedic, neurology, behavioral health and women’s services programs.
     Consolidation. As a result of the recent economic pressures, we believe a large number of public and not-for-profit operators have been affected dramatically and are experiencing financial challenges. For-profit hospital operators with strong management and access to capital are well-positioned to act as strategic acquirers or partners to assist these financially challenged operators in achieving their long-term objectives of providing high quality, cost-effective care to the communities they serve. Our management team has a demonstrated track record of successfully identifying, acquiring and integrating facilities that meet our disciplined acquisition criteria. In addition, our management team maintains significant experience converting public and not-for-profit facilities to for-profit status. We believe some of the key elements in converting a hospital from not-for-profit status to for-profit status involves engaging local community leaders and committing to continued support of the hospital’s mission. Each of our hospitals has a Board of Trustees, which is comprised of physicians and local community leaders, as well as the hospital Chief Executive Officer (“CEO”). In addition, we support community programs and charitable organizations in our communities both financially and with volunteer time.
     Healthcare Reform. The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act”) were signed into law on March 23, 2010 and March 30, 2010, respectively. The Affordable Care Act dramatically alters the United States healthcare system and is intended to decrease the number of uninsured Americans and reduce the overall cost of healthcare. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments, including disproportionate share hospital (“DSH”) payments, expanding the Medicare program’s use of value-based

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purchasing programs and tying hospital payments to the satisfaction of certain quality criteria. We believe, as a result of our physician alignment strategies as well as our continued focus on providing high quality, cost-effective healthcare, that we are well-positioned to capitalize on the opportunities and face the challenges that are likely to arise as a result of the enactment of the Affordable Care Act. As the legislation will be implemented over the next several years, the extent of the impact on our business from expected increased patient volumes, an increased number of insured patients, reimbursement cuts and other program changes cannot be determined at this time.
Our Competitive Strengths
     We believe the significant factors allowing us to implement our mission and business strategies successfully include the following:
    Commitment to Delivery of Patient Care Excellence. We believe providing patient care excellence is critical to attracting patients, physicians, medical staff and employees to our facilities. In addition, providing high quality patient care is increasingly vital to achieving our operating and financial success, including receiving full reimbursement from governmental and commercial insurance payors. As a result, we have implemented several management and operating initiatives aimed at continuously monitoring and improving our quality of care. We believe several factors contribute to providing patient care excellence, including leadership and accountability at all levels of our organization, aligning ourselves with quality physicians and clinical staff, as well as providing a clinical environment that is satisfactory to our patients, physicians and employees. To support these initiatives, each of our hospitals has a Chief Quality Officer (“CQO”) who is responsible for implementing and monitoring our quality training and operating programs. In addition, we have Boards of Trustees and Local Physician Leadership Groups (“LPLGs”) at each of our facilities, a Physician Advisory Group (“PAG”), a National Physician Leadership Group (“NPLG”) and several on-line training tools, which are focused on delivering patient care excellence, clinical best practices and results in our hospitals. In January 2011, we added a Chief Medical Officer (“CMO”) to our senior management team to assume leadership responsibility for facilitating the work of our NPLG, ensuring that physician leaders across the Company are continuously involved in shaping our vision and future strategies. The CMO is also responsible for providing leadership for our affiliated hospitals’ quality and service excellence initiatives as well as for on-going communication with medical staff members. Furthermore, we strive continually to improve physician and employee satisfaction, which we believe is critical to delivering quality patient care. Our satisfaction review program is instrumental in identifying ways to improve quality of care in each of our facilities. Some of the results of our efforts include:
    accreditation of all of our hospitals, including 12 by The Joint Commission and one by the American Osteopathic Association;
 
    in spring of 2011, The Joint Commission recognized eight of our hospitals for significant improvement and/or consistent high performance in various elements of the core measures and invited them to participate in the pilot-testing of Solutions Exchange, a program to help other hospitals throughout the nation;
 
    Parkway Medical Center was ranked in the top 1% of all U.S. hospitals by Data Advantage Hospital Value Index (“HVI”) and was recognized as a center of excellence in bariatric surgery in 2010;
 
    Capital Medical Center received a #1 ranking in the state of Washington by HealthGrades for its orthopedic program in 2010 and a Best in Country, Top 10 in the state of Washington by HealthGrades for general surgery in 2011;
 
    Southwestern Medical Center was the first hospital in southwest Oklahoma to receive certification from The Joint Commission for its stroke program and, in 2011, earned its fifth consecutive accreditation from the Commission on Accreditation of Rehabilitation Facilities;
 
    Muskogee Regional Medical Center earned accreditation from the Oklahoma State Medical Association as a sponsor of Continuing Medical Education in 2010 and earned Quality Respiratory Care Recognition from the American Association for Respiratory Care in 2010 and 2011;
 
    Willamette Valley Medical Center was named a “Best Value in the State of Oregon” for 2009 and 2010 by the Press Ganey Hospital Value Index;
 
    River Park Hospital earned its third consecutive national Chest Pain Center accreditation in 2010 from the Society of Chest Pain Centers;
 
    Mineral Area Regional Medical Center was named a 2011 “Excellence through Insight” award recipient in the category of “Overall Physician Satisfaction” by HealthStream Research;
 
    National Park Medical Center was named to HomeCare Elite in 2010, which is the top 5% of high performance home health agencies in the U.S.; and
 
    improved physician and employee satisfaction scores in 2010, as measured by HealthStream, an independent, third-party, nationally-recognized survey administrator.

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    Diversified Portfolio of Assets with Strong Market Positions in Attractive Communities. We diversified our asset base by entering new geographic markets through successful acquisitions. Our top three states, Arkansas, Oklahoma and Oregon, which contain five of our hospitals, accounted for 25.6%, 21.7% and 12.7% of our 2010 net revenue, respectively, and 25.6%, 21.0% and 12.7% of our net revenue, respectively, for the six month period ended June 30, 2011.
 
    Strategic Physician Recruitment and Retention. We have been successful in implementing our strategic physician recruitment and retention plan. In the summer of 2008, we commissioned an independent consulting group to perform a market needs analysis with a focus on the unserved medical needs of the community. From that analysis, we developed a strategic recruitment plan to meet each of our market’s healthcare needs. Executing that plan, we recruited 61 physicians in 2008; 72 in 2009; and 68 in 2010. During 2010, 42.6% were specialists in areas such as general surgery, cardiology, women’s services and, orthopedics. The remainder were primary care physicians, including hospitalists and physicians practicing in areas such as family medicine, internal medicine and pediatrics.
 
    Proven Ability to Instill Operational Excellence in Acquired Facilities. We have acquired and integrated 14 hospitals successfully since our inception in 2005. Once we acquire a facility, we implement a customized strategic plan focused on leadership, quality, physician engagement and recruitment, capital investment, cost initiatives and enhancing key services. We believe our ability to increase revenue, operating margins and cash flow at acquired facilities is the direct result of our disciplined approach to expanding and improving key services, recruiting physicians to provide these services, streamlining costs, enhancing relationships with our physicians and employees and implementing a targeted capital investment program. In addition, our senior management team has an average of more than 28 years of experience in hospital operations, with three members of our senior management team having been either a hospital CEO or Chief Financial Officer (“CFO”).
 
    Strategic Capital Investments Resulting in Well Capitalized Facilities. We have not been required to make significant capital investments renovating or repairing our facilities because the hospitals we acquired typically have been capitalized and maintained well by their previous owners. For example, Willamette Valley Medical Center completed an approximately $37 million renovation and expansion project in November 2007 (we acquired it in March 2008) and Muskogee Regional Medical Center was in the process of completing an approximately $31 million renovation and expansion project in April 2007 when we entered into a long-term lease for that facility. Although we monitored the project’s completion, the lessor bore the cost of renovation and expansion. We have invested in targeted growth initiatives, primarily focused on new and enhanced services. We have invested a total of approximately $68.0 million in our facilities over the three-year period ended December 31, 2010. Major projects funded by us include (i) approximately $9 million in renovations and expansions to operating rooms, the intensive care unit and the cancer center at Southwestern Medical Center that were completed in 2008; (ii) aggregate of approximately $5.2 million for the purchase of a linear accelerator and medical oncology and radiation therapy renovations at Capital Medical Center that were also completed in 2008; and (iii) approximately $3.4 million for Novalis Tx radiation oncology equipment at Muskogee Regional Medical Center in 2010. We believe that our continued commitment to invest in our communities and facilities will further strengthen our quality of care and our ability to recruit and retain leading physicians and healthcare professionals.
 
    Experienced Senior Management and Leadership Teams. Our senior management team has an average of more than 28 years of experience in the healthcare industry with a proven record of achieving strong operating results while operating with significant leverage. The senior management team is highly respected in the hospital industry, has significant experience in acquiring, improving and managing hospitals and has demonstrated its ability to integrate hospitals effectively without reducing its focus on existing operations. In addition, the average experience of our current hospital CEOs is approximately 25 years.
Our Business Strategy
     The key elements of our business strategy are:
    Enhancing Quality of Care and Service Excellence. We place significant emphasis on consistently providing high quality patient care and service excellence. We seek to achieve this by continuously enhancing our programs and protocols through targeted investments in our employees, physicians, systems and strategic growth initiatives. We believe value based purchasing initiatives of both governmental and private payors, such as linking payment for healthcare services to performance on objective quality measures, will increasingly become key drivers of financial performance. Examples of these initiatives include denying payment for avoidable hospital re-admissions and bundling payments for acute care services with physician or post-acute services. We believe our continued strategic investments to improve patient care excellence will prepare us to face the challenges and capitalize on the opportunities relating to the ever-changing, pay-for-performance environment. Some of our strategic initiatives in quality and service excellence include:
    Emergency Rooms. Recently, we embarked on a multi-year strategy to enhance quality and improve operating efficiencies in our emergency rooms. This strategy involves implementing process improvement initiatives such as Lean for Healthcare techniques, which are designed to improve patient experiences through more efficient utilization of resources. As a result of this initiative, several members of our corporate and hospital staff have received Lean for Healthcare certifications. We also are making a significant investment in a leading emergency department information system, which is comprised of several modules that offer comprehensive patient management tools. The program provides appropriate and consistent guidelines for patient care excellence helping to ensure that proper screening, evaluation and treatment is performed.
 
    Local Physician Leadership Groups, or LPLGs. Our LPLGs are comprised of four to five physician leaders and our hospital CEO in each of our markets. The groups (i) provide ongoing dialogue with hospital administration; (ii) help develop key strategic initiatives for the hospital; and (iii) promote patient care excellence.
 
    Physician Advisory Group, or PAG. Our PAG is comprised of physician leaders across the Company. The group (i) provides clinical review and guidance related to information system design, build-out and workflow; (ii) advises us on physician communication and education; and (iii) identify opportunities where technology can be used to improve clinical processes and outcomes.
 
    National Physician Leadership Group, or NPLG. Our NPLG is comprised of one member of each LPLG and Capella senior management. The group (i) receives updates on Capella corporate strategy and vision; (ii) discusses quality of care issues and goals; (iii) promotes networking among Capella-affiliated physicians; (iv) offers advice on special projects where front line physician input is critical; and (v) allows members of the medical staff to have direct communication with members of Capella senior management.
 
    Chief Medical Officer. Our CMO is responsible for facilitating the work of our NPLG, ensuring that physician leaders from across the Company are continuously involved in shaping our vision and future strategies. The CMO is also responsible for providing leadership for our affiliated hospitals’ quality and service excellence initiatives as well as for on-going communication with medical staff members.

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    Training and Education. We provide the Capella Learning Center, a customized on-line learning center comprised of approximately 3,000 clinically based courses to all our staff. Our corporate CQO develops and implements a work plan for each of the hospitals based upon their specific needs. The hospital CQO and Chief Nursing Officer (“CNO”), in turn, develop individual educational work plans for each staff member at their facility. Usage of the Capella Learning Center is monitored by the corporate CQO and is reported to Capella senior management. We work with an independent consulting group to provide training in the areas of improving patient care processes as well as employee, physician and patient satisfaction. We believe this is a critical element in emphasizing our philosophy that, if our employees and physicians enjoy where they work and are intellectually stimulated, they will improve the quality care our patients receive. We will continue to survey our physicians and our employees on an annual basis to identify objectives for quality and satisfaction improvement.
 
    Compensation. We base the incentive compensation for our hospital administrative teams in significant part on achieving key individual and facility quality and service metrics such as performance on patient satisfaction surveys and other core measurements.
    Continued Physician Engagement and Alignment Initiatives. Our ability to meet the medical care needs of our communities and enhance and expand our services is highly dependent on our physician engagement strategies. We have a comprehensive recruiting program that is directed at the local level by our hospital CEOs and Boards of Trustees. We supplement our local teams with several third-party recruiting firms to assist us in identifying candidates that match the profile of our physician needs. We maintain a flexible approach to aligning our goals with our physician partners, including our willingness to recruit physicians through multi-year employment and/or income guarantee arrangements and to enter into joint venture and other collaborative arrangements. We added a CMO to our senior management team to assume leadership responsibility for facilitating the work of our NPLG, ensuring that physician leaders across the Company are continuously involved in shaping the Company’s vision and future strategies. In addition, we believe physicians are attracted to our hospitals because of several factors, including:
    our commitment to patient care excellence;
 
    our willingness to deploy strategic capital to improve the delivery of care;
 
    our focus on employing and developing high quality nursing and support staff; and
 
    our integration into, and support of, the communities we serve.
    Identifying and Establishing Strong Local Market Leadership. We empower our individual hospital management teams to develop comprehensive strategic plans and position their hospitals to meet the healthcare needs of the communities they serve. In addition to strong corporate oversight and resources, each of our local leadership teams is supported by a local Board of Trustees and a LPLG. The Board of Trustees is comprised of physicians and community leaders as well as the hospital CEO. We believe local community leaders are an important resource for our hospital CEOs to insure that we are being responsive to the needs of the communities we serve. Our LPLGs are typically comprised of local physician leaders as well as members of our hospital’s administration. These groups insure that we are providing patient care excellence, offering the appropriate medical services, maintaining high quality employees and recruiting the best physicians to our medical staff. Capella corporate provides continuous operational, financial and human resources support to our local teams and has designed programs that allow us to share best practices across our entire portfolio of facilities.
 
    Expanding the Services We Provide. Each year, we conduct in-depth strategic reviews of the major service lines offered at each of our facilities as well as market demand for additional services. We leverage our local market knowledge and information together with input and guidance from our local physician and community leaders to prioritize the healthcare services our communities are seeking. We then initiate a financial assessment and develop an investment plan that supports the expansion of the appropriate services. Focus areas include:
    expanding specialty medical services such as medical and radiation oncology, orthopedic, cardiovascular, neurology, behavioral health and women’s services;
    initiating and expanding outpatient services;

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    investing in medical equipment and technology to support our service lines;
    improving our efficiency to deliver better quality care in our emergency rooms; and
    enhancing patient, physician and employee satisfaction.
      We have engaged consultants and are working with our hospital CEOs to identify trends in service lines and areas for future expansion of services. We remain motivated to invest in our facilities in order to increase the quality and scope of services we provide, meet the needs of our communities and establish a strong reputation so that we may continue to recruit leading physicians, become the healthcare provider of choice in our communities and increase the revenue and profitability of our facilities. For example, we re-introduced medical and radiation oncology to Capital Medical Center to meet the needs of that community. In coordination with this effort, we were able to recruit several medical and radiation oncologists to that facility. More recently, we were able to develop a total joint replacement program at Willamette Valley Medical Center. As part of this program, we were able to recruit three orthopedic surgeons to the market. The hospital’s reputation for quality and our local physicians’ participation helped this program come to fruition.
 
    Pursuing Acquisitions and Strategic Relationships. We believe we will continue to have opportunities to pursue acquisitions of hospitals and other healthcare facilities both in existing and new markets. We will pursue a disciplined acquisition strategy in markets where we believe we can have the greatest impact on the financial and operational performance of the acquired facility. We will continue to target acute care hospitals and ancillary facilities in attractive, primarily non-urban markets with populations generally greater than 35,000. We have a focused criteria that cover multiple aspects of a new facility and include demographics, operational improvement, financial improvement and cultural alignment. We perform a significant amount of due diligence on each facility we intend to acquire to ensure that our criteria are met.
 
      As a result of the recent economic downturn, we believe many public and not-for-profit hospitals are facing significant financial challenges and could seek to partner with strong operators who are well capitalized and who demonstrate a willingness to invest in the communities they serve. We believe we meet these criteria. From time to time, we also may consider entering into joint ventures or strategic alliances with other hospitals and healthcare providers.
 
    Investing in Technology to Improve Patient Care. The Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009 (“ARRA”). The HITECH Act includes provisions designed to increase the use of computerized physician order entry at hospitals and the use of electronic health records (“EHR”) by both physicians and hospitals. We believe that these systems improve quality, safety, efficiency and clinical outcomes. We intend to comply with the EHR meaningful use requirements of the HITECH Act to qualify for the maximum available Medicare and Medicaid incentive payments. We continue to refine our budgeted costs and the expected reimbursement improvements associated with our EHR initiatives. Our compliance will result in significant costs, including professional services focused on successfully desiging and implementing our EHR solutions and costs associated with the hardware and software components of the project. Consequently, we believe we may qualify for Medicare reimbursement at three of our hospitals in the fourth quarter of 2011 and already qualify for Medicaid reimbursement in three states. Implementing a standard emergency room management system across all hospitals is another example of our investing in information technology to improve patient care. This system, in conjunction with our other process improvement initiatives, helps to ensure that appropriate and consistent quality patient care is administered quickly and reliably to our emergency room patients. Additionally, the creation of our PAG is designed to foster collaboration with our physicians to assist us in providing patient care excellence through technological improvements.
 
    Delivering Strong Financial Performance. We pride ourselves on maintaining disciplined financial policies aimed at growing revenue, improving margins and generating free cash flow. We will continue to focus on ways in which we can increase revenue from our existing facilities, including continued investments to expand services, physician recruitment to meet our communities’ needs and favorable managed care contracts. We are also focused on capitalizing on several operational efficiencies to improve our margins and free cash flow, including:
    continued focus on revenue cycle management and collections;
    disciplined deployment of capital across our portfolio;

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    encouragement and motivation of our physicians and medical staff to adhere to our established protocols related to medical supplies utilization;
    infrastructure build-out to support our growing physician clinic operations;
    implementation of appropriate staffing tools and continued reduction of contract labor; and
    leveraged technical expertise through use of our corporate resources.
Summary of Risks and Challenges
     Our ability to successfully operate our business is subject to numerous risks and challenges, including those that are generally associated with operating in the healthcare industry. Any of the factors set forth under “Risk Factors” beginning on page 19 may limit our ability to successfully execute our business strategy. Among these important risks are the following:
    we cannot predict the effect that healthcare reform and other changes in government programs may have on our financial condition or operations;
 
    our operations may be adversely affected by growth in uninsured accounts and “patient due” accounts;
 
    our revenue may decline if federal or state programs reduce our Medicare or Medicaid payments;
 
    our revenue may decline if payments from our third-party payors are reduced or eliminated, or if we are unable to negotiate contracts or maintain satisfactory relationships with third-party payors;
 
    controls designed to reduce inpatient services may reduce our revenue;
 
    we may experience a shortage of qualified professional and staff personnel;
 
    our performance depends on our ability to recruit and retain quality physicians;
 
    we are subject to competition from other hospitals or healthcare providers, including physicians;
 
    if our access to licensed information systems is interrupted or restricted, or if we are not able to integrate changes to our existing information systems or information systems of acquired hospitals, our operations could be adversely affected; and
 
    our substantial indebtedness could affect our financial condition adversely and our ability to fulfill our obligations under the notes.
The Refinancing
     In June 2010, we completed a comprehensive refinancing plan (the “Refinancing”). Under the Refinancing, we issued the outstanding notes and entered into a new senior secured asset based loan (“ABL”), consisting of a $100.0 million revolving credit facility maturing in November 2014 (the “2010 Revolving Facility”). The proceeds from the issuance of the outstanding notes were used to repay the outstanding principal and interest related to our previous term loan facility and to pay fees and expenses relating to the Refinancing of approximately $21.7 million. At June 30, 2011, there were no amounts outstanding under the ABL.
Recent Developments
     Effective July 1, 2011, a subsidiary of Capella that owns a majority interest in White County Community Hospital, LLC, which owns and operates White County Community Hospital in Sparta, Tennessee, completed the acquisition of a 60% interest in Cannon County Hospital, LLC (“CCH”), which owns and operates DeKalb Community Hospital and Stones River Hospital (the “CCH Transaction”). Capella owns majority interests in DeKalb Community Hospital and Stones River Hospital and manages each of those facilities pursuant to management agreements.
Additional Information
     Capella is organized in Delaware. Our principal executive offices are located at 501 Corporate Centre Drive, Suite 200, Franklin, Tennessee 37067 and our telephone number at that address is (615) 764-3000. Our corporate website address is www.capellahealth.com. Information contained on our website or that can be accessed through our website is not incorporated by reference in this prospectus and does not constitute a part of this prospectus and you should not rely on this information.
Our Principal Investor
     Founded in 1980, GTCR is a leading private equity firm focused on investing in growth companies in the healthcare, financial services and information technology industries. The Chicago-based firm identifies and partners with industry leaders as the critical first step in identifying, acquiring and building market-leading companies through acquisitions and organic growth. Since its inception, GTCR has invested more than $8.5 billion in over 200 companies.

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(GRAPHIC)
 
(1)   As of June 30, 2011. Comprised of shares of common stock.
 
(2)   Captive insurance company.
 
(3)   As of June 30, 2011, joint ventures owned and operated (i) Capital Medical Center, White County Community Hospital and National Park Medical Center in which physicians hold interests representing approximately 9.75%, 16.20% and 4.96%, respectively, of the equity ownership of these facilities; and (ii) outpatient centers in which Capella holds a minority interest. Following the completion of the CCH Transaction on July 1, 2011, physicians hold interests representing approximately 12.275% of the equity ownership in White County Community Hospital, and a joint venture owns and operates DeKalb Community Hospital and Stones River Hospital, each of which are owned by CCH, in which physicians hold interests representing 40% of the equity ownership of CCH.
Risk Factors
     You should consider carefully all of the information set forth in this prospectus prior to exchanging your outstanding notes. In particular, we urge you to consider carefully the factors set forth under the heading “Risk Factors.”

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The Exchange Offer
     On June 28, 2010, we completed a private offering of the outstanding notes. We entered into a registration rights agreement with the initial purchasers of the outstanding notes in which we agreed to deliver to you this prospectus and to complete an exchange offer for the outstanding notes. Below is a summary of the exchange offer.
     
Outstanding Notes
  $500,000,000 aggregate principal amount of 91/4% Senior Notes due 2017.
 
   
Exchange Notes
  Up to $500,000,000 aggregate principal amount of 91/4% Senior Notes due 2017, which have been registered under the Securities Act. The form and terms of the exchange notes are identical in all material respects to those of the outstanding notes, except that the transfer restrictions and registration rights relating to the outstanding notes do not apply to the exchange notes.
 
   
Exchange Offer
  We are offering to issue up to $500,000,000 aggregate principal amount of the exchange notes in exchange for a like principal amount of the outstanding notes to satisfy our obligations under the registration rights agreement that was executed when the outstanding notes were issued in a transaction in reliance upon the safe harbors from registration provided by Rule 144A and Regulation S of the Securities Act. Outstanding notes may be tendered in minimum denominations of $2,000 and integral multiples of $1,000. We will issue the exchange notes promptly after expiration of the exchange offer. See “The Exchange Offer — Terms of the Exchange Offer.”
 
   
Resale
  Based on an interpretation by the staff of the Securities and Exchange Commission (the “SEC”) set forth in no-action letters issued to third parties, we believe that the exchange notes issued under the exchange offer for the outstanding notes may be offered for resale, resold and otherwise transferred by you (unless you are our “affiliate” within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, if:
    you are not our affiliate;
 
    you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the exchange notes;
 
    you are acquiring the exchange notes in the ordinary course of your business; and
 
    you are not acting on behalf of any person who could not truthfully make the foregoing representations.
     
 
  If you are a broker-dealer and receive exchange notes for your own account in exchange for outstanding notes that you acquired as a result of market-making activities or other trading activities (other than outstanding notes acquired directly from us), you must acknowledge that you will deliver this prospectus in connection with any resale of the exchange notes. See “Plan of Distribution.”
 
   
 
  Any holder of outstanding notes who:
    is our affiliate;

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    does not acquire exchange notes in the ordinary course of its business; or
 
    tenders its outstanding notes in the exchange offer with the intention to participate, or the purpose of participating, or has any arrangement or understanding with any person to participate, in a distribution of exchange notes
     
 
  cannot rely on the position of the staff of the SEC enunciated in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in Shearman & Sterling (available July 2, 1993), and similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes.
 
   
Expiration Date
  The exchange offer will expire at 5:00 p.m., New York City time, on November 1, 2011, unless we decide to extend it.
 
   
Conditions to the Exchange Offer
  The exchange offer is subject to customary conditions, which we may waive. See the discussion below under the caption “The Exchange Offer — Certain Conditions to the Exchange Offer” for more information regarding the conditions to the exchange offer.
 
   
Procedures for Tendering Outstanding Notes
  To participate in the exchange offer, you must complete, sign and date the letter of transmittal and send it, together with all other documents required by the letter of transmittal, including the outstanding notes that you wish to exchange, to U.S. Bank National Association, as exchange agent, at the address indicated on the cover page of the letter of transmittal. In the alternative, you can tender your outstanding notes by following the procedures for book-entry transfer described in this prospectus.
 
   
 
  If your outstanding notes are held through The Depository Trust Company (“DTC”) and you wish to participate in the exchange offer, you may do so through the Automated Tender Offer Program of DTC. If you tender under this program, you will agree to be bound by the letter of transmittal that we are providing with this prospectus as though you had signed the letter of transmittal. By signing the letter of transmittal or authorizing the transmission of the agent’s message, you will represent to us that, among other things:
    you are not an affiliate of Capella;
 
    you are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the exchange notes;
 
    you are acquiring the exchange notes in the ordinary course of business; and
 
    you are not acting on behalf of any person who could not truthfully make the foregoing representations.
     
 
  If you are a broker-dealer who holds outstanding notes that were acquired for your own account as a result of market marking activities or other trading activities (other than outstanding notes acquired directly from us), that you will deliver a prospectus in connection with any resale of such exchange notes.

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Special Procedures for Beneficial Owners
  If you are a beneficial owner of outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender those outstanding notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender those outstanding notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date.
 
   
Guaranteed Delivery Procedures
  If you wish to tender your outstanding notes and your outstanding notes are not immediately available, or you cannot deliver your outstanding notes, the letter of transmittal or any other required documents to the exchange agent, or you cannot comply with the procedures under DTC’s Automated Tender Offer Program prior to the expiration date, you must tender your outstanding notes according to the guaranteed delivery procedures set forth in this prospectus under “The Exchange Offer — Guaranteed Delivery Procedures.”
 
   
Withdrawal
  You may withdraw your tender of outstanding notes at any time prior to the expiration date of the exchange offer. To withdraw, the exchange agent must receive notice of withdrawal, which may be by facsimile, at its address indicated on the cover page of the letter of transmittal before 5:00 p.m., New York City time, on the expiration date of the exchange offer, or you must comply with the appropriate procedures of DTC’s Automated Tender Offer Program system.
 
   
Acceptance of Outstanding Notes
  If you fulfill all conditions required for proper acceptance of outstanding notes, we will accept any and all outstanding notes that you properly tender in the exchange offer on or before 5:00 p.m., New York City time, on the expiration date. We will return any outstanding notes that we do not accept for exchange to you as promptly as practicable after the expiration date and acceptance of the outstanding notes for exchange. See “The Exchange Offer — Terms of the Exchange Offer.”
 
   
Effect on Holders of Outstanding Notes
  Upon acceptance for exchange of all validly tendered outstanding notes pursuant to the terms of the exchange offer, we will have fulfilled a covenant under the registration rights agreement. Accordingly, there will be no increase in the applicable interest rate on the outstanding notes under the circumstances described in the registration rights agreement. If you do not tender your outstanding notes in the exchange offer, you will continue to be entitled to all the rights and limitations applicable to the outstanding notes as set forth in the indenture, except we will not have any further obligation to you to provide for the exchange and registration of untendered outstanding notes under the registration rights agreement. To the extent that outstanding notes are tendered and accepted in the exchange offer, any trading market that may develop for outstanding notes that are not so tendered and accepted could be adversely affected.

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Certain U.S. Federal Income Tax Consequences
  The exchange of outstanding notes for exchange notes in the exchange offer will not be a taxable event for U.S. federal income tax purposes. See “Certain Material U.S. Federal Income Tax Considerations.”
 
   
Regulatory Approvals
  Other than compliance with the Securities Act and qualification of the indentures governing the notes under the Trust Indenture Act of 1939 (the “Trust Indenture Act”), there are no federal or state regulatory requirements that must be complied with or approvals that must be obtained in connection with the exchange offer.
 
   
Use of Proceeds
  We will not receive any cash proceeds from the issuance of the exchange notes in the exchange offer. See “Use of Proceeds.”
 
   
Fees and Expenses
  We will bear all expenses related to soliciting tenders. See “The Exchange Offer — Fees and Expenses.”
 
   
Consequences of Failure to Exchange
  All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the outstanding notes under the Securities Act.
 
   
Exchange Agent
  We have appointed U.S. Bank National Association as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or the letter of transmittal and requests for the notice of guaranteed delivery to the exchange agent addressed as follows: U.S. Bank National Association, 60 Livingston Avenue, St. Paul, MN 55107, Attn: Specialized Finance Dept. Eligible institutions may make requests by facsimile at (651) 495-8158.

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The Exchange Notes
     The summary below describes the principal terms of the exchange notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The “Description of Exchange Notes,” section of this prospectus contains more detailed descriptions of the terms and conditions of the outstanding notes and exchange notes. The exchange notes will have terms identical in all material respects to the outstanding notes, except that the exchange notes will not contain terms with respect to transfer restrictions, registration rights and additional interest for failure to observe certain obligations in the registration rights agreement.
     
Issuer
  Capella Healthcare, Inc.
 
   
Notes Offered
  $500,000,000 aggregate principal amount of 91/4% Senior Notes due 2017.
 
   
Maturity
  The exchange notes will mature on July 1, 2017.
 
   
Interest Payments
  January 1 and July 1 of each year after the date of issuance of the exchange notes, beginning on January 1, 2011.
 
   
Guarantees
  The exchange notes will be guaranteed, jointly and severally, on a senior unsecured basis by all of our current and future Restricted Subsidiaries (as defined herein) that guarantee indebtedness, or are named borrowers, under our credit facility. See “Description of Exchange Notes — Subsidiary Guarantees.” The guarantee of each guarantor is a general unsecured obligations of the respective guarantors and will be:
    equal in right of payment to all existing and future senior unsecured debt of the respective guarantors; and
 
    senior in right of payment to all existing and future subordinated obligations of the respective guarantors.
     
Ranking
  The exchange notes will be our general senior unsecured obligations and will be:
    effectively subordinated to all our existing and future secured debt to the extent of the value of the assets securing that debt;
 
    equal in right of payment with all existing and future senior unsecured debt of Capella;
 
    senior in right of payment to all existing and future subordinated obligations of Capella; and
 
    fully and unconditionally guaranteed on a senior, unsecured basis by the guarantors.
     
Optional Redemption
  At any time, we may redeem all or any portion of the exchange notes at our option on the redemption dates and at the redemption prices specified under “Description of Exchange Notes — Optional Redemption.”
 
   
 
  On or prior to July 1, 2013, we may on one or more occasions, at our option, apply funds equal to the proceeds from one or more equity offerings to redeem up to 35% of the notes at a redemption price of 109.250% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date.

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Offer to Repurchase
  If we experience a change of control, we must offer to repurchase all of the exchange notes (unless otherwise redeemed) at a price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest to the repurchase date. See “Description of Exchange Notes — Repurchase at the Option of Holders — Change of Control.”
 
   
 
  If we sell assets under certain circumstances, we must use the proceeds to make an offer to purchase exchange notes at a price equal to 100% of their principal amount, plus accrued and unpaid interest to the date of purchase. See “Description of Exchange Notes — Repurchase at the Option of Holders — Asset Sales.”
 
   
Covenants
  The indenture contains covenants that, among other things, will limit our ability and the ability of our Restricted Subsidiaries to:
    incur more indebtedness and issue preferred stock;
 
    pay dividends, redeem stock or make other distributions;
 
    make investments;
 
    create liens;
 
    transfer or sell assets;
 
    merge or consolidate;
 
    enter into certain transactions with our affiliates; and
 
    enter into sale and lease back transactions.
     
No Prior Market
  The exchange notes will be freely transferable but will be new securities for which there will not initially be a market. We do not intend to list the exchange notes on any securities exchange. Accordingly, we cannot assure you whether a market for the exchange notes will develop or as to the liquidity of any such market that may develop.

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Summary Historical Consolidated Financial and Operating Data
     The following summary historical consolidated financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Consolidated Financial and Operating Data” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The summary historical consolidated financial data as of December 31, 2008, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010, other than “Operating Data,” have been derived from our audited historical consolidated financial statements and related notes included elsewhere in this prospectus, which have been audited by Ernst & Young LLP. The summary historical consolidated financial data as of June 30, 2011 and for the six-month periods ended June 30, 2010 and 2011, other than “Operating Data,” have been derived from our unaudited historical consolidated financial statements and related notes included elsewhere in this prospectus. As a result of our rapid growth through numerous acquisitions, our operating results for the periods presented are not directly comparable.
                                         
                            Six Months  
    Year Ended December 31,     Ended June 30,  
    2008(12)     2009     2010     2010(13)     2011(13)  
            (Dollars in millions, except for operating data)          
Statement of Operations Data:
                                       
Net revenue
  $ 702.4     $ 813.9     $ 869.5     $ 426.5     $ 422.2  
Costs and expenses:
                                       
Salaries and benefits (includes stock compensation of $—, $0.1, $0.3, $0.2 and $0.2, respectively)
    304.7       346.9       359.7       178.1       186.2  
Supplies
    96.8       109.7       119.6       58.7       61.2  
Provision for bad debts
    81.1       111.3       136.2       64.4       40.0  
Other operating expenses
    137.8       150.3       158.3       75.0       84.3  
Depreciation and amortization
    33.7       37.8       37.1       18.3       18.6  
Interest, net
    50.4       48.5       48.4       23.0       25.4  
Management fee to related party
    0.2       0.2       0.2       0.1       0.1  
Loss on refinancing
    22.4             20.8       20.8        
 
                             
Total costs and expense
    727.1       804.7       880.3       438.4       415.8  
 
                             
Income (loss) from continuing operations before income taxes
    (24.7 )     9.2       (10.8 )     (11.9 )     6.4  
Income taxes
    5.5       2.2       3.2       1.6       1.8  
 
                             
Income (loss) from continuing operations
    (30.2 )     7.0       (14.0 )     (13.5 )     4.6  
Income (loss) from discontinued operations, net of taxes
    (1.9 )     (4.5 )     (0.2 )     (0.1 )     0.1  
 
                             
Net income (loss)
  $ (32.1 )   $ 2.5     $ (14.2 )   $ (13.6 )   $ 4.7  
 
                             
Less: Net income attributable to noncontrolling interests
    0.5       0.9       1.5       0.7       1.0  
 
                             
Net income (loss) attributable to Capella Healthcare, Inc.
  $ (32.6 )   $ 1.6     $ (15.7 )   $ (14.3 )   $ 3.7  
 
                             
Other Financial Data:
                                       
Purchases of property and equipment, net
  $ (19.8 )   $ (22.1 )   $ (26.1 )   $ (10.8 )   $ (13.9 )
Net cash provided by operating activities
    35.7       35.6       65.9       20.0       22.3  
Net cash used in investing activities
    (337.1 )     (16.3 )     (23.8 )     (16.1 )     (42.1 )
Net cash provided by (used in) financing activities
    307.8       (6.1 )     (13.4 )     (5.4 )     (0.5 )
Adjusted EBITDA(1)
    82.0       95.7       95.7       50.3       50.5  
Operating Data(2):
                                       
Number of hospitals at end of each period(3)
    13       13       13       13       13  
Licensed beds(4)
    1,799       1,745       1,745       1,745       1,745  
Admissions(5)
    47,815       50,728       50,682       25,701       25,348  
Adjusted admissions(6)
    93,468       101,405       104,023       51,366       51,984  
Net revenue per adjusted admission
  $ 7,515     $ 8,026     $ 8,359     $ 8,303     $ 8,122  
Patient days(7)
    219,281       232,359       231,568       117,383       118,460  
Average length of stay (days)(8)
    4.6       4.6       4.6       4.6       4.7  
Occupancy rate (licensed beds)(9)
    33.3 %     36.5 %     36.4 %     37.2 %     37.5 %

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                            As of  
    As of December 31,     June 30,  
    2008(12)     2009     2010     2011  
            (Dollars in millions)          
Balance Sheet Data:
                               
Cash and cash equivalents
  $ 6.4     $ 19.6     $ 48.3     $ 28.0  
Property, plant and equipment, net
    475.9       461.7       450.7       446.0  
Total assets
    745.5       756.3       767.8       777.0  
Long-term debt, including current portion
    487.7       484.5       494.1       494.6  
Working capital(10)
    90.1       97.3       119.2       99.1  
                                                         
          Six Months  
    Year Ended December 31,     Ended June 30,  
    2006     2007     2008     2009     2010     2010     2011  
Ratio of earnings to fixed charges(11)
    1.1x       1.1x       N/A       1.2x       N/A       N/A       1.2x  
 
(1)   “EBITDA,” a measure used by management to evaluate operating performance, is defined as net income plus (i) provision for income taxes, (ii) interest expense and (iii) depreciation and amortization. EBITDA is not a recognized term under generally accepted accounting principles in the United States and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and other debt service requirements. Management believes EBITDA is helpful in highlighting trends because EBITDA excludes the results of decisions that are outside the control of operating management and that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies.
 
    “Adjusted EBITDA” is defined as EBITDA plus (i) net income attributable to noncontrolling interests, (ii) loss on refinancing, (iii) loss from discontinued operations and (iv) management fee to related party, if any, for the applicable period. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting adjusted EBITDA are appropriate to provide additional information to investors about the impact of certain noncash items, unusual items that we do not expect to continue at the same level in the future and other items.

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    The following table presents a reconciliation to provide a more detailed analysis of these non-GAAP performance measures:
                                         
                            Six Months  
    Year Ended December 31,     Ended June 30,  
    2008     2009     2010     2010     2011  
            (Dollars in millions)                  
Net income (loss)
  $ (32.6 )   $ 1.6     $ (15.7 )   $ (14.3 )   $ 3.7  
Plus income taxes
    5.5       2.2       3.2       1.6       1.8  
Plus net interest expense and amortization of deferred financing costs
    50.4       48.5       48.4       23.0       25.4  
Plus depreciation and amortization
    33.7       37.8       37.1       18.3       18.6  
 
                             
EBITDA
  $ 57.0     $ 90.1     $ 73.0     $ 28.6     $ 49.5  
Plus net income attributable to noncontrolling interests
  $ 0.5     $ 0.9     $ 1.5     $ 0.7       1.0  
Plus loss from refinancing
    22.4             20.8       20.8        
Plus (income) loss from discontinued operations
    1.9       4.5       0.2       0.1       (0.1 )
Plus management fee to related party
    0.2       0.2       0.2       0.1       0.1  
 
                             
Adjusted EBITDA
  $ 82.0     $ 95.7     $ 95.7     $ 50.3     $ 50.5  
 
                             
(2)   The operating data set forth in this table includes all facilities that are consolidated for financial reporting purposes as of the end of each period presented.
 
(3)   For the year ended December 31, 2008, Woodland Medical Center is included through June 30, 2008, when it was moved to discontinued operations.
 
(4)   Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency regardless of actual use.
 
(5)   Represents the number of patients admitted for inpatient treatment.
 
(6)   General measure of combined inpatient and outpatient volume. We computed adjusted admissions by multiplying admissions by gross patient revenue and then dividing that number by gross inpatient revenue.
 
(7)   Represents the total number of days of care provided to inpatients.
 
(8)   Represents the average number of days admitted patients stay in our hospitals.
 
(9)   Represents the percentage of hospital licensed beds occupied by patients. We calculated occupancy rate percentages by dividing the average daily number of inpatients by the weighted average licensed beds.
 
(10)   We define working capital as current assets minus current liabilities.
 
(11)   See “Ratio of Earnings to Fixed Charges” for an explanation of the calculation of these ratios.
 
(12)   Effective March 1, 2008, we acquired nine hospitals and their affiliated businesses from Community Health Systems, Inc. (“CHS”).
 
(13)   The comparability of our results of operations for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010 is impacted by the change in our uninsured discount policy, effective January 1, 2011, as more thoroughly explained under “Critical Accounting Policies.” The change in the uninsured discount policy effectively shifts a portion of our expenses previously classified as provision for bad debts to revenue deductions, thereby resulting in lower net revenue and lower bad debt expense for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. Had the uninsured discount policy been in place effective January 1, 2010, the revenue and bad debt expenses would have been as follows:
                 
    Net Revenue     Provision for Bad Debts  
    Six Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2010  
    (In millions)  
Historical results of operations as presented
  $ 426.5     $ 64.4  
Uninsured discount impact of pro forma change in policy
    (30.6 )     (30.6 )
 
           
Pro forma results of operations
  $ 395.9     $ 33.8  
 
           

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The following table reflects the results of operations for the six months ended June 30, 2010 on a pro forma basis for the change in our uninsured discounts policy:
                 
    Six Months Ended  
    June 30, 2010  
    (Dollars in millions)  
    Amount     %  
Net revenue
  $ 395.9       100.0 %
Costs and expenses:
               
Salaries and benefits
    178.1       45.0  
Supplies
    58.7       14.8  
Provision for bad debts
    33.8       8.5  
Other operating expenses
    75.0       19.0  
Depreciation and amortization
    18.3       4.6  
Interest, net
    23.0       5.8  
Management fee to related party
    0.1        
Loss on refinancing
    20.8       5.3  
 
           
Total costs and expenses
    407.8       103.0  
 
           
Loss from continuing operations before income taxes
    (11.9 )     (3.0 )
Income taxes
    1.6       0.4  
 
           
Loss from continuing operations
    (13.5 )     (3.4 )
Loss from discontinued operations, net of taxes
    (0.1 )      
 
           
Net loss
  $ (13.6 )     (3.4 )
 
           
Less: Net income attributable to non-controlling interests
    0.7       0.2  
 
           
Net loss attributable to Capella Healthcare, Inc.
  $ (14.3 )     (3.6 )%
 
           

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RISK FACTORS
     You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before deciding to tender your outstanding notes in the exchange offer. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, the trading price of the exchange notes could decline or we may not be able to make payments of interest and principal on the exchange notes, and you may lose all or part of your original investment.
Risks Relating to the Exchange Offer
You must carefully follow the required procedures in order to exchange your outstanding notes.
     We will only issue exchange notes in exchange for outstanding notes that you timely and properly tender. Therefore, you should allow sufficient time to ensure timely delivery of the outstanding notes and you should carefully follow the instructions on how to tender your outstanding notes. Neither we nor the exchange agent is required to tell you of any defects or irregularities with respect to your tender of outstanding notes. Any holder of outstanding notes who tenders in the exchange offer for the purpose of participating in a distribution of the exchange notes will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes that were acquired in market-making or other trading activities (other than outstanding notes acquired directly from us) must deliver a prospectus in connection with any resale of the exchange notes.
If you do not properly tender your outstanding notes, you will continue to hold unregistered outstanding notes and your ability to transfer outstanding notes will remain restricted and may be adversely affected.
     If you do not exchange your outstanding notes for exchange notes pursuant to the exchange offer, the outstanding notes you hold will continue to be subject to the existing transfer restrictions. In general, you may not offer or sell the outstanding notes except under an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not plan to register outstanding notes under the Securities Act unless, in accordance with our registration rights agreement with the initial purchasers of the outstanding notes, (i) the exchange offer is not consummated within 35 days after effectiveness of this exchange offer registration statement or (ii) requested by a holder of the outstanding notes who (a) cannot participate in the exchange offer, (b) cannot resell the exchange notes acquired by it in the exchange offer to the public without delivering a prospectus and the prospectus contained in this exchange offer registration statement is not appropriate or available for such resales by such holder, or (c) is a broker-dealer and holds outstanding securities acquired directly from the Company or one of its affiliates. Further, if you continue to hold any outstanding notes after the exchange offer are consummated, you may be unable to sell them because there will be fewer of these notes outstanding.
You may not be able to resell exchange notes you receive in the exchange offer without registering those notes or delivering a prospectus.
     Based on interpretations by the staff of the SEC in no-action letters, we believe, with respect to exchange notes issued in the exchange offer, that:
    holders who are not “affiliates” of the Company within the meaning of Rule 405 of the Securities Act;
 
    holders who acquire their exchange notes in the ordinary course of business; and
 
    holders who do not engage in, intend to engage in, or have an arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of the exchange notes; and holders that are not acting on behalf of any person who could not truthfully make the foregoing representations,
do not have to comply with the registration and prospectus delivery requirements of the Securities Act.
     Holders described in the preceding sentence must tell us in writing at our request that they meet these criteria. Holders that do not meet these criteria could not rely on interpretations of the staff of the SEC in no-action letters, and would have to register the exchange notes they receive in the exchange offer and deliver a prospectus for them. In addition, holders that are broker-dealers may be deemed “underwriters” within the meaning of the Securities Act

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in connection with any resale of exchange notes acquired in the exchange offer. Holders that are broker-dealers and that acquired their outstanding notes in market-making activities or other trading activities (other than outstanding notes acquired directly from us) and must deliver a prospectus when they resell the exchange notes they acquire in the exchange offer in order not to be deemed an underwriter.
Risks Related to Our Business
We cannot predict the effect that healthcare reform and other changes in government programs may have on our financial condition or results of operations.
     The Affordable Care Act dramatically alters the United States healthcare system and is intended to decrease the number of uninsured Americans and reduce overall healthcare costs. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments, including DSH payments to providers, expanding the Medicare program’s use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, and bundling payments to hospitals and other providers. The Affordable Care Act also contains a number of measures that are intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of Recovery Audit Contractors (“RACs”) in the Medicaid program, expanding the scope of the federal False Claims Act and generally prohibiting physician-owned hospitals from increasing the total percentage of physician ownership or increasing the aggregate number of operating rooms, procedure rooms, and beds for which they are licensed. Because a majority of the measures contained in the Affordable Care Act do not take effect until 2014, it is difficult to predict the impact the Affordable Care Act will have on our facilities. In addition, there have been a number of challenges to the Affordable Care Act, and some courts have ruled that the requirement for individuals to carry health insurance or the Affordable Care Act is unconstitutional. Several bills have been and will likely continue to be introduced in Congress to repeal or amend all or significant provisions of the Affordable Care Act. It is difficult to predict the full impact of the Affordable Care Act because of its complexity, lack of implementing regulations and interpretive guidance, gradual and potentially delayed implementation, pending court challenges, and possible repeal and/or amendment, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them by the Affordable Care Act. Depending on further legislative developments, how the pending court challenges are resolved, and how the Affordable Care Act is ultimately interpreted and implemented, it could have an adverse effect on our business, financial condition and results of operations.
Our overall business results may suffer from the current economic downturn.
     The United States economy recently experienced an economic downturn and unemployment levels remain high. During economic downturns, governmental entities often experience budgetary constraints as a result of increased costs and lower than expected tax collections. These budgetary constraints may result in decreased spending for health and human service programs, including Medicare, Medicaid and similar programs, which represent significant payor sources for our hospitals. Additionally, when patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose to defer or forego elective surgeries and other non-emergent procedures, which are generally more profitable lines of business for hospitals. Moreover, we could experience increases in the uninsured and underinsured populations and difficulties in collecting patient co-payment and deductible receivables. Although the recent passage of the Affordable Care Act is intended to decrease the number of uninsured legal U.S. residents, many of the reform measures do not become effective until 2014 and will not have an immediate impact.
The growth of uninsured and “patient due” accounts and a deterioration in the collectability of these accounts could affect our results of operations adversely.
     The primary collection risks of our accounts receivable relate to the uninsured patient accounts and patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and co-payments) remain outstanding. The provision for doubtful accounts relates primarily to amounts due directly from patients. This risk has increased, and will likely continue to increase, as more individuals enroll in high deductible insurance plans or those with high co-payments or who have no insurance coverage. These trends will likely be exacerbated if general economic conditions remain challenging or

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if unemployment levels in the communities in which we operate rise. As unemployment rates increase, our business strategies to generate organic growth and to improve admissions and adjusted admissions at our hospitals could become more difficult to accomplish.
     The amount of our provision for doubtful accounts is based on our assessments of historical collection trends, business and economic conditions, trends in federal and state governmental and private employer health coverage and other collection indicators. A continuation in trends that results in increasing the proportion of accounts receivable being comprised of uninsured accounts and deterioration in the collectability of these accounts could adversely affect our collections of accounts receivable, results of operations and cash flows. As enacted, the Affordable Care Act seeks to decrease, over time, the number of uninsured individuals. Among other things, the Affordable Care Act will, beginning in 2014, expand Medicaid and incentivize employers to offer, and require individuals to carry, health insurance or be subject to penalties. However, it is difficult to predict the full impact of the Affordable Care Act because of its complexity, lack of implementing regulations and interpretive guidance, gradual and potentially delayed implementation, pending court challenges, and possible repeal and/or amendment, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them by the Affordable Care Act. In addition, even after implementation of the Affordable Care Act, we may continue to experience bad debts and be required to provide uninsured discounts and charity care for undocumented aliens who are not permitted to enroll in a health insurance exchange or government healthcare programs.
Our revenue may decline if federal or state programs reduce our Medicare or Medicaid payments.
     Approximately 36.0% and 12.0% of our net patient revenue for the year ended December 31, 2010 came from the Medicare and Medicaid programs, respectively, including Medicare and Medicaid managed plans. For the six months ended June 30, 2011, approximately 39.7% and 13.2% of our net patient revenue came from the Medicare and Medicaid programs, including Medicare and Medicaid managed plans. In recent years, federal and state governments have made significant changes in the Medicare and Medicaid programs. Some of those changes adversely affect the reimbursement we receive for certain services. In addition, budget deficits in many states have caused significant decreases or proposed decreases in state funding for Medicaid programs.
     On August 22, 2007, CMS issued a final rule for federal fiscal year (“FFY”) 2008 for the hospital inpatient prospective payment system. This rule adopted a two-year implementation of Medicare severity-adjusted diagnosis-related groups (“MS-DRGs”), a severity-adjusted diagnosis-related group (“DRG”) system. This change represented a refinement to the DRG system, and its impact on our revenue has not been significant. Realignments in the DRG system could impact the margins we receive for certain services.
      DRG rates are updated and MS-DRG weights are recalibrated each FFY. The index used to update the market basket gives consideration to the inflation experienced by hospitals and entities outside the healthcare industry in purchasing goods and services. On August 1, 2011, CMS issued Medicare Inpatient Hospital Prospective Payment System (“IPPS”) final rule for FFY 2012, which begins on October 1, 2011. Under the final rule, hospitals that report quality data under the Inpatient Quality Reporting (“IQR”) Program will receive a 1.0% payment rate increase for inpatient hospital stays paid under the IPPS and hospitals that do not report quality data will receive 1.0% decrease in payment rates. The 1.0% net increase is a compilation of a 1.9% base increase, a (2.0)% documentation and coding adjustment to recoup the effects of increased aggregate payments resulting from the adoption of MS-DRGs, and a positive 1.1% adjustment to negate the misapplication of a budget neutrality adjustment between FFYs 1999-2006. The final rate increase also reflects a (2.9)% adjustment as part of a two year process to recoup overpayments resulting from the conversion to the MS-DRG system. However, because the adjustment is non-cumulative, it does not yield any change compared to the FFY 2011 reimbursement rates.
      On July 1, 2011, CMS issued the proposed outpatient prospective payment system (“OPPS”) rates for calendar year (“CY”) 2012. Under the proposed rule, the market basket update for CY 2012 for hospitals under the OPPS would be 1.5%, which represents a 2.8% market basket update, reduced by a 1.2% multifactor productivity adjustment and a 0.1% adjustment, both of which are required by the Affordable Care Act. Hospitals that submit quality data in accordance with the Hospital Outpatient Quality Data Reporting Program will receive the full 1.5% market basket update, and those that do not submit quality data will receive a -0.5% update. In addition, CMS has proposed a 0.6% reduction to the payment rates for non-cancer OPPS hospitals to offset the adjustment to cancer hospital payments. When combined with the estimated 0.2% payment increase that is needed to ensure budget neutrality in connection with the proposed transition to full use of community mental health center (“CMHC”) data for CMHC partial hospital program per diem payment rates, CMS anticipates that the proposed rule would increase payment rates for hospital outpatient services provided in non-cancer hospitals by 1.1% in CY 2012.
     Medicaid programs are funded jointly by the federal government and the states and are administered by states under approved plans. Most state Medicaid program payments are made under a prospective payment system or are based on negotiated payment levels with individual hospitals. Since most states must operate with balanced budgets and since the Medicaid program is often the state’s largest program, many states in which we operate have adopted, or are considering adopting, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand

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the states’ Medicaid systems. The current economic downturn has increased the budgetary pressures on most states, and these budgetary pressures have resulted and likely will continue to result in decreased spending, or decreased spending growth, for Medicaid programs in many states. In addition, the Affordable Care Act contains a provision requiring states to expand Medicaid coverage to more individuals by 2014. Future legislation or other changes in the administration or interpretation of government health programs could have a material adverse effect on our business, financial condition and results of operations.
     We are subject to regular post-payment inquiries, investigations and audits of the claims we submit to Medicare and Medicaid for payment for our services. These post-payment reviews are increasing as a result of new government cost-containment initiatives, including audits of Medicare and Medicaid claims under the RAC program. RACs were first introduced only in the Medicare program; however, the Affordable Care Act expands the RAC program’s scope to include Medicaid claims by requiring all states to establish programs to contract with RACs in 2011. In addition, CMS employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. The Affordable Care Act increases federal funding for the MIC program for federal fiscal year 2011 and beyond. In addition to RACs and MICs, state Medicaid agencies and other contractors have also increased their review activities. These additional post-payment reviews may require us to incur additional costs to respond to requests for records and to pursue the reversal of payment denials and ultimately may require us to refund amounts paid to us that are determined to have been overpaid.
Our revenue may decline if payments from our third-party payors are reduced or eliminated, or if we are unable to negotiate contracts or maintain satisfactory relationships with third-party payors.
     In addition to governmental programs, we are dependent upon private third-party sources of payment for the services provided to patients at our hospitals. If these payments are reduced, our revenue will decrease. The amount of payment we receive for services provided at our hospitals may be adversely affected by market and cost factors as well as other factors over which we have no control.
Controls designed to reduce inpatient services may reduce our revenue.
     Controls imposed by Medicare and commercial third-party payors designed to reduce admissions and lengths of stay, commonly referred to as “utilization review,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and course of treatment of a patient by managed care plans. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-required preadmission authorization and utilization review and by payor pressures to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Efforts to impose more stringent cost controls are expected to continue. Fixed fee schedules, capitation payment arrangements, exclusion from participation in managed care programs or other factors affecting payments for healthcare services over which we will have no control could cause a reduction in our revenue.
     There has been recent increased scrutiny of a hospital’s “Medicare Observation Rate” from outside auditors, government enforcement agencies and industry observers. The term “Medicare Observation Rate” is defined as total unique observation claims divided by the sum of total unique observation claims and total inpatient short-stay acute care hospital claims. A low rate may raise suspicions that a hospital is inappropriately admitting patients that could be cared for in an observation setting. In our hospitals, we use the independent, evidence-based clinical criteria developed by McKesson Corporation, commonly known as InterQual Criteria, to determine whether a patient qualifies for inpatient admission. The industry may anticipate increased regulatory scrutiny of inpatient admission decisions and the Medicare Observation Rate in the future.
We may experience a shortage of qualified professional and staff personnel.
     Consistent with a nationwide trend in the healthcare industry, our hospitals have experienced a shortage of nurses and other qualified professional and staff personnel. The shortage of qualified professional and staff personnel may be exacerbated by the development of other healthcare facilities in the market areas of our hospitals.

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As a result, our hospitals may utilize contract nurses to ensure adequate patient care, which typically are more expensive than full-time employees. In addition, our hospitals may be forced to implement more costly coverage and retention programs. There can be no assurance that our hospitals will be able to recruit or retain a sufficient number of qualified professional and staff personnel to deliver healthcare services efficiently. Accordingly, our financial condition and results of operations may be affected adversely.
Our performance depends on our ability to recruit and retain quality physicians.
     Physicians generally direct the majority of hospital admissions. Thus, the success of our hospitals depends in part on the following factors:
    the number and quality of the physicians on the medical staffs of our hospitals;
 
    the admitting practices of those physicians; and
 
    the development and maintenance of constructive relationships with those physicians, including physicians with whom we have joint ventures.
     Most physicians at our hospitals also have admitting privileges at other hospitals. Our efforts to attract and retain physicians are affected by our efforts to promote quality, leadership, satisfaction and intellectual development, our managed care contracting relationships, national shortages in some specialties, the adequacy of our support personnel, the condition of our facilities and medical equipment, the availability of suitable medical office space and federal and state laws and regulations prohibiting financial relationships that may have the effect of inducing patient referrals. There can be no assurance that our physician recruitment measures, including multi-year employment and/or income guarantee arrangements, joint ventures and other collaborative arrangements will be successful. Also, as we recruit more physicians, the costs associated with integrating and managing these new physicians could have a negative impact on our operating results and liquidity in the short term.
     If facilities are not staffed with adequate support personnel or technologically advanced equipment that meets the needs of patients, physicians may be discouraged from referring patients to our facilities, which could affect our profitability adversely. Furthermore, physicians we recruit or employ may fail to maintain successful medical practices, one or more key members of a particular physician group may cease practicing with that group, or other surgeons in the community may refuse to use our hospitals. Although we were generally successful in our physician recruiting efforts during fiscal 2009 and 2010, we cannot assure you of the long-term success of this strategy. We also face continued challenges in some of our markets to recruit certain types of physician specialists who are in high demand.
We are dependent on our senior management team and the loss of the services of one or more of our senior management team could have a material adverse effect on our business.
     The success of our business is largely dependent upon the services and management experience of our senior management team, which includes Daniel S. Slipkovich, our Chief Executive Officer; D. Andrew Slusser, our Senior Vice President of Acquisition and Development; Denise W. Warren, our Senior Vice President, Chief Financial Officer and Treasurer; and Michael A. Wiechart, our Senior Vice President and Chief Operating Officer. In addition, we depend on the ability of our senior officers and key employees to manage growth successfully and on our ability to attract and retain skilled employees. We do not maintain key man life insurance policies on any of our officers. If we were to lose any of our senior management team or members of our local management teams, or if we are unable to attract other necessary personnel in the future, it could have a material adverse effect on our business, financial condition and results of operations. If we were to lose the services of one or more members of our senior management team, we could experience a significant disruption in our operations and failure of the affected hospitals to adhere to their respective business plans.
If we fail to comply with extensive laws and government regulations, including fraud and abuse laws, we could suffer penalties or be required to make significant changes to our operations.
     The healthcare industry is required to comply with many laws and regulations at the federal, state, and local government levels. These laws and regulations require that hospitals meet various requirements, including those

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relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, compliance with building codes, environmental protection and privacy. These laws include the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), a section of the Social Security Act, known as the “anti-kickback” statute, and the federal physician self-referral prohibition (the “Stark Law”).
     There are heightened coordinated civil and criminal enforcement efforts by both federal and state government agencies relating to the healthcare industry, including the hospital segment. The ongoing investigations of certain healthcare providers relate to various referral, inpatient status cost reporting and billing practices, laboratory and home care services, privacy and physician ownership and joint ventures involving hospitals. Moreover, the health reform laws increase funding for fraud and abuse enforcement and increase penalties under the False Claims Act. Federal regulations issued under HIPAA contain provisions that required us to implement and, in the future, may require us to implement additional costly electronic media security systems and to adopt new business procedures designed to protect the privacy and security of each of our patient’s health and related financial information. Such privacy and security regulations impose extensive administrative, physical and technical requirements on us, restrict our use and disclosure of certain patient health and financial information, provide patients with rights with respect to their health information and require us to enter into contracts extending many of the privacy and security regulation requirements to third parties that perform duties on our behalf. We are also required to make certain expenditures to help ensure our continued compliance with such laws and regulations and, in the future, such expenses could negatively impact our results of operations. ARRA included provisions for heightened enforcement of HIPAA and stiffer penalties for HIPAA violations.
     If we fail to comply with applicable laws and regulations, including fraud and abuse laws, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in the Medicare, Medicaid, and other federal and state healthcare programs. Our facilities also are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. If any facility loses its accreditation, it may be in default under its third party payor agreements, make difficult the attraction, negotiation and retention of those agreements on satisfactory terms or at all and could put its Medicare certification at risk if the facility’s Medicare certification was obtained through deemed status as a result of the facility’s accreditation. If a facility loses its certification under the Medicare program, then the facility will be unable to receive reimbursement from the Medicare and Medicaid programs. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, we may need to make changes in our facilities, equipment, personnel and services.
     In the future, changes, different interpretations or enforcement of these laws and regulations, including any changes pursuant to the Affordable Care Act, could subject our current practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs, and operating expenses. For a more detailed discussion of these laws, rules and regulations, see “Business — Government Regulation and Other Factors.”
CMS may impose substantial fines or other penalties as a result of the matters disclosed in certain self-disclosure letters, which could have a material adverse impact on the results of operations and financial condition of the joint venture in which we own a 60% interest and through which we recently acquired Cannon County Hospital, LLC, or CCH.
      Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. CMS and the Office of the Inspector General (“OIG”) allow providers to disclose prior conduct that may have violated those laws and regulations and resolve those issues below the maximum penalties authorized by law. CMS recently established a Voluntary Self-Referral Disclosure Protocol under the authority provided in the Affordable Care Act, which allows providers to disclose to CMS actual or potential violations of the Stark Law and allows CMS to compromise the total amount of overpayments owed as a result of inadvertent Stark Law violations. Additionally, the OIG is responsible for imposing penalties for Stark Law violations and violations of the anti-kickback statute, which may include civil monetary penalties, imposition of a Corporate Integrity Agreement or exclusion from federal health care programs such as Medicare and Medicaid. CMS does not have the authority to compromise any of the potential penalties that may be imposed by the OIG. Based on the findings from CCH’s internal investigation, management of CCH submitted voluntary self-disclosure letters to CMS for each of DeKalb Community Hospital and Stones River Hospital on June 22, 2011 (collectively, the “Self-Disclosure Letters”). The Self-Disclosure Letters disclose certain potentially non-compliant arrangements with physicians under the Stark Law, including lack of certain written agreements with physicians and, solely with respect to Stones River Hospital, administrative failures to ensure that physicians who leased space from CCH executed compliant leases and regularly paid the rental amounts that were due. CCH’s current management is unable to predict CMS’s response to the Self-Disclosure Letters, the potential liability that may result from the Self Disclosure Letters or whether CMS may widen the scope of its investigation beyond the matters covered in the Self-Disclosure Letters or refer the matters to any other governmental agencies. If CMS imposes substantial fines as a result of the conduct described in the Self-Disclosure Letters to CMS, it would have a material adverse impact on the results of operations and financial condition of CCH and the joint venture in which we own a 60% interest.
We are subject to competition from other hospitals or healthcare providers, including physicians, which could affect our results of operations adversely.
     Our success depends on the effective and efficient operation of our hospitals, which will be affected by competition from other acute care hospitals, free-standing outpatient diagnostic and surgery centers, labs and alternative delivery systems, some of which have substantially greater resources than we do. The healthcare industry is highly competitive. Alternative forms of healthcare delivery systems, such as health maintenance organizations and preferred provider organizations, are significant factors in the delivery of healthcare services and the rates chargeable by physicians and hospitals. Typically, our hospitals’ primary competitor is a not-for-profit hospital. Further, our hospitals face competition from hospitals outside of their primary service area, including hospitals in urban areas that provide more complex services. Patients in our primary service areas may travel to these other hospitals for a variety of reasons. These reasons include physician referrals or the need for services we do not offer. Patients who seek services from these other hospitals subsequently may shift their preferences to those hospitals for the services we provide.
     We also face very significant and increasing competition not only from services offered by physicians (including physicians on our medical staffs) in their offices and from other specialized care providers, including

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outpatient surgery, oncology, physical therapy and diagnostic centers (including many in which physicians may have an ownership interest), but also from physicians owning and operating competing hospitals. For example, physicians own interests in competing hospitals in Muskogee, Oklahoma and Hot Springs, Arkansas. Some of our hospitals have and will seek to develop outpatient facilities where necessary to compete effectively. However, to the extent that other providers are successful in developing outpatient facilities or physicians are able to offer additional, advanced services in their offices, our market share for these services likely will decrease in the future.
Our net revenue is especially concentrated in a small number of states which makes us particularly sensitive to regulatory and economic changes in those states.
     Our net revenue is particularly sensitive to regulatory and economic changes in states in which we generate the majority of our revenue, including Oklahoma and Arkansas. For the year ended December 31, 2010 and the six months ended June 30, 2011, we generated approximately 47.3% and 46.6%, respectively, of our net revenue in Oklahoma and Arkansas. This concentration makes us particularly sensitive to regulatory, economic, environmental and competitive conditions and changes in those states. Any material change in the current payment programs or regulatory, economic, environmental or competitive conditions in those states could have a disproportionate effect on our overall business results. The economies of the non-urban communities in which our hospitals operate are often dependant on a small number of large employers, especially manufacturing or other facilities. These employers often provide income and health insurance for a disproportionately large number of community residents who may depend on our hospitals for care. The failure of one or more large employers, or the closure or substantial reduction in the number of individuals employed at manufacturing or other facilities located in or near many of the non-urban communities in which our hospitals operate, could cause affected employees to move elsewhere for employment or lose insurance coverage that was otherwise available to them. The occurrence of these events may cause a material reduction in our revenue or impede our business strategies intended to generate organic growth and improve operating results at our hospitals. Any material change in the current demographic, economic, competitive or regulatory conditions in any of our markets could affect our overall business results adversely because of the significance of our operations in each of these markets to our overall operating performance. Moreover, because of the concentration of our revenue in a limited number of markets, our business is less diversified and, accordingly, is subject to greater regional risk than that of some of our larger competitors.
If our access to licensed information systems is interrupted or restricted, or if we are not able to integrate changes to our existing information systems or information systems of acquired hospitals, our operations could suffer.
     Our business depends significantly on effective information systems to process clinical and financial information. Information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information processing technology. We rely heavily on an affiliate of HCA Holdings, Inc. (“HCA”) and another third-party vendor for information systems. These two parties provide us with our primary financial, clinical, revenue cycle management, patient accounting and network information services. HCA’s primary business is to own and operate hospitals, not to provide information systems. We do not control these systems, and if these systems fail or are interrupted, if our access to these systems is limited in the future or if these parties develop systems more appropriate for the urban healthcare market and not suited for our hospitals, our operations could suffer.
     System conversions are costly, time consuming and disruptive for physicians and employees. Should we decide or be required to convert away from systems provided by third parties, such implementation would be very costly and could have a material adverse effect on our business, financial condition and results of operations.
     In addition, as new information systems are developed in the future, we will need to integrate them into our existing systems. Evolving industry and regulatory standards, such as HIPAA and EHR regulations, may require changes to our information systems in the future. For example, the HITECH Act, contains a number of provisions that significantly expand the reach of HIPAA. Among other things, the HITECH Act (i) created new security breach notification requirements for covered entities (ii) extended the HIPAA security provisions to business associates, and (iii) increased a patient’s ability to restrict access to his or her protected health information. We may not be able to integrate new systems or changes required to our existing systems or systems of acquired hospitals in the future effectively or on a cost-efficient basis.

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     Additionally, as required by ARRA, the United States Department of Health and Human Services (“HHS”) is in the process of developing and implementing an incentive payment program for eligible hospitals and healthcare professionals that adopt and meaningfully use certified EHR technology. If our hospitals and employed professionals are unable to meet the requirements for participation in the incentive payment program, we will not be eligible to receive incentive payments that could offset some of the costs of implementing EHR systems. Further, beginning in 2015, eligible hospitals and professionals that fail to demonstrate meaningful use of certified EHR technology will be subject to reduced payments from Medicare. Failure to implement EHR systems effectively and in a timely manner could have a material adverse effect on our financial position and results of operations.
We may be subject to liabilities for professional liability and other claims brought against our facilities.
     We may be liable for damages to persons or property arising from occurrences at our hospitals. We maintain casualty, professional and general liability insurance through Auriga Insurance Group (“Auriga”), a wholly-owned subsidiary of our parent, Capella Holdings, Inc. (“Holdings”), in amounts and with deductibles that we believe to be appropriate for our operations. Our reserves for professional and general liability claims and workers compensation claims are based upon independent third-party actuarial calculations, which consider historical claims data, demographic considerations, severity factors and other actuarial assumptions in determining reserve estimates. If the assumptions underlying the third-party actuarial calculations prove to be materially different from actual claims brought against us, our reserves may be insufficient. We also carry excess layers should a claim exceed Auriga’s aggregate cap. If we become subject to claims, however, our insurance coverage (i) may not cover all successful professional and general liability claims brought against us or (ii) continue to be available at a cost allowing us to maintain adequate levels of insurance. If one or more successful claims against us were not covered by or exceeded the coverage of our insurance, we could be affected adversely.
Future capital commitments, acquisitions or joint ventures may require significant resources, may be unsuccessful or could expose us to unforeseen liabilities.
     As part of our growth strategy, we may pursue acquisitions or joint ventures of hospitals or other related healthcare facilities and services. These acquisitions or joint ventures may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that could have a material adverse effect on our business, financial condition and results of operations. Acquisitions or joint ventures involve numerous risks, including:
    difficulty and expense of integrating acquired operations into our business;
 
    diversion of management’s time from existing operations;
 
    potential loss of key employees or physicians of acquired facilities; and
 
    assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations.
     In connection with the transaction in 2007 pursuant to which we lease Muskogee Regional Medical Center, we agreed to make at least $28 million in general capital expenditures at that facility during the first five years following the closing. As of December 31, 2010, we had made related capital expenditures of approximately $23.9 million in the aggregate since the closing of that transaction. For the six months ended June 30, 2011, we made additional related capital expenditures of approximately $1.2 million. Therefore, we remain obligated for $2.9 million in expenditures pursuant to our agreement. We intend to satisfy our obligation to make additional capital expenditures within the agreed period. A failure to make the required capital expenditures could increase the costs of compliance by subjecting us to claims for breach of these obligations.
     We cannot assure you that we will succeed in obtaining financing for acquisitions or joint ventures at a reasonable cost, or that such financing will not contain restrictive covenants that limit our operating flexibility. Further, volatility and disruption of the capital and credit markets and adverse changes in the U.S. and global economies may further impact our ability to access both available and affordable financing. We also may be unable to operate acquired hospitals profitably or succeed in achieving improvements in their financial performance.

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     Additionally, many states, including some where we have hospitals and others where we may in the future attempt to acquire hospitals, have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have specific legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste. These legislative and administrative efforts focus primarily on the appropriate valuation of the assets divested and the use of the sale proceeds by the not-for-profit seller. These review and approval processes can add time to the consummation of an acquisition of a not-for-profit hospital, and future actions on the state level seriously could delay or even prevent future acquisitions of not-for-profit hospitals. Furthermore, as a condition to approving an acquisition, the attorney general of the state in which the hospital is located may require us to maintain specific services, such as emergency departments, or to continue to provide specific levels of charity care, which may affect our decision to acquire or the terms upon which we acquire one of these hospitals.
If we fail to enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment, our ability to maintain and expand our markets will be affected adversely.
     Technological advances with respect to computed axial tomography (CT), magnetic resonance imaging (MRI) and positron emission tomography (PET) equipment, as well as other equipment used in our facilities, are continually evolving. In an effort to provide high quality patient care and to compete with other healthcare providers, we must constantly evaluate our equipment needs and upgrade equipment as a result of technological improvements. Such equipment costs typically range from $1.0 million to $3.0 million, exclusive of construction or build-out costs. If we fail to remain current with the technological advancements of the medical community, our volumes and revenue may be impacted negatively.
Difficulties with major expansion projects may involve significant capital expenditures that could have an adverse impact on our liquidity.
     We may decide to construct major expansion projects to existing hospitals in order to achieve our growth objectives. Our ability to complete new expansion projects on budget and on schedule would depend on a number of factors, including, but not limited to:
    our ability to control construction costs;
 
    adverse weather conditions;
 
    shortages of labor or materials;
 
    our ability to obtain necessary licensing and other required governmental authorizations; and
 
    other unforeseen problems and delays.
     As a result of these and other factors, we cannot assure you that if we decide to pursue major expansion projects we will not experience greater construction or other expansion costs than originally planned in connection with expansion projects.
State efforts to regulate the construction or expansion of healthcare facilities could impair our ability to operate and expand our operations.
     Some states, including the ones in which we operate, require healthcare providers to obtain prior approval, known as a certificate of need (“CON”), for the purchase, construction or expansion of healthcare facilities, to make certain capital expenditures or to make changes in services or bed capacity. In giving approval, these states consider the need for additional or expanded healthcare facilities or services. The failure to obtain any requested CON could impair our ability to operate or expand operations. Any such failure could, in turn, adversely affect our ability to attract patients to our facilities and grow our revenue, which would have an adverse effect on our results of operations.

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The industry trend toward value-based purchasing may negatively impact our revenue.
     There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs, including Medicare and Medicaid, require hospitals to report certain quality data to receive full reimbursement updates. In addition Medicare does not reimburse for care related to certain preventable adverse events (also called “never events”). Many large commercial payors currently require hospitals to report quality data, and several commercial payors do not reimburse hospitals for certain preventable adverse events. Furthermore, we implemented a policy pursuant to which we do not bill patients or third-party payors for fees or expenses incurred as a result of certain preventable adverse events. We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. We are unable at this time to predict how this trend will affect our results of operations, but it could impact our revenue negatively.
A majority of the employees of Capital Medical Center and its related clinics are union members and subject to the terms of collective bargaining agreements.
     Capital Medical Center is currently a party to collective bargaining agreements with two local unions that represent all of the employees of that hospital with the exception of professional employees, managerial employees, confidential employees, guards and supervisors (as those terms are defined in the National Labor Relations Act). The terms of the collective bargaining agreements set forth certain criteria related to the hospital’s employment practices, seniority, hours of work and overtime, holidays, use and redemption of paid time off, extended illness bank, vacation scheduling, compensation, pay practice, health and non-health benefits, leaves of absence, grievance procedures, disability accommodations and the hospital’s drug and alcohol policies. If Capital Medical Center is unable to meet any such criteria, it could result in discussions with union representatives that could be costly and time-consuming for that facility. Furthermore, the terms of the collective bargaining agreements constrain our flexibility as general partner of Capital Medical Center with respect to certain employee issues. Other facilities could experience unionizing activity, which could increase our labor costs materially.
Our interest in Muskogee Regional Medical Center will expire at the end of the lease term.
     We currently lease or sublease Muskogee Regional Medical Center and related properties pursuant to a forty-year lease with Muskogee Medical Center Authority, which expires in 2047 (the “Muskogee Lease”). Under the terms of the Muskogee Lease, Muskogee Regional Medical Center and related properties will automatically revert to the Muskogee Medical Center Authority or the City of Muskogee, as applicable, upon the expiration or termination of the Muskogee Lease. The Muskogee Lease also grants the Muskogee Medical Center Authority the option to purchase some or all of the assets owned by us and used in connection with the operation of Muskogee Regional Medical Center and related properties in the event the Lease expires or is terminated. Upon the expiration or termination of the Muskogee Lease, our interest in Muskogee Regional Medical Center and related properties will cease.
GTCR indirectly controls us and may have conflicts of interest with us or you in the future.
     GTCR owns 80.1% of Holdings common stock, which in turn owns 100% of the outstanding shares of Capella’s common stock. GTCR elects a majority of the board of directors of Holdings and Capella and controls all matters affecting us, including any determination with respect to:
    our direction and policies;
 
    the acquisition and disposition of assets;
 
    future issuances of common stock, preferred stock or other securities;
 
    our future incurrence of debt; and
 
    any dividends on our common stock or preferred stock.

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     The interests of GTCR could conflict with the interests of holders of the notes. If we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity holders might conflict with those of the holders of the notes. In addition, GTCR may have an interest in pursuing acquisitions, divestitures, financings or other transactions, that, in its judgment, could enhance its equity investment even though such transactions might involve risks to the holders of the notes. In addition, GTCR is in the business of making investments in companies and may from time to time acquire interests in businesses that directly or indirectly compete with our business.
Our hospitals are subject to potential responsibilities and costs under environmental laws that could lead to material expenditures or liability.
     We are subject to various federal, state and local environmental laws and regulations, including those relating to the protection of human health and the environment. We could incur substantial costs to maintain compliance with these laws and regulations. To our knowledge, we have not been and are not currently the subject of any investigations relating to noncompliance with environmental laws and regulations. We could become the subject of future investigations, which could lead to fines or criminal penalties if we are found to be in violation of these laws and regulations. The principal environmental requirements and concerns applicable to our operations relate to proper management of hazardous materials, hazardous waste and medical waste, above-ground and underground storage tanks, operation of boilers, chillers and other equipment, and management of building conditions, such as the presence of mold, lead-based paint or asbestos. Our hospitals engage independent contractors for the transportation and disposal of hazardous waste, and we require that our hospitals be named as additional insureds on the liability insurance policies maintained by these contractors.
     We also may be subject to requirements related to the remediation of substances that have been released into the environment at properties owned or operated by us or our predecessors or at properties where substances were sent for off-site treatment or disposal. These remediation requirements may be imposed without regard to fault, and liability for environmental remediation can be substantial.
Risks Related to the Notes
Our substantial indebtedness could affect our financial condition adversely and our ability to fulfill our obligations under the notes.
     As of June 30, 2011, our total consolidated indebtedness was approximately $494.6 million. Our indebtedness could have important consequences to you, including:
    making it more difficult for us to satisfy our obligations with respect to the notes;
 
    increasing our vulnerability to general adverse economic and industry conditions;
 
    requiring that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions and general corporate requirements;
 
    limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and general corporate requirements;
 
    limiting our flexibility in planning for, or reacting to, changes in our business and the healthcare industry; and
 
    placing us at a competitive disadvantage to our competitors that have less indebtedness.
     For example, we and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indenture and the ABL do not fully prohibit us or our subsidiaries from doing so. Our ABL provides commitments of up to $100.0 million (not giving effect to any outstanding letters of credit, which would reduce the amount available under our ABL), of which approximately $70.0 million would have been available for future borrowings as of June 30, 2011. In addition, we may seek to increase the borrowing availability under the ABL. All of those borrowings would be senior and secured, and as a result, would be effectively senior to the notes and the guarantees of the notes by the guarantors. If we incur any additional indebtedness that ranks equally with the notes,

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the holders of that debt will be entitled to share ratably with the holders of the notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up. This may have the effect of reducing the amount of proceeds paid to you in any of these events. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could increase.
Our business and financial results depend on our ability to generate sufficient cash flow to service our debt or refinance our indebtedness on commercially reasonable terms.
     Our ability to make payments on and to refinance our debt and fund planned expenditures depends on our ability to generate cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations or that future borrowings will be available to us under the ABL in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. We cannot assure you that we will be able to refinance our borrowing arrangements or any other outstanding debt on commercially reasonable terms or at all. Refinancing our borrowing arrangements could cause us to:
    pay interest at a higher rate;
 
    be subject to additional or more restrictive covenants than currently provided in our debt agreements; and
 
    grant additional security interests in our assets.
     Our inability to generate sufficient cash flow to service our debt or refinance our indebtedness on commercially reasonable terms would have a material adverse effect on our business, financial condition and results of operations.
Operating and financial restrictions in our debt agreements limit our operational and financial flexibility.
     The ABL and the indenture under which the notes are issued contain a number of significant covenants that, among other things, restrict our ability to:
    incur additional indebtedness or issue preferred stock;
 
    pay dividends on or make other distributions or repurchase our capital stock or make other restricted payments;
 
    make investments;
 
    enter into certain transactions with affiliates;
 
    issue dividends or other payments from restricted subsidiaries to Holdings or other restricted subsidiaries;
 
    create liens;
 
    designate our subsidiaries as unrestricted subsidiaries; and
 
    sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of our assets.
     In addition, under the ABL, we are required to satisfy and maintain specified financial ratios and tests. Events beyond our control may affect our ability to comply with those provisions, and we may not be able to meet those ratios and tests. The breach of any of these covenants would result in a default under the ABL and the lenders could elect to declare all amounts borrowed under the ABL, together with accrued interest, to be due and payable and could proceed against the collateral securing that indebtedness. Because borrowings under the ABL are secured by certain of our assets and certain assets of our subsidiaries, borrowings under the ABL are superior in right of payment to the notes to the extent of the assets securing the ABL. If any of our indebtedness were to be accelerated, our assets may not be sufficient to repay in full that indebtedness and the notes.
     Under the ABL, when (and for as long as) the availability under the ABL is less than a specified amount for a certain period of time, or if an event of default has occurred and is continuing, funds deposited into any of our

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depository accounts will be transferred on a daily basis into a blocked account with the administrative agent and applied to prepay loans under the asset-based revolving credit facility and, if an event of default has occurred and is continuing, to cash collateralize letters of credit and swingline loans issued thereunder and certain other contingent obligations arising in connection with the ABL.
     Our capital expenditure and acquisition strategy requires substantial capital resources. The building of new hospitals and the operations of our existing hospitals and newly acquired hospitals require ongoing capital expenditures for construction, renovation, expansion and the addition of medical equipment and technology. More specifically, we are currently, and may in the future be, contractually obligated to make significant capital expenditures relating to the facilities we acquire. Also, construction costs to build new hospitals are substantial. Our debt agreements may restrict our ability to incur additional indebtedness to fund these expenditures.
     A breach of any of the restrictions or covenants in our debt agreements could cause a cross-default under other debt agreements. A significant portion of our indebtedness then may become immediately due and payable. We are not certain whether we would have, or be able to obtain, sufficient funds to make these accelerated payments. If any senior debt is accelerated, our assets may not be sufficient to repay in full such indebtedness and our other indebtedness.
As a holding company, we rely on payments from our subsidiaries in order for us to make payments on the notes.
     We are a holding company with no significant operations of our own. Because our operations are conducted through our subsidiaries, we depend on dividends, loans, advances and other payments from our subsidiaries in order to allow us to satisfy our financial obligations. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts to us, whether by dividends, loans, advances or other payments. The ability of our subsidiaries to pay dividends and make other payments to us depends on their earnings, capital requirements and general financial conditions and is restricted by, among other things, applicable corporate and other laws and regulations as well as, in the future, agreements to which our subsidiaries may be a party.
A subsidiary guarantee could be voided or subordinated because of federal bankruptcy law or comparable state law provisions.
     Our obligations under the notes are guaranteed by substantially all of our existing domestic restricted subsidiaries. Under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, one or more of the subsidiary guarantees could be voided or claims against a subsidiary guarantor could be subordinated to all other debts of that subsidiary guarantor if, among other things, the subsidiary guarantor, at the time it incurred the indebtedness evidenced by its subsidiary guarantee:
    incurred the guarantee with the intent of hindering, delaying or defrauding current or future creditors; or
 
    received less than reasonably equivalent value or fair consideration for the incurrence of the subsidiary guarantee and:
 
    was insolvent or rendered insolvent by reason of such incurrence;
 
    was engaged in a business or transaction for which the subsidiary guarantor’s remaining assets constituted unreasonably small capital; or
 
    intended to incur, or believed that it would incur, debts beyond its ability to pay its debts as they mature.
     In addition, any payment by that subsidiary guarantor pursuant to its subsidiary guarantee could be voided and required to be returned to the subsidiary guarantor or to a fund for the benefit of the creditors of the subsidiary guarantor.

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     The measure of insolvency for purposes of fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a subsidiary guarantor would be considered insolvent if:
    the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;
 
    the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
 
    it could not pay its debts as they become due.
     We cannot be sure which standards a court would use to determine whether or not the subsidiary guarantors were solvent at the relevant time, or, regardless of the standard the court uses, that the issuance of the subsidiary guarantee would not be voided or the subsidiary guarantee would not be subordinated to that subsidiary guarantor’s other debt. If the subsidiary guarantees were legally challenged, any subsidiary guarantee could also be subject to the claim that the obligations of the applicable subsidiary guarantor were incurred for less than fair consideration, since the subsidiary guarantee was incurred for our benefit and only indirectly for the benefit of the subsidiary guarantor. Although each guarantee limited as necessary to prevent that guarantee from constituting a fraudulent conveyance under applicable law, this provision may not be effective to protect the guarantees from being voided under the fraudulent transfer laws described above.
     A court could thus void the obligations under the subsidiary guarantee or subordinate the subsidiary guarantee to the applicable subsidiary guarantor’s other debt or take other action detrimental to holders of the notes.
We may be unable to repurchase the notes if we experience a change of control.
     If we experience a change of control, as that term is defined in the indenture governing the notes, we will be required to offer to purchase all of the notes. Any such offer would need to comply with any applicable regulations under federal securities laws, including Rule 14e-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our failure to repay holders tendering notes upon a change of control will result in an event of default under the notes. The events that constitute a change of control, or an event of default, under the notes may also result in an event of default under the ABL, which may result in the acceleration of that indebtedness requiring us to repay that indebtedness immediately. The lenders under the ABL may have the right to prohibit any such purchase or redemption, in which event we will seek to obtain waivers from the required lenders under the ABL, but may not be able to do so. If a change of control were to occur, we cannot assure you that we would have sufficient funds to repay debt outstanding under the ABL or to purchase the notes. We expect that we would require additional financing from third parties to fund any such purchases, and we cannot assure you that we would be able to obtain financing on satisfactory terms or at all.
We cannot assure you that an active trading market will develop for the exchange notes, which may reduce their market price.
     We do not intend to apply for a listing of the exchange notes on a securities exchange or on any automated dealer quotation system. There is currently no established market for the outstanding notes or for the exchange notes and we cannot assure you as to the liquidity of markets that may develop for the exchange notes, your ability to sell the exchange notes or the price at which you would be able to sell the exchange notes. If such markets were to exist, the exchange notes could trade at prices that may be lower than their principal amount or purchase price depending on many factors, including prevailing interest rates and the markets for similar securities.
     We cannot assure you that an active market for the exchange notes will develop or, if developed, that it will continue. Historically, the market for noninvestment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the exchange notes. The market, if any, for the exchange notes may experience similar disruptions and any such disruptions may adversely affect the prices at which you may sell your exchange notes. Also, the future trading prices of the exchange notes will depend on many factors, including:
    our operating performance and financial condition;

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    our ability to complete the exchange offer to exchange the outstanding notes for the exchange notes;
 
    the interest of securities dealers in making a market in the exchange notes; and
 
    the market for similar securities.
Volatile trading prices may require you to hold the notes for an indefinite period of time.
     If a market develops for the notes, the notes may trade at prices higher or lower than their initial offering price. The trading price would depend on many factors, such as prevailing interest rates, the market for similar securities, general economic conditions and our financial condition, performance and prospects. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial fluctuation in the prices of these securities. Disruptions of this type could have an adverse effect on the price of the notes. You should be aware that you may be required to bear the financial risk of an investment in the notes for an indefinite period of time.
Not all of our subsidiaries guarantee our obligations under the notes, and the assets of the non-guarantor subsidiaries may not be available to make payments on the notes.
     Our present and future unrestricted subsidiaries, and our subsidiaries that are less than wholly-owned, are not guarantors of the notes. Payments on the notes are only required to be made by the subsidiary guarantors and us. As a result, no payments are required to be made from the assets of subsidiaries that do not guarantee the notes, unless those assets are transferred by dividend or otherwise to us or a subsidiary guarantor.
     The notes are subordinated structurally to any existing and future preferred stock, indebtedness and other liabilities of any of our subsidiaries that do not guarantee the notes, even if such obligations do not constitute senior indebtedness. In the event of a bankruptcy, liquidation or reorganization of any of the non-guarantor subsidiaries, holders of their indebtedness, including their trade creditors and other obligations, including any preferred stock, will be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to us. As a result, the notes are effectively subordinated to all the liabilities of the non-guarantor subsidiaries.
     Our less than wholly-owned subsidiaries also may be subject to restrictions on their ability to distribute cash to in their financing or other agreements and, as a result, we may not be able to access their cash flows to service their respective debt obligations, including in respect of the notes.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.
     Any default under the agreements governing our indebtedness, including a default under the ABL that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flows and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including the ABL), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the ABL could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against the assets securing the ABL, and we could be forced into bankruptcy or liquidation.
     If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under the ABL to avoid being in default. If we breach our covenants under the ABL and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the ABL, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation.

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The notes are not secured and, therefore, effectively are subordinated to all of our existing and future secured indebtedness.
     The notes are not secured by any of our assets or any assets of our subsidiaries. In the event of a bankruptcy or similar proceeding involving us or our subsidiaries, the assets which serve as collateral securing the indebtedness of such entities will be available to satisfy their obligations under any secured indebtedness they presently have or may incur in the future. Moreover, the indenture governing the notes will permit us to incur additional indebtedness that is secured.
If a bankruptcy petition were filed by or against us, holders of notes may receive a lesser amount for their claim than they would have been entitled to receive under the indenture governing the notes.
     If a bankruptcy petition were filed by or against us under the U.S. Bankruptcy Code after the issuance of the notes, the claim by any holder of the notes for the principal amount of the notes may be limited to an amount equal to the sum of:
    the original issue price for the notes; and
 
    that portion of the original discount that does not constitute “unmatured interest” for purposes of the U.S. Bankruptcy Code.
     Any original issue discount that was not amortized as of the date of the bankruptcy filing would constitute unmatured interest. Under the U.S. Bankruptcy Code, the holders of notes would only have the right to receive interest accruing after the commencement of a bankruptcy proceeding to the extent that the value of the collateral securing the notes and the guarantees (after taking into account all prior liens on such collateral) exceeds the claim of the holders of notes for principal and pre-petition interest on the notes. Accordingly, holders of the notes under these circumstances may receive a lesser amount than they would be entitled to under the terms of the indenture governing the notes, even if sufficient funds are available.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
     Certain statements made in this prospectus, as well as information included in oral statements or other written statements made, or to be made, by our management, contain, or will contain, disclosures that are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “project,” “continue,” “should” and other comparable terms. These forward-looking statements are based on the current plans and expectations of our management and are subject to a number of risks and uncertainties, including those set forth below, which could significantly affect our current plans and expectations and future financial condition and results and there can be no assurance that the plan or expectation will be achieved or accomplished.
     Except as required by law, we undertake no obligation to update publicly or to revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors are cautioned against relying on such forward-looking statements when evaluating the information presented in this prospectus or included in oral statements or other written statements.
     While it is not possible to identify all of these factors, we continue to face many risks and uncertainties that could cause actual results to differ from those forward-looking statements, including:
    the effects of the Affordable Care Act on our financial position and results of operations;
 
    our substantial indebtedness and adverse changes in credit markets impacting our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs;
 
    risks inherent to the healthcare industry, including the impact of unforeseen changes in regulation and the potential adverse impact of government investigations, liabilities and other claims asserted against us;
 
    economic downturn resulting in efforts by federal and state healthcare programs and managed care companies to reduce reimbursement rates for our services;
 
    potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional inpatient facilities on favorable terms;
 
    our ability to comply with applicable licensure and accreditation requirements;
 
    our ability to comply with extensive laws and government regulations related to billing, physician relationships, adequacy of medical care and licensure;
 
    our ability to retain key employees who are instrumental to our successful operations;
 
    our ability to integrate and improve successfully the operations of acquired inpatient facilities;
 
    our ability to maintain favorable and continuing relationships with physicians and other healthcare professionals who use our inpatient facilities;
 
    our ability to ensure confidential information is not inappropriately disclosed and that we are in compliance with federal and state health information privacy standards;
 
    our ability to comply with federal and state governmental regulation covering healthcare-related products and services on-line, including the regulation of medical devices and the practice of medicine and pharmacology;
 
    our ability to obtain adequate levels of general and professional liability insurance;
 
    future trends for pricing, margins, revenue and profitability remain difficult to predict in the industries that we serve; and
 
    negative press coverage of us or our industry that may affect public opinion.

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     We caution you that the factors listed above, as well as the risk factors included elsewhere in this prospectus, may not be exhaustive. In particular, information included under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” contains forward-looking statements. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statements.

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USE OF PROCEEDS
     We will not receive any proceeds from the issuance of the exchange notes. We are making this exchange offer solely to satisfy our obligations under the registration rights agreement. In consideration for issuing the exchange notes as contemplated by this prospectus, we will receive outstanding notes in a like principal amount. The form and terms of the exchange notes are substantially identical to the form and terms of the outstanding notes, except the exchange notes have been registered under the Securities Act and will not contain restrictions on transfer or registration rights. Outstanding notes surrendered in exchange for the exchange notes will be retired and canceled and will not be reissued. Accordingly, the issuance of the exchange notes will not result in any change in our capitalization.

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RATIO OF EARNINGS TO FIXED CHARGES
     The following table sets forth our ratio of earnings to fixed charges for the years ended December 31, 2006, 2007, 2008, 2009 and 2010 and for the six months ended June 30, 2010 and 2011, respectively. For the purpose of calculating the ratio of earnings to fixed charges, earnings are defined as earnings from continuing operations before income taxes plus fixed charges. Fixed charges are defined as interest expense, plus amortized premiums, discounts and capitalized expenses related to indebtedness, plus an estimate of the interest within rental expense. Earnings were insufficient to cover fixed charges by approximately $24.7 million for the year ended December 31, 2008, $10.8 million for the year ended December 31, 2010 and $13.5 million for the six months ended June 30, 2010.
                             
    Year Ended December 31,   Six Months Ended June 30,
    2006   2007   2008   2009   2010   2010   2011
Ratio of earnings to fixed charges
  1.1x   1.1x   N/A   1.2x   N/A   N/A   1.2x

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CAPITALIZATION
     The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2011. The information in this table is unaudited and should be read in conjunction with “Selected Historical Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included elsewhere in this prospectus.
         
    As of June 30, 2011  
    (Unaudited)  
    (In millions)  
Cash and cash equivalents
  $ 28.0  
 
     
Debt:
       
Revolving Loans
  $  
ABL
     
91/4% Senior Notes due 2017(1)
    500.0  
 
     
Total debt
  $ 500.0  
Stockholder’s deficit
  $ (44.3 )
 
     
Total capitalization
  $ 455.7  
 
     
 
(1)   Excludes effect of $6.3 million discount upon original issuance.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
     The following table sets forth our selected historical consolidated financial and operating data as of the dates indicated and for the periods indicated. The selected historical consolidated financial data as of December 31, 2008, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010, other than “Operating Data,” have been derived from our audited historical consolidated financial statements and related notes included elsewhere in this prospectus, which have been audited by Ernst & Young LLP. The selected historical consolidated financial data as of December 31, 2006 and 2007 and for the two years ended December 31, 2006 and 2007, other than “Operating Data,” have been derived from our historical consolidated financial statements audited by Ernst & Young LLP that are not included herein. The selected historical consolidated financial data as of June 30, 2011 and for the six-month periods ended June 30, 2010 and 2011, other than “Operating Data,” have been derived from our unaudited historical consolidated financial statements and related notes included elsewhere in this prospectus. As a result of our rapid growth through numerous acquisitions, our operating results for the periods presented are not directly comparable.
     The selected historical consolidated financial and operating data set forth below should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.
                                                         
                                            Six Months  
    Year Ended December 31,     Ended June 30,  
    2006     2007     2008(11)     2009     2010     2010(12)     2011(12)  
            (Dollars in millions, except for operating data)          
Statement of Operations Data:
                                                       
Net revenue
  $ 211.8     $ 305.6     $ 702.4     $ 813.9     $ 869.5     $ 426.5     $ 422.2  
Costs and expenses:
                                                       
Salaries and benefits (includes stock compensation of $-, $0.1, $0.3, $0.1, $0.1, $0.2 and $0.2, respectively)
    92.7       134.8       304.7       346.9       359.7       178.1       186.2  
Supplies
    30.2       42.7       96.8       109.7       119.6       58.7       61.2  
Provision for bad debts
    16.1       28.4       81.1       111.3       136.2       64.4       40.0  
Other operating expenses
    44.5       55.3       137.8       150.3       158.3       75.0       84.3  
Depreciation and amortization
    13.2       17.8       33.7       37.8       37.1       18.3       18.6  
Interest, net
    14.2       23.9       50.4       48.5       48.4       23.0       25.4  
Management fee to related party
    0.1       0.2       0.2       0.2       0.2       0.1       0.1  
Loss on refinancing
                22.4             20.8       20.8        
 
                                         
Total costs and expense
    211.0       303.1       727.1       804.7       880.3       438.4       415.8  
 
                                         
Income (loss) from continuing operations before income taxes
    0.8       2.5       (24.7 )     9.2       (10.8 )     (11.9 )     6.4  
Income taxes
          0.9       5.5       2.2       3.2       1.6       1.8  
 
                                           
Income (loss) from continuing operations
    0.8       1.6       (30.2 )     7.0       (14.0 )     (13.5 )     4.6  
Income (loss) from discontinued operations, net of income taxes
                (1.9 )     (4.5 )     (0.2 )     (0.1 )     0.1  
 
                                           
Net income (loss)
  $ 0.8     $ 1.6     $ (32.1 )   $ 2.5     $ (14.2 )   $ (13.6 )   $ 4.7  
 
                                           
Less: Net income attributable to noncontrolling interests
                0.5       0.9       1.5       0.7       1.0  
 
                                             
Net income (loss) attributable to Capella Healthcare, Inc.
  $ 0.8     $ 1.6     $ (32.6 )   $ 1.6     $ (15.7 )   $ (14.3 )   $ 3.7  
 
                                         
Other Financial Data:
                                                       
Purchases of property and equipment, net
  $ (8.7 )   $ (9.6 )   $ (19.8 )   $ (22.1 )   $ (26.1 )   $ (10.8 )   $ (13.9 )
Net cash provided by operating activities
    13.7       21.9       35.7       35.6       65.9       20.0       22.3  
Net cash used in investing activities
    (19.7 )     (147.7 )     (337.1 )     (16.3 )     (23.8 )     (16.1 )     (42.1 )
Net cash provided by (used in) financing activities
    (0.3 )     125.2       307.8       (6.1 )     (13.4 )     (5.4 )     (0.5 )
Adjusted EBITDA(1)
    28.4       44.4       82.0       95.7       95.7       50.3       50.5  
Operating Data(2):
                                                       
Number of hospitals at end of each period(3)
    4       5       13       13       13       13       13  
Licensed beds(4)
    513       842       1,799       1,745       1,745       1,745       1,745  
Admissions(5)
    15,064       22,508       47,815       50,728       50,682       25,701       25,348  
Adjusted admissions(6)
    26,999       40,816       93,468       101,405       104,023       51,366       51,984  
Net revenue per adjusted admission
  $ 7,847     $ 7,488     $ 7,515     $ 8,026     $ 8,354     $ 8,303     $ 8,122  
Patient days(7)
    76,398       110,431       219,281       232,359       231,568       117,383       118,460  
Average length of stay (days)(8)
    5.1       4.9       4.6       4.6       4.6       4.6       4.7  
Occupancy rate (licensed beds)(9)
    40.8 %     35.9 %     33.3 %     36.5 %     36.4 %     37.2 %     37.5 %

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    As of December 31,     As of June 30,  
    2006     2007     2008(11)     2009     2010     2011  
            (Dollars in millions, except for operating data)          
Balance Sheet Data:
                                               
Cash and cash equivalents
  $ 0.6     $     $ 6.4     $ 19.6     $ 48.3     $ 28.0  
Property, plant and equipment
    163.6       245.0       475.9       461.7       450.7       446.0  
Total assets
    247.0       395.8       745.5       756.3       767.8       777.0  
Long-term debt, including current portion
    154.9       242.3       487.7       484.5       494.1       494.6  
Working capital(10)
    22.0       32.2       90.1       97.3       119.2       99.1  
 
(1)   “EBITDA,” a measure used by management to evaluate operating performance, is defined as net income plus (i) provision for income taxes, (ii) interest expense and (iii) depreciation and amortization. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and other debt service requirements. Management believes EBITDA is helpful in highlighting trends because EBITDA excludes the results of decisions that are outside the control of operating management and that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies.
 
    “Adjusted EBITDA” is defined as EBITDA plus (i) net income attributable to noncontrolling interests, (ii) loss on refinancing, (iii) loss from discontinued operations and (iv) management fee to related party, if any, for the applicable period. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting adjusted EBITDA are appropriate to provide additional information to investors about the impact of certain noncash items, unusual items that we do not expect to continue at the same level in the future and other items.
 
    The following table presents a reconciliation to provide a more detailed analysis of these non-GAAP performance measures:
                                                         
                                            Six Months Ended  
    Year Ended December 31,     June 30,  
    2006     2007     2008     2009     2010     2010     2011  
    (Dollars in millions)                  
Net income (loss)
  $ 0.8     $ 1.6     $ (32.6 )   $ 1.6     $ (15.7 )   $ (14.3 )   $ 3.7  
Plus taxes
          0.9       5.5       2.2       3.2       1.6       1.8  
Plus net interest expense and deferred financing costs
    14.2       23.9       50.4       48.5       48.4       23.0       25.4  
Plus depreciation and amortization
    13.2       17.8       33.7       37.8       37.1       18.3       18.6  
 
                                         
EBITDA
  $ 28.2     $ 44.2     $ 57.0     $ 90.1     $ 73.0     $ 28.6     $ 49.5  
 
                                         
Plus net income attributable to noncontrolling interests
  $     $     $ 0.5     $ 0.9     $ 1.5     $ 0.7     $ 1.0  
Plus loss on refinancing
                22.4             20.8       20.8        
Plus (income) loss from discontinued operations
                1.9       4.5       0.2       0.1       (0.1 )
Plus management fee to related party
    0.1       0.2       0.2       0.2       0.2       0.1       0.1  
 
                                         
Adjusted EBITDA
  $ 28.3     $ 44.4     $ 82.0     $ 95.7     $ 95.7     $ 50.3     $ 50.5  
 
                                         
 
(2)   The operating data set forth in this table includes all facilities that are consolidated for financial reporting purposes as of the end of each period presented.
 
(3)   For the year ended December 31, 2008, Woodland Medical Center is included through June 30, 2008, when it was moved to discontinued operations.

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(4)   Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency regardless of actual use.
 
(5)   Represents the number of patients admitted for inpatient treatment.
 
(6)   General measure of combined inpatient and outpatient volume. We computed adjusted admissions by multiplying admissions by gross patient revenue and then dividing that number by gross inpatient revenue.
 
(7)   Represents the total number of days of care provided to inpatients.
 
(8)   Represents the average number of days admitted patients stay in our hospitals.
 
(9)   Represents the percentage of hospital licensed beds occupied by patients. We calculated occupancy rate percentages by dividing the average daily number of inpatients by the weighted average licensed beds.
 
(10)   We define working capital as current assets minus current liabilities.
 
(11)   Effective March 1, 2008, we acquired nine hospitals and their affiliated businesses from CHS.
 
(12)   The comparability of our results of operations for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010 is impacted by the change in our uninsured discount policy, effective January 1, 2011, as more thoroughly explained under “Critical Accounting Policies.” The change in the uninsured discount policy effectively shifts a portion of our expenses previously classified as provision for bad debts to revenue deductions, thereby resulting in lower net revenue and lower bad debt expense for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. Had the uninsured discount policy been in place effective January 1, 2010, the revenue and bad debt expenses would have been as follows:
                 
    Net Revenue     Provision for Bad Debts  
    Six Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2010  
    (In millions)  
Historical results of operations as presented
  $ 426.5     $ 64.4  
Uninsured discount impact of pro forma change in policy
    (30.6 )     (30.6 )
 
           
Pro forma results of operations
  $ 395.9     $ 33.8  
 
           
    The following table reflects the results of operations for the three months ended June 30, 2010 on a pro forma basis for the change in our uninsured discounts policy:
                 
    Six Months Ended June 30, 2010  
    (Dollars in millions)  
    Amount     %  
Net revenue
  $ 395.9       100.0 %
Costs and expenses:
               
Salaries and benefits
    178.1       45.0  
Supplies
    58.7       14.8  
Provision for bad debts
    33.8       8.5  
Other operating expenses
    75.0       19.0  
Depreciation and amortization
    18.3       4.6  
Interest, net
    23.0       5.8  
Management fee to related party
    0.1        
Loss on refinancing
    20.8       5.3  
 
           
Total costs and expenses
    407.8       103.0  
 
           
Loss from continuing operations before income taxes
    (11.9 )     (3.0 )
Income taxes
    1.6       0.4  
 
           
Loss from continuing operations
    (13.5 )     (3.4 )
Loss from discontinued operations, net of taxes
    (0.1 )      
 
             
Net loss
  $ (13.6 )     (3.4 )
 
           
Less: Net income attributable to non-controlling interests
    0.7       0.2  
 
           
Net loss attributable to Capella Healthcare, Inc.
  $ (14.3 )     (3.6 )%
 
           

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion and analysis of our financial condition and results of operations includes periods through June 30, 2011. You should read the following discussion of our financial condition and results of operations with “Selected Historical Consolidated Financial and Operating Data” and the audited and unaudited historical consolidated financial statements and accompanying notes included elsewhere in this prospectus. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements.
Executive Overview
     We are a provider of general and specialized acute care, outpatient and other medically necessary services in our primarily non-urban communities. We provide these services through a portfolio of acute care hospitals and complementary outpatient facilities and clinics. As of June 30, 2011, we operated 13 acute care hospitals (12 of which we own and one of which we lease pursuant to a long-term lease) comprised of 1,745 licensed beds in Arkansas, Alabama, Missouri, Oklahoma, Oregon, Tennessee and Washington. We are focused on enabling our facilities to maximize their potential to deliver high quality care in a patient-friendly environment. We invest our financial and operational resources to establish and support services that meet the needs of our communities. We seek to achieve our objectives by providing exceptional quality care to our patients, establishing strong local management teams, physician leadership groups and hospital boards, developing deep physician and employee relationships and working closely with our communities.
     Effective July 1, 2011, we completed the acquisition of a 60% interest in Cannon County Hospital, LLC, which owns and operates DeKalb Community Hospital in Smithville, Tennessee and Stones River Hospital in Woodbury, Tennessee. The acquisition was funded on June 30, 2011, with an effective date of July 1, 2011. We own majority interests in the two hospitals and manage each of the hospitals pursuant to a management agreement.
     Effective July 1, 2011, we completed the acquisition of GP Surgery Center, LLC, a surgery center located in Lawton, Oklahoma (“Great Plains Surgery Center”).
Operating Environment
     We believe that the operating environment for healthcare providers continues to evolve, which presents both challenges and opportunities for us. In order to remain competitive in the markets we serve, we must conform our strategies not only to accommodate the changing operating environment, but also for competitive reasons. These factors will require continued focus on quality of care initiatives. As consumers become more involved in their healthcare decisions, we believe perceived quality of care will become an even greater factor in determining where physicians choose to practice and where patients choose to receive care. In the following paragraphs we discuss both current and future challenges that we face and our strategies to address them proactively.
     Impact of Healthcare Reform
     The Affordable Care Act dramatically alters the United States healthcare system and is intended to decrease the number of uninsured Americans and reduce the overall cost of healthcare. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments, including DSH payments, expanding the Medicare program’s use of value-based purchasing programs and tying hospital payments to the satisfaction of certain quality criteria. The Affordable Care Act also contains several Medicare payment and delivery system innovations, including the establishment of a Medicare Shared Savings Program to promote accountability and coordination of care through the creation of accountable care organizations (“ACOs”) and the establishment of pilot programs related to bundled payment for post-acute care. Under the bundled post-acute care pilot program, Medicare would pay one bundled payment for acute, inpatient hospital services, physician services, outpatient hospital services, and post-acute care services for an episode of care that begins three days prior to a hospitalization and spans 30 days following discharge. The Affordable Care Act requires the Secretary of HHS to expand the pilot program if it achieves the stated goals of reducing spending while improving or not reducing quality. The pilot program will be established by January 1, 2013, and expanded, if appropriate, by January 1, 2016.

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     Under the ACO Medicare Shared Savings Program, organizations known as ACOs would enter into a contract with the Secretary of the HHS in which the ACO agrees to be accountable for the overall care of its Medicare beneficiaries, to have adequate participation of primary care physicians, to define processes to promote evidence-based medicine, to report on quality and costs, and to coordinate care. ACOs that meet quality and efficiency standards would be allowed to share in the cost savings they achieve for the Medicare program. On March 31, 2011, CMS released proposed ACO regulations setting forth the parameters of ACO contracts and payments under the Medicare Shared Savings Program. The proposed rules outline certain key characteristics of an ACO, including the scope and length of an ACO’s contract with CMS, the required governance of an ACO, the assignment of Medicare beneficiaries to an ACO, the payment models under which an ACO can share in cost savings, and the quality and other reporting requirements expected of an ACO. Under the proposed regulations, patient and provider participation in ACOs will be voluntary. We will continue to monitor developments in the proposed ACO regulations. We cannot predict if the proposed ACO rules will be adopted or, if adopted, if they will be adopted in their current form. These regulations are subject to comment and may contain significant revisions when they are released in final form.
     The Affordable Care Act also contains a number of measures that are intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of RACs in the Medicaid program, expanding the scope of the federal False Claims Act and generally prohibiting physician-owned hospitals from increasing the total percentage of physician ownership or increasing the aggregate number of operating rooms, procedure rooms, and beds for which they are licensed.
     As part of the effort to control or reduce healthcare spending, the Affordable Care Act places a number of significant requirements and limitations on the exception to the federal physician self-referral prohibition, commonly known as the Stark Law, that allows physicians to have ownership interests in hospitals (the “Whole Hospital Exception”). Among other things, the Affordable Care Act prohibits hospitals from increasing the percentage of the total value of the ownership interest held in the hospital by physicians after March 23, 2010.
     Because a majority of the measures contained in the Affordable Care Act do not take effect until 2014, it is difficult to predict the impact the Affordable Care Act will have on us. In addition, there have been a number of challenges to the Affordable Care Act, and some courts have ruled that the requirement for individuals to carry health insurance or the Affordable Care Act in its entirety is unconstitutional. Several bills have been and will likely continue to be introduced in Congress to repeal or amend all or significant provisions of the Affordable Care Act. It is difficult to predict the full impact of the Affordable Care Act because of its complexity, lack of implementing regulations and interpretive guidance, gradual and potentially delayed implementation, pending court challenges, and possible repeal and/or amendment, as well as the inability to foresee how individuals and businesses will respond to the choices afforded them by the Affordable Care Act. Depending on further legislative developments, how the pending court challenges are resolved, and how the Affordable Care Act is ultimately interpreted and implemented, it could have an adverse effect on our business, financial condition and results of operations.
     Medicare and Medicaid Reimbursement
     Medicare payment methodologies have been, and can be expected to continue to be, significantly revised based on cost containment and policy considerations. CMS has already begun to implement some of the Medicare reimbursement reductions required by the Affordable Care Act. These revisions will likely be more frequent and significant as more of the Affordable Care Act’s changes and cost-saving measures become effective.
     On July 1, 2011, CMS issued the proposed OPPS rates for CY 2012. Under the proposed rule, the market basket update for CY 2012 for hospitals under the OPPS would be 1.5%, which represents a 2.8% market basket update, reduced by a 1.2% multifactor productivity adjustment and a 0/1% adjustment, both of which are required by the Affordable Care Act. Hospitals that submit quality data in accordance with the Hospital Outpatient Quality Data Reporting Program will receive the full 1.5% market basket update, and those that do not submit quality data will receive a -0.5% update. In addition, CMS has proposed a 0.6% reduction to the payment rates for non-cancer OPPS hospitals to offset the adjustment to cancer hospital payments. When combined with the estimated 0.2% payment increase that is needed to ensure budget neutrality in connection with the proposed transition to full use of CMHC data for CMHC partial hospital program per diem payment rates, CMS anticipates that the proposed rule would increase payment rates for hospital outpatient services provided in non-cancer hospitals by 1.1% in CY 2012.

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     As part of the proposed rule, CMS is also considering a number of quality-related provisions. CMS has proposed to add nine quality measures to the current list of 23 measures to be reported by hospital outpatient departments, bringing to the total number of measures to 32 that are to be reported for purposes of the CY 2014 payment determination. In addition, CMS has proposed to expand the measure included in the Hospital Value-Based Purchasing Program (the “VBP Program”) in FFY 2014 by adding on additional clinical process of care measure and has proposed to establish the performance periods, standards and weighting scheme for the VBP Program.
     On August 1, 2011, CMS issued Medicare IPPS final rule for FFY 2012, which begins on October 1, 2011. Under the final rule, hospitals that report quality data under the IQR Program will receive a 1.0% payment rate increase for inpatient hospital stays paid under the IPPS and hospitals that do not report quality data will receive 1% decrease in payment rates. The 1% net increase is a compilation of a 1.9% base increase, a (2.0)% documentation and coding adjustment to recoup the effects of increased aggregate payments resulting from the adoption of MS-DRGs, and a positive 1.1% adjustment to negate the misapplication of a budget neutrality adjustment between FFYs 1999-2006. The final rate increase also reflects a (2.9)% adjustment as part of a two year process to recoup overpayments resulting from the conversion to the MS-DRG system. However, because the adjustment is non-cumulative, it does not yield any change compared to the FFY 2011 reimbursement rates.
     In addition, the rule contains several provisions intended to strengthen the relationship between payment and quality of service. First, the rule adopts a number of policies as part of the Hospital Readmissions Reduction Program, established by the Affordable Care Act, which requires a reduction in Medicare payments to hospitals with excess readmissions for certain conditions. Second, the rule expands the quality measures that hospitals must report in FFYs 2014 and 2015 to avoid a 2.0% payment reduction under the IQR Program by, among other things, increasing the number of measures to be reported to 76. Finally, the rule expands the list of measures CMS has proposed to adopt for the VBP Program.
     Hospitals that treat a disproportionately large number of low-income patients currently receive additional payments from Medicare in the form of DSH payments. DSH payments are determined annually based upon certain statistical information defined by CMS and are calculated as a percentage add-on to the MS-DRG payments. This percentage varies, depending on several factors that include the percentage of low-income patients served. The recent health reform legislation contains certain changes to the DSH formula, including a change that would give greater weight to the amount of uncompensated care provided by a hospital than it would to the number of low- income patients treated.
     As authorized by the Affordable Care Act, HHS issued its final rule on April 29, 2011 launching the VBP Program. The VBP Program begins in October 2012 and provides that hospitals will be paid for inpatient acute care services based on quality of care measures as specifically set forth by CMS. The quality measures focus on how closely hospitals follow best clinical practices and how well hospitals enhance patients’ experiences of care. Hospitals will receive points on each measure based on the higher of (i) their level of achievement relative to an established standard or (ii) their improvement in performance from their performance during a prior baseline period. Each hospital’s combined scores on all the measures will be translated into value-based incentive payments for inpatient discharges occurring on or after October 1, 2012. For scoring on achievement, hospitals will be measured based on how much their current performance differs from all other hospitals’ baseline period performance. For scoring on improvement, hospitals will be assessed based on how much their current performance changes from their own baseline period performance. CMS will calculate a total performance score for each hospital by combining the greater of its achievement or improvement points on each measure to determine a score for each of the two domains that will be measured. Hospitals that receive higher total performance scores will receive higher incentive payments than those that receive lower total performance scores. CMS will notify each hospital of the estimated amount of its value-based incentive payment for FFY 2013 at least 60 days prior to October 1, 2012, and will notify each hospital of the exact amount of its value-based incentive payment on November 1, 2012. We have implemented, and will continue to implement, expanded clinical quality initiatives, such as those described below under the subheading “ — Implementation of our Clinical Quality Initiatives.” Although we believe that our quality initiatives will enable us to quality for incentive payments, we cannot predict the impact that the implementation of the VBP Program will have on our revenue and results of operations.

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     There is considerable pressure on governmental payors, managed Medicare/Medicaid payors and commercial managed care payors to control costs by either reducing or limiting increases in reimbursement to healthcare providers or limiting benefits to enrollees. The current economic downturn has magnified these pressures. Lower than expected tax collections resulting from higher unemployment and depressed consumer spending have resulted in budget shortfalls for most states, including those in which we operate. Additionally, the demand for Medicaid coverage has increased as a result of job losses that have left many individuals without health insurance. To balance their budgets, many states have adopted, or may be considering, legislation that is intended to reduce Medicaid coverage and program eligibility, enroll Medicaid recipients in managed care programs, and/or impose additional taxes on hospitals to help finance or expand their Medicaid programs. During the six months ended June 30, 2011 and 2010, Medicaid and managed Medicaid programs accounted for approximately 13.2% and 12.3%, respectively, of our net revenue. Managed care payors also face economic pressures during periods of economic weakness as a result of lower enrollment resulting from higher unemployment rates and the inability of individuals to afford private insurance coverage. These payors may respond to these challenges by reducing or limiting increases to healthcare provider reimbursement rates or reducing benefits to enrollees. During the six months ended June 30, 2011 and 2010, we recognized approximately 37.3% and 38.3%, respectively, of our net revenue from managed care payors. If we do not receive increased payor reimbursement rates from governmental or managed care payors that cover the increasing cost of providing healthcare services to our patients or if governmental payors defer payments to our hospitals, our margins could deteriorate, which could adversely effect our financial condition, results of operations and cash flows.
     On August 2, 2011, Congress passed the Budget Control Act (the “BCA”), which raised the federal debt ceiling and made spending cuts of roughly the same amount. Under the BCA, the Joint Select Committee on Deficit Reduction is tasked with reducing the federal deficit by an additional $1.5 trillion by December 23, 2011. If the joint committee fails to approve a bill or Congress does not enact the recommendations, a number of cuts will be automatically “triggered”, which could result in approximately a 2% reduction in Medicare reimbursement rates for providers. We cannot predict whether the joint committee will recommend spending cuts to federal health care programs and, if it does, whether Congress will actually enact their recommendations or whether the automatic cuts will be triggered by Congress’s failure to act and if the automatic cuts are triggered, what the actual reductions in reimbursement will be to hospitals or other providers. Any reduction in provider reimbursement rates under federal health care programs could have a material adverse effect on our financial condition and results of operations.
     Pay for Performance Reimbursement
     Many payors, including Medicare and several large managed care organizations, currently require hospital providers to report certain quality measures in order to receive the full amount of payment increases that were awarded automatically in the past. For federal fiscal year 2010, Medicare expanded the number of quality measures to be reported to 47, compared to 43 during federal fiscal year 2009. Many large managed care organizations have developed quality measurement criteria that are similar to or even more stringent than these Medicare requirements. While current Medicare guidelines and contracts with most managed care payors provide for reimbursement based upon the reporting of quality measures, we believe significant payors will utilize the quality measures to determine reimbursement rates for hospital services. We have developed key processes and infrastructure that we believe enable us to meet or exceed the current established quality guidelines. We plan to continue to invest in quality initiatives and technology in order to meet the quality demands of our payors in the future.
     Implementation of our Clinical Quality Initiatives
     The integral component of responding to each of the challenge areas previously discussed is quality of care. We have implemented many of our expanded clinical quality initiatives and are in the process of implementing several others. These initiatives include the following:
    review of the current CMS quality indicators;
 
    mock Joint Commission surveys conducted by a third-party;
 
    implementation of hourly nursing rounds;
 
    alignment of hospital management incentive compensation with quality and satisfaction indicators;
 
    feedback from our LPLGs, NPLG, and PAG;
 
    hospital board and medical staff oversight of patient safety and quality of care; and
 
    investment in clinical technology.

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     Physician Alignment
     Our ability to attract skilled physicians to our hospitals is critical to our success. Coordination of care and alignment of care strategies between hospitals and physicians will become more critical as reimbursement becomes more episode-based. We have physician recruitment goals with primary emphasis on recruiting physicians specializing in family practice, internal medicine, general surgery, oncology, obstetrics and gynecology, cardiology, neurology, orthopedics and inpatient hospital care (hospitalists). To provide our patients access to the appropriate physician resources, we actively recruit physicians to the communities served by our hospitals through employment agreements, relocation agreements or physician practice acquisitions. We invest in the infrastructure necessary to coordinate our physician alignment strategies and manage our physician operations. The costs associated with recruiting, integrating and managing a large number of new physicians will have a negative impact on our operating results and cash flows in the near term. However, we expect to realize improved clinical quality and service expansion capabilities from this initiative that will impact our operating results positively over the long term.
     Cost Pressures
     In order to demonstrate a highly reliable environment of care, we must hire and retain nurses who share our ideals and beliefs with respect to delivering high quality patient care and who have access to the training necessary to implement our clinical quality initiatives. While the national nursing shortage has abated somewhat during the last year, the nursing workforce remains volatile. As a result, we expect continuing pressures on nursing salaries and benefits. These pressures include base wage increases, demands for flexible working hours and other increased benefits as well as higher nurse-to-patient ratios. In addition, inflationary pressures and technological advancements and increased acuity continue to drive supply costs higher. We implemented multiple supply chain initiatives, including consolidation of low-priced vendors, established value analysis teams and coordinated quality of care efforts to encourage group purchasing contract compliance.
     Adoption of Electronic Health Records
     The Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009, or the ARRA. The HITECH Act includes provisions designed to increase the use of electronic health records, or EHR, by both physicians and hospitals. We intend to comply with the EHR meaningful use requirements of the HITECH Act in time to qualify for the maximum available Medicare and Medicaid incentive payments. Our compliance will result in significant costs including professional services focused on successfully designing and implementing our EHR solutions along with costs associated with the hardware and software components of the project. During the three and six months ended June 30, 2011, we recognized $1.9 million in revenue related to Estimated Medicaid EHR incentive payments. We continue to refine our budgeted costs and the expected reimbursement improvements associated with our EHR initiatives and have the potential to recognize additional revenue from EHR incentive payments in the later part of 2011. We currently estimate that at a minimum the total costs incurred to comply will be recovered through this initiative.
Revenue/Volume Trends
     Our revenue depends upon inpatient occupancy levels, outpatient procedures, ancillary services and therapy programs as well as our ability to negotiate appropriate payment rates for services with third-party payors and our ability to achieve quality metrics to maximize payment from our payors.
     Sources of Revenue
     The primary sources of our revenue include various managed care payors, including managed Medicare and managed Medicaid programs, the traditional Medicare program, various state Medicaid programs, commercial health plans and patients themselves. We are typically paid less than our gross charges, regardless of the payor source, and report net revenue to reflect contractual adjustments and other allowances required by managed care providers and federal and state agencies.
     The following table sets forth the percentages of net patient revenue by payor for the years ended December 31, 2008, 2009 and 2010 and the three months and six months ended June 30, 2010 and 2011:
                                                         
                            Three Months     Six Months  
    Year Ended December 31,     Ended June 30,     Ended June 30,  
    2008     2009     2010     2010     2011     2010     2011  
Medicare(1)
    36.1 %     39.1 %     36.0 %     40.2 %     39.5 %     40.5 %     39.7 %
Medicaid(1)
    8.3       9.6       12.0       13.2 %     12.8 %     12.3 %     13.2 %
Managed Care and Other
    43.4       38.3       36.1       36.8 %     37.5 %     38.3 %     37.3 %
Self-pay
    12.2       13.0       15.9       9.8 %     10.2 %     8.9 %     9.8 %
 
                                         
Total
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 
                                         
 
(1)   Includes net patient revenue received under managed Medicare or managed Medicaid programs.

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     Impact of Current Economic Environment
     We continue to experience volume pressure based on reduced demand for inpatient healthcare services and increased competition for patients. The recent economic downturn impacted healthcare and many other industries negatively. While many healthcare services are considered non-discretionary in nature, certain services including elective procedures and other non-emergent services may be deferred or canceled by patients when they are suffering personal financial hardship or have a negative outlook on the general economy. Continually high unemployment results in high numbers of uninsured patients, and employer cost reduction programs may result in a higher level of co-pays and deductible limits for patients. Governmental payors and managed care payors may reduce reimbursement paid to hospitals and other healthcare providers to address economic and regulatory pressures. We believe a more severe economic downturn could have an adverse impact on our revenue whether in the form of payor mix shifts from managed care to uninsured or Medicaid, additional charity care, lower patient volumes, lower collection rates of patient co-pay and deductible balances or a combination of such factors. We expect our volumes to improve over the long-term as a result of our quality of care, physician recruitment and service line expansion initiatives. In addition, in a number of our markets, the population growth of a key age category that demands more hospital services is near or exceeds the national average. We cannot determine when we will realize the benefits of our long-term strategies.
     Payor Reimbursement Trends
     In addition to the volume factors described above, patient mix, acuity factors and pricing trends affect our net revenue. Net revenue per adjusted admission was $8,026 and $8,359 for the years ended December 31, 2009 and 2010, respectively. This increase reflects: (i) an increase in the average acuity of our services provided as evidenced by an increase of 3.1% in our Medicare case mix index, which refers to the acuity or severity of illness of an average Medicare patient at our hospitals, to 1.35 as compared to 1.31 in the prior year; (ii) favorable managed care contract pricing negotiations; (iii) Medicare hospital market basket increases; (iv) the impact from price increases; and (v) the impact from new provider tax programs in a number of the states in which we operate. However, as a result of consolidation of managed care plans and federal and state efforts to decrease Medicare and Medicaid spending, our ability to recognize improved reimbursement above or equal to rates recognized in previous periods could become more difficult.
     Net revenue per adjusted admission was $8,303 and $8,122 for the six months ended June 30, 2010 and 2011, respectively. Adjusted for the change, effective January 1, 2011, in the uninsured discount policy described below under “Critical Accounting Policies,” pro forma net revenue per adjusted admission for the six months ended June 30, 2010 was $7,707. The increase in net revenue per adjusted admission for the six months ended June 30, 2011 over pro forma for the same period in 2010 was 5.4%. This increase reflects: (i) an increase in the average acuity of our services provided as evidenced by an increase of 0.7% in our Medicare case mix index, which refers to the acuity or severity of illness of an average Medicare patient at our hospitals, to 1.37 as compared to 1.36 in the prior year; (ii) favorable managed care contract pricing negotiations; (iii) Medicare hospital market basket increases; (iv) the impact of price increases, and (v) the impact of provider tax programs in states in which we operate. However, as a result of consolidation of managed care plans and federal and state efforts to decrease Medicare and Medicaid spending, our ability to recognize improved reimbursement above or equal to rates recognized in previous periods could become more difficult.
     We cannot assure you that future reimbursement rates, even if improved, will cover potential increases in the cost of providing healthcare services to our patients.
     Accounts Receivable Collection Risks Leading to Increased Bad Debts
     Similar to others in the hospital industry, we have a significant amount of self-pay receivables (including co-payments and deductibles from insured patients), and collecting these receivables may become more difficult if economic conditions worsen. The following table provides a summary of our accounts receivable payor class mix as of December 31, 2008, 2009 and 2010 and June 30, 2011:
                                 
December 31, 2008   0-90 Days     91-180 Days     Over 180 Days     Total  
Medicare(1)
    21.3 %     0.7 %     0.6 %     22.6 %
Medicaid(1)
    6.8       0.6       0.7       8.1  
Managed Care and Other
    21.3       2.3       1.4       25.0  
Self-Pay(2)
    12.4       11.5       20.4       44.3  
 
                       
Total
    61.8 %     15.1 %     23.1 %     100.0 %
 
                       
                                 
December 31, 2009   0-90 Days     91-180 Days     Over 180 Days     Total  
Medicare(1)
    21.5 %     0.5 %     0.3 %     22.3 %
Medicaid(1)
    5.8       0.4       0.4       6.6  
Managed Care and Other
    20.3       1.6       1.1       23.0  
Self-Pay(2)
    14.2       11.7       22.2       48.1  
 
                       
Total
    61.8 %     14.2 %     24.0 %     100.0 %
 
                       
                                 
December 31, 2010   0-90 Days     91-180 Days     Over 180 Days     Total  
Medicare(1)
    22.0 %     0.4 %     0.3 %     22.7 %
Medicaid(1)
    6.2       0.7       0.5       7.4  
Managed Care and Other
    18.7       1.6       1.0       21.3  
Self-Pay(2)
    13.6       12.4       22.6       48.6  
 
                       
Total
    60.5 %     15.1 %     24.4 %     100.0 %
 
                       
                                 
June 30, 2011   0-90 Days     91-180 Days     Over 180 Days     Total  
Medicare(1)
    24.9 %     0.7 %     0.4 %     26.0 %
Medicaid(1)
    6.6       0.5       0.6       7.7  
Managed Care and Other
    18.6       1.9       0.9       21.4  
Self-Pay(2)
    10.1       8.5       26.3       44.9  
 
                       
Total
    60.2 %     11.6 %     28.2 %     100.0 %
 
                       
 
(1)   Includes net patient revenue received under managed Medicare or managed Medicaid programs.
 
(2)   Includes both uninsured as well as estimated co-payment and deductible amounts from insured patients.

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     The volume of self-pay accounts receivable remains sensitive to a combination of factors, including price increases, acuity of services, higher levels of insured patient co-payments and deductibles, economic factors and the increased difficulties of uninsured patients who do not qualify for charity care programs to pay for escalating healthcare costs. We have implemented a number of practices to mitigate bad debt expense and increase collections, including increased focus on upfront cash collections, incentive plans for our hospitals’ financial counselors and registration personnel, increased focus on payment plans with non-emergent patients, among other efforts. Despite these practices, we believe bad debts will remain a significant risk for us and the rest of the hospital industry in the near term.
Critical Accounting Policies
     The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts and related disclosures. We consider an accounting estimate to be critical if:
    It requires assumptions to be made that were uncertain at the time the estimate was made; and
 
    Changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition.
     Revenue and Revenue Deductions
     We recognize net revenue during the period the healthcare services are provided based upon estimated amounts due from payors. We record contractual adjustments to our gross charges to reflect expected reimbursement negotiated with or prescribed by third-party payors. We estimate contractual adjustments and allowances based upon payment terms set forth in managed care health plan contracts and by federal and state regulations. For the majority of our net revenue, we apply contractual adjustments to patient accounts at the time of billing using specific payor contract terms entered into the accounts receivable systems, but in some cases we record an estimated allowance until payment is received. If our estimated contractual adjustments as a percentage of gross revenue had been 1% higher for all insured accounts, our net revenue would have been reduced by approximately $31.0 million and $16.6 million for the year ended December 31, 2010 and the six months ended June 30, 2011, respectively. We derive most of our net revenue from healthcare services provided to patients with Medicare (including managed Medicare plans) or managed care insurance coverage.
     Services provided to Medicare patients are generally reimbursed at prospectively determined rates per diagnosis, while services provided to managed care patients are generally reimbursed based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Medicaid reimbursements vary by state. Other than Medicare and Medicaid, no individual payor represents more than 10% of our net revenue.
     Medicare regulations and many of our managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our healthcare facilities. To obtain reimbursement for certain services under the Medicare program, we must submit annual cost reports and record estimates of amounts owed to or receivable from Medicare. These cost reports include complex calculations and estimates related to indirect medical education, disproportionate share payments, reimbursable Medicare bad debts and other items that are often subject to interpretation that could result in payments that differ from recorded estimates. We estimate amounts owed to or receivable from the Medicare program using the best information available and our interpretation of the applicable Medicare regulations. We include differences between original estimates and subsequent revisions to those estimates (including final cost report settlements) in our consolidated statements of operations in the period in which the revisions are made. Net adjustments for the final third-party settlements increased net revenue and income from continuing operations before income taxes by $2.8 million, $4.4 million, and $0.6 million during the years ended December 31, 2008, 2009 and 2010, respectively.
     Net adjustments for final third-party settlements increased net revenue and income from continuing operations before income taxes by $0.9 million and $0.2 million for the six months ended June 30, 2010 and 2011, respectively. Additionally, updated regulations and contract negotiations with payors occur frequently, which necessitates continual review of revenue estimation processes by management. Management believes that future adjustments to its current third-party settlement estimates will not materially impact our results of operations, cash flows or financial position.
     We do not pursue collection of amounts due from uninsured patients that qualify for charity care under our guidelines (currently those uninsured patients whose incomes are equal to or less than 200% of the current federal poverty guidelines set forth by HHS). We deduct charity care accounts from gross revenue when we determine that the account meets our charity care guidelines. We also provide discounts from billed charges and alternative payment structures for uninsured patients who do not qualify for charity care but meet certain other minimum income guidelines, primarily those uninsured patients with incomes between 200% and 500% of the federal poverty guidelines. Charity care deductions reduced gross revenue by $11.7 million, $15.7 million and $18.6 million during the years ended December 31, 2008, 2009 and 2010, respectively, and $8.5 million and $9.8 million during the six months ended June 30, 2010 and 2011, respectively.

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     Insurance Reserves
     We are self-insured for substantially all of the medical expenses and benefits of our employees. Our reserve for employee medical benefits primarily reflects the current estimate of incurred but not reported losses, based upon an actuarial calculation.
     Given the nature of our operating environment, we are subject to potential medical malpractice lawsuits and other claims as part of providing healthcare services. To mitigate a portion of this risk, we maintain insurance through Auriga in sufficient amounts for malpractice claims, subject to a self-insured retention per occurrence. Auriga has re-insurance for malpractice claims which cover additional amounts in the aggregate. Our reserves for professional and general liability claims are based upon independent actuarial calculations, which consider historical claims data, demographic considerations, severity factors and other actuarial assumptions in determining reserve estimates. Our reserve estimates are discounted to present value using a 3.0% discount rate.
     We are also subject to potential workers’ compensation claims as part of providing healthcare services. To mitigate a portion of this risk, we maintain insurance for individual workers’ compensation claims exceeding approximately $250,000 per occurrence and $5.0 million in the aggregate per year. Our hospital facility located in the State of Washington and our two facilities located in Oklahoma participate in state-specific programs rather than our established program. Our reserve for workers’ compensation is based upon an independent third-party actuarial calculation, which considers historical claims data, demographic considerations, development patterns, severity factors and other actuarial assumptions. Our reserve estimates are undiscounted and are revised on an annual basis. Our reserve for workers’ compensation claims reflects the current estimate of all outstanding losses, including incurred but not reported losses, based upon an actuarial calculation.
     Our expense for professional and general liability claims and workers’ compensation claims each year includes: the actuarially determined estimate of losses for the current year, including claims incurred but not reported (“IBNR”); the change in the estimate of losses for prior years based upon actual claims development experience as compared to prior actuarial projections; amortization of the insurance premiums for losses in excess of our self-insured retention level; the administrative costs of the insurance program; and interest expense related to the discounted portion of the liability.
     The following tables summarize our claims loss and claims payment information during the years ended December 31, 2008, 2009 and 2010 and our professional and general liability reserve balances (including the current portions of such reserves) as of December 31, 2009 and 2010.
                         
    Year Ended  
    December 31,  
    2008     2009     2010  
    (In millions)  
Accrual for general and professional liability claims at January 1
  $ 2.1     $ 5.4     $ 9.7  
Expense (income) related to(1):
                       
Current accident year
    3.7       4.4       4.9  
Prior accident years
          0.9       (0.4 )
 
                 
Total incurred loss and loss expense
    3.7       5.3       4.5  
 
                 
Paid claims and expenses related to:
                       
Current accident year
    0.1       0.1       0.2  
Prior accident years
    0.3       0.9       1.6  
 
                 
Total paid claims and expense
    0.4       1.0       1.8  
 
                 
Accrual for general and professional liability claims at December 31
  $ 5.4     $ 9.7     $ 12.4  
 
                 
 
(1)   Total expense, including premiums for insured coverage, was $10.7 million, $10.9 million and $11.8 million for the years ended December 31, 2008, 2009 and 2010, respectively.
     Our estimate of professional and general liability and workers compensation IBNR utilizes statistical confidence levels that are below 75%. Using a higher statistical confidence level, while not permitted under GAAP, would increase the estimated reserve. The following table illustrates the sensitivity of the reserve estimates at 75% and 90% confidence levels:
                 
    Professional and     Workers  
    General Liability     Compensation  
    (In millions)  
December 31, 2008 reserve:
               
As Reported
  $ 5.4     $ 2.4  
With 75% Confidence Level
    6.5       2.6  
With 90% Confidence Level
    8.2       3.0  
December 31, 2009 reserve:
               
As Reported
  $ 9.7     $ 2.0  
With 75% Confidence Level
    11.4       2.4  
With 90% Confidence Level
    14.1       2.8  
December 31, 2010 reserve:
               
As Reported
  $ 12.4     $ 2.7  
With 75% Confidence Level
    13.8       2.8  
With 90% Confidence Level
    17.1       3.3  
     If our estimate of the number of unpaid days of employee health claims expense changed by five days, our employee health IBNR estimate would change by approximately $0.4 million.

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     Income Taxes
     We believe that our income tax provisions are accurate and supportable, but certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. To reflect the possibility that all of our tax positions may not be sustained, we maintain tax reserves that are subject to adjustment as updated information becomes available or as circumstances change. We record the impact of tax reserve changes to our income tax provision in the period in which the additional information, including the progress of tax audits, is obtained.
     We assess the realization of our deferred tax assets to determine whether an income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be verified objectively, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The factors used in this determination include the following:
    cumulative losses in recent years;
 
    income/losses expected in future years;
 
    unsettled circumstances that, if favorably resolved, would adversely affect future operations;
 
    availability, or lack thereof, of taxable income in prior carryback periods that would limit realization of tax benefits;
 
    carryforward period associated with the deferred tax assets and liabilities; and
 
    prudent and feasible tax planning strategies.
     In addition, financial forecasts used in determining the need for or amount of federal and state valuation allowances are subject to changes in underlying assumptions and fluctuations in market conditions that could significantly alter our recoverability analysis and thus have a material adverse effect on our consolidated financial condition, results of operations or cash flows. Effective January 1, 2009, we adopted the provisions of Financial Accounting Standards Board (“FASB”) authoritative guidance regarding income tax uncertainties. No tax adjustment was required upon adoption of this authoritative guidance. Under these provisions, we elected to classify interest paid on an underpayment of income taxes and related penalties as a component of income tax expense.

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     Long-Lived Assets and Goodwill
     Long-lived assets, including property, plant and equipment and amortizable intangible assets, comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist under the provisions of FASB authoritative guidance regarding the impairment or disposal of long-lived assets. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. For long-lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. Our business comprises a single operating reporting unit for impairment of long-lived assets. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. Given the relatively few number of hospitals we own and the significant amounts of long-lived assets attributable to those hospitals, an impairment of the long-lived assets could materially adversely impact our operating results or financial position.
     Goodwill also represents a significant portion of our total assets. We review goodwill for impairment annually at October 1 or more frequently if certain impairment indicators arise under the provisions of FASB authoritative guidance regarding goodwill and other intangible assets. Our business comprises a single operating unit for impairment of goodwill. We review our carrying value of the consolidated net assets to the net present value of our estimated discounted future cash flows. If the carrying value exceeds the net present value of estimated discounted future cash flows, an impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact our financial position or results of operations.
     We did not incur any impairment charges during the years ended December 31, 2008, 2009 or 2010 and the six months ended June 30, 2011.
     Allowance for Doubtful Accounts and Provision for Doubtful Accounts
     Our ability to collect the self-pay portion of our receivables is critical to our operating performance and cash flows. Our allowance for doubtful accounts was approximately 51.6% and 45.5% of accounts receivable, net of contractual discounts, as of December 31, 2010 and June 30, 2011, respectively. Our additions to the allowance for doubtful accounts are made by means of the provision for doubtful accounts. Accounts written off as uncollectable are deducted from the allowance for doubtful accounts and subsequent recoveries are added. The amount of the provision for doubtful accounts is based upon our assessment of historical and expected net collections, business and economic conditions, trends in federal, state, and private employer healthcare coverage and other collection indicators. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts (including copayment and deductible amounts from patients who have healthcare coverage) due directly from patients. We write off accounts when all reasonable internal and external collection efforts have been performed. We consider the return of an account from the primary external collection agency to be the culmination of our reasonable collection efforts and the timing basis for writing off the account balance. We rely on certain analytical tools, including (i) historical trended cash collections compared to net revenue less bad debt; (ii) total bad debt expense, charity care deductions and uninsured discounts as a percentage of self pay revenue; (iii) net days in accounts receivable; and (iv) the allowance for doubtful accounts as a percentage of total self pay accounts receivable. Adverse changes in general economic conditions, billing and collections operations, payor mix, or trends in federal or state governmental healthcare coverage could affect our collection of accounts receivable, cash flows and results of operations. If our uninsured accounts receivable as of June 30, 2011 were 1% higher, our provision for doubtful accounts would have increased by $1.0 million.
     Effective January 1, 2011, we adopted a uniform uninsured discount policy. Under this policy, all patients without insurance are provided a 60% discount from gross charges at the time of billing. The discount is reflected as a deduction from revenue in the determination of net revenue. The amount billed to the patient is subject to our customary collection process and, to the extent not collected, becomes subject to our policy governing our bad debt provision. Prior to January 1, 2011, each of our hospitals utilized a market-specific uninsured discount policy and in each case at an amount less than 60%.

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Results of Operations
     Same-Hospital Operating Results and Data
     We present same-hospital results and operating data as a basis for measuring organic growth and results of operations. During periods in which we acquire or divest of hospitals, our same-hospital operating results and data will not be directly comparable to our consolidated results. For the two-year period ended December 2009, we are providing a summary of same-hospital operating results and data for the four hospitals we owned since 2005 and Muskogee Regional Medical Center, as these are the only five hospitals that we operated for the full 12 months in each period. For the two-year period ended December 2008, we are only providing same-hospital operating results and data for the four hospitals we owned since 2005 as these are the only hospitals we operated for the full 12 months in each period. Because our same-hospital operating results for these periods reflect results for less than half of our current hospitals and represent a relatively small number of facilities, same-hospital results for these periods can be disproportionately affected by the results of any one hospital. For example, the impact of the opening of a competing physician-owned hospital in our Muskogee, Oklahoma market in April 2009 materially affected the comparative same-hospital data in 2009 as compared to 2008. In addition, because of our short operating history and because we are in the early stages of implementing our operating initiatives and strategies at many of our hospitals, our consolidated and same-hospital operating results will not fully reflect some of these initiatives, including certain targeted capital investments to expand and enhance services, the benefits of our recent physician recruitment strategies and our recent cost savings actions.
     Our December 31, 2010 and 2009 same hospital data represents the first comparative period in which we owned all 13 of our hospitals for the full periods presented and, therefore, our same hospital results and consolidated data are the same for these periods.
     Selected Operating Statistics
     The following table presents summaries of results of operations for the three years ended December 31, 2008, 2009 and 2010 and the three-month and six-month periods ended June 30, 2010 and 2011.
                                                         
                            Three Months Ended     Six Months  
    Year Ended December 31,     June 30,     Ended June 30,  
    2008     2009     2010     2010     2011     2010     2011  
                    (In millions)                          
Net revenue
  $ 702.4     $ 813.9     $ 69.5     $ 216.2     $ 213.7     $ 426.5     $ 422.2  
Costs and expenses:
                                                       
Salaries and benefits (includes stock compensation of $—, $0.1, $0.3, $0.1, $0.1, $0.2, and $0.2 respectively)
    304.7       346.9       359.7       88.7       92.3       178.1       186.2  
Supplies
    96.8       109.7       119.6       29.5       30.7       58.7       61.2  
Provision for bad debts
    81.1       111.3       136.2       34.3       22.0       64.4       40.0  
Other operating expenses
    137.8       150.3       158.3       37.5       42.3       75.0       84.3  
Depreciation and amortization
    33.7       37.8       37.1       9.4       9.0       18.3       18.6  
Interest, net
    50.4       48.5       48.4       11.3       12.7       23.0       25.4  
Management fee to related party
    0.2       0.2       0.2                   0.1       0.1  
Loss on refinancing
    22.4             20.8       20.8             20.8        
 
                                         
Total costs and expense
    727.1       804.7       880.3       231.5       209.0       438.4       415.8  
 
                                         
Income (loss) from continuing operations before income taxes
    (24.7 )     9.2       (10.8 )     (15.3 )     4.7       (11.9 )     6.4  
Income taxes
    5.5       2.2       3.2       0.8       0.9       1.6       1.8  
 
                                         
Income (loss) from continuing operations
    (30.2 )     7.0       (14.0 )     (16.1 )     3.8       (13.5 )     4.6  
Income (loss) from discontinued operations, net of taxes
    (1.9 )     (4.5 )     (0.2 )     0.1             (0.1 )     0.1  
 
                                         
Net income (loss)
  $ (32.1 )   $ 2.5     $ (14.2 )   $ (16.0 )   $ 3.8     $ (13.6 )   $ 4.7  
 
                                         
Less: Net income attributable to noncontrolling interests
    0.5       0.9       1.5       0.3       0.5       0.7       1.0  
 
                                         
Net income (loss) attributable to Capella Healthcare, Inc.
  $ (32.6 )   $ 1.6     $ (15.7 )   $ (16.3 )   $ 3.3     $ (14.3 )   $ 3.7  
 
                                         

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     The comparability of our results of operations for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010 is impacted by the change in our uninsured discount policy, effective January 1, 2011, as more thoroughly explained under “Critical Accounting Policies.” The change in the uninsured discount policy effectively shifts a portion of our expenses previously classified as provision for bad debts to revenue deductions, thereby resulting in lower net revenue and lower bad debt expense for the three and six months ended June 30, 2011 as compared to the three and six months ended June 30, 2010. Had the uninsured discount policy been in place effective January 1, 2010, the revenue and bad debt expenses would have been as follows:
                                 
    Net Revenue     Provision for Bad Debts  
    Three Months Ended     Six Months Ended     Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2010     June 30, 2010     June 30, 2010  
    (In millions)  
Historical results of operations as presented
  $ 216.2     $ 426.5     $ 34.3     $ 64.4  
Uninsured discount impact of pro forma change in policy
    (16.8 )     (30.6 )     (16.8 )     (30.6 )
 
                       
Pro forma results of operations
  $ 199.4     $ 395.9     $ 17.5     $ 33.8  
 
                       
     The following table reflects the results of operations for the three and six months ended June 30, 2010 on a pro forma basis for the change in our uninsured discounts policy:
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2010  
            (Dollars in millions)        
    Amount     %     Amount     %  
Net revenue
  $ 199.4       100.0 %   $ 395.9       100.0 %
Costs and expenses:
                               
Salaries and benefits
    88.7       44.5       178.1       45.0  
Supplies
    29.5       14.8       58.7       14.8  
Provision for bad debts
    17.5       8.8       33.8       8.5  
Other operating expenses
    37.5       18.8       75.0       19.0  
Depreciation and amortization
    9.4       4.7       18.3       4.6  
Interest, net
    11.3       5.7       23.0       5.8  
Management fee to related party
                0.1        
Loss on refinancing
    20.8       10.4       20.8       5.3  
 
                       
Total costs and expenses
    214.7       107.7       407.8       103.0  
 
                       
Loss from continuing operations before income taxes
    (15.3 )     (7.7 )     (11.9 )     (3.0 )
Income taxes
    0.8       0.4       1.6       0.4  
 
                       
Loss from continuing operations
    (16.1 )     (8.1 )     (13.5 )     (3.4 )
Income (loss) from discontinued operations, net of taxes
    0.1             (0.1 )      
 
                       
Net loss
  $ (16.0 )     (8.1 )   $ (13.6 )     (3.4 )
 
                       
Less: Net income attributable to non-controlling interests
    0.3       0.1       0.7       0.2  
 
                       
Net loss attributable to Capella Healthcare, Inc.
  $ (16.3 )     (8.2 )%   $ (14.3 )     (3.6 )%
 
                       

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     Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
     The following table compares key consolidated operating results and statistics for the three-month periods ended June 30, 2010 and 2011:
                         
    Three Months Ended June 30,  
    2010     2011     %Change  
            (Unaudited)          
    (Dollars in millions,  
    except operating data)  
Statement of Operations Data:
                       
Net revenue
  $ 216.2     $ 213.7       (1.2 )%
Salaries and benefits
    88.7       92.3       4.1  
Supplies
    29.5       30.7       4.1  
Provisions for bad debts
    34.3       22.0       (35.9 )
Other operating expenses
    37.5       42.3       12.8  
Depreciation and amortization
    9.4       9.0       (4.3 )
Loss on refinancing
    20.8             (100.0 )
Operating Data:
                       
Number of hospitals at end of each period
    13       13        
Admissions
    12,750       12,450       (2.4 )
Adjusted admissions(1)
    25,968       25,962        
Net revenue per adjusted admission
  $ 8,326     $ 8,231       (1.1 )
Average length of stay
    4.6       4.7       2.2  
 
(1)   General measure of combined inpatient and outpatient volume. We computed adjusted admissions by multiplying admissions by gross patient revenue and then dividing that number by gross inpatient revenue.
     Net revenue. Net revenue for the three months ended June 30, 2011 was $213.7 million, a decrease of $2.5 million, or 1.2%, over the same period last year. Net revenue for the three months ended June 30, 2011 increased by $14.3 million or 7.2% as compared to pro forma net revenue for the same period of the previous year after giving effect to the change in our uninsured discount policy. The increase in net revenue was affected favorably by (i) favorable managed care contract pricing negotiations, (ii) an average rate increase of approximately 6.0% in May 2010, and (iii) approximately $6.2 million in net revenue during the three months ended June 30, 2011 from provider tax programs in a number of the states in which we operate. For the three months ended June 30, 2010, we recognized $2.0 million in provider tax program revenue. In addition, during the three months ended June 30, 2011, we recognized $1.9 million in revenue related to Estimated Medicaid EHR incentive payments.
     Admissions for the three months ended June 30, 2011 decreased by 300 to 12,450, a decrease of 2.4%, and adjusted admissions decreased by six to 25,962, over the same period last year. The decrease in admissions was primarily because of decreases in volumes in the areas of surgical volumes and births, partially offset by increases in behavioral and rehabilitation volumes.
     We continue to implement multiple initiatives to transform our company’s operations to prepare for the future changes we expect to occur in the healthcare industry. This transformation process is built upon on our goal of providing ideal experiences for our patients and their families through clinical excellence, aligning nursing and physician interests to provide coordination of care and improving healthcare delivery efficiencies to provide quality outcomes without overutilization of resources. The success of these initiatives will determine our ability to increase revenue from our existing operations and to increase revenue through acquisitions of other hospitals.
     Costs and expenses. Total costs and expenses from continuing operations, exclusive of income taxes, were $209.0 million, or 97.8%, of net revenue for the three months ended June 30, 2011, compared to $214.7 million, or 107.7%, of net revenue on a pro forma basis for the same period last year. Salaries and benefits, supplies, and provision for bad debts represent the most significant of our normal costs and expenses and those that are typically subject to the greatest level of fluctuation period over period.
     Salaries and benefits. Salaries and benefits for the three months ended June 30, 2011 increased to $92.3 million, or 4.1%, from $88.7 million for the same period last year. Salaries and benefits as a percentage of pro forma net revenue decreased from 44.5% of pro forma net revenue for the three month periods ending June 30, 2010 to 43.2% of net revenue for the three months ended June 30, 2011. The increase in salaries and benefits was affected by the number of our employed physicians. The number of employed physicians increased by 13 from 139 at June 30, 2010 to 152 at June 30, 2011. As we continue to employ an increasing number of medical professionals, including physicians, we anticipate that salaries and benefits as a percentage of net revenue could increase in future periods. The increase in salaries and benefits was offset partially by a reduction of $2.0 million in contract labor.

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     Supplies. Supplies for the three months ended June 30, 2011 increased to $30.7 million, or 4.1%, from $29.5 million for the same period last year. Supplies as a percentage of net revenue decreased to 14.4% for the three months ended June 30, 2011 compared to 14.8% on a pro forma basis for the same period last year. The increase in supplies expense was attributable to (i) an increase in the consumer price index adjustment on existing contracts under our group purchasing organization, (ii) an increase in pharmaceutical costs, and (iii) an increase in our orthopedic and cardiac business lines.
     Provision for bad debts. The provision for bad debts for the three months ended June 30, 2011 decreased to $22.0 million, or 35.9%, from $34.3 million for the same period last year. On a pro forma basis, the provision for bad debts increased by $4.5 million for the three months ended June 30, 2011, or 25.7%. The provision for bad debts as a percentage of pro forma net revenue increased to 10.3% for the three months ended June 30, 2011 from 8.8% for the same period last year. This increase was primarily attributable to an increase in our self-pay revenue and certain price increases. As an additional key measure of our fiscal performance, we have calculated the following ratio: the sum of (i) provision for bad debts, (ii) uninsured self-pay patient discounts and (iii) unrecognized revenue for charity and indigent care, divided by the sum of (x) net revenue, (y) uninsured self-pay patient discounts and (z) unrecognized revenue for charity and indigent care. We refer to this ratio as our Uncompensated Care Percentage. This ratio was determined to be 21.2% for the three-month period ended June 30, 2011 and, for the reasons stated above, represented an increase from 19.9% for the same period the prior year.
     Other operating expenses. Other operating expenses include, among other things, professional fees, repairs and maintenance, rents and leases, utilities, insurance, non-income taxes and physician income guarantee amortization. Other operating expenses for the three months ended June 30, 2011 increased to $42.3 million, or 12.8%, from $37.5 million for the same period last year and increased as a percentage of pro forma net revenue to 19.8% for the three months ended June 30, 2011 from 18.8% for the same period the prior year. The increase in other operating expenses was primarily attributable to an increase of $2.4 million in provider taxes from new provider tax programs in a number of the states in which we operate.
     Other. Depreciation and amortization decreased to $9.0 million for the three months ended June 30, 2011 from $9.4 million for the same period last year. Net interest for the three months ended June 30, 2011 increased to $12.7 million, or 12.4%, from $11.3 million for the same period last year. Net interest includes interest on the outstanding notes, interest on borrowings under our previous bank credit facility, interest on the unused portion of our ABL revolving credit facility, deferred loan cost amortization and the impact of the mark-to-market adjustments on the fair value of our interest rate hedge. The mark-to-market adjustments on our interest rate hedge represented expense of approximately $24,000 and income of $84,000 for the three months ended June 30, 2011 and 2010, respectively. The interest expense recorded on the swap instrument decreased by $0.2 million for the three months ended June 30, 2011 from the same period last year, as a result of the termination of our swap instrument in December 2010. Interest on the outstanding notes for the three months ended June 30, 2011 was $11.6 million, compared to $0.4 million for the three months ended June 30, 2010. Interest under our ABL was $0.2 million for the three months ended June 30, 2011. Interest on borrowings under our previous bank credit facility totaled $10.0 million for the three months ended June 30, 2010.
     Income taxes. Our effective tax rate from continuing operations was approximately 28.5% for the six months ended June 30, 2011 compared to (13.4)% for the same period last year.
     Six months ended June 30, 2011 Compared to Six months Ended June 30, 2010
     The following table compares key consolidated operating results and statistics for the six months ended June 30, 2010 and 2011.
                         
    Six Months Ended June 30,  
    2010     2011     %Change  
    (Dollars in millions,  
    except operating data)  
Statement of Operations Data:
                       
Net revenue
  $ 426.5     $ 422.2       (1.0 )%
Salaries and benefits
    178.1       186.2       4.5  
Supplies
    58.7       61.2       4.3  
Provisions for bad debts
    64.4       40.0       (37.9 )
Other operating expenses
    75.0       84.3       12.4  
Loss on refinancing
    20.8             (100.0 )
Depreciation and amortization
    18.3       18.6       1.6  
Operating Data:
                       
Number of hospitals at end of each period
    13       13        
Admissions
    25,701       25,348       (1.4 )
Adjusted admissions
    51,366       51,984       1.2  
Net revenue per adjusted admission
  $ 8,303     $ 8,122       (2.2 )
Average length of stay
    4.6       4.7       2.2  

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     Net revenue. Net revenue for the six months ended June 30, 2011 was $422.2 million, a decrease of $4.3 million, or 1.0%, over the six months ended June 30, 2010. Net revenue for the six months ended June 30, 2011 increased by $26.3 million, or 6.6% as compared to pro forma net revenue for the same period of the previous year after giving effect to the change in our uninsured discount policy. The increase in net revenue reflects (i) an increase in the average acuity of our services provided as evidenced by an increase of 0.7% in our Medicare case mix index to 1.37 as compared to 1.36 in the prior year; (ii) favorable managed care contract pricing negotiations; (iii) Medicare hospital market basket increase; and (iv) approximately $5.6 million in net revenue from provider tax programs in Alabama and Tennessee. For the six months ended June 30, 2010, we recognized $4.3 million in provider tax program revenue. In addition, during the three months ended June 30, 2011, we recognized $1.9 million in revenue related to Estimated Medicaid EHR incentive payments.
     Admissions for the six months ended June 30, 2011 decreased by 353 to 25,348, a decrease of 1.4%, and adjusted admissions increased by 618 to 51,984.
     Costs and expenses. Total costs and expenses from continuing operations, exclusive of income taxes, were $415.8 million or 98.5% of net revenue for the six months ended June 30, 2011, compared to $407.8 million or 103.0% of net revenue on a pro forma basis for the same period last year. Excluding the non-recurring loss on refinancing of $20.8 million incurred in connection with the offering of currently outstanding 91/4% Senior Notes due 2017 (the “9.25% Senior Notes”), total costs and expenses from continuing operations were 97.8% of net revenue for the six months ending June 30, 2010. Salaries and benefits, supplies, and provision for bad debts represent the most significant of our normal costs and expenses and those that are typically subject to the greatest level of fluctuation period over period.
     Salaries and benefits. Salaries and benefits for the six months ended June 30, 2011 increased to $186.2 million, or 4.5%, from $178.1 million for the six months ended June 30, 2010. Salaries and benefits as a percentage of pro forma net revenue decreased from 45.0% in 2010 to 44.1% in 2011. This ratio was affected negatively by the increase in the number of our employed physicians. The number of employed physicians increased from 139 at June 30, 2010 to 152 at June 30, 2011. Implementation of our quality initiatives also resulted in additional labor costs associated with training staff to utilize new clinical quality systems and additional hospital and corporate resources to monitor and manage quality indicators. The increase in salaries and benefits was offset partially by a reduction of $3.9 million in contract labor.
     Supplies. Supplies for the six months ended June 30, 2011 increased to $61.2 million, or 4.3%, from $58.7 million for the six months ended June 30, 2010. Supplies as a percentage of pro forma net revenue decreased from 14.8% in 2010 to 14.5% in 2011. Although the acuity of our services provided increased during 2011 compared to 2010, we were successful in limiting the ratio of supplies to net revenue by further implementing supply chain initiatives such as increased use of our group purchasing contract and pharmacy formulary management.
     Provision for bad debts. The provision for bad debts for the six months ended June 30, 2011 decreased to $40.0 million, or 37.9% from $64.4 million for the six months ended June 30, 2010. The provision for bad debts as a percentage of pro forma net revenue increased to 9.5% in 2011 from 8.5% in 2010. This increase was primarily attributable to (i) an increase in our self pay revenue because of increases in unemployment in many of our communities, and (ii) certain price increases. Our Uninsured Care Percentage was determined to be 20.7% for the six months ended June 30, 2011 and, for the reasons stated above, represented an increase from 19.4% for the six months ended June 30, 2010.
     Other operating expenses. Other operating expenses for the six months ended June 30, 2011 increased to $84.3 million, or 12.4%, from $75.0 million for the six months ended June 30, 2010. Other operating expenses as a percentage of pro forma net revenue increased to 20.0% in 2011 compared to 19.0% in 2010. The increase in other operating expenses was primarily attributable to an increase of $4.9 million in provider taxes from new provider tax programs in a number of the states in which we operate.
     Other. Depreciation and amortization increased to $18.6 million for the six months ended June 30, 2011 from $18.3 million for the six months ended June 30, 2010. Our depreciation and amortization expense increased as a result of capital improvement projects and purchases of diagnostic equipment during late 2010 and the first six months of 2011. Net interest increased by $2.4 million during 2011. Net interest includes interest on the outstanding notes, interest on borrowings under our previous bank credit facility, interest on the unused portion of our ABL revolving credit facility, deferred loan cost amortization and the impact of the mark-to-market adjustments on the fair value of our interest rate hedge. The mark-to-market adjustments on our interest rate hedge represented an expense of approximately $38,000 and $98,000 for the six months ended June 30, 2011 and 2010, respectively. Interest on the outstanding notes for the six months ended June 30, 2011 was $23.1 million. Interest on borrowings under our previous bank credit facility totaled $20.0 million for the six months ended June 30, 2010.

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     Loss on refinancing. In connection with the offering of the 9.25% Senior Notes in June 2010, we terminated our existing bank credit facility and expensed approximately $20.8 million in deferred loan costs and prepayment penalties on the existing bank credit facility.
     Income taxes. Our effective tax rate from continuing operations was approximately 28.5% during the six months ended June 30, 2011 as compared to (13.4)% during the six months ended June 30, 2010.
     Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
     The following table compares key consolidated operating results and statistics for the years ended December 31, 2009 and 2010:
                         
    Year Ended December 31,  
    2009     2010     %Change  
    (Dollars in millions,  
    except operating data)  
Statement of Operations Data:
                       
Net revenue
  $ 813.9     $ 869.5       6.8 %
Salaries and benefits
    346.9       359.7       3.7  
Supplies
    109.7       119.6       9.0  
Provisions for bad debts
    111.3       136.2       22.3  
Other operating expenses
    150.3       158.3       5.3  
Loss on refinancing
          20.8       100.0  
Depreciation and amortization
    37.8       37.1       (1.9 )
Operating Data:
                       
Number of hospitals at end of each period
    13       13        
Admissions
    50,728       50,862       0.3  
Adjusted admissions
    101,405       104,023       2.6  
Net revenue per adjusted admission
  $ 8,026     $ 8,359       4.1  
Average length of stay (days)
    4.6       4.6        
     Net revenue. Net revenue for the year ended December 31, 2010 was $869.5 million, an increase of $55.6 million, or 6.8%, over the year ended December 31, 2009. The increase in net revenue reflects (i) an increase in the average acuity of our services provided, as evidenced by an increase of 3.1% in our Medicare case mix index to 1.35 as compared to 1.31 in the prior year; (ii) favorable managed care contract pricing negotiations; (iii) Medicare hospital market basket increase; (iv) an average price increase of approximately 6% in each of October 2009 and May 2010; and (v) an approximately $15.6 million increase in net revenue from a provider tax program in a number of the states in which we operate.
     Admissions for the year ended December 31, 2010 increased by 134 to 50,862, an increase of 0.3%, and adjusted admissions increased by 2,618 to 104,023. The increase in admissions was due primarily to strength in behavioral and surgical volumes and cardiovascular services, as partially offset by decreases in volumes in the areas of respiratory, circulatory and births. Our admissions and adjusted admissions growth was negatively impacted by ice storms during the month of January 2010 in Oklahoma, Arkansas, Missouri and to a lesser extent, Middle Tennessee.
     Costs and expenses. Total costs and expenses from continuing operations, exclusive of income taxes, were $880.3 million or 101.2% of net revenue for the year ended December 31, 2010, compared to $804.7 million or 98.8% of net revenue for the year ended December 31, 2009. Excluding the non-recurring loss on refinancing of $20.8 million incurred in connection with the offering of the outstanding notes, total costs and expenses from continuing operations were 98.8% of net revenue for the year ended December 31, 2010. Salaries and benefits, supplies, and provision for bad debts represent the most significant of our normal costs and expenses and those that are typically subject to the greatest level of fluctuation period over period.

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     Salaries and benefits. Salaries and benefits for the year ended December 31, 2010 increased to $359.7 million, or 3.7%, from $346.9 million for the year ended December 31, 2009. Salaries and benefits as a percentage of net revenue decreased to 41.4% in 2010 from 42.6% in 2009. This ratio was affected positively by improved operating efficiencies and a decrease in employee medical claim costs of $0.7 million. This ratio was affected negatively by the increase in the number of our employed physicians. The number of employed physicians increased from 129 at December 31, 2009 to 152 at December 31, 2010.
     Supplies. Supplies for the year ended December 31, 2010 increased to $119.6 million, or 9.0%, from $109.7 million for the year ended December 31, 2009. Supplies as a percentage of net revenue increased to 13.7% during 2010 compared to 13.5% during 2009. Although the acuity of our services provided increased during 2010 compared to 2009, we were successful in limiting the ratio of supplies to net revenue by further implementing supply chain initiatives such as increased use of our group purchasing contract and pharmacy formulary management.
     Provision for bad debts. The provision for bad debts for the year ended December 31, 2010 increased to $136.2 million, or 22.3% from $111.3 million for the year ended December 31, 2009. The provision for bad debts as a percentage of net revenue increased to 15.6% in 2010 from 13.7% in 2009. This increase was primarily attributable to (i) reclassification of certain patient accounts receivable caused by the conversion of two of our facilities to patient accounting services provided by an affiliate of HCA; (ii) an increase in our self-pay revenue, and (iii) certain price increases. Our Uncompensated Care Percentage was determined to be 20.1% for the year ended December 31, 2010 and, for the reasons stated above, represented an increase from 17.9% for the year ended December 31, 2009.
     Other operating expenses. Other operating expenses for the year ended December 31, 2010 increased to $158.3 million, or 5.3%, from $150.3 million for the year ended December 31, 2009. Other operating expenses as a percentage of net revenue decreased to 18.2% in 2010 compared to 18.4% in 2009. This ratio was affected negatively by an increase of approximately $7.3 million in provider taxes from a provider tax program in three of the states in which we operate. Provider taxes totaled $0.7 million for the year ended December 31, 2009 compared to $8.0 million for the year ended December 31, 2010.
     Other. Depreciation and amortization decreased to $37.1 million for the year ended December 31, 2010 from $37.8 million for the year ended December 31, 2009. Our depreciation and amortization expense for the year ended December 31, 2009 included approximately $0.7 million in additional depreciation to adjust the estimated useful lives on equipment at one of our hospitals. Our depreciation and amortization expense, after giving consideration to the 2009 depreciation adjustment, increased as a result of capital improvement projects and purchases of diagnostic equipment during late 2009 and the year ended 2010. Net interest decreased by $0.1 million during 2010. For the year ended December 31, 2010, the mark-to-market adjustments on our interest rate hedges represented income of $0.2 million as compared to income of $1.7 million for the same period of the prior year. Interest on the 9.25% Senior Notes for the year ended December 31, 2010 was $23.2 million. Interest on borrowings under our previous bank credit facility totaled $20.0 million for the year ended December 31, 2010 compared to $41.2 million for the same period last year. The interest expense recorded on the swap instruments decreased to $0.9 million for the year ended December 31, 2010 compared to $5.1 million for the same period last year because of the termination of the majority of our swap instruments in December 2009.
     Loss on refinancing. In connection with the offering of the 9.25% Senior Notes in June 2010, we terminated our existing bank credit facility and expensed approximately $20.8 million in deferred loan costs and prepayment penalties on the existing bank credit facility.
     Income taxes. Our effective tax rate from continuing operations was approximately 29% during the year ended December 31, 2010 as compared to 24% during the year ended December 31, 2009.

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     Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
     Our operating results for the year ended December 31, 2008 were affected by (i) the acquisition of nine hospitals and their affiliated healthcare businesses from Community Health Systems, Inc. (Community Acquisition), effective March 1, 2008 and (ii) Woodland Medical Center being moved to discontinued operations on July 1, 2008 and sold on July 15, 2009. The operating results for the year ended December 31, 2008 include the results of operations for the Community Acquisition from the date of acquisition.
     The following table compares key consolidated operating results and statistics and same hospital operating results and statistics for the years ended December 31, 2008 and 2009.
                         
    Year Ended December 31,  
    2008     2009     %Change  
    (Dollars in millions, except operating data)  
Statement of Operations Data:
                       
Net revenue
  $ 702.4     $ 813.9       15.9 %
Salaries and benefits
    304.7       346.9       13.8  
Supplies
    96.8       109.7       13.4  
Provisions for bad debts
    81.1       111.3       37.2  
Other operating expenses
    137.8       150.3       9.1  
Depreciation and amortization
    33.7       37.8       12.2  
Operating Data:
                       
Number of hospitals at end of each period
    13       13        
Admissions
    47,815       50,728       6.1  
Adjusted admissions
    93,468       101,405       8.5  
Net revenue per adjusted admission
  $ 7,515     $ 8,026       6.8  
Average length of stay
    4.6       4.6        
 
                       
Same hospital results(1)
                       
Statement of Operations Data:
                       
Net revenue
  $ 341.2     $ 349.5       2.4 %
Salaries and benefits
    149.8       155.9       4.1  
Supplies
    48.3       50.4       4.3  
Provision for bad debts
    32.5       37.7       16.0  
Other operating expenses
    71.7       73.6       2.6  
Depreciation and amortization
    19.3       20.1       4.1  
Operating Data:
                       
Number of hospitals at end of each period
    5       5        
Admissions
    23,795       22,533       (5.3 )
Adjusted admissions
    43,759       42,137       (3.7 )
Net revenue per adjusted admission
  $ 7,797     $ 8,294       6.4  
Average length of stay
    5.1       5.1        
 
(1)   Same hospital information includes the results of our operations and statistical data for those hospitals owned for the entire 12-month period for both periods presented.
     Net revenue. Net revenue for the year ended December 31, 2009 was $813.9 million, an increase of $111.5 million, or 15.9%, over the year ended December 31, 2008, primarily attributable to operating the facilities acquired in the Community Acquisition for a full year (as compared to ten months in 2008). The increase in net revenue reflects (i) an increase in admissions; (ii) an increase in the average acuity of our services provided as evidenced by an increase of 3.1% in our Medicare case mix index to 1.31 as compared to 1.27 in the prior year; (iii) favorable managed care contract pricing negotiations; and (iv) Medicare hospital market basket increase.

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     Admissions for the year ended December 31, 2009 increased by 2,913 to 50,728, an increase of 6.1%, and adjusted admissions increased by 7,937 to 101,405, an increase of 8.5%. Our same hospital admissions and adjusted admissions, based on 5 of our 13 hospitals, decreased by 1,262 to 22,533, or 5.3% and by 1,622 to 42,137, or 3.7%, respectively. Our same hospital admissions and adjusted admissions growth were impacted negatively by the opening of a competing physician-owned hospital in our Muskogee, Oklahoma market. Excluding our Muskogee hospital admissions and adjusted admissions, our same hospital admissions decreased by 451 to 14,182, or 3.1% and same hospital adjusted admissions increased by 180 to 27,263, or 0.7%. We believe that the scenario in Muskogee in which a competing facility is developed, owned and operated by physicians is unlikely to occur elsewhere because of limitations placed on the Whole Hospital Exception adopted in the Affordable Care Act.
     Costs and expenses. Total costs and expenses from continuing operations, exclusive of income taxes, were $804.7 million or 98.9% of net revenue for the year ended December 31, 2009, compared to $727.1 million or 103.5% of net revenue for the year ended December 31, 2008. Excluding the non-recurring loss on refinancing of $22.4 million incurred in connection with the Community Acquisition, total costs and expenses from continuing operations were 100.3% of net revenue for the year ended December 31, 2008. Salaries and benefits, supplies, and provision for bad debts represent the most significant of our normal costs and expenses and those that are typically subject to the greatest level of fluctuation period over period.
     Salaries and benefits. Salaries and benefits for the year ended December 31, 2009 increased to $346.9 million, or 13.8%, from $304.7 million for the year ended December 31, 2008. This increase was primarily attributable to operating the facilities acquired in the Community Acquisition for a full year (as compared to 10 months). On a consolidated basis, salaries and benefits as a percentage of net revenue decreased to 42.6% in 2009 from 43.4% in 2008. This ratio was affected positively by the reduction in contract labor, primarily related to nursing, of approximately $8.3 million and an overall focus and improvement on utilization of our employed clinicians. In addition, we implemented salary cost control initiatives in 2009, related to wages and compensation. This ratio was affected negatively by the increase in the number of our employed physicians. Therefore, we may experience increases of salaries, wages and benefits expenses in future periods as a result of continuing to employ physicians. The number of employed physicians increased from 105 at December 31, 2008 to 129 at December 31, 2009. Implementation of our quality initiatives also resulted in additional labor costs associated with training staff to utilize new clinical quality systems and additional hospital and corporate resources to monitor and manage quality indicators. Additionally, this ratio also was affected adversely during 2009 by an increase in employee medical claim costs of approximately $7.5 million of which $3.8 million related to seven employees with catastrophic medical claims that were not covered by any employee medical claim excess insurance coverage at the time the claims were incurred. We have since entered into a medical claim excess coverage policy covering medical claims in excess of $350,000 with Auriga.
     On a same hospital basis, salaries and benefits, based on 5 of our 13 hospitals, increased 4.1% to $155.9 million for the year ended December 31, 2009 and represented 44.6% of same hospital net revenue, compared to 43.9% for the year ended December 31, 2008. Same hospital salaries and benefits for the year ended December 31, 2009 included incentive compensation expense of approximately $4.2 million, representing 1.2% of same hospital net revenue.
     Supplies. Supplies for the year ended December 31, 2009 increased to $109.7 million, or 13.4%, from $96.8 million for the year ended December 31, 2008. This increase was primarily attributable to operating the facilities acquired in the Community Acquisition for a full year (as compared to ten months in 2008). On a consolidated basis, supplies as a percentage of net revenue decreased to 13.5% during 2009 compared to 13.8% during 2008. Although the acuity of our services provided increased during 2009 compared to 2008, we were successful in limiting the ratio of supplies to net revenue by further implementing supply chain initiatives such as increased use of our group purchasing contract and pharmacy formulary management. Our ability to reduce this ratio in future periods may be limited as a result of expansion of higher acuity services and inflationary pressures on medical supplies and pharmaceuticals.
     On a same hospital basis, supplies expense, based on 5 of our 13 hospitals, increased 4.3% to $50.4 million, or 14.4% of same hospital net revenue for the year ended December 31, 2009 from $48.3 million or 14.2% of same hospital net revenue for the year ended December 31, 2008. The slight increase in supplies expense is because, in part, of the expiration of certain contracts in our group purchasing organization in June 2008. Upon their expiration, we were required to renegotiate these contracts outside the group purchasing organization on less favorable terms.
     Provision for bad debts. The provision for bad debts for the year ended December 31, 2009 increased to $111.3 million, or 37.2% from $81.1 million for the year ended December 31, 2008, which was primarily attributable to operating the facilities acquired in the Community Acquisition for a full year (as compared to ten months in 2008). On a consolidated basis, the provision for bad debts as a percentage of net revenue increased to 13.7% in 2009 from 11.5% in 2008. This increase was primarily attributable to (i) the Community Acquisition as those facilities had a higher bad debt reserve percentage than our other hospitals; (ii) reclassification of certain patient accounts receivable caused by the conversion of one of our facilities to patient accounting services provided by an affiliate of HCA; (iii) the change of a Medicaid eligibility vendor in two of our states; (iv) an increase in our self pay revenue because of increases in unemployment in many of our communities during fiscal 2009; and (v) certain price increases. On a consolidated basis, our Uninsured Care Percentage was determined to be 17.7% for the year ended December 31, 2009 and, for the reasons stated above, represented an increase from 15.0% for the year ended December 31, 2008.
     On a same hospital basis, the provision for bad debts, based on 5 of our 13 hospitals, increased to $37.7 million, or 10.8% of same hospital net revenue for the year ended December 31, 2009 from $32.5 million or 9.5% of same hospital net revenue for the year ended December 31, 2008. This increase was primarily attributable to: (i) an increase in the self-pay net revenue payor mix from 12.2% in 2008 to 13.0% in 2009, (ii) the effect of price increases at our hospitals during 2009 and (iii) the initial impact of the migration of the business office function at Muskogee from in-house to HCA.

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     We utilized hindsight testing analysis, cash collections data and other metrics to conclude that our policies adequately provided for uncompensated care during the years ended December 31, 2009 and 2008. We expect our bad debts ratio to remain sensitive to deteriorating economic conditions that could result in a greater number of uninsured patients and increased difficulty for patients to pay their co-payment and deductible balances.
     Other operating expenses. Other operating expenses include, among other things, professional fees, repairs and maintenance, rents and leases, utilities, insurance, non-income taxes and physician income guarantee amortization. Other operating expenses for the year ended December 31, 2009 increased to $150.3 million, or 9.1%, from $137.8 million for the year ended December 31, 2008. On a consolidated basis, other operating expenses as a percentage of net revenue decreased to 18.5% in 2009 compared to 19.6% in 2008. This ratio was impacted favorably by flat year-over-year utility costs and a decrease in professional and general liability premium expense charged by Auriga as compared to premiums charged by an independent carrier in 2008. The premium savings totaled approximately $4.5 million. This ratio was affected negatively by increased physician income guarantee expense and the incremental costs of recruiting quality physicians to our markets resulting from our increased physician recruitment efforts.
     On a same hospital basis, other operating expenses, based on 5 of our 13 hospitals, increased to $73.6 million, or 21.1% of same hospital net revenue for the year ended December 31, 2009 from $71.7 million, or 21.0% of same hospital net revenue for the year ended December 31, 2008.
     Other. Depreciation and amortization increased to $37.8 million for the year ended December 31, 2009 from $33.7 million for the year ended December 31, 2008. This increase was attributable to the 2009 expense representing 12 months depreciation on the Community Acquisition as compared to ten months in 2008. Net interest decreased by $1.9 million during 2009. Net interest includes interest on borrowings under our bank credit facility, interest on the unused portion of our revolving credit facility, deferred loan cost amortization and the impact of the mark-to-market adjustments on the fair value of our interest rate hedges. In 2009, the mark-to-market adjustments on our interest rate hedges represented income of $1.7 million as compared to expense of $4.7 million in the prior year. Interest expense on our borrowings under our bank credit facility increased for the year ended December 31, 2009 compared to the year ended December 31, 2008 by $4.5 million. The increase in interest expense under our bank credit facility is because of a larger outstanding principal balance for 12 months in 2009 compared to ten months in 2008.
     Loss on refinancing. In connection with the funding of the Community Acquisition in March 2008, we amended and restated our existing bank credit facility and expensed approximately $22.4 million in deferred loan costs on the existing bank credit facility. In connection with the Refinancing, we also expect to incur additional deferred loan costs, which cannot be calculated until the closing of this offering of the notes.
     Income taxes. Our effective tax rate from continuing operations was approximately 24% during 2009 as compared to 22% during 2008.
Liquidity and Capital Resources
     Operating Activities
     At December 31, 2010, we had working capital of $119.2 million, including cash and cash equivalents of $48.3 million, compared to working capital at December 31, 2009 of $106.6 million, including cash and cash equivalents of $19.6 million. Cash provided by operating activities was $65.9 million for the year ended December 31, 2010 as compared to $35.5 million for the same period last year. Our accrued interest increased by $23.7 million during the year ended December 31, 2010 compared to a $0.3 million decrease for the same period last year. Interest on the 9.25% Senior Notes is payable semiannually on January 1 and July 1. Accordingly, at December 31, 2010, we had six months of interest accrued on our consolidated balance sheet. Under our previous bank credit facility, interest was payable at the end of each quarter. Our accrued salaries decreased by $3.4 million during the year ended December 31, 2010, compared to an increase in accrued salaries of $4.9 million for the same period last year. Changes in accrued salaries are based upon the timing of our hospitals’ last paid pay period in each of the years ended December 31, 2010 and 2009. We process eight of our hospitals’ payroll on one week and the remaining five hospitals on the alternating week. Our accrued payroll is, therefore, sensitive to the number of hospitals included in the last paid payroll in a reporting period. In addition, in April 2010, we paid approximately $5.1 million in incentive compensation payments related to 2009, which were accrued at December 31, 2009. Our net accounts receivable increased by $129.7 million for the year ended December 31, 2010 compared to an increase of $122.3 million for the same period last year. This change is principally the result of an increase in our net revenue, as partially offset by an increase in our cash collections on patient accounts receivable in 2010 as compared to the same period last year.

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     At June 30, 2011, we had working capital of $99.1 million, including cash and cash equivalents of $28.0 million, compared to working capital at December 31, 2010 of $119.2 million, including cash and cash equivalents of $48.3 million. Cash provided by operating activities was $22.3 million for the six months ended June 30, 2011 as compared to $20.0 million for the same period last year. Our net accounts receivable increased by $48.5 million during the six months ended June 30, 2011 compared to an increase of $65.6 million during the same period of the prior year. The change in our uninsured discount policy, effective January 1, 2011, results in an immediate write off of 60% of the uninsured patient’s billed charges, resulting in lower patient receivable balance at the time of billing than under the previous policy. Our accrued salaries increased by $2.3 million for the six months ended June 30, 2011, compared to a decrease in accrued salaries of $5.7 million for the same period last year. Changes in accrued salaries are based upon the timing of our hospitals’ last paid pay period in each of the six month periods ended June 30, 2011 and 2010. We process eight of our hospitals’ payroll in one week and the remaining five hospitals on the alternating week. Our accrued payroll is, therefore, sensitive to the number of hospitals included in the last paid payroll in a reporting period. In addition, in April 2010, we paid approximately $5.1 million in incentive compensation payments, which were accrued at December 31, 2009.
     Investing Activities
     Cash used in investing activities increased to $23.8 million for the year ended December 31, 2010 from $16.3 million for the same period last year. Capital expenditures for the year ended December 31, 2010 were $26.1 million as compared to $22.1 million for the same period last year. Significant capital expenditures during the year ended December 31, 2010 included (i) $4.0 million for information technology, (ii) the purchase of Novalis TX radiation equipment for our cancer program at Muskogee Regional Medical Center, (iii) PACs systems at a number of our hospitals, (iv) a new MRI at Southwestern Medical Center, and (iv) renovations and upgrades to our women’s health centers, including a number of digital mammography units.
     Cash used in investing activities increased to $42.1 million for the six months ended June 30, 2011 from $16.1 million for the same period last year. In connection with our purchase of a 60% interest in Cannon County Hospital, LLC and our purchase of Great Plains Surgery Center, we made agent funded deposits on June 30, 2011 in the cumulative amount of $32.0 million. Capital expenditures for the six months ended June 30, 2011 were $13.9 million as compared to $10.8 million for the same period last year. During the six months ended June 30, 2011. we spent approximately $4.5 million on information technology, $5.1 million on growth capital, with the remainder on routine capital.
     Financing Activities
     Cash flows used in financing activities increased from $6.1 million for the year ended December 31, 2009 to $13.4 million for the same period in the current year, primarily because of the $12.6 million net debt payments from the Refinancing (debt borrowings less debt repayments and the payment of related fees and expenses). Cash flows used in financing activities decreased from $5.4 million for the six months ended June 30, 2010 to $0.5 million for the same period in the current year, primarily due to the $6.2 million net debt payments from the Refinancing (debt borrowings less debt repayments and the payment of related fees and expenses). As of December 31, 2010 and June 30, 2011, we had outstanding $500.0 million in aggregate indebtedness.
     The Refinancing
     In June 2010, we completed a comprehensive refinancing plan, or the Refinancing. Under the Refinancing, we issued $500.0 million of new 9.25% Senior Notes due 2017, or the outstanding notes, in a private placement offering and entered into a new senior secured asset based loan, or the ABL, consisting of a $100.0 million revolving credit facility maturing in November 2014, or the 2010 Revolving Facility. The proceeds from the outstanding notes were used to repay the outstanding principal and interest related to our previous term loan facility and to pay fees and expenses relating to the Refinancing of approximately $21.7 million.
     For a description of the ABL, including the 2010 Revolving Facility, please refer to the section below entitled “Description of Other Indebtedness.”
     Debt Covenants
     The indenture governing the outstanding notes contains a number of covenants that among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries, to sell assets, incur additional indebtedness or issue preferred stock, pay dividends and distributions or repurchase our capital stock, create liens on assets, make investments, engage in mergers or consolidations, and engage in certain transactions with affiliates. At December 31, 2010 and June 30, 2011, we were in compliance with all debt covenants that were subject to testing at such dates.

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Capital Resources
     We expect that cash on hand, cash generated from our operations and cash expected to be available to us under the 2010 Revolving Facility will be sufficient to meet our working capital needs and planned capital expenditure programs for the next 12 months and into the foreseeable future. However, we cannot assure you that our operations will generate sufficient cash or that future borrowings under the Refinancing will be available to enable us to meet these requirements.
     We had $48.3 million and $28.0 million of cash and cash equivalents as of December 31, 2010 and June 30, 2011, respectively. We rely on available cash, cash flows generated by operations and available borrowing capacity under the 2010 Revolving Facility to fund our operations and capital expenditures. We invest our cash in accounts in high-quality financial institutions. We continually explore various options to increase the return on our invested cash while preserving our principal cash balances. However, the significant majority of our cash and cash equivalents are held in accounts that are not federally-insured and could be at risk in the event of a collapse of the financial institutions at which those accounts are held.
     In addition, our liquidity and ability to fund our capital requirements are dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control. If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flows from operations or we may not be able to obtain future financings to meet our liquidity needs. We anticipate that, to the extent additional liquidity is necessary to fund our operations, it would be funded through borrowings under our 2010 Revolving Facility, the incurrence of other indebtedness, additional note issuances or a combination of these potential sources of liquidity. We may not be able to obtain this additional liquidity when needed on terms acceptable to us.
     We also intend to continue to pursue acquisitions or partnering arrangements, either in existing markets or new markets, which fit our growth strategies. To finance such transactions, we may draw upon cash on hand, amounts available under our revolving credit facility or seek additional funding sources. We continually assess our capital needs and may seek additional financing, including debt or equity, as considered necessary to fund potential acquisitions, fund capital projects or for other corporate purposes. We may be unable to raise additional equity proceeds from GTCR or other investors should we need to obtain cash for any of these purposes. Our future operating performance, ability to service our debt and ability to draw upon other sources of capital will be subject to future economic conditions and other business factors, many of which are beyond our control.
     As market conditions warrant, we and our major equity holders, including GTCR, may from time-to-time repurchase debt securities issued by us, in privately negotiated or open market transactions, by tender offer or otherwise.

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Obligations and Commitments
     The following table reflects a summary of obligations and commitments outstanding with payment dates as of June 30, 2011:
                                         
    Payments Due by Period  
    Within     During     During     After        
    1 Year     Years 2-3     Years 4- 5     5 Years     Total  
                    (In millions)                  
Contractual Cash Obligations:
                                       
Long-term debt (1)
  $ 46.9     $ 93.8     $ 93.8     $ 570.1     $ 804.6  
Operating leases (2)
    7.9       12.4       7.4       4.2       31.9  
Estimated self-insurance liabilities (3)
    6.8       6.7       2.9       2.3       18.7  
 
                             
Subtotal
  $ 61.6     $ 112.9     $ 104.1     $ 576.6     $ 855.2  
 
                             
 
                                       
Other Commitments:
                                       
Construction and capital improvements (4)
  $ 8.1     $     $     $     $ 8.1  
Letters of credit (5)
    4.5                         4.5  
Physician commitments (6)
    0.5                         0.5  
Information technology commitments (7)
    5.6       12.9       14.7       16.6       49.8  
 
                             
Subtotal
  $ 18.7     $ 12.9     $ 14.7     $ 16.6     $ 62.9  
 
                             
Total obligations and commitments
  $ 80.3     $ 125.8     $ 118.8     $ 593.2     $ 918.1  
 
                             
 
(1)   Includes both principal and interest portions of outstanding debt.
 
(2)   These obligations are not reflected in our consolidated balance sheets.
 
(3)   Includes the current and long-term portions of our professional and general liability, workers’ compensation and employee health reserves.
 
(4)   Represents our estimate of amounts we are committed to fund in future periods through executed agreements to complete projects included as construction in progress on our consolidated balance sheets.
 
(5)   Amounts relate to instances in which we have letters of credit outstanding with the third party administrators of our self-insured workers’ compensation program.
 
(6)   Includes physician guarantee liabilities recognized on our consolidated balance sheets under FASB provisions regarding minimum revenue guarantees and liabilities for other fixed expenses under physician relocation agreements not yet paid.
 
(7)   An affiliate of HCA and another third-party vendor provide various information systems services, including but not limited to, financial, clinical, revenue cycle management, patient accounting and network information services, under contracts that expire beginning 2018. The amounts are based on estimated fees that will be charged to our hospitals with an annual fee increase to our hospitals that is capped by the consumer price index increase.

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Guarantees and Off-Balance Sheet Arrangements
     We are a party to certain master lease agreements and other similar arrangements with non-affiliated entities.
     We enter into physician income guarantees and other guarantee arrangements, including parent-subsidiary guarantees, in the ordinary course of business. We do not believe we have engaged in any transaction or arrangement with an unconsolidated entity that is reasonably likely to affect liquidity materially.
     We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Effects of Inflation and Changing Prices
     Various federal, state and local laws have been enacted that, in certain cases, limit our ability to increase prices. Revenue for acute hospital services rendered to Medicare patients is established under the federal government’s prospective payment system. We believe that hospital industry operating margins have been, and may continue to be, under significant pressure because of changes in payor mix and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. In addition, as a result of increasing regulatory and competitive pressures, our ability to maintain operating margins through price increases to non-Medicare patients is limited.
Quantitative and Qualitative Disclosures About Market Risk
     We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. As of June 30, 2011, we had no indebtedness outstanding bearing interest at variable rates. Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed under the 2010 Revolving Facility in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates would not be material to our results of operations or cash flows. The variable interest rate risk is partially mitigated by the interest rate cap that became effective in December 2009, as discussed below.
     In December 2009, we entered into an interest rate cap agreement with Calyon Credit Agricole (the “Counterparty”). Under this agreement, we made a $0.6 million dollar payment to cap the interest on a notional $75.0 million of our debt at a 4.5% rate of interest. The fair value of the interest rate cap as of June 30, 2011 was an asset for us of approximately $6,000. We use derivatives such as interest rate caps from time-to-time to manage our market risk associated with variable rate debt. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage features.
     While we anticipate that the Counterparty will satisfy its obligations under the interest rate swap and cap agreements fully, we are exposed to credit losses in the event of non-performance by the Counterparty.

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BUSINESS
Company Overview
     We are a provider of general and specialized acute care, outpatient and other medically necessary services in our primarily non-urban communities. We provide these services through a portfolio of acute care hospitals and complementary outpatient facilities and clinics. As of June 30, 2011, we operated 13 acute care hospitals (12 of which we own and one of which we lease pursuant to a long-term lease) comprised of 1,745 licensed beds in Arkansas, Alabama, Missouri, Oklahoma, Oregon, Tennessee and Washington. We are focused on enabling our facilities to maximize their potential to deliver high quality care in a patient-friendly environment. We invest our financial and operational resources to establish and support services that meet the needs of our communities. We seek to achieve our objectives by providing exceptional quality care to our patients, establishing strong local management teams, physician leadership groups and hospital boards, developing deep physician and employee relationships and working closely with our communities.
     Our hospitals offer a broad range of general acute care services, including, for example, internal medicine, general surgery, cardiology, oncology, orthopedics, women’s services, neurology and emergency services. In addition, our facilities also offer other specialized and ancillary services, including, for example, psychiatric, diagnostic, rehabilitation, home health and outpatient surgery.
     In addition to providing capital resources, we make available a variety of management services and expertise to affiliated healthcare facilities. These services include ethics and compliance, group purchasing, accounting, financial, clinical systems, resource management, governmental reimbursement, information systems, legal, personnel management, internal audit and access to managed care networks.
     Our mission is to provide high quality healthcare in the communities we serve and to provide services in an affordable and accessible manner. We also believe in partnering with communities to build strong local healthcare systems, especially communities that are either growing or are underserved.
     Capella was formed in April 2005 by four former executives of Province Healthcare, formerly a publicly-traded operator of non-urban acute care hospitals, with the support of a significant equity commitment by GTCR. Since 2005, we have completed three significant acquisitions resulting in our current operation of 13 acute care hospitals and have added multiple ancillary outpatient centers and clinics. In December 2005, we acquired four hospitals and their related businesses from HCA. In December 2006, we acquired Middle Tennessee Surgical Care, an outpatient surgery center now affiliated with our River Park hospital. Effective in April 2007, we acquired by long-term lease Muskogee Regional Medical Center and certain related businesses and joint ventures. In November 2007, we acquired the remaining minority interests in two of those diagnostic imaging joint ventures related to the Muskogee Transaction. Effective March 1, 2008, we acquired nine hospitals and their affiliated businesses from CHS. In July 2009, we sold one of those nine facilities, which was located in Cullman, Alabama.
     For the six months ended June 30, 2011, we generated net revenue and adjusted EBITDA of $422.2 million and $50.5 million, respectively. For the year ended December 31, 2010, we generated net revenue and adjusted EBITDA of $869.5 million and $95.7 million, respectively. For the year ended December 31, 2009, our first full calendar year of operations of all 13 current hospitals, we generated net revenue and adjusted EBITDA of $813.9 million and $95.7 million, respectively. For the three-year period ended December 31, 2010, our compounded annual net revenue and adjusted EBITDA growth were 11.3% and 8.0%, respectively. See page 41 within the section entitled “Selected Historical Consolidated Financial and Operating Data” for a discussion and reconciliation of adjusted EBITDA.
Our Competitive Strengths
     We believe the significant factors allowing us to implement our mission and business strategies successfully include the following:

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     Commitment to Delivery of Patient Care Excellence
     We believe providing patient care excellence is critical to attracting patients, physicians, medical staff and employees to our facilities. In addition, providing high quality patient care is increasingly vital to achieving our operating and financial success, including receiving full reimbursement from governmental and commercial insurance payors. As a result, we have implemented several management and operating initiatives aimed at continuously monitoring and improving our quality of care. We believe several factors contribute to providing patient care excellence, including leadership and accountability at all levels of our organization, aligning ourselves with quality physicians and clinical staff, as well as providing a clinical environment that is satisfactory to our patients, physicians and employees. To support these initiatives, each of our hospitals has a CQO who is responsible for implementing and monitoring our quality training and operating programs. In addition, we have Boards of Trustees and LPLGs at each of our facilities, a PAG, a NPLG and several on-line training tools, which are focused on delivering patient care excellence, clinical best practices and results in our hospitals. In January 2011, we added a CMO to our senior management team to assume leadership responsibility for facilitating the work of our NPLG, ensuring that physician leaders across our are continuously involved in shaping the Company’s vision and future strategies. The CMO is also responsible for providing leadership for our affiliated hospitals’ quality and service excellence initiatives as well as for on-going communication with medical staff members. Furthermore, we strive continually to improve physician and employee satisfaction, which we believe is critical to delivering quality patient care. Our satisfaction review program is instrumental in identifying ways to improve quality of care in each of our facilities. Some of the results of our efforts include:
    accreditation of all of our hospitals, including 12 by The Joint Commission and one by the American Osteopathic Association;
 
    in the spring of 2011, The Joint Commission recognized eight of our hospitals for significant improvement and/or consistent high performance in various elements of the core measures and invited them to participate in the pilot-testing of Solutions Exchange, a program to help other hospitals throughout the nation;
 
    Parkway Medical Center was ranked in the top 1% of all U.S. hospitals by Data Advantage Hospital Value Index (“HVI”) and was recognized as a center of excellence in bariatric surgery in 2010;
 
    Capital Medical Center received a #1 ranking in the state of Washington by HealthGrades for its orthopedic program in 2010 and a Best in Country, Top 10 in the state of Washington by HealthGrades for general surgery in 2011;
 
    Southwestern Medical Center was the first hospital in southwest Oklahoma to receive certification from The Joint Commission for its stroke program and, in 2011, earned its fifth consecutive accreditation from the Commission on Accreditation of Rehabilitation Facilities;
 
    Muskogee Regional Medical Center earned accreditation from the Oklahoma State Medical Association as a sponsor of Continuing Medical Education in 2010 and Quality Respiratory Care Recognition from the American Association for Respiratory Care in 2010 and 2011;
 
    Willamette Valley Medical Center was named a “Best Value in the State of Oregon” for 2009 and 2010 by the Press Ganey Hospital Value Index;
 
    River Park Hospital earned its third consecutive national Chest Pain Center accreditation in 2010 from the Society of Chest Pain Centers;
 
    Mineral Area Regional Medical Center was named a 2011 “Excellence through Insight” award recipient in the category of “Overall Physician Satisfaction” by HealthStream Research;
 
    National Park Medical Center was named to HomeCare Elite 2010, which is the top 5% of high performance home health agencies in the U.S.; and
 
    improved physician and employee satisfaction scores in 2010, as measured by HealthStream, an independent, third-party, nationally-recognized survey administrator.

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     Diversified Portfolio of Assets with Strong Market Positions in Attractive Communities
     We diversified our asset base by entering new geographic markets through successful acquisitions. Currently, our top three states, Arkansas, Oklahoma and Oregon, which contain five of our hospitals, account for 25.6%. 21.7% and 12.7% of our 2010 net revenue, respectively, and 25.6%. 21.0% and 12.7% of our net revenue, respectively, for the six month period ended June 30, 2011.
     Strategic Physician Recruitment and Retention
     We have been successful in implementing our strategic physician recruitment and retention plan. In the summer of 2008, we commissioned an independent consulting group to perform a market needs analysis with a focus on the unserved medical needs of the community. From that analysis, we developed a strategic recruitment plan to meet each of our market’s healthcare needs. Executing that plan, we recruited 61 physicians in 2008; 72 in 2009; and 68 in 2010. During 2010, 42.6% were specialists in areas such as general surgery, cardiology, women’s services, and orthopedics. The remainder were primary care physicians, including hospitalists and physicians practicing in areas such as family medicine, internal medicine and pediatrics.
     Proven Ability to Instill Operational Excellence in Acquired Facilities
     We have acquired and integrated 14 hospitals successfully since our inception in 2005. Once we acquire a facility, we implement a customized strategic plan focused on leadership, quality, physician engagement and recruitment, capital investment, cost initiatives and enhancing key services. We believe our ability to increase revenue, operating margins and cash flow at acquired facilities is the direct result of our disciplined approach to expanding and improving key services, recruiting physicians to provide these services, streamlining costs, enhancing relationships with our physicians and employees and implementing a targeted capital investment program. In addition, our senior management team has an average of more than 28 years of experience in hospital operations, with three members of our senior management team having been either a hospital CEO or CFO.
     Strategic Capital Investments Resulting in Well Capitalized Facilities.
     We have not been required to make significant capital investments renovating or repairing our facilities because the hospitals we acquired typically have been capitalized and maintained well by their previous owners. For example, Willamette Valley Medical Center completed an approximately $37 million renovation and expansion project in November 2007 (we acquired it in March 2008) and Muskogee Regional Medical Center was in the process of completing an approximately $31 million renovation and expansion project in April 2007 when we entered into a long-term lease for that facility. Although we monitored the project’s completion, the lessor bore the cost of renovation and expansion. We have invested in targeted growth initiatives, primarily focused on new and enhanced services. We have invested a total of approximately $68.0 million in our facilities over the three-year period ended December 31, 2010. Major projects funded by us include (i) approximately $9 million in renovations and expansions to operating rooms, the intensive care unit and the cancer center at Southwestern Medical Center that were completed in 2008; (ii) aggregate of approximately $5.2 million for the purchase of a linear accelerator and medical oncology and radiation therapy renovations at Capital Medical Center that were also completed in 2008; and (iii) approximately $3.4 million for Novalis Tx radiation oncology equipment at Muskogee Regional Medical Center in 2010. We believe that our continued commitment to invest in our communities and facilities will further strengthen our quality of care and our ability to recruit and retain leading physicians and healthcare professionals.

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     Experienced Senior Management and Leadership Teams
     Our senior management team has an average of more than 28 years of experience in the healthcare industry with a proven record of achieving strong operating results while operating with significant leverage. The senior management team is highly respected in the hospital industry, has significant experience in acquiring, improving and managing hospitals and has demonstrated its ability to integrate hospitals effectively without reducing its focus on existing operations. In addition, the average experience of our current hospital CEOs is approximately 25 years.
     Our senior management team is led by Daniel S. Slipkovich, our Chief Executive Officer. Most recently, Mr. Slipkovich served as President and COO at Province Healthcare and previously held executive management positions at a number of hospital companies including LifePoint Hospitals, Inc. (“LifePoint”) and HCA. The other members of our senior management team are Denise W. Warren, our Senior Vice President, Chief Financial Officer and Treasurer; D. Andrew Slusser, our Senior Vice President of Acquisitions and Development; Michael A. Wiechart, our Senior Vice President and Chief Operating Officer; and Erik E. Swensson, MD, our Senior Vice President and Chief Medical Officer. Additional information about each of the members of our senior management team can be found in the section below entitled “Management.”
     Additionally, J. Thomas Anderson, who joined Capella at its inception and previously served as our president, currently serves as a member and Vice Chairman of Capella’s Board of Directors. Most recently, Mr. Anderson served as Senior Vice President of Acquisitions and Development at Province Healthcare from January 1998 to April 2005, and previously held executive positions of varying responsibility at CHS.
Our Business Strategy
     The key elements of our business strategy are:
     Enhancing Quality of Care and Service Excellence
     We place significant emphasis on consistently providing high quality patient care and service excellence. We seek to achieve this by continuously enhancing our programs and protocols through targeted investments in our employees, physicians, systems and strategic growth initiatives. We believe value-based purchasing initiatives of both governmental and private payors, such as linking payment for healthcare services to performance on objective quality measures, will increasingly become key drivers of financial performance. Examples of these initiatives include denying payment for avoidable hospital re-admissions and bundling payments for acute care services with physician or post-acute services. We believe our continued strategic investments to improve patient care excellence will prepare us to face the challenges and capitalize on the opportunities relating to the ever-changing, pay-for-performance environment. Some of our strategic initiatives in quality and service excellence include:
    Emergency Rooms. Recently, we embarked on a multi-year strategy to enhance quality and improve operating efficiencies in our emergency rooms. This strategy involves implementing process improvement initiatives such as Lean for Healthcare techniques, which are designed to improve patient experiences through more efficient utilization of resources. As a result of this initiative, several members of our corporate and hospital staff have received Lean for Healthcare certifications. We also are making a significant investment in a leading emergency department information system, which is comprised of several modules that offer comprehensive patient management system tools. The program provides appropriate and consistent guidelines for patient care excellence helping to ensure that proper screening, evaluation and treatment is performed.
 
    Local Physician Leadership Groups, or LPLGs. Our LPLGs are comprised of four to five physician leaders and our hospital CEO in each of our markets. The groups (i) provide ongoing dialogue with hospital administration; (ii) help develop key strategic initiatives for the hospital; and (iii) promote patient care excellence.
 
    Physician Advisory Group, or PAG. Our PAG is comprised of physician leaders across the Company. The group (i) provides clinical review and guidance related to information system design, build-out and workflow; (ii) advises us on physician communication and education; and (iii) identifies opportunities where technology can be used to improve clinical processes and outcomes.

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    National Physician Leadership Group, or NPLG. Our NPLG is comprised of one member of each LPLG and Capella senior management. The group (i) receives updates on Capella corporate strategy and vision; (ii) discusses quality of care issues and goals; (iii) promotes networking among Capella-affiliated physicians; (iv) offers advice on special projects where front line physician input is critical; and (v) allows members of the medical staff to have direct communication with members of Capella senior management.
 
    Chief Medical Officer. Our CMO is responsible for facilitating the work of our NPLG, ensuring that physician leaders from across the Company are continuously involved in shaping our vision and future strategies. The CMO is also responsible for providing leadership for our affiliated hospitals’ quality and service excellence initiatives as well as for on-going communication with medical staff members.
 
    Training and Education. We provide a customized on-line learning center comprised of approximately 3,000 clinically based courses to all our staff. Our corporate CQO develops and implements a work plan for each of the hospitals based upon their specific needs. The hospital CQO and CNO, in turn, develop individual educational work plans for each staff member at their facility. Usage of the Capella Learning Center is monitored by the corporate CQO and is reported to Capella senior management. We work with an independent consulting group to provide training in the areas of improving patient care processes as well as employee, physician and patient satisfaction. We believe this is a critical element in emphasizing our philosophy that, if our employees and physicians enjoy where they work and if they are intellectually stimulated, they will improve the quality care our patients receive. We survey our physicians and our employees on an annual basis to identify objectives for quality and satisfaction improvement.
 
    Compensation. We base the incentive compensation for our hospital administrative teams in significant part on achieving key individual and facility quality and service metrics such as performance on patient satisfaction surveys and other core measurements.
     Continued Physician Engagement and Alignment Initiatives
     Our ability to meet the medical care needs of our communities and enhance and expand our services is highly dependent on our physician engagement strategies. We have a comprehensive recruiting program that is directed at the local level by our hospital CEOs and Boards of Trustees. We supplement our local teams with several third party recruiting firms to assist us in identifying candidates that match the profile of our physician needs. We maintain a flexible approach to aligning our goals with our physician partners, including our willingness to recruit physicians through multi-year employment and/or income guarantee arrangements and to enter into joint venture and other collaborative arrangements. We added a CMO to our senior management team to assume leadership responsibility for facilitating the work of our NPLG, ensuring that physician leaders across the Company are continuously involved in shaping the Company’s vision and future strategies. In addition, we believe physicians are attracted to our hospitals because of several factors, including:
    our commitment to patient care excellence;
 
    our willingness to deploy strategic capital to improve the delivery of care;
 
    our focus on employing and developing high quality nursing and support staff; and
 
    our integration into, and support of, the communities we serve.
     Identifying and Establishing Strong Local Market Leadership
     We empower our individual hospital management teams to develop comprehensive strategic plans and position their hospitals to meet the healthcare needs of the communities they serve. In addition to strong corporate oversight and resources, each of our local leadership teams is supported by a local Board of Trustees and a LPLG. The Board of Trustees is comprised of physicians and community leaders as well as the hospital CEO. We believe local community leaders are an important resource for our hospital CEOs to insure that we are being responsive to the needs of the communities we serve. Our LPLGs are typically comprised of local physician leaders as well as members of our hospital’s administration. These groups insure that we are providing patient care excellence, offering the appropriate medical services, maintaining high quality employees and recruiting the best physicians to

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our medical staff. Capella corporate provides continuous operational, financial and human resources support to our local teams and has designed programs that allow us to share best practices across our entire portfolio of facilities.
     Expanding the Services We Provide
     Each year, we conduct in-depth strategic reviews of the major service lines offered at each of our facilities as well as market demand for additional services. We leverage our local market knowledge and information together with input and guidance from our local physician and community leaders to prioritize the healthcare services our communities are seeking. We then initiate a financial assessment and develop an investment plan that supports the expansion of the appropriate services. Focus areas include:
    expanding specialty medical services such as medical and radiation oncology, cardiovascular, orthopedic, neurology, behavioral health and women’s services;
 
    initiating and expanding outpatient services;
 
    investing in medical equipment and technology to support our service lines;
 
    improving our efficiency to deliver better quality care in our emergency rooms; and
 
    enhancing patient, physician and employee satisfaction.
     We have engaged consultants and are working with our hospital CEOs to identify trends in service lines and areas for future expansion of services. We remain motivated to invest in our facilities in order to increase the quality and scope of services we provide, meet the needs of our communities and establish a strong reputation so that we may continue to recruit leading physicians, become the healthcare provider of choice in our communities and increase the revenue and profitability of our facilities. For example, we re-introduced medical and radiation oncology to Capital Medical Center to meet the needs of that community. In coordination with this effort, we were able to recruit several medical and radiation oncologists to that facility. More recently, we were able to develop a total joint replacement program at Willamette Valley Medical Center. As part of this program, we were able to recruit three orthopedic surgeons to the market. The hospital’s reputation for quality and our local physicians’ participation helped this program come to fruition.
     Pursuing Acquisitions and Strategic Relationships
     We believe we will continue to have opportunities to pursue acquisitions of hospitals and other healthcare facilities both in existing and new markets. We will pursue a disciplined acquisition strategy in markets where we believe we can have the greatest impact on the financial and operational performance of the acquired facility. We will continue to target acute care hospitals and ancillary facilities in attractive, primarily non-urban markets with populations generally greater than 35,000. We have focused criteria that cover multiple aspects of a new facility and include demographics, operational improvement, financial improvement and cultural alignment. We perform a significant amount of due diligence on each facility we intend to acquire to ensure that our criteria are met.
     We also anticipate we will have opportunities to pursue selective acquisitions or otherwise develop complementary ancillary businesses in the markets we currently serve. We have placed a significant emphasis on pursuing such strategic in-market transactions that support our ability to consolidate and/or expand our community service offerings. These investments can include, but are not limited to: ambulatory surgery centers, outpatient diagnostic imaging centers, free-standing clinical laboratories, home healthcare and urgent or primary care centers. Our criteria for in-market strategic investments is similar to our criteria for external acquisitions, including focusing on outpatient ancillary centers where we can increase market share, improve operations and achieve cost and/or reimbursement synergies and cultural alignment.
     As a result of the recent economic downturn, we believe many public and not-for-profit hospitals are facing significant financial challenges and could seek to partner with consistently strong operators who are well capitalized and who demonstrate a willingness to invest in the communities they serve. We believe we meet these criteria. From time to time, we also may consider entering into joint ventures or strategic alliances with other hospitals and healthcare providers.

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     Investing in Technology to Improve Patient Care
     The HITECH Act includes provisions designed to increase the use of computerized physician order entry at hospitals and the use of EHR by both physicians and hospitals. We believe that these systems improve quality, safety, efficiency and clinical outcomes. We intend to comply with the EHR meaningful use requirements of the HITECH Act to qualify for the maximum available Medicare and Medicaid incentive payments. We continue to refine our budgeted costs and the expected reimbursement improvements associated with our EHR initiatives. Our compliance will result in significant costs, including professional services focused on successfully designing and implementing our EHR solutions and costs associated with the hardware and software components of the project. Consequently, we believe we may qualify for Medicare reimbursement at three of our hospitals in the fourth quarter of 2011 and already qualify for Medicaid reimbursement in three states. Implementing a standard emergency room management system across all hospitals is another example of our investing in information technology to improve patient care. This system, in conjunction with our other process improvement initiatives, helps to ensure that appropriate and consistent quality patient care is administered quickly and reliably to our emergency room patients. Additionally, the creation of our PAG is designed to foster collaboration with our physicians to assist us in providing patient care excellence through technological improvements.
     Delivering Strong Financial Performance
     We pride ourselves on maintaining disciplined financial policies aimed at growing revenue, improving margins and generating free cash flow. We will continue to focus on ways in which we can increase revenue from our existing facilities, including continued investments to expand services, continued physician recruitment to meet our communities’ needs and favorable managed care contracts. We are also focused on capitalizing on several operational efficiencies to improve our margins and free cash flow, including:
    continued focus on revenue cycle management and collections;
 
    disciplined deployment of capital across our portfolio;
 
    encouragement and motivation our physicians and medical staff to adhere to our established protocols related to medical supplies utilization;
 
    infrastructure build-out to support our growing physician clinic operations;
 
    implementation of appropriate staffing tools and continued reduction of contract labor; and
 
    leveraged technical expertise through use of our corporate resources.
Industry and Industry Trends
     The U.S. healthcare industry is large and growing. According to CMS, total annual U.S. healthcare expenditures grew 4.0% in 2009 to $2.5 trillion, representing 17.6% of the U.S. gross domestic product. CMS projects total U.S. healthcare spending to grow by an average annual growth rate of 6.1% from 2009 through 2019.
     According to the AHA, in 2009 there were approximately 5,000 inpatient hospitals in the United States. The U.S. hospital industry is broadly defined to include acute care, rehabilitation and psychiatric facilities that are either public (government owned and operated), not-for-profit (private, religious or secular) or for-profit institutions (investor owned). Ownership of hospitals is dominated by not-for-profit hospitals, which, in 2009, controlled 58% of the market, followed by state and local governments with 26% and for-profit hospitals with 16%.
     We believe well-capitalized and operations-focused providers of healthcare services will benefit from the current industry trends, some of which include:
     Demographics and Disease Trends. According to the U.S. Census Bureau, the demographic age group of persons aged 65 and over is expected to experience compounded annual growth of 3.0% over the next 20 years, and constitute 19.3% of the total U.S. population by 2030. CMS projects continued increases in hospital services based on the aging of the U.S. population, advances in medical procedures, expansion of health coverage, increasing consumer demand for expanded medical services and increased prevalence of chronic conditions such as diabetes, heart disease and obesity. We believe these factors will continue to drive increased utilization of healthcare services and the need for comprehensive, integrated hospital networks that can provide a wide array of essential and sophisticated healthcare.

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     Quality-Driven Reimbursement. We believe the U.S. healthcare system is continuing to evolve in ways that favor large-scale, comprehensive and integrated providers that provide high levels of quality care. Specifically, we believe there are a number of initiatives that will continue to gain importance in the foreseeable future, including introduction of value-based payment methodologies tied to performance, quality and coordination of care, implementation of integrated electronic health records and information, and an increasing ability for patients and consumers to make choices about all aspects of healthcare. We have developed key processes and infrastructure that we believe enable us to meet or exceed the current established quality guidelines. We plan to continue to invest in quality initiatives and technology in order to meet the quality demands of our payors in the future. Based on our compliance with reporting requirements, we received full market basket reimbursement rates from Medicare in all of our facilities in 2009 and 2010.
     Specialized Services. We believe patients are gaining increased access to medical information and statistics and, as a result, are better informed when seeking specialized care and treatment alternatives. We believe facilities that provide specialized patient care in areas such as cardiology, oncology, orthopedics, women’s services and neurology, among others, will benefit from the increased demand for these services. We continually assess our markets and engage community and hospital leadership to develop specialized services to meet the demands of our patients. Examples of the services we developed, enhanced and/or expanded over the past several years include, among others, cardiology, oncology, orthopedic, neurology, behavioral health and women’s services programs.
     Consolidation. As a result of the recent economic pressures, we believe a large number of public and not-for-profit operators have been affected dramatically and are experiencing financial challenges. For-profit hospital operators with strong management and access to capital are well-positioned to act as strategic acquirers or partners to assist these financially challenged operators in achieving their long-term objectives of providing high quality, cost-effective care to the communities they serve. Our management team has a demonstrated track record of successfully identifying, acquiring and integrating facilities that meet our disciplined acquisition criteria. In addition, our management team maintains significant experience converting public and not-for-profit facilities to for-profit status. We believe some of the key elements in converting a hospital from not-for-profit status to for-profit status involves engaging local community leaders and committing to continued support of the hospital’s mission. Each of our hospitals has a Board of Trustees, which is comprised of physicians and local community leaders, as well as the hospital CEO. In addition, we support community programs and charitable organizations in our communities both financially and with volunteer time.
     Healthcare Reform. The Affordable Care Act dramatically alters the United States healthcare system and is intended to decrease the number of uninsured Americans and reduce the overall cost of healthcare. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments, including DSH payments, expanding the Medicare program’s use of value-based purchasing programs and tying hospital payments to the satisfaction of certain quality criteria. We believe, as a result of our physician alignment strategies as well as our continued focus on providing high quality, cost-effective healthcare, that we are well-positioned to capitalize on the opportunities and face the challenges that are likely to arise as a result of the enactment of the Affordable Care Act. As the legislation will be implemented over the next several years, the extent of the impact on our business from expected increased patient volumes, an increased number of insured patients, reimbursement cuts and other program changes cannot be determined at this time.
The Markets We Serve
     Our hospitals are located in the following states:
     Alabama
     As of June 30, 2011, we owned and operated three hospitals in the State of Alabama, with a total of 359 licensed beds. We acquired these hospitals in March 2008 from CHS as part of a multi-facility acquisition. Hartselle Medical Center primarily serves the community of Hartselle, Alabama, which is located approximately 60 miles from Birmingham. Jacksonville Medical Center primarily serves the community of Jacksonville, Alabama and is located approximately 63 miles from Birmingham. Parkway Medical Center primarily serves the community of Decatur, Alabama and is located approximately 25 miles from Huntsville. During the year ended December 31,

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2010 and the six months ended June 30, 2011, we generated approximately 11.3% and 10.3%, respectively, of our total net revenue in this market.
     Arkansas
     As of June 30, 2011, we owned and operated two hospitals in the State of Arkansas with a total of 336 licensed beds. We acquired these hospitals in March 2008 from CHS as part of a multi-facility acquisition. St. Mary’s Regional Medical Center primarily serves the community of Russellville, Arkansas, which is located approximately 77 miles from Little Rock. National Park Medical Center primarily serves the community of Hot Springs, Arkansas, which is located approximately 52 miles from Little Rock. During the year ended December 31, 2010 and the six months ended June 30, 2011, we generated approximately 25.6% and 25.6%, respectively, of our total net revenue in this market.
     Missouri
     As of June 30, 2011, we owned and operated one hospital in the State of Missouri with 135 licensed beds. Mineral Area Regional Medical Center serves the community of Farmington, Missouri, which is located approximately 80 miles south of St. Louis. We acquired Mineral Area Regional Medical Center in March 2008 from CHS as part of a multi-facility acquisition. During the year ended December 31, 2010 and the six months ended June 30, 2011, we generated approximately 5.7% and 5.8%, respectively, of our total net revenue in this market.
     Oklahoma
     As of June 30, 2011, we owned and operated two hospitals in the State of Oklahoma with a total of 474 licensed beds. Muskogee Regional Medical Center primarily serves the Muskogee, Oklahoma community, located approximately 50 miles from Tulsa, which we acquired pursuant to a 40-year lease in April 2007 from the Muskogee Medical Center Authority. In connection with this transaction, we agreed to make at least $28 million in general capital expenditures at that facility during the first five years following the closing. As of December 31, 2010, we had made related capital expenditures of approximately $23.9 million in the aggregate since the closing of that transaction. For the six months ended June 30, 2011, we made additional related capital expenditures of approximately $1.2 million. Therefore, we remain obligated for $2.9 million in expenditures pursuant to our agreement. We intend to satisfy our obligation to make additional capital expenditures within the agreed period. We acquired Southwestern Regional Medical Center in November 2005 from HCA pursuant to a multi-facility transaction. Southwestern Regional Medical Center primarily serves the community of Lawton, Oklahoma, which is approximately 90 miles from Oklahoma City. During the year ended December 31, 2010 and the six months ended June 30, 2011, we generated approximately 21.7% and 21.0%, respectively, of our total net revenue in this market.
     Oregon
     As of June 30, 2011, we owned and operated one hospital in the State of Oregon with 88 licensed beds. Willamette Valley Medical Center serves the community of McMinnville, Oregon, which is located approximately 38 miles from Portland. We acquired Willamette Valley Medical Center in March 2008 from CHS as part of a multi-facility acquisition. During the year ended December 31, 2010 and the six months ended June 30, 2011, we generated approximately 12.7% and 12.7%, respectively, of our total net revenue in this market.
     Tennessee
     As of June 30, 2011, we owned and operated three hospitals in the State of Tennessee with a total of 255 licensed beds. We acquired Grandview Medical Center and River Park Hospital in November 2005 from HCA pursuant to a multi-facility transaction. Grandview Medical Center primarily serves the community of Jasper, Tennessee, which is located approximately 30 miles west of Chattanooga. River Park Hospital primarily serves the community of McMinnville, Tennessee, which is approximately 90 miles from Nashville and Chattanooga. White County Community Hospital primarily serves the Sparta, Tennessee community, located approximately 90 miles from Nashville, which we acquired in March 2008 from CHS as part of a multi-facility acquisition. During the year

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ended December 31, 2010 and the six months ended June 30, 2011, we generated approximately 12.4% and 13.3%, respectively, of our total net revenue in this market.
     Washington
     As of June 30, 2011, we owned and operated one hospital in the State of Washington with 110 licensed beds. Capital Medical Center serves the community of Olympia, Washington, which is located approximately 65 miles south of Seattle. We acquired Capital Medical Center in December 2005 from HCA pursuant to a multi-facility transaction. During the year ended December 31, 2010 and the six months ended June 30, 2011, we generated approximately 10.7% and 11.3%, respectively, of our total net revenue in this market.
Our Facilities
     As of June 30, 2011, we owned and operated thirteen (13) general acute care hospitals. The following table sets forth certain information concerning our hospitals:
                 
Hospital   Location   Licensed Beds   Date Acquired
Capital Medical Center(1)
  Olympia, WA     110     December 1, 2005
Grandview Medical Center
  Jasper, TN     70     December 1, 2005
Hartselle Medical Center
  Hartselle, AL     150     March 1, 2008
Jacksonville Medical Center
  Jacksonville, AL     89     March 1, 2008
Mineral Area Regional Medical Center
  Farmington, MO     135     March 1, 2008
Muskogee Regional Medical Center
  Muskogee, OK     275     April 3, 2007
National Park Medical Center(2)
  Hot Springs, AR     166     March 1, 2008
Parkway Medical Center
  Decatur, AL     108     March 1, 2008
River Park Hospital
  McMinnville, TN     125     December 1, 2005
Southwestern Medical Center
  Lawton, OK     199     December 1, 2005
St. Mary’s Regional Medical Center
  Russellville, AR     170     March 1, 2008
White County Community Hospital(3)
  Sparta, TN     60     March 1, 2008
Willamette Valley Medical Center
  McMinnville, OR     88     March 1, 2008
 
               
Total Licensed Beds
        1,745      
 
(1)   This hospital is operated by us in a joint venture with physicians in which we own 90.25% and physicians or physician entities own the remaining 9.75%.
 
(2)   This hospital is operated by us in a joint venture with physicians in which we own 95.04% and physicians or physician entities own the remaining 4.96%.
 
(3)   This hospital is operated by us in a joint venture with physicians in which we own 83.8% and physicians or physician entities own the remaining 16.2%.
     In each of the three joint ventures listed above, the managing member or general partners, as applicable, are one or more of our wholly-owned subsidiaries (each a “Capella Owner”). Each Capella Owner manages the day-to-day operation of the Hospital in exchange for a management fee and reimbursement of its out-of-pocket expenses. In addition, our Capital Medical Center and White County joint ventures participate in our cash management system pursuant to a Cash Management Agreement and Revolving Credit Loan (the “Cash Management Agreement”). Under the Cash Management Agreement, we may but are not obligated to, provide the applicable joint venture with working capital revolving credit loans as we deem necessary or appropriate for the conduct of the joint venture’s business.
     In addition to the hospitals listed above we own, either directly or through an interest in a joint venture, certain outpatient service locations complementary to our hospitals. We also own, operate and/or lease medical office buildings in conjunction with certain of our hospitals which are primarily occupied by physicians practicing at our hospitals.
     Effective July 1, 2011, we completed the acquisition of a 60% interest in Cannon County Hospital, LLC, or CCH, which owns and operates De Kalb Community Hospital in Smithville, Tennessee with 71 licensed beds and Stones River Hospital in Woodbury, Tennessee with 60 licensed beds.

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     As of June 30, 2011, we leased approximately 17,000 square feet of office space at 501 Corporate Centre, Suite 200, Franklin, Tennessee, for our corporate headquarters. Our headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for our present needs.
Our Hospital Operations
     Acute Care Services
     Our hospitals typically provide the full range of services commonly available in acute care hospitals, such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics, women’s services, diagnostic and emergency services, as well as select tertiary services such as open-heart surgery and level II and III neonatal intensive care. Our hospitals also generally provide outpatient and ancillary healthcare services such as outpatient surgery, laboratory, radiology, respiratory therapy and physical therapy. We also provide outpatient services at our imaging centers and ambulatory surgery centers. Certain of our hospitals have a limited number of psychiatric, skilled nursing and rehabilitation beds. Two of our hospitals operate separate psychiatric facilities.
     Management and Oversight
     Our senior management team has extensive experience in operating multi-facility hospital networks and plays a vital role in the strategic planning for our facilities. A hospital’s local management team is generally comprised of a chief executive officer, chief operating officer, chief financial officer, chief nursing officer and chief quality officer. Local management teams, in consultation with their LPLG and the hospital’s Board of Trustees and our corporate staff, develop annual operating plans setting forth revenue growth strategies through the expansion of current services, implementation of new services and the recruitment and retention of physicians in each community, as well as plans to improve operating efficiencies and reduce costs. We believe that the ability of each local management team to identify and meet the needs of our patients, medical staffs and the community as a whole is critical to the success of our hospitals. We base the compensation for each local management team in part on its ability to achieve the goals set forth in the annual operating plan, including quality of care, patient satisfaction and financial measures.
     Boards of trustees at each hospital, consisting of local community leaders, members of the medical staff and the hospital chief executive officer, advise the local management teams and help develop the strategic operating plan for their hospital. In addition, they play a key role in providing the patient care excellence that Capella demands. Members of each Board of Trustees are identified and recommended by our local management teams. The Boards of Trustees establish policies concerning medical, professional and ethical practices, monitor these practices and ensure that they conform to our high standards. We maintain company-wide compliance and quality assurance programs and use patient care evaluations and other assessment methods to support and monitor quality of care standards and to meet accreditation and regulatory requirements.
     Each hospital has a LPLG made up of key physicians and members of the hospital’s administrative team. The Chairman of each group serves on Capella’s NPLG. The mission of the LPLG is to provide ongoing dialogue between hospital administration and members of the medical staff primarily in the areas of operations, quality patient care, employee satisfaction and community relations.
     We also provide support to the local management teams through our corporate resources in areas such as revenue cycle, business office, legal, managed care, clinical efficiency, physician services and other administrative functions. These resources allow for sharing best practices and standardization of policies and processes among all of our hospitals.
     Attracting Patients
     We believe that the most important factors affecting a patient’s choice in hospitals are the reputation of the hospital for delivering quality care, the availability and expertise of physicians and nurses caring for patients at the facility and the location and convenience of the hospital. Other factors that affect utilization include local demographics and population growth, local economic conditions and the hospital’s success in contracting with a wide range of local payors.

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     Outpatient Services
     The healthcare industry has experienced a general shift during recent years from inpatient services to outpatient services as Medicare, Medicaid and managed care payors have sought to reduce costs by shifting lower-acuity cases to an outpatient setting. Advances in medical equipment technology and pharmacology have supported the shift to outpatient utilization, which has resulted in an increase in the acuity of inpatient admissions. However, we expect inpatient admission use rates to increase over the long term as the baby boomer population reaches ages where inpatient admissions become more prevalent. We have responded to the shift to outpatient services through expanding service offerings and increasing the throughput and convenience of our emergency departments, outpatient surgery facilities and other ancillary units in our hospitals. We also own minority interests in a surgery center and a radiation therapy center in the Muskogee, Oklahoma service area. We continually upgrade our resources, including procuring excellent physicians and nursing staff and utilizing technologically advanced equipment, to support our comprehensive service offerings to capture inpatient volumes from the baby boomers.
Competition
     The hospital industry is highly competitive. We currently face competition from established, not-for-profit healthcare systems, investor-owned hospital companies, large tertiary care hospitals, specialty hospitals and outpatient service providers. In the future, we expect to encounter increased competition from companies, like ours, that consolidate hospitals and healthcare companies in specific geographic markets. Continued consolidation in the healthcare industry will be a leading factor contributing to increased competition in our current markets and markets we may enter in the future. Because of the shift to outpatient care and more stringent payor-imposed pre-authorization requirements during the past few years, most hospitals have significant unused capacity resulting in increased competition for patients. Many of our competitors are larger than us and have more financial resources available than we do. Other not-for-profit competitors have endowment and charitable contribution resources available to them and can purchase equipment and other assets on a tax-free basis. In addition, two of our facilities, Muskogee Regional Medical Center and National Park Medical Center, currently compete with facilities that are owned and operated by physicians.
Employees and Medical Staff
     As of June 30, 2011, we had approximately 6,200 employees, including approximately 1,500 part-time employees. Approximately 239 of our full-time employees at our Olympia, Washington hospital are unionized. While some of our non-unionized hospitals experience union organizing activity from time to time, we do not currently expect these efforts to affect our future operations materially. Our hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate.
     While the national nursing shortage has abated somewhat as a result of the weakened U.S. economy, certain pockets of the markets we serve continue to have limited available nursing resources. Nursing shortages often result in our using more contract labor resources to meet increased demand especially during the peak winter months. We expect our nurse leadership and recruiting initiatives to mitigate the impact of the nursing shortage. These initiatives include more involvement with nursing schools, participation in more job fairs, recruiting nurses from abroad, implementing preceptor programs, providing flexible work hours, improving performance leadership training, creating awareness of our quality of care and patient safety initiatives and providing competitive pay and benefits. We anticipate that demand for nurses will continue to exceed supply especially as the baby boomer population reaches the ages where inpatient stays become more frequent. We continue to implement best practices to reduce turnover and to stabilize our nursing workforce over time.
     We have developed a strategic physician recruitment and retention plan. In the summer of 2008, we commissioned an independent consultant group to perform a market needs analysis of each of our communities with a focus on what medical specialties the community needs to meet its healthcare demands. From this study, we developed a strategic recruitment plan to meet each market’s healthcare needs. Executing that plan, we recruited 61 physicians in 2008, 72 in 2009 and 68 in 2010. Of this total, 42.6% were specialists in areas such as general surgery, cardiology, women’s services and orthopedics. The remainder were primary care physicians, including hospitalists and physicians practicing in areas such as family medicine, internal medicine and pediatrics. Recruitment of family practice and internal medicine is critical to building a solid foundation of referring physicians in our markets.

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     Our hospitals grant staff privileges to licensed physicians who may serve on the medical staffs of multiple hospitals, including hospitals not owned by us. A physician who is not an employee can terminate his or her affiliation with our hospital at any time. Although we employ a growing number of physicians, a physician does not have to be our employee to be a member of the medical staff of one of our hospitals. Any licensed physician may apply to be admitted to the medical staff of any of our hospitals, but admission to the staff must be approved by each hospital’s medical staff and Board of Trustees in accordance with established credentialing criteria. Under state laws and other licensing standards, hospital medical staffs are generally self-governing organizations subject to ultimate oversight by the hospital’s local governing board. Although we were generally successful in our physician recruiting efforts during 2010, we face continued challenges in some of our markets to recruit certain types of physician specialists who are in high demand.
Compliance Program
     We voluntarily maintain a company-wide Ethics & Compliance program designed to ensure that we maintain high standards of ethical conduct in the operation of our business. We continually implement policies and procedures for all of our employees, so they can act in compliance with all applicable laws, regulations and company policies. Additionally, we have engaged an independent consultant to evaluate our programs and recommend improvements. The organizational structure of our Ethics & Compliance program includes oversight by Capella’s Board of Directors and a high-level Corporate Ethics & Compliance Committee (“CECC”). The Board of Directors and the CECC are responsible for ensuring that the compliance program meets its stated goals and remains up-to-date to address the current regulatory environment and other issues affecting the healthcare industry. Our Vice President of Ethics & Compliance reports jointly to our Chief Executive Officer and to the Board of Directors. He serves as our Chief Compliance Officer and is charged with direct responsibility for the day-to-day oversight of our compliance program. Other features of our compliance program include initial and periodic ethics and compliance training and effectiveness reviews, a toll-free hotline for employees to report, without fear of retaliation, any suspected legal or ethical violations, and annual “coding audits” to make sure our hospitals bill the proper service codes for reimbursement from the Medicare program.
     Our compliance program also oversees the implementation and monitoring of the standards set forth by HIPAA for privacy and security. Ongoing HIPAA compliance also includes self-monitoring of HIPAA policy and procedure implementation by each of our healthcare facilities and oversight by the CECC and the Chief Compliance Officer.
Our Information Systems
     We believe that our information systems must cost-effectively meet the needs of our hospital management, medical staff and nurses in a variety of areas of our business operations, such as:
    patient accounting, including billing and collection of revenue;
 
    accounting, financial reporting and payroll;
 
    coding and compliance;
 
    laboratory, radiology and pharmacy systems;
 
    medical records and document storage;
 
    physician access to patient data;
 
    quality indicators;
 
    materials and asset management; and
 
    negotiating, pricing and administering our managed care contracts

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     During 2010, we continued to invest in information technology. We believe that the importance of and reliance upon information technology will continue to increase in the future. Accordingly, we expect to make additional significant investments in information technology during the next several years as part of our business strategy to increase the efficiency and quality of patient care.
     Although we map the financial information systems from each of our hospitals to one centralized database, we do not automatically standardize our financial information systems among all of our hospitals. We carefully review the existing systems at the hospitals we acquire. If a particular information system is unable to cost-effectively meet the operational needs of the hospital, we will convert or upgrade the information system at that hospital to a standardized information system that can cost-effectively meet these needs.
Professional and General Liability Insurance
     As is typical in the healthcare industry, we are subject to claims and legal actions by patients and others in the ordinary course of business. For professional and general liability claims, we self-insure the first portion of each claim, and Auriga, a wholly-owned subsidiary of Holdings, insures the next portion of each claim. We maintain excess coverage from independent third-party carriers for claims exceeding the coverage provided by Auriga from Lloyds of London for the first portion of the excess policy and the Bermuda market for the remaining portion. Auriga funds its portion of claims costs from proceeds of premium payments received from us.
     We believe that our current insurance program provides sufficient coverage for our facilities. We cannot, however, ensure that potential claims will not exceed those amounts. Consistent with the policy limits and indemnification agreements, our insurance coverage will cover insured professional/general liability claims made against us, during the time such insurance is in force, consistent with the policy terms and conditions; however, our insurance policy covers the members of our Board of Directors and the boards of our subsidiaries only with respect to acts performed in their capacity as board members.
Legal Proceedings
     We operate in a highly regulated and litigious industry. As a result, we are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, medical malpractice, breach of management contracts, wrongful restriction of or interference with physicians’ staff privileges and employment related claims. In certain of these actions, plaintiffs request punitive or other damages against us or our affiliates which may not be covered by insurance. We are currently not a party to any proceeding which, in management’s opinion, would have a material adverse effect on our business, financial condition or results of operations.
Payment for Services
   General
     We are dependent upon private and governmental third-party sources of reimbursement for services provided to patients. Medicare is generally the largest source of governmental payment. Most of our private sources of reimbursement come from third-party healthcare insurance plans. Revenue under Medicare, Medicaid and third-party payor plans varies depending on the type of service provided and the volume of services provided.
     The table below presents the approximate percentage of net patient revenue we received from the following sources for the periods indicated:
                                         
                            Six months
                            Ended
    Year Ended December 31,   June 30,
    2008   2009   2010   2010   2011
Medicare
    36.1 %     39.1 %     36.0 %     40.5 %     39.7 %
Medicaid
    8.3       9.6       12.0       12.3       13.2  
Managed Care and other
    43.4       38.3       36.1       38.3       37.3  
Self-Pay
    12.2       13.0       15.9       8.9       9.8  
 
                                       
Total
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 
                                       

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     The trends in the various categories are primarily driven by our acquisition history and to a lesser extent the shifts in payor mix because of economic conditions. For example, those assets acquired in 2008 have a higher concentration in “Medicare and Medicaid” versus the assets acquired in earlier years.
     Medicare Inpatient Services
     Under the Medicare program, hospitals are reimbursed for the operating costs of acute care inpatient stays under an IPPS pursuant to which a hospital receives a fixed payment amount per inpatient discharge based on the patient’s assigned MS-DRG. Over a two-year transition period that began in October 2007, CMS implemented MS-DRGs to replace the previously used Medicare diagnosis related groups in an effort to better recognize severity of illness and cost of providing care in Medicare payment rates. Each MS-DRG is assigned a payment weight that is based on the average amount of hospital resources that are needed to treat Medicare patients in that MS-DRG. MS-DRG payments are adjusted for area wage differentials. In addition, if a hospital treats a patient who is more expensive to treat than the average Medicare patient in the same MS-DRG, the hospital will receive an additional outlier payment if the hospital’s cost of treating that patient exceeds a certain threshold amount. MS-DRG classifications and weights are re-calibrated and adjusted on an annual basis to reflect the inflation experienced by hospitals (and entities outside the healthcare industry) in purchasing goods and services (the “market basket index”).
     The Affordable Care Act contains many Medicare payment initiatives and changes. Many of the changes, such as payments to accountable care organizations and proposed bundled payments, have not yet gone into effect, but other revisions, such as programs to reduce payments to hospitals for excessive readmissions, and reductions in the hospital market basket update, are effective now.
     On August 1, 2011, CMS issued the Medicare IPPS final rule for FFY 2012, which begins on October 1, 2011. Under the final rule, hospitals that report quality data under the IQR Program will receive a 1.0% payment rate increase for inpatient hospital stays paid under the IPPS and hospitals that do not report quality data will receive 1.0% decrease in payment rates. The 1.0% net increase is a compilation of a 1.9% base increase, a (2.0)% documentation and coding adjustment to recoup the effects of increased aggregate payments resulting from the adoption of MS-DRGs, and a positive 1.1% adjustment to negate the misapplication of a budget neutrality adjustment between FFYs 1999-2006. The final rate increase also reflects a (2.9)% adjustment as part of a two year process to recoup overpayments resulting from the conversion to the MS-DRG system. However, because the adjustment is non-cumulative, it does not yield any change compared to the FFY 2011 reimbursement rates.
     In addition, the rule contains several provisions intended to strengthen the relationship between payment and quality of service. First, the rule adopts a number of policies as part of the Hospital Readmissions Reduction Program, established by the Affordable Care Act, which requires a reduction in Medicare payments to hospitals with excess readmissions for certain conditions. Second, the rule expands the quality measures that hospitals must report in FFYs 2014 and 2015 to avoid a 2% payment reduction under the IQR Program by, among other things, increasing the number of measures to be reported to 76. Finally, the rule expands the list of measures CMS has proposed to adopt for the VBP Program.
     Hospitals that treat a disproportionately large number of low-income patients currently receive additional payments from Medicare in the form of DSH payments. DSH payments are determined annually based upon certain statistical information defined by CMS and are calculated as a percentage add-on to the MS-DRG payments. This percentage varies, depending on several factors that include the percentage of low-income patients served. The

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recent health reform legislation contains certain changes to the DSH formula, including a change that would give greater weight to the amount of uncompensated care provided by a hospital than it would to the number of low- income patients treated.
     As authorized by the Affordable Care Act, HHS issued its final rule on April 29, 2011 launching the Hospital VBP Program. The VBP Program begins in October 2012 and provides that hospitals will be paid for inpatient acute care services based on quality of care measures as specifically set forth by CMS. The quality measures focus on how closely hospitals follow best clinical practices and how well hospitals enhance patients’ experiences of care. The higher the quality measures, the higher the reward from CMS. The Company intends for its facilities to achieve high levels of quality under the VBP Program, however, the Company cannot guarantee that its facilities’ reimbursement will increase and will not decrease as a result of the implementation of the VBP Program.
     Medicare Outpatient Payment
     Under Medicare’s hospital outpatient prospective payment system (“OPPS”), hospital outpatient services are classified into groups called ambulatory payment classifications (“APCs”). Services in each APC are clinically similar and are similar in terms of the resources they require. CMS establishes a payment rate for each APC, and, depending on the services provided, a hospital may be paid for more than one APC for each patient encounter. APC classifications and payment rates are reviewed and adjusted on an annual basis. Historically, the rate of increase in payments for hospital outpatient services has been higher than the rate of increase in payments for inpatient services.
     On July 1, 2011, CMS issued the proposed OPPS rates for CY 2012. Under the proposed rule, the market basket update for CY 2012 for hospitals under the OPPS would be 1.5%, which represents a 2.8% market basket update, reduced by a 1.2% multifactor productivity adjustment and a 0.1% adjustment, both of which are required by the Affordable Care Act. Hospitals that submit quality data in accordance with the Hospital Outpatient Quality Data Reporting Program will receive the full 1.5% market basket update, and those that do not submit quality data will receive a -0.5% update. In addition, CMS has proposed a 0.6% reduction to the payment rates for non-cancer OPPS hospitals to offset the adjustment to cancer hospital payments. When combined with the estimated 0.2% payment increase that is needed to ensure budget neutrality in connection with the proposed transition to full use of CMHC data for CMHC partial hospital program per diem payment rates, CMS anticipates that the proposed rule would increase payment rates for hospital outpatient services provided in non-cancer hospitals by 1.1% in CY 2012.
     As part of the proposed rule, CMS is also considering a number of quality-related provisions. CMS has proposed to add nine quality measures to the current list of 23 measures to be reported by hospital outpatient departments, bringing to the total number of measures to 32 that are to be reported for purposes of the CY 2014 payment determination. In addition, CMS has proposed to expand the measure included in the VBP Program in FFY 2014 by adding on additional clinical process of care measure and has proposed to establish the performance periods, standards and weighting scheme for the VBP Program.
Budget Control Act
     On August 2, 2011, Congress passed the Budget Control Act, or the BCA, which raised the federal debt ceiling and made spending cuts of roughly the same amount. Under the BCA, the Joint Select Committee on Deficit Reduction is tasked with reducing the federal deficit by an additional $1.5 trillion by December 23, 2011. If the joint committee fails to approve a bill or Congress does not enact the recommendations, a number of cuts will be automatically “triggered”, which could result in approximately a 2.0% reduction in Medicare reimbursement rates for providers. We cannot predict whether the joint committee will recommend spending cuts to federal health care programs and, if it does, whether Congress will actually enact their recommendations or whether the automatic cuts will be triggered by Congress’s failure to act and if the automatic cuts are triggered, what the actual reductions in reimbursement will be to hospitals or other providers. Any reduction in provider reimbursement rates under federal health care programs could have a material adverse effect on our financial condition and results of operations.
     Healthcare Reform
     The Affordable Care Act dramatically alters the United States healthcare system and is intended to decrease the number of uninsured Americans and reduce overall healthcare costs. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments, including DSH payments to providers, expanding the Medicare program’s use of value-based purchasing programs, and tying hospital payments to the satisfaction of certain quality criteria. The Affordable Care Act also contains several Medicare payment and delivery system innovations, including the establishment of a Medicare Shared Savings Program to promote accountability and coordination of care through the creation of accountable care organizations or “ACOs” and the establishment of pilot programs related to bundled payment for post-acute care. Under the bundled post-acute care pilot program, Medicare would pay one bundled payment for acute, inpatient hospital services, physician services, outpatient hospital services, and post-acute care services for an episode of care that begins three days prior to a hospitalization and spans 30 days following discharge. The Affordable Care Act requires the Secretary of HHS to expand the pilot program if it achieves the stated goals of reducing spending while improving or not reducing quality. The pilot program will be established by January 1, 2013, and expanded, if appropriate, by January 1, 2016. Under the ACO Medicare Shared Savings Program, organizations known as “ACOs” would enter into a contract with the Secretary of the HHS in which the ACO agrees to be accountable for the overall care of its Medicare beneficiaries, to have adequate participation of primary care physicians, to define processes to promote evidence-based medicine, to report on quality and costs, and to coordinate care. ACOs that meet quality and efficiency standards would be allowed to share in the cost savings they achieve for the Medicare program. On March 31, 2011, HHS, the Federal Trade Commission and the Internal Revenue Service jointly released proposed ACO regulations setting forth the parameters of ACO contracts and payments under the Medicare Shared Savings Program. These regulations are subject to comment and may contain significant revisions when they are released in final form. We will continue to monitor payment developments and innovations established by the Affordable Care Act, but because the details of

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these payment reforms have not yet been finalized, we are unable to predict the impact of these reforms on the Company.
     The Affordable Care Act also contains a number of measures that are intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of RACs in the Medicaid program, expanding the scope of the federal False Claims Act and generally prohibiting physician-owned hospitals from increasing the total percentage of physician ownership or increasing the aggregate number of operating rooms, procedure rooms, and beds for which they are licensed.
     As part of the effort to control or reduce healthcare spending, the Affordable Care Act places a number of significant requirements and limitations on the Whole Hospital Exception to the federal physician self-referral prohibition, commonly known as the Stark Law, which allows physicians to have ownership interests in hospitals. Among other things, the Affordable Care Act prohibits hospitals from increasing the percentage of the total value of the ownership interest held in the hospital by physicians after March 23, 2010.
     Because a majority of the measures contained in the Affordable Care Act do not take effect until 2013, it is difficult to predict the impact the Affordable Care Act will have on the Company. In addition, there have been a number of challenges to the Affordable Care Act, and some courts have ruled that the requirement for individuals to carry health insurance or the Affordable Health Care Act in its entirety is unconstitutional. Several bills have been and will likely continue to be introduced in Congress to repeal or amend all or significant provisions of the Affordable Care Act. It is difficult to predict the full impact of the Affordable Care Act because of its complexity, lack of implementing regulations and interpretive guidance, gradual and potentially delayed implementation, pending court challenges, and possible repeal and/or amendment, as well as the inability to foresee how individuals and businesses will respond to the choices afforded them by the Affordable Care Act. Depending on further legislative developments, how the pending court challenges are resolved, and how the Affordable Care Act is ultimately interpreted and implemented, it could have an adverse effect on the business, financial condition and results of operations of the Company.
     Impact of Affordable Care Act on the Company
     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 private or public program coverage. In addition, a disproportionately large percentage of the new Medicaid coverage is likely to be in states that currently have relatively low income eligibility requirements. Further, the Affordable Care Act provides for a value-based purchasing program, the establishment of ACOs and bundled payment pilot programs, which will create possible sources of additional revenue.
     However, it is difficult to predict the size of the potential revenue gains to the Company as a result of these elements of the Affordable Care Act, because of uncertainty surrounding a number of material factors, including the following:
    how many previously uninsured individuals will obtain coverage as a result of the Affordable Care Act (while the CBO estimates 32 million, CMS estimates almost 34 million; both agencies made a number of assumptions to derive that figure, including how many individuals will ignore substantial subsidies and decide to pay the penalty rather than obtain health insurance and what percentage of people in the future will meet the new Medicaid income eligibility requirements);
 
    what percentage of the newly insured patients will be covered under the Medicaid program and what percentage will be covered by private health insurers;
 
    the extent to which states will enroll new Medicaid participants in managed care programs;
 
    the pace at which insurance coverage expands, including the pace of different types of coverage expansion;
 
    the change, if any, in the volume of inpatient and outpatient hospital services that are sought by and provided to previously uninsured individuals;

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    the rate paid to hospitals by private payers for newly covered individuals, including those covered through the newly created Exchanges and those who might be covered under the Medicaid program under contracts with the state;
 
    the rate paid by state governments under the Medicaid program for newly covered individuals;
 
    how the value-based purchasing and other quality programs will be implemented;
 
    the percentage of individuals in the Exchanges who select the high deductible plans, since health insurers offering those kinds of products have traditionally sought to pay lower rates to hospitals;
 
    whether the net effect of the Affordable Care Act, including the prohibition on excluding individuals based on pre-existing conditions, the requirement to keep medical costs lower than a specified percentage of premium revenue, other health insurance reforms and the annual fee applied to all health insurers, will be to put pressure on the bottom line of health insurers, which in turn might cause them to seek to reduce payments to hospitals with respect to both newly insured individuals and their existing business; and
 
    the possibility that implementation of provisions expanding health insurance coverage will be delayed or even blocked because of court challenges or revised or eliminated as a result of court challenges and efforts to repeal or amend the new law.
     On the other hand, the Affordable Care Act provides for significant reductions in the growth of Medicare spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to quality and integration. Since 48% of our revenue in 2010 were from Medicare and Medicaid, collectively, reductions to these programs may significantly impact us and could offset any positive effects of the Affordable Care Act. It is difficult to predict the size of the revenue reductions to Medicare and Medicaid spending, because of uncertainty regarding a number of material factors, including the following:
    the amount of overall revenue we will generate from Medicare and Medicaid business when the reductions are implemented;
 
    whether reductions required by the Affordable Care Act will be changed by statute prior to becoming effective;
 
    the size of the Affordable Care Act’s annual productivity adjustment to the market basket beginning in 2012 payment years;
 
    the amount of the Medicare DSH reductions that will be made, commencing in FFY 2014;
 
    the allocation to our hospitals of the Medicaid DSH reductions, commencing in FFY 2014;
 
    what the losses in revenue will be, if any, from the Affordable Care Act’s quality initiatives;
 
    how successful ACOs, in which we participate, will be at coordinating care and reducing costs;
 
    the scope and nature of potential changes to Medicare reimbursement methods, such as an emphasis on bundling payments or coordination of care programs; and
 
    reductions to Medicare payments CMS may impose for “excessive readmissions.”
     Because of the many variables involved, we are unable to predict the net effect on the Company of the expected increases in insured individuals using our facilities, the reductions in Medicare spending and reductions in Medicare and Medicaid DSH funding, and numerous other provisions in the Affordable Care Act that may affect us. Further, it is unclear how federal lawsuits challenging the constitutionality of the Affordable Care Act will be resolved or what the impact will be of any resulting changes to the law. For example, should the requirement that individuals maintain health insurance ultimately be deemed unconstitutional but the prohibition on health insurers excluding coverage because of pre-existing conditions be maintained, significant disruption to the health insurance industry could result, which could impact our revenue and operations

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     CMS Disclosure Obligations
     In addition to setting payment rates, recent CMS payment rules have also imposed disclosure obligations and reporting requirements on physician-owned hospitals. Among other things, the rules require physician-owned hospitals to disclose the names of their physician owners to their patients, require physician-owners who are members of the hospital’s medical staff to disclose their ownership interests to the patients they refer to the hospital, and require the hospital to notify all patients in writing at the beginning of their inpatient hospital stay or outpatient visit if a physician is not present in the hospital 24 hours per day, 7 days per week. The notice regarding the presence of a physician must also describe how the hospital will meet the medical needs of patients who develop emergency conditions while no doctor is on the premises. We intend for our facilities to comply with these requirements.
     Recovery Audit Contractors
     In 2005, CMS began using RACs to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private auditing firms to examine Medicare claims filed by healthcare providers. The RAC program began as a demonstration project in a few states and was later made permanent by the Tax Relief and Health Care Act of 2006. The permanent RAC program was gradually expanded across the United States in 2008 and 2009 and is currently operating in all 50 states. The Affordable Care Act has further expanded the use of RACs and requires each state to establish a Medicaid RAC program in 2011.
     RACs utilize a post-payment targeted review process employing data analysis techniques in order to identify those Medicare claims most likely to contain overpayments, such as incorrectly coded services, incorrect payment amounts, non-covered services and duplicate payments. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process.
     RACs are paid a contingency fee based on the overpayments they identify and collect. Therefore, we expect that the RACs will look very closely at claims submitted by our facilities in an attempt to identify possible overpayments. Although we believe our claims for reimbursement submitted to the Medicare and Medicaid programs are accurate, many of our hospitals have had claims audited by the RAC program. While most of our hospitals have successfully appealed any adverse determinations raised by these audits, we cannot predict if this trend will continue or the results of any future audits. These additional post-payment reviews may require us to incur additional costs to respond to requests for records and to pursue the reversal of payment denials and ultimately may require us to refund amounts paid to us that are determined to have been overpaid.
     Medicaid
     Medicaid programs are funded jointly by the federal government and the states and are administered by states under approved plans. Most state Medicaid program payments are made under a prospective payment system or are based on negotiated payment levels with individual hospitals. Medicaid reimbursement is less than Medicare reimbursement for the same services and is often less than a hospital’s cost of services. The federal government and many states have recently reduced or are currently considering legislation to reduce the level of Medicaid funding (including upper payment limits) or program eligibility that could adversely affect future levels of Medicaid reimbursement received by our hospitals. As permitted by law, certain states in which we operate have adopted broad-based provider taxes to fund their Medicaid programs. Since states must operate with balanced budgets and since the Medicaid program is often the state’s largest program, states may consider further reductions in their Medicaid expenditures.

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     Third-Party Payors
     We also will be dependent upon private third-party sources of reimbursement for services provided to patients. In addition, market and cost factors affecting the fee structure, cost containment, and utilization decisions of third-party payors and other payment factors over which we will have no control may adversely affect the amount of payment we will receive for our services. The market share growth of private third-party managed care has resulted in substantial competition among providers of services, including pain management and outpatient and inpatient surgical services, for inclusion in managed care contracting in some markets. In addition, many third-party payor contracts contain termination provisions that allow the payor to terminate the contract without cause after delivering notice of intent to terminate. Termination of a managed care contract can result in material reductions in patient volume and revenue to us. Our financial condition and results of operations may be adversely affected by fixed fee schedules, capitation payment arrangements, exclusion from participation in managed care programs, or other changes in payments for healthcare services.
Government Regulation and Other Factors
     General
     All participants in the healthcare industry are required to comply with extensive government regulation at the federal, state and local levels. In addition, these laws, rules and regulations are extremely complex and the healthcare industry has had the benefit of little or no regulatory or judicial interpretation of many of them. Although we believe we are in compliance in all material respects with such laws, rules and regulations, if a determination is made that we were in material violation of such laws, rules or regulations, our business, financial condition or results of operations could be materially adversely affected. If we fail to comply with applicable laws and regulations, we can be subject to criminal penalties and civil sanctions and our hospitals can lose their licenses and their ability to participate in the Medicare and Medicaid programs.
     Licensing, Certification and Accreditation
     Healthcare facility construction and operation is subject to federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Our facilities also are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. We believe that all of our operating healthcare facilities are properly licensed under appropriate state healthcare laws.
     All of our hospitals are certified under the Medicare program and are accredited by The Joint Commission or the American Osteopathic Association. Some of the Company’s facilities have used Joint Commission or American Osteopathic Association accreditation in lieu of Medicare surveys to obtain Medicare certification. For those facilities, the effect of accreditation is to permit the facilities to participate in the Medicare and Medicaid programs. If any facility that obtained Medicare participation based on its accreditation loses that accreditation status, or any of our facilities otherwise lose certification under the Medicare program, then the facility will be unable to receive reimbursement from the Medicare and Medicaid programs. We intend to conduct our operations in compliance with current applicable federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, we may need to make changes in our facilities, equipment, personnel and services.
     Medicare Participation
     Our facilities have received certification under the federal Medicare program in order to qualify for reimbursement for services rendered to eligible patients under such program. The Medicare program has conditions of participation that a provider must satisfy to qualify for reimbursement including, but not limited to, compliance with state licensure requirements, governing body and management requirements, medical records requirements, credit balance refund requirements, quality assurance and utilization review requirements, surgical service standards, physical environment standards, nursing services standards, pharmaceutical standards, laboratory and radiological standards, medical staff credentialing standards, and architectural standards. We intend for all of its facilities to

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comply with all applicable Medicare conditions and requirements. However, the failure to obtain, or any loss or restriction of, Medicare certification may adversely affect our financial viability. In addition, any significant reduction in government payments for services provided at Company facilities could have a material adverse effect on our business.
     The requirements for certification and enrollment under Medicare and other government reimbursement programs such as Medicaid are subject to change and, in order to remain qualified for such programs, it may be necessary for us to make changes from time to time in its facilities, equipment, personnel or services.
     Anti-Kickback Laws
     The Social Security Act includes provisions addressing illegal remuneration (the “Anti-Kickback Laws”) which prohibit providers and others from, among other things, soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a service or item covered by a federal healthcare program or ordering or arranging for or recommending the order of any covered service or item. Violations of the Anti-Kickback Laws are felonies that include criminal penalties or imprisonment or criminal fines up to $25,000 per violation. In addition, violations of the Anti-Kickback Laws also include civil monetary penalties of up to $50,000 per violation, damages up to three times the total amount of the improper payment made to the referral source, and exclusion from participation in Medicare, Medicaid, or other tendered healthcare programs.
     In U.S. v. Greber, 760 F.2d 68 (3d Cir. 1985), the United States Court of Appeals for the Third Circuit held that the Anti-Kickback Laws are violated if one purpose (as opposed to a primary or sole purpose) of a payment to a provider is to induce referrals. Other federal circuit courts have followed the Greber case.
     Under regulations issued by the OIG, certain categories of activities are deemed not to violate the Anti-Kickback Laws (the “Safe Harbors”). According to the preamble to the Safe Harbors, the failure of a particular business arrangement to comply with the regulations does not determine whether the arrangement violates the Anti-Kickback Laws. The Safe Harbors do not make conduct illegal, but instead delineate standards that, if complied with, protect conduct that might otherwise be deemed in violation of the Anti-Kickback Laws. Currently there are safe harbors for various activities, including the following: investment interests, space rental, equipment rental, practitioner recruitment, personal services and management contracts, sale of practice, referral services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary coinsurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, ambulatory surgery centers and referral agreements for specialty services.
     The Health Reform Acts increase funding for fighting fraud and abuse, allow CMS to establish enrollment moratoria in areas indentified as being at elevated risk of fraud, create new penalties for fraud and abuse violations, increases penalties for submitting false claims, and restrict physician ownership of hospitals.
     We have a variety of financial relationships with physicians who refer patients to our facilities. As of June 30, 2011, referring physicians owned interests in three of our hospitals, and two outpatient facilities in which we own a minority interest. We may sell ownership interests in certain other of our facilities to physicians and other qualified investors in the future. We also have contracts with physicians providing for a variety of financial arrangements, including employment contracts, leases and professional service agreements. We have provided financial incentives to recruit physicians to relocate to communities served by our hospitals, including income and collection guarantees and reimbursement of relocation costs, and will continue to provide recruitment packages in the future. Although we have established policies and procedures to ensure that our arrangements with physicians comply with current law and applicable regulations, we cannot assure you that regulatory authorities that enforce these laws will not determine that some of these arrangements violate the Anti-Kickback Statute or other applicable laws. An adverse determination could subject us to liabilities under the Social Security Act, including criminal penalties, civil monetary penalties and exclusion from participation in Medicare, Medicaid or other federal healthcare programs, any of which could have a material adverse effect on our business, financial condition or results of operations.

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     The Stark Law
     Physician self-referral laws have been enacted by Congress and many states to prohibit certain self-referrals for healthcare services. The federal prohibition, commonly known as the Stark Law, prohibits physicians from referring patients for certain designated health services provided by an entity with which the physician has a financial relationship if those services are paid for, in whole or in part, by Medicare or Medicaid. The Stark Law also prohibits the entity from seeking payment from Medicare or Medicaid for services rendered pursuant to a prohibited referral. If an entity is paid for services rendered pursuant to a prohibited referral, it may incur civil penalties of up to $15,000 per prohibited claim and may be excluded from participating in Medicare and Medicaid.
     Under the Stark Law, designated health services include inpatient and outpatient hospital services; radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services; physical therapy services; occupational therapy services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment, and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home healthcare services; and outpatient prescription drugs. Our facilities provide designated health services under Stark.
     As discussed below, the Affordable Care Act creates potential False Claims Act liability for failure to timely report and repay known overpayments to the federal government, including payments received for services rendered pursuant to a referrals that are not Stark Law compliant. In 2010, CMS published a self-referral disclosure protocol (the “SDP”) to encourage providers to disclose and attempt to resolve potential Stark Law violations and related overpayment liabilities at levels below the maximum penalties and amounts set forth by statute. In light of these developments, we may make certain disclosures through the SDP in the future. We cannot predict how CMS will resolve any issues reported through the SDP, including whether CMS will resolve any potential Stark Law violations are related overpayments at levels below the maximum amounts set forth by law.
     Laws allowing physicians to refer their patients to facilities in which they have an investment interest are presently, and are expected to continue to be, the focus of federal and state lawmakers. The Stark Law prohibits a physician from having a financial relationship in and making referrals to an entity that provides designated health services, which includes inpatient or outpatient hospital services, unless an exception applies to the financial relationship. The Stark Law provides several exceptions including exceptions for leases and personal services agreements as long as the arrangements comply with the parameters of the exceptions. In addition, there are exceptions for investments in rural areas, and there is a Whole Hospital Exception that, prior to the recent reform legislation, allowed physicians to own interests in hospitals. The Affordable Care Act also prohibits an increase in the aggregate number of beds, operating rooms, and procedure rooms in physician-owned hospitals from March 23, 2010; requires a referring physician owner or investor to disclose his or her ownership interest in a hospital (along with the ownership or investment interest of any treating physician) to patients at a time when the patient may make a meaningful decision regarding the receipt of care; requires physician-owned hospitals to submit an annual report identifying each physician owner and investor, and the nature and extent of all ownership and investment interests; requires physician-owned hospitals to disclose any physician ownership or investment interest on the hospital’s website and in any public advertisement; and ensures that ownership in hospitals by physician owners or investors is bona fide and satisfies the Whole Hospital Exception.
     In addition to the physician referral requirements, the Stark Law also includes specific reporting requirements that require each entity furnishing covered items or services to provide the Secretary with certain information concerning its ownership, investment, and compensation arrangements with physicians. In a series of notices in 2007, CMS indicated its intent to require a group of 500 hospitals to submit a Disclosure of Financial Relationships Report (“DFRR”) to CMS that contains detailed information concerning each hospital’s ownership, investment, and compensation arrangements with physicians. CMS has since determined that mandating hospitals to complete the DFRR may duplicate some of the reporting obligations related to physician ownership and investment set forth in the Affordable Care Act. Therefore, CMS has decided to delay implementation of the DFRR, and instead focus on implementing relevant sections of the Affordable Care Act. CMS has indicated that it remains interested in analyzing physician compensation relationships with DHS entities, and after collecting and examining information related to ownership and investment interests pursuant to the Affordable Care Act, it will determine if it is necessary to capture information related to compensation arrangements. If CMS continues with the DFRR requirement and one of our facilities receives the DFRR request, it will have a limited amount of time to compile a significant amount of information relating to its financial relationships with physicians, including any ownership by physicians. Our facilities may be subject to substantial penalties if it is unable to assemble and report this information within the required timeframe or if CMS or any other government agency determines that its submission is inaccurate or incomplete. In addition, a facility may be the subject of investigations or enforcement actions if a government agency determines that any of the information indicates a potential violation of law. Any such investigation or enforcement action could materially adversely affect the Company’s results of operations. These activities reflect the general trend of increasing governmental scrutiny of the financial relationships between hospitals and referring physicians under the Stark Law.

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     Corporate Practice of Medicine and Fee Splitting
     Some of the states in which we operate have laws that prohibit unlicensed persons or business entities, including corporations, from employing physicians or laws that prohibit certain direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties and rescission of business arrangements that may violate these restrictions. These statutes vary from state to state, are often vague and seldom have been interpreted by the courts or regulatory agencies. Although we exercise care to structure our arrangements with healthcare providers to comply with the relevant state law and believe these arrangements comply with applicable laws in all material respects, we cannot assure you that governmental officials responsible for enforcing these laws will not assert that we, or transactions in which we are involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with our interpretations.
     HIPAA Privacy, Transaction and Security Standards
     HIPAA required HHS to promulgate regulations designed to encourage electronic commerce in the healthcare industry. These regulations apply to healthcare providers that transmit information in an electronic form in connection with standard HIPAA transactions, such as electronic claims.
     At this time, HHS has promulgated standards for the HIPAA transactions, standards for unique identifiers for employers and healthcare providers to be used in the HIPAA transactions, standards for the privacy of individually identifiable information, security standards for the protection of electronic health information and general administrative requirements relating to procedures for investigating violations of HIPAA, the imposition of penalties for such violations and procedures for hearings to appeal the imposition of penalties. The Company’s facilities are subject to these standards.
     HIPAA security standards require our Company’s facilities to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic health and related financial information. The security standards were designed to protect electronic information against reasonably anticipated threats or hazards to the security or integrity of the information and to protect the information against unauthorized use or disclosure.
     HIPAA privacy standards apply to individually identifiable information held or disclosed by our facilities in any form, whether communicated electronically, on paper or orally. These standards impose extensive new administrative requirements on our facilities, including appointing a privacy officer, adopting privacy policies and training our facilities’ workforce on these policies. They require our facilities’ compliance with rules governing the use and disclosure of health information. They create new rights for patients in their health information, such as the right to amend their health information, and they require our facilities to impose these rules, by contract, on any business associate to whom our facilities disclose such information in order to perform functions on our facilities’ behalf. In addition, our facilities will continue to remain subject to any state laws that are more restrictive than the privacy standards issued under HIPAA.
     A violation of these regulations could result in civil money penalties of $100 per incident, up to a maximum of $25,000 per person per year per standard. HIPAA also provides for criminal penalties of up to $50,000 and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to $100,000 and five years in prison for obtaining protected health information under false pretenses, and up to $250,000 and ten (10) years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm. Since there is no significant history of enforcement efforts by the federal government at this time, it is not possible to ascertain the likelihood of enforcement efforts in connection with the HIPAA regulations or the potential for fines and penalties which may result from the violation of the regulations.
     On February 17, 2009, President Obama signed the federal stimulus bill, which is officially known as the American Recovery and Reinvestment Act of 2009, and referred to herein as the “ARRA” into effect. The ARRA included the HITECH Act, which contains a number of provisions that significantly expand the reach of HIPAA. Among other things, the HITECH Act (i) created new security breach notification requirements for covered entities

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(ii) extended the HIPAA security provisions to business associates, and (iii) increased a patient’s ability to restrict access to his or her protected health information. The HITECH Act also expanded the number of enforcement mechanisms that are available to prosecute violations of HIPAA by creating a private cause-of-action for non-compliance which may be brought by state attorneys general on behalf of affected patients and increasing the civil monetary penalties that may be imposed for violations of HIPAA by establishing a tiered system that authorizes penalties of $100 per violation (up to $25,000 for each requirement) for violations based on lack of knowledge, $1,000 per violation (up to $100,000 for each requirement) for violations because of reasonable cause, $10,000 per violation (up to $250,000 for each requirement) for violations because of willful neglect, and $50,000 per violation (up to $1,500,000 for each requirement) for violations that are not corrected.
     On August 24, 2009, HHS issued regulations implementing certain of the requirements of the HITECH Act, including the breach notification requirements providing obligations for compiling and reporting of certain information relating to breaches by providers and their business associates (the “Interim Final Breach Rule”), effective September 23, 2009. HHS subsequently promulgated and withdrew a final breach notification rule for review, but it intends to publish a final data breach rule in the coming months. Until such time as a new final breach rule is issued, the Interim Final Breach Rule remains in effect. In addition, our facilities remain subject to any state laws that relate to the reporting of data breaches that are more restrictive than the regulations issued under HIPAA and the requirements of the HITECH Act.
     On July 14, 2010, HHS issued a notice of proposed rulemaking to modify the HIPAA privacy, security and enforcement regulations. These changes may require substantial operational changes for HIPAA covered entities and their business associates, including, in part, new requirements for business associate agreements and a transition period for compliance, new limits on the use and disclosure of health information for marketing and fundraising, enhanced individuals’ rights to obtain electronic copies of their medical records and restricted disclosure of certain information, new requirements for notices of privacy practices, modified restrictions on authorizations for the use of health information for research, and new changes to the HIPAA enforcement regulations. HHS has not yet released the final version of these rules, and, as a result, we cannot quantify the financial impact of compliance with these new regulations. We could, however, incur expenses associated with such compliance.
     The Company intends to comply fully with HIPAA and the applicable portions of the HITECH Act, when required. However, the Company cannot provide any assurances that the Company’s actions will not be reviewed or challenged by the authorities having responsibility for HIPAA enforcement. The Company further believes that HIPAA will likely be an area of increased government enforcement in the future. The Company expects that compliance with these standards will require significant commitment and action by the Company.
     Federal Trade Commission “Red Flags Rule”
     On November 9, 2007, the Federal Trade Commission (“FTC”) issued a final rule, known as the Red Flags Rule, that requires financial institutions and other businesses which maintain accounts that are used for primarily individual purposes and that permit multiple payments, to implement written identity theft prevention programs. The FTC may seek penalties of up to $3,500 per violation for certain violations of the Rule. In addition, states may enforce the Red Flags Rule on behalf of their citizens by either (i) seeking direct damages or (ii) penalties of up to $1,000 per independent violation, plus attorney’s fees. Finally, affected individuals may also file civil suits in which they may recover actual damages, plus attorney’s fees, for negligent violations, or actual damages of up to $1,000, plus attorney’s fees and punitive damages, for willful noncompliance.
     The Red Flag Program Clarification Act of 2010, signed on December 18, 2010, appears to exclude certain healthcare providers from the Red Flags Rule, but permits the FTC or relevant agencies to designate additional creditors subject to the Red Flags Rule through future rulemaking if the agencies determine that the person in question maintains accounts subject to foreseeable risk of identity theft. The Company intends to comply with the Red Flags Rule if required. However, the Company cannot provide any assurances that its operations and identity theft prevention programs will not be reviewed or challenged by the FTC or other governmental authorities with responsibility for enforcing the Red Flags Rule, or if challenged, that its operations and programs would be found to be compliant.

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     False and Other Improper Claims
     The U.S. government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs. Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes. While the criminal statutes are generally reserved for instances of fraudulent intent, the U.S. government is applying its criminal, civil and administrative penalty statutes in an ever expanding range of circumstances. For example, the government has taken the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant merely should have known the services were unnecessary, even if the government cannot demonstrate actual knowledge. The government has also taken the position that claiming payment for low quality services is a violation of these statutes if the claimant should have known that the care was substandard. In addition, some courts have held that a violation of the Stark law can result in liability under the federal False Claims Act. Additionally, under the Affordable Care Act, the False Claims Act is implicated by the knowing failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due, whichever is later, and the Affordable Care Act also specifically provides that submission of claims for services or items generated in violation of the Anti-Kickback Laws constitutes a false or fraudulent claim under the False Claims Act.
     Over the past several years, the U.S. government has accused an increasing number of healthcare providers of violating the federal False Claims Act. The False Claims Act prohibits a person from knowingly presenting, or causing to be presented, a false or fraudulent claim to the U.S. government. The statute defines “knowingly” to include not only actual knowledge of a claim’s falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a claim. Because our facilities perform hundreds of similar procedures a year for which they are paid by Medicare, and there is a relatively long statute of limitations, a billing error or cost reporting error could result in significant civil or criminal penalties. Under the “qui tam,” or whistleblower, provisions of the False Claims Act, private parties may bring actions on behalf of the U.S. government. These private parties, often referred to as relators, are entitled to share in any amounts recovered by the government through trial or settlement.
     Both direct enforcement activity by the government and whistleblower lawsuits have increased significantly in recent years and have increased the risk that a healthcare provider, such as the Hospital, will have to defend a false claims action, pay fines or be excluded from the Medicare and Medicaid programs as a result of an investigation resulting from a whistleblower case. Risk to our Facilities is further increased by the Affordable Care Act’s elimination of the requirement that a whistleblower be an original source of information, thereby easing barriers to filing of whistleblower suits. Although it is believed that our facilities’ operations materially comply with both federal and state laws, one of our facilities or the Company itself may nevertheless be the subject of a whistleblower lawsuit, or may otherwise be challenged or scrutinized by governmental authorities. A determination that the Company or one of our facilities violated these laws could have a material adverse effect on the Company.
     The Emergency Medical Treatment and Active Labor Act
     The Federal Emergency Medical Treatment and Active Labor Act (“EMTALA”) was adopted by the U.S. Congress in response to reports of a widespread hospital emergency room practice of “patient dumping.” At the time of the enactment, patient dumping was considered to have occurred when a hospital capable of providing the needed care sent a patient to another facility or simply turned the patient away based on such patient’s inability to pay for his or her care. The law imposes requirements upon physicians, hospitals and other facilities that provide emergency medical services. Such requirements pertain to what care must be provided to anyone who comes to such facilities seeking care before they may be transferred to another facility or otherwise denied care. The government broadly interprets the law to cover situations in which patients do not actually present to a hospital’s emergency department, but present to a hospital-based clinic that treats emergency medical conditions on an urgent basis or are transported in a hospital-owned ambulance, subject to certain exceptions. EMTALA does not generally apply to patients admitted for inpatient services. Sanctions for violations of this statute include termination of a hospital’s Medicare provider agreement, exclusion of a physician from participation in Medicare and Medicaid programs and civil monetary penalties. In addition, the law creates private civil remedies that enable an individual who suffers personal harm as a direct result of a violation of the law, and a medical facility that suffers a financial loss as a direct result of another participating hospital’s violation of the law, to sue the offending hospital for damages and equitable relief. Although we believe that our practices are in substantial compliance with the law, we cannot assure you that

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governmental officials responsible for enforcing the law will not assert from time to time that our facilities are in violation of this statute.
     Environmental Matters
     We are subject to various federal, state and local laws and regulations relating to environmental protection. The principal environmental requirements and concerns applicable to our operations relate to:
    the proper handling and disposal of hazardous and low level medical radioactive waste;
 
    ownership or historical use of underground and above-ground storage tanks;
 
    management of impacts from leaks of hydraulic fluid or oil associated with elevators, chiller units or incinerators;
 
    appropriate management of asbestos-containing materials present or likely to be present at some locations; and
 
    the potential acquisition of, or maintenance of air emission permits for, boilers or other equipment.
     We do not expect our compliance with environmental laws and regulations to have a material effect on us. We may also be subject to requirements related to the remediation of substances that have been released into the environment at properties owned or operated by us or at properties where substances were sent for off-site treatment or disposal. These remediation requirements may be imposed without regard to fault and whether or not we owned or operated the property at the time that the relevant releases or discharges occurred. Liability for environmental remediation can be substantial.

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MANAGEMENT
Executive Officers and Directors
     The table below presents information with respect to the members of Capella’s Board of Directors and executive officers and their ages as of June 30, 2011.
             
Name   Age   Position
Daniel S. Slipkovich
    53     Chief Executive Officer, President and Director
D. Andrew Slusser
    51     Senior Vice President of Acquisitions and Development
Denise W. Warren
    50     Senior Vice President, Chief Financial Officer and Treasurer
Michael A. Wiechart
    46     Senior Vice President and Chief Operating Officer
Erik Swensson, MD
    57     Senior Vice President and Chief Medical Officer
Steven R. Brumfield
    47     Vice President and Controller
J. Thomas Anderson
    57     Vice-Chair and Co-Founder and Director
Joseph P. Nolan
    46     Director
David S. Katz
    45     Director
Robert Z. Hensley
    53     Director
     Daniel S. Slipkovich has been the Chief Executive Officer and a director of Capella since May 2005 and President of Capella since August 2011. Mr. Slipkovich has managed hospitals in over 20 states through a career that has included investor relations, market strategies, physician recruitment and integration, clinical and operational management, joint venture structuring, information systems development, revenue cycle, HIPAA, ethics and compliance programs. From February 2004 until April 2005, Mr. Slipkovich served as the President and Chief Operating Officer of Province Healthcare, an operator of non-urban acute care hospitals, responsible for broad-based corporate activities as well as all hospital operations through three operating divisions with $900 million in revenue. Prior to that, Mr. Slipkovich worked for HCA and spin-off companies, HealthTrust Purchasing Group (“HealthTrust”) and LifePoint from 1983 to 2003. He previously served in hospital CFO positions and served in several Division Vice President positions and as Group Vice President for HCA in Florida responsible for hospital and ancillary operations with revenue of $5 billion. He was promoted to Senior Vice President for HCA corporate, where he was responsible for the divestiture of 24 hospitals in the spin-off of LifePoint. In addition, Mr. Slipkovich serves on the board of directors of the Federation of American Hospitals and, in 2009, was named to Modern Healthcare’s list of Top 100 Most Powerful People in Healthcare. Mr. Slipkovich is a certified public accountant. Mr. Slipkovich earned an Accounting degree from West Virginia University and attended graduate school at the University of Miami and Virginia Tech.
     D. Andrew Slusser has been the Senior Vice President of Acquisitions and Development of Capella since the formation of Capella in April 2005. From April 1999 to April 2005, Mr. Slusser was the Vice President of Acquisitions and Development for Province Healthcare, responsible for all activities to develop and complete the acquisition of hospitals, including market identification, proposal presentation, negotiation of terms and conditions, pro forma financial statements and management of due diligence. Prior to that, Mr. Slusser was a founding officer and the Senior Vice President and Chief Financial Officer of Arcon Healthcare Inc., a provider of comprehensive ambulatory care services. He has also held Chief Financial Officer positions with HealthTrust and HCA, the latter including Western Group Chief Financial Officer with responsibility for 45 U.S. hospitals, five European hospitals and 125 surgical centers across the United States. Mr. Slusser is a certified public accountant (inactive). Mr. Slusser earned a Bachelor of Business Administration in Accounting from the University of Texas.
     Denise W. Warren has been the Senior Vice President, Chief Financial Officer and Treasurer of Capella since October 2005 and has more than 25 years of financial experience. In 2011, Ms. Warren was named by Nashville Medical News as a “Woman to Watch.” In 2010, Ms. Warren was named as a “Woman of Influence in Tennessee” by the Nashville Business Journal. In 2009, Ms. Warren was named CFO of the Year for large private companies in Tennessee by the Nashville Business Journal. From 2001 to 2005, Ms. Warren served as a Senior Equity Analyst

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and former Research Director for Avondale Partners LLC (“Avondale”). Prior to her time at Avondale, from 2000 to 2001, Ms. Warren served as Senior Vice President and Chief Financial Officer for Gaylord Entertainment Company, a leading hospitality and entertainment organization (“Gaylord”). While at Gaylord, she was selected as Financial Executive of the Year by The Institute of Management Accountants. Prior to that, from 1996 to 2000, Ms. Warren worked in the New York office of Merrill Lynch & Co. as a Director and Senior Equity Analyst. Ms. Warren currently serves as a member of the Board of Governors of the Federation of American Hospitals, an investor-owned hospital industry group based in Washington, D.C. Ms. Warren earned a Bachelor of Science degree in Economics from Southern Methodist University where she graduated Phi Beta Kappa, summa cum laude. Ms. Warren also earned a Master of Business Administration from Harvard University.
     Michael A. Wiechart has been the Senior Vice President and Chief Operating Officer of Capella since May 2009. From February 2004 to May 2009, Mr. Wiechart served as a Group President and Division President of LifePoint. Prior to that, Mr. Wiechart served as a Division Chief Financial Officer of the LifePoint from May 1999 until February 2004. Prior to that time, Mr. Wiechart served as vice president/operations controller of Province Healthcare and in various financial positions with HCA. Mr. Wiechart earned a Bachelor of Science degree in Accounting from the University of Kentucky. Mr. Wiechart also earned a Lean Healthcare certification from the University of Tennessee at Knoxville.
     Erik Swensson, M.D. has been the Senior Vice President and Chief Medical Officer of Capella since January 2011. Dr. Swensson is a vascular and general surgeon that has been practicing medicine for over 25 years. Dr. Swensson has been on the medical staff of Willamette Valley Medical Center in McMinnville, Oregon since 1998. During this time, he served in a variety of leadership positions for the hospital as well as the community, including Chief of Staff in 2007. Dr. Swensson was the first president of Willamette Valley Cancer Foundation, a non-profit organization that provides support for low-income cancer patients, and continues to serve on the foundation’s board. Additionally, since the formation of our National Physician Leadership Group in 2010, Dr. Swenson has served as National Chair. Dr. Swensson earned his medical degree from Washington University in St. Louis, MO, in 1979 with honors. He then completed his general surgery internship and residency with Medical College of Virginia in Richmond, where he was selected as Chief Surgical Resident. Dr. Swensson also completed a vascular surgery fellowship at St. Louis University in 1985. He has earned board certification in general surgery and vascular surgery from the American Board of Surgery, as well as completed extensive education and training in wound care and hyperbaric oxygen therapy.
     Steven R. Brumfield has been the Vice President and Controller of Capella since August 2005. From December 2003 to April 2005, Mr. Brumfield was the Vice President and Controller for Province Healthcare, during which time he was responsible for SEC reporting, accounting and internal control structure, accounting due diligence and external audit coordination. Prior to that, Mr. Brumfield served as Director of Financial Audit for LifePoint from January 2002 until December 2003 and as Vice President and Controller of Netcare Health Systems, Inc. from 1996 until 2001. Mr. Brumfield also served from 1987 until 1996 with the Nashville office of Ernst & Young, LLP. Mr. Brumfield earned a Bachelor of Business Administration in Accounting from Austin Peay State University. Mr. Brumfield is a certified public accountant (inactive).
     J. Thomas Anderson has been the Vice-Chair and Co-Founder of Capella since September 2010 and served as our President and a director from May 2005 to September 2010. From 1998 until 2005, Mr. Anderson served as the Senior Vice President of Acquisitions and Development for Province Healthcare during which time he developed growth strategies, managed the development of Province Healthcare’s national market presence and closed transactions to acquire 18 hospitals representing $900 million in annual net revenue. Prior to that, from 1992 to 1998, Mr. Anderson served as Vice President and Group Director for CHS, where he was responsible for the operations of 14 facilities in six states as well as new business development for CHS including the assimilation of 17 facilities when CHS acquired Hallmark Health Systems, Inc., a community-based nonprofit hospital operator in northern Boston. Mr. Anderson was previously the Chief Executive Officer and Chief Financial Officer of several community hospitals, including the Chief Financial Officer/Associate Administrator for Baptist Medical Center in Montgomery, Alabama and the Chief Executive Officer at Harton Regional Medical Center in Tullahoma, Tennessee. Mr. Anderson is a certified public accountant and began his career with HCA in accounting and internal audit. Mr. Anderson earned a Bachelor of Science degree in Accounting from Tennessee Technological University and a Master of Business Administration from Auburn University at Montgomery.

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     Joseph P. Nolan has been a director of Capella since May 2005. Mr. Nolan joined GTCR in 1994 and became a principal in 1996. Mr. Nolan is currently a member of the firm’s investment committee. Mr. Nolan was previously on the board of Province Healthcare, and currently serves as a director of HealthSpring, Inc. and several private GTCR portfolio companies including APS Healthcare, a provider of disease management and behavioral services and Devicor Holdings, a manufacturer of medical devices. Mr. Nolan earned a Bachelor of Science degree in Accountancy from the University of Illinois where he graduated with high honors. Mr. Nolan earned a Master in Business Administration from the University of Chicago.
     David S. Katz has been a director of Capella since December 2006. Mr. Katz joined GTCR as a principal in 2006. Prior to joining GTCR, Mr. Katz served as a managing director of Frontenac Company, where he worked for 12 years. He also previously served as an associate of the Clipper Group and a consultant at the Boston Consulting Group. Mr. Katz also serves as a director of APS Healthcare, ATI Physical Therapy and Curo Health Services and previously served as a director of Gevity HR and numerous other privately held companies. Mr. Katz graduated cum laude with a Bachelor of Arts in political science from Yale University and earned a Masters in Business Administration from Harvard University’s, with distinction.
     Robert Z. Hensley has been a director of Capella since January 2009. From July 2002 to September 2003, Mr. Hensley was an audit partner at Ernst & Young, LLP in Nashville, Tennessee. Prior to that, he served as an audit partner at Arthur Andersen LLP in Nashville, Tennessee from 1990 to 2002, and was managing partner of the Nashville, Tennessee office of Arthur Andersen LLP from 1997 to July 2002. Mr. Hensley is the founder and an owner of two real estate and rental property development companies, each of which is located in Destin, Florida. He also serves on the board of directors of Advocat, Inc., a publically traded provider of long-term care services to nursing home patients and residents of assisted living facilities and Spheris Holding III, Inc. (a successor to Spheris, Inc.), formerly a provider of medical transcription technology and services. From 2006 to 2010, Mr. Hensley also served as a director of COMSYS IT Partners, Inc., an information technology services company and Spheris, Inc., a provider of medical transcription technology and services. Since 2008, Mr. Hensley has served as a senior advisor to the healthcare and transaction advisory services groups of Alvarez and Marsal, LLC, a professional services company. Mr. Hensley holds a M.A. in Accountancy and a Bachelor of Science in Accounting from the University of Tennessee. Mr. Hensley is a certified public accountant.
Board of Directors and Board Committees
     Capella’s Board of Directors consists of five members, two of whom are designated by GTCR, one of whom is designated by a majority of our investors, one of whom is Capella’s Chief Executive Officer and one of whom is the Vice-Chair and Co-Founder (who formerly was Capella’s President and by agreement continues to serve on the Board of Directors). The Board of Directors currently has two standing committees; the Audit Committee and the Compensation Committee. Each of the directors designated by GTCR has the right to serve on all standing committees of the Board of Directors.
                 
    Audit   Compensation
Name of Director   Committee   Committee
J. Thomas Anderson
           
Robert Z. Hensley
    X       X  
David S. Katz
    X       X  
Joseph P. Nolan
    X       X  
Daniel S. Slipkovich(1)
           

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(1)   Indicates management director.
Director Independence
     Though not formally considered by the Board of Directors because our common stock is not currently listed or traded on any national securities exchange, based upon the listing standards of the New York Stock Exchange (“NYSE”) and NASDAQ, we do not believe that any of our directors other than Mr. Hensley would be considered “independent” because of their relationships with us or GTCR, which holds significant interests in Holdings, which owns 100% of our outstanding stock. Accordingly, we do not believe that Messrs. Katz or Nolan, members of our Audit Committee and Compensation Committee, would meet the independence requirements of Rule 10A-1 of the Exchange Act, or the NYSE’s independence requirements. We do not have a nominating/corporate governance committee, or a committee that serves a similar purpose.
Risk Oversight
     We maintain a comprehensive, company-wide Ethics & Compliance program to address healthcare regulatory and other compliance requirements. This Ethics & Compliance program includes, among other things, initial and periodic ethics and compliance training, a toll-free reporting hotline for employees and annual coding audits. The organizational structure of our Ethics & Compliance program includes oversight by the Board of Directors and a high-level Corporate Ethics & Compliance Committee (“CECC”). The Vice President of Ethics & Compliance reports jointly to the Chief Executive Officer and to the Board of Directors, serves as the Chief Compliance Officer and is charged with direct responsibility for the day-to-day oversight of our compliance program.
Code of Ethics
     We have a Code of Conduct which is applicable to all of our directors, officers and employees (the “Code of Conduct”). The Code of Conduct is available on the “Ethics and Compliance Program” page of our website at www.capellahealth.com.

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COMPENSATION DISCUSSION AND ANALYSIS
     Capella is a wholly-owned subsidiary of Holdings. The same individuals serve on both Holding’s board of directors and Capella’s Board of Directors. The compensation of Capella’s Named Executive Officers is overseen and administered by its Board of Directors and the Compensation Committee of the Board of Directors, which is comprised of three non-management directors. The Compensation Committee operates without a charter. Additionally, as a privately-owned company with a relatively small board of directors, the entire Board of Directors historically has been involved in most compensation decisions. For purposes of this discussion, the Named Executive Officers, or NEOs, are the individuals included in the Summary Compensation Table on page 100 of this prospectus.
     Our NEO compensation policies are designed to complement and contribute to the achievement of our business objectives. The Compensation Committee’s general philosophy is that NEO compensation should:
    attract, retain, motivate and reward individuals of the highest quality in the industry with the experience, skills and integrity necessary to promote our success;
 
    be competitive within our industry and community and responsive to the needs of our NEOs;
 
    provide incentive opportunities that will motivate NEOs to achieve our long-term objectives;
 
    link compensation paid to NEOs to corporate and individual performance; and
 
    comply with all applicable laws, and be appropriate in light of reasonable and sensible standards of good corporate governance.
     In 2008, Capella’s Human Resources Department engaged Sullivan, Cotter and Associates, Inc. (“SullivanCotter”) to prepare a market data analysis of total cash compensation paid to NEOs and other executive officers of certain peer group companies1 and to provide Capella with recommendations for a long-term incentive plan for both NEOs and other corporate employees with management functions. SullivanCotter’s market data analysis is not used for benchmarking but, as discussed below, is used to assist Capella’s Chief Executive Officer, Compensation Committee and Board of Directors in obtaining a general understanding of current base salary levels in comparable executive positions of the peer group companies. The Human Resources Department recently engaged SullivanCotter to prepare a new market data analysis based on an updated list of peer group companies.
Compensation Process
     During our fiscal year ended December 31, 2010, the Compensation Committee and the Board of Directors did not retain the services of any external compensation consultant, however, the Compensation Commitee and the Board of Directors had access to the market data analysis prepared by SullivanCotter in 2008 (which was the last time Capella’s Human Resources Department obtained such data, Generally, the Compensation Committee relies on Capella’s Chief Executive Officer, Mr. Slipkovich, as a member of the Board of Directors, to make compensation recommendations about the other NEOs for the Compensation Committee’s and the Board of Directors’ consideration and approval. Mr. Slipkovich does not make any recommendations regarding his own compensation, and any deliberations and decisions by the Board of Directors regarding compensation for Mr. Slipkovich take place without Mr. Slipkovich in attendance. Additionally, the Compensation Committee may delegate to the Chief Executive Officer the authority to make, within the framework of the Compensation Committee’s and the Board of Directors’ philosophy or objectives that it has adopted from time to time, compensation decisions with respect to our non-NEO employees.
Components of Executive Compensation
     In fiscal year 2010, the principal elements of the compensation for the NEOs were:
    Base salaries;
 
    Non-equity incentive compensation; and
 
    Benefits and perquisites.
Each of these elements is discussed in further detail below.
          Although not an element of compensation in 2010, the Compensation Committee and the Board of Directors may make discretionary bonuses to any or all of the NEOs outside of the non-equity incentive compensation plan. The Compensation Committee and the Board of Directors retain this flexibility because their evaluation of the performance of an NEO may lead them to determine that an NEO should receive additional
 
1   Capella’s Human Resources Department determined in 2008 that the following companies constituted a relevant group for purposes of comparing compensation data: Emeritus Corporation, Health Management Associates, Inc., HealthSouth Corporation, Iasis Healthcare LLC, LifePoint Hospitals, Inc., Magellan Health Services, Inc., MedCath Corporation, Pediatrix Medical Group Inc., RehabCare Group, Inc., Res-Care, Inc., United Surgical Partners International, Inc. and Vanguard Health Systems, Inc..

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compensation in a year regardless of whether the financial goal established under the non-equity incentive compensation plan is achieved.
     Additionally, equity incentive compensation awards historically have not been granted as an element of NEO compensation. The board of directors of Holdings has adopted the Capella Holdings, Inc. 2006 Stock Option Plan (the “2006 Stock Option Plan”), which permits the board of directors of Holdings to issue stock options to our directors, executive officers and other key personnel, subject to the terms and conditions set forth in the 2006 Stock Option Plan and in each option award. Holdings has never issued stock options under the 2006 Stock Option Plan. Additionally, although Holdings previously has granted restricted share awards to certain of our employees, no restricted share awards have been granted to the NEOs.
     Base Salaries
     The initial base salary of each NEO was established by each NEO’s employment agreement, see “Executive Compensation — Summary Compensation Table — Employment Agreements.” Under each employment agreement, the NEOs base salary can be increased by the Board of Directors from time to time. The purpose of the base salary is to provide each NEO with a set amount of cash compensation that is not variable in nature and that is generally competitive with market practices. The base salary is established based on the scope of the executive’s responsibilities.
     Base salaries of the NEOs are reviewed and adjusted by the Compensation Committee and the Board of Directors once per year based upon the recommendations of our Chief Executive Officer (except he makes no recommendation as to his own base salary). In turn, our Chief Executive Officer bases his recommendations upon his assessment of each NEO’s performance, our overall budgetary guidelines and market data of the peer group companies compiled by SullivanCotter from a number of recognized surveys published by independent firms. In addition to the annual salary review, based upon the recommendations of our Chief Executive Officer, the Compensation Committee and the Board of Directors may also adjust base salaries at other times during the year in connection with promotions, increased responsibilities or to maintain competitiveness in the market.
     Non-Equity Incentive Compensation
     Certain of our corporate-level employees, including the NEOs, are eligible for a cash incentive bonus under our non-equity incentive compensation plan. Non-equity incentive compensation is intended to motivate the NEOs to achieve pre-determined financial or other goals appropriate to each NEO’s area of responsibility set by our Chief Executive Officer, consistent with our overall business strategies. When determining the amount of non-equity incentive compensation to be paid to each NEO, the Compensation Committee and the Board of Directors reviews and considers the following information:
    evaluations of each of the NEOs, as well as feedback from the Board of Directors, regarding each NEO’s performance;
 
    the Chief Executive Officer’s review and evaluation of each of the other NEOs, addressing individual performance and the results of operations of the business areas and departments for which such executive had responsibility;
 
    the financial performance of the Company, including achieving EBITDA goals established by the Chief Executive Officer and presented to and approved by the Board of Directors; and
 
    total proposed compensation, as well as each element of proposed compensation, taking into account the recommendations of the Chief Executive Officer.
     For 2010, the Board of Directors, based on the recommendation of the Chief Executive Officer, determined a potential cash incentive bonus amount for each of our eligible employees based on a specific percentage of each eligible employee’s base salary. For 2010, each of Messrs. Slipkovich, Slusser and Anderson was eligible to earn a potential cash incentive bonus of 100% of his base salary, and each of Messrs. Wiechart and Wall and Ms. Warren was eligible to earn a potential cash incentive bonus of 75% of his or her base salary. Under the non-equity incentive compensation plan, each eligible employee can earn up to 100% of his or her pre-established cash incentive bonus

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amount if certain performance goals are achieved. For 2010, Capella’s Chief Executive Officer established an adjusted EBITDA target of $102.2 under the plan (the “2010 Target”), which target was presented to and approved by the Board of Directors. The Board of Directors determined that, if Capella’s adjusted EBITDA for 2010 exceeded the 2010 Target, the amount of any such excess earnings could be distributed, in the discretion of the Board of Directors, pro rata as a cash incentive bonus to each of the eligible employees, up to the aggregate amount of the entire cash incentive bonus pool. Under the non-equity incentive compensation plan, cash incentive bonuses that are earned for achievement of pre-established performance goals are generally paid in the first four months of the year following the year during which such goals were achieved.
     In 2010, Capella’s adjusted EBITDA was $95.7 million. Because this amount was less than the 2010 Target, none of our eligible employees, including the NEOs, received cash incentive bonuses under the non-equity incentive compensation plan. See page 41 within the section entitled “Selected Historical Consolidated Financial and Operating Data” for a discussion and reconciliation of adjusted EBITDA.
     Benefits and Perquisites
     The NEOs generally receive only those benefits and perquisites available to all of our employees. The NEOs are eligible to participate in Capella’s 401(k) plan and other employee recognition programs on the same basis as other employees. The 401(k) plan allows eligible employees to contribute up to 95% of annual compensation, subject to applicable limits imposed by the Internal Revenue Code of 1986, as amended (the “Code”). Pursuant to the terms of the 401(k) plan, we can make a discretionary matching contribution and/or a discretionary supplemental contribution on behalf of each eligible employee. Capella offers all employees group life and disability insurance.
     Additionally, certain members of management, including the NEOs, are eligible to participate in our non-qualified deferred compensation plan (the “Deferred Compensation Plan”). Pursuant to the Deferred Compensation Plan, the NEOs and other participants in the Deferred Compensation Plan may defer up to 100% of their annual base compensation and up to 100% of any annual cash bonus. In the discretion of the Board of Directors, the Company may make additional contributions to be credited to the account of any or all participants in the Deferred Compensation Plan. Any such discretionary contributions become vested based on a participant’s years of service according to the following schedule: less than 1 year, 0%; 1 year, 20%; 2 years, 40%; 3 years, 60%; 4 years, 80%; 5 years or more, 100%.
Impact of Tax and Accounting Rules
     The forms of the NEO compensation are largely dictated by our capital structure and have not been designed to achieve any particular accounting treatment. We take tax considerations into account, both to avoid tax disadvantages and to obtain tax advantages, where reasonably possible, consistent with our compensation goals (tax advantages for our executives benefit us by reducing the overall compensation we must pay to provide the same after-tax income to our executives). The severance arrangements are generally designed to avoid the application of “parachute” excise taxes under Section 280G of the Code by reducing the amount of severance payments and benefits to the degree necessary to avoid such excise taxes. Similarly Capella has taken steps to structure and implement our executive compensation program in compliance with Section 409A of the Code.

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EXECUTIVE COMPENSATION
Summary Compensation Table
     The following table sets forth certain information concerning compensation paid or accrued by us and our subsidiaries for each of the last three years with respect to Capella’s Chief Executive Officer, Chief Financial Officer, three other most highly compensated executive officers and Capella’s Vice Chairman who served as President until September 2010 (collectively, the “Named Executive Officers” or “NEOs”):
                                                 
                            Non-Equity        
                            Incentive Plan   All Other    
Name and Principal                           Compensation   Compensation    
Position   Year   Salary   Bonus (4)   (5)   (6)   Total
Daniel S. Slipkovich
    2010     $ 450,000     $     $     $ 3,333     $ 453,333  
Chief Executive Officer
    2009       450,000             450,000       3,822       903,822  
 
    2008       433,335                   1,622       434,957  
 
                                               
Denise W. Warren
    2010     $ 358,750     $     $     $ 2,901     $ 361,651  
Senior Vice President,
    2009       350,000             262,500       3,390       615,890  
Chief Financial Officer and Treasurer
    2008       344,167                   1,622       345,789  
 
                                               
D. Andrew Slusser
    2010     $ 292,125     $     $     $ 3,333     $ 295,458  
Senior Vice President of
    2009       285,000             285,000       3,822       573,822  
Acquisitions and Development
    2008       281,250                   1,622       282,872  
 
                                               
Howard T. Wall (1)
    2010     $ 312,625     $     $     $ 3,333     $ 315,958  
Former Senior Vice
    2009       285,000             228,750       3,822       517,572  
President, General Counsel and Secretary
    2008       281,250                   1,622       282,872  
 
                                               
Michael A. Wiechart (2)
    2010     $ 384,375     $     $     $ 2,901     $ 387,276  
Senior Vice President
    2009       226,190             169,643       1,560       397,393  
and Chief Operating Officer
    2008                                
 
                                               
J. Thomas Anderson (3)
    2010     $ 399,996     $     $     $ 4,413     $ 404,409  
Vice Chairman
    2009       399,996             399,996       4,902       804,894  
 
    2008       391,665                   1,622       393,287  
 
(1)   Mr. Wall resigned as our Senior Vice President, General Counsel and Secretary effective June 10, 2011.
 
(2)   Mr. Wiechart joined the Company on May 26, 2009 as our Senior Vice President and Chief Operating Officer. Mr. Wiechart’s salary for 2009 reflects compensation earned by Mr. Wiechart from May 26, 2009 through December 31, 2009.
 
(3)   Reflects compensation paid to Mr. Anderson in his capacity as our President. In September 2010, Mr. Anderson resigned as President and currently serves as Vice Chairman of the Board of Directors.
 
(4)   Reflects discretionary bonuses awarded by the Compensation Committee and the Board of Directors. No such bonuses were awarded for 2008, 2009 or 2010.
 
(5)   Reflects cash awards earned under our non-equity incentive compensation plan.
 
(6)   Details of the amounts included in “All Other Compensation” for 2010 are as follows:
                         
            Long-Term    
    Group Term Life   Disability   Total
Daniel S. Slipkovich
  $ 1,242     $ 2,091     $ 3,333  
Denise W. Warren
    810       2,091       2,901  
D. Andrew Slusser
    1,242       2,091       3,333  
Howard T. Wall
    1,242       2,091       3,333  
Michael A. Wiechart
    810       2,091       2,901  
J. Thomas Anderson
    2,322       2,091       4,413  

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     Employment Agreements with the NEOs
     Capella has entered into an employment agreement with each of the NEOs. Each of the employment agreements has substantially similar terms. The employment agreements establish the initial base salary of each NEO. The base salaries of the NEOs are reviewed and adjusted by the Compensation Committee and the Board of Directors once per year. In addition to the annual salary review, based upon the recommendations of the Chief Executive Officer, the Compensation Committee and the Board of Directors may also adjust base salaries at other times during the year in connection with promotions, increased responsibilities or to maintain competitiveness in the market. Additionally, the employment agreements establish the cash incentive bonus potential of each NEO under the non-equity compensation plan as a percentage of base salary. Each of Messrs. Slipkovich, Slusser and Anderson are eligible to earn a potential cash incentive bonus under the non-equity compensation plan of 100% of his base salary, and each of Messrs. Wiechart and Wall and Ms. Warren was eligible to earn a potential cash incentive bonus under the non-equity compensation plan of 75% of his or her base salary
     Under the terms of each employment agreement, except with respect to Mr. Anderson’s employment agreement discussed below, the NEO and Capella may terminate the employment agreement at any time with or without cause. Under certain circumstances, an NEO may receive severance payments. See the section below entitled “— Potential Termination and Change-in-Control Payments.” Each NEO has agreed that during employment and for a certain period thereafter, such NEO may not directly or indirectly, anywhere in the United States, own, manage, control, participate in, consult with, render services for, or in any manner engage in any competing business with our businesses. Each of Messrs. Slipkovich and Slusser and Ms. Warren agreed that such restriction shall continue for a one year period after the end of his or her respective employment for any reason. Mr. Wiechart agreed that, if he voluntarily terminates his employment without good reason or is terminated for cause, he is subject to such restriction for two years following the end of his employment. If Mr. Wiechart’s employment is terminated for any other reason, the restriction lasts for one year following the end of his employment.
     In September 2010, Mr. Anderson executed an amendment to his employment agreement in connection with his transition from Capella’s President to Vice-Chair and Co-Founder. Mr. Anderson’s employment term will end on September 1, 2013 unless sooner terminated in accordance with his amended employment agreement. Beginning in September 2011, Mr. Anderson’s annual base salary will be reduced to $100,000 annually. However, during his employment term, Mr. Anderson is eligible to earn an acquisition bonus of between 0% and 0.5% of the purchase or acquisition price of any transaction closed and consummated by Holdings, Capella or one of its subsidiaries. The amount of such bonus is subject to the discretion of the board of directors of Holdings, which will give consideration to factors such as input from the Chief Executive Officer and the amount of Mr. Anderson’s involvement in the such acquisition transaction. Additionally, Mr. Anderson’s amended employment agreement provides that during the employment term and for the period during which Mr. Anderson is receiving payments under his employment agreement, and for one year thereafter, Mr. Anderson may not directly or indirectly, anywhere in the United States, own, manage, control, participate in, consult with, render services for, or in any manner engage in any competing business with our businesses.
Grant of Plan Based Awards at December 31, 2010
     The following table provides information about non-equity incentive plan awards granted to the NEOs in 2010:
                         
    Estimated Future Payouts Under Non-Equity Incentive
    Plan Awards (1)
Name
  Threshold   Target   Maximum
Daniel S. Slipkovich
        $ 450,000     $ 450,000  
Denise W. Warren
          269,063       269,063  
D. Andrew Slusser
          292,125       292,125  
Howard T. Wall
          234,469       234,469  
Michael A. Wiechart
          288,281       288,281  
J. Thomas Anderson
          399,996       399,996  

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(1)   Reflects cash bonus awards granted under our non-equity incentive compensation plan where receipt is contingent upon the achievement of a performance goal. The applicable performance goal was not achieved for 2010; therefore, no payments were made to the NEOs under the non-equity incentive compensation plan. For more information about our non-equity incentive compensation plan, please refer to the section above entitled “Compensation Discussion and Analysis — Components of Executive Compensation — Non-Equity Incentive Compensation.”
Potential Termination and Change-in-Control Payments
     Capella has entered into employment agreements with each of the NEOs. We believe that post-termination severance payments allow NEOs to receive value in the event of certain terminations of employment that were beyond their control. The protections afforded by post-termination severance payments allow management to focus its attention and energy on making the best objective business decisions that are in our interest without allowing personal considerations to cloud the decision-making process.
     The employment agreements contain certain severance arrangements that provide for severance payments in the following circumstances:
    Messrs. Slipkovich, Slusser or Anderson are terminated without Cause or as a result of a Disability or death or they resign for Good Reason, then they are entitled to receive their annual base salary for one year, and, with respect to Messrs. Slipkovich and Slusser, are entitled to cause Holdings to purchase of portion of their shares of Holdings common stock at fair market value as of the date such right is exercised;
 
    Ms. Warren is terminated without Cause or as a result of Disability or death, she is entitled to receive her annual base salary for one year; and
 
    Mr. Wiechart is terminated without Cause or as a result of Disability or death or he resigns for Good Reason, he is entitled to receive his annual base salary for two years.
     “Cause” is defined in each NEO’s employment agreement to mean (i) the commission of, or entry of a plea of guilty or nolo contendere, to a felony or a crime involving moral turpitude or any act or any other act or omission involving dishonesty or fraud with respect to Holdings, Capella or any of their respective subsidiaries or any of their customers or suppliers or stockholders, (ii) reporting to work repeatedly under the influence of alcohol or reporting to work under the influence of illegal drugs, the use of illegal drugs (whether or not at the workplace) or other repeated conduct causing Holdings, Capella or any of their respective subsidiaries substantial public disgrace or disrepute or substantial economic harm which, if curable, is not cured within 15 days following written notice thereof to the NEO, (iii) substantial and repeated failure to perform duties of the office held by the NEO as reasonably directed by the Board of Directors which is not cured within 15 days following written notice thereof to the NEO, (iv) a breach of the NEO’s duty of loyalty to Holdings, Capella or any of their respective subsidiaries or affiliates or any act of fraud or material dishonesty with respect to Holdings, Capella or any of their respective subsidiaries or (v) any material breach of the employment agreement or any other agreement between the NEO and Holdings, Capella or any of their respective affiliates which is not cured within 15 days after written notice thereof to the NEO.
     “Disability” is defined in each NEO employment agreement to mean the disability of an NEO caused by any physical or mental injury, illness or incapacity as a result of which the NEO is unable to effectively perform the essential functions of the NEO’s duties as determined by the Board of Directors in good faith.
     “Good Reason” is defined in each NEO’s employment agreement to mean (a) any decision by the Board of Directors which results in the primary business of Holdings being a business other than acquiring or operating acute-care hospitals, (b) substantial detrimental change in the positions or responsibilities of the NEO without the consent of the NEO, (c) where the NEO’s benefits under the employee benefit or health or welfare plan or programs of Holdings are in the aggregate materially decreased, excluding reductions because of benefit plan changes applicable to employees generally, (d) the failure by Holdings to pay the NEO’s base salary or to provide for the NEO’s annual bonus if and when due, (e) the relocation of the NEO’s primary place of employment to a location which is more than 100 miles from the city limits of Nashville, Tennessee; provided, however, that any of the foregoing (a) through (e) may be cured or remedied by Holdings within 30 days after receiving notice thereof from the NEO.

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     The employment agreements do not provide any of the NEOs with cash severance upon a Sale of the Company, but any unvested common stock in Holdings acquired by an NEO in accordance with his or her employment agreement may become automatically vested, unless the Sale of the Company is a result of a Public Offering. A portion of common stock purchased by Messrs. Slipkovich and Anderson pursuant to their respective employment agreements remains unvested until immediately prior to a Sale of the Company or an initial Public Offering that would result in appreciation of the value of the unvested shares.
     “Public Offering” is defined in each NEO’s employment agreement to mean the sale in an underwritten public offering registered under the Securities Act of equity securities of Holdings or a corporate successor to Holdings.
     “Sale of the Company” is defined in each NEO’s employment agreement to mean any transaction or series of transactions pursuant to which any person or group of related persons other than GTCR in the aggregate acquire(s) (i) equity securities of Holdings possessing the voting power (other than voting rights accruing only in the event of a default, breach or event of noncompliance) to elect a majority of the board of directors of Holdings (whether by merger, consolidation, reorganization, combination, sale or transfer of Holding’s equity, stockholder or voting agreement, proxy, power of attorney or otherwise) or (ii) all or substantially all of Holding’s assets determined on a consolidated basis; provided that a Public Offering shall not constitute a Sale of the Company.
     The amount of compensation payable to each NEO entitled to benefits if any such event had occurred on December 31, 2010 is listed in the tables below:
     Daniel S. Slipkovich
                                 
    Involuntary            
Executive Benefits and   Termination   Resignation for   Change in   Death or
Payments upon Termination   without Cause   Good Reason   Control   Disability
Cash Payments
  $ 450,000     $ 450,000           $ 450,000  
Accelerated Vesting of Unvested Restricted Stock
              $ 3,051,574 (2)      
Put Right
    2,703,784 (1)     2,703,784 (1)            
 
(1)   Reflects the right to require Holdings to purchase (i) 299,171 shares of Holdings common stock based on a per share price of $3.80 per share, which was determined to be the fair market value of Holdings common stock as of December 31, 2011 by an third-party appraiser, and (ii) 1,566.934 shares of Holdings preferred stock at $1,000 per share. In May 2005, Mr. Slipkovich originally purchased the shares of common stock for fair market value and 1,172.749 share of preferred stock for $1,000 per share.
 
(2)   Reflects the accelerated vesting of 789,888 shares of Holdings common stock that remain unvested until certain terms are met upon a Sale of the Company or an initial Public Offering. The amount of compensation reflected in this column is based on a per share price of $3.80, which was determined to be the fair market value of Holdings common stock as of December 31, 2011 by an third-party appraiser. Mr. Slipkovich originally purchased these shares for fair market value in May 2005.
Denise W. Warren
                                 
    Involuntary            
Executive Benefits and   Termination   Resignation for   Change in   Death or
Payments upon Termination   without Cause   Good Reason   Control   Disability
Cash Payments
  $ 358,750                 $ 358,750  
Accelerated Vesting of Unvested Restricted Stock
                       

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     D. Andrew Slusser
                                 
    Involuntary            
Executive Benefits and   Termination   Resignation for   Change in   Death or
Payments upon Termination   without Cause   Good Reason   Control   Disability
Cash Payments
  $ 292,125     $ 292,125           $ 292,125  
Accelerated Vesting of Unvested Restricted Stock
                       
Put Right
    26,058 (1)     26,058 (1)            
 
(1)   Reflects the right to require Holdings to purchase (i) 2,883 shares of Holdings common stock based on a per share price of $3.80, which was determined to be the fair market value of Holdings common stock as of December 31, 2010 by an third-party appraiser, and (ii) 15.102 shares of Holdings preferred stock at $1,000 per share. In May 2005, Mr. Slusser originally purchased the shares of common stock for fair market value and 11.302 shares of preferred stock for $1,000 per share.
     Michael A. Wiechart
                                 
    Involuntary            
Executive Benefits and   Termination   Resignation for   Change in   Death or
Payments upon Termination   without Cause   Good Reason   Control   Disability
Cash Payments
  $ 768,750     $ 768,750           $ 768,750  
Accelerated Vesting of Unvested Restricted Stock
              $ 1,824,000 (1)      
 
(1)   Reflects the accelerated vesting of 480,000 shares of Holdings common stock that remain unvested until certain terms are met upon a Sale of the Company, except in the case of an initial Public Offering. The amount of compensation reflected in this column is based on a per share price of $3.80, which was determined to be the fair market value of Holdings common stock as of December 31, 2010 by an third-party appraiser. Mr. Wiechart originally purchased these shares for fair market value in May 2009.
     J. Thomas Anderson
                                 
    Involuntary            
Executive Benefits and   Termination   Resignation for   Change in   Death or
Payments upon Termination   without Cause   Good Reason   Control   Disability
Cash Payments
  $ 399,996     $ 399,996           $ 399,996  
Accelerated Vesting of Unvested Restricted Stock
              $ 1,800,964 (1)      
 
(1)   Reflects the accelerated vesting of 473,938 shares of Holdings common stock that remain unvested until certain terms are met upon a Sale of the Company or an initial Public Offering. The amount of compensation reflected in this column is based on a per share price of $3.80, which was determined to be the fair market value of Holdings common stock as of December 31, 2010 by an third-party appraiser. Mr. Anderson originally purchased these shares for fair market value in May 2005.
     Potential payments upon termination or change in control for Mr. Wall are not reflected in this section. Mr. Wall resigned as our Senior Vice President, General Counsel and Secretary effective June 10, 2011. Please refer to the section below entitled “Certain Relationships and Related Transactions — Departure Terms.”
Director Compensation for 2010
     During the year ended December 31, 2010, none of our directors received compensation for their service as a member of the Board, except for Robert Hensley as the only member of the Board that we believe would be considered “independent” based upon NYSE and NASDAQ listing standards.
             
    Fees Earned or        
Name   Paid in Cash   Stock Awards*   Total
Robert Z. Hensley   $35,000   $8,375   $43,375
 
*   Reflects the grant date fair value for 2,500 shares of Holding’s common stock on October 4, 2010.
     All of our directors are reimbursed for reasonable expenses incurred in connection with their services.
Compensation Committee Interlocks and Insider Participation
     Messrs. Hensley, Katz and Nolan served as members of our Compensation Committee throughout 2010. Although Messrs. Hensley, Katz and Nolan serve on the board of Holdings, none of them has at any time been an

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officer or employee of Capella, Holdings or any of their subsidiaries. Additionally, none of our executive officers has served as a member of another entity’s compensation committee, one of whose executive officers served on our Compensation Committee or was one of our directors. Members of our Compensation Committee have certain relationships with Capella and Holdings, as described in the section below entitled “Certain Relationships and Related Transactions.”

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
     In accordance with its charter, the Audit Committee reviews and approves all material related party transactions. Prior to its approval of any material related party transaction, the Audit Committee will discuss the proposed transaction with management and our independent auditor. In addition, our Code of Conduct requires that all of our employees, including our executive officers, remain free of conflicts of interest in the performance of their responsibilities to the Company. An executive officer who wishes to enter into a transaction in which his or her interests may conflict with ours must first receive the approval of the Audit Committee.
Stock Purchase Agreement
     In accordance with a Stock Purchase Agreement, dated May 4, 2005, as amended by Supplement No. 1 to the Stock Purchase Agreement, dated April, 2007 and Amendment and Supplement No. 2 to the Stock Purchase Agreement, dated February 29, 2008 (collectively, the “Purchase Agreement”), Holdings authorized the issuance and sale to GTCR of 196,000.000 shares of Holdings Cumulative Redeemable Preferred Stock and 50,000,000 shares of Holdings common stock. At the initial closing, GTCR purchased 25,000,000 shares of Holdings common stock at a price of $0.08 per share for gross proceeds of $2,000,000. At such time, GTCR intended to provide up to $198,000,000 in equity financing to Holdings as the equity portion of the debt and equity financing necessary to fund the acquisition of acute care hospitals, in each case as approved by the Holdings Board of Directors and GTCR. Such additional equity financing would be provided through the purchase by GTCR of up to 25,000,000 shares of Holdings common stock at $0.08 per share and 196,000.000 shares of Holdings preferred stock at $1,000 per share (each such purchase, a “Subsequent Closing”). As of June 30, 2011, 50,000,000 shares of Holdings common stock and 205,541.741 shares of Holdings preferred stock have been purchased by GTCR in Subsequent Closings. This agreement called for the execution of employment agreements with senior management (see “Executive Compensation-Summary Compensation Table—Employment Agreements”), a Stockholders Agreement, a Registration Rights Agreement and a Professional Services Agreement. Pursuant to the Purchase Agreement, Holdings may not, among other things, without the prior written consent of the majority holders, pay any dividends or make distributions, make or permit any subsidiaries, including Capella, to make any loans or advances, or merge or consolidate with any person. Under the Purchase Agreement, Holdings agreed to pay certain expenses of GTCR, including fees and expenses incurred with respect to any amendments or waivers and stamp and other taxes in connection with the Purchase Agreement.
Stockholders Agreement
     The Stockholders Agreement includes various provisions such as restrictions with respect to the designation of the board of directors of Holdings, sale of the stock, tag-along rights and rights of first refusal. Certain of the transfer restrictions expired on May 4, 2010. The tag-along rights allow all stockholders to participate in any potential sale of Holders stock by GTCR. The right of first refusal gives Holdings a right of first refusal on the same terms as a proposed transfer until the earliest of a public offering, the time of a public sale by a stockholder, the consummation of an approved sale, or the date on which such stock has been transferred under the right of first refusal. If the board of directors of Holdings and the holders of a majority of the Holdings common stock held by GTCR and its affiliates (the “Investor Majority”) approve a sale of Holdings, each holder of shares shall vote for the sale. If the sale is a (i) merger or consolidation, each holder waives all dissenter’s rights and appraisal rights, (ii) a sale of stock, each holder of shares shall agree to sell all of his shares or rights to acquire shares on the terms and conditions approved by the Holdings Board and the Investor Majority or (iii) sale of assets, each holder of shares shall vote such holder’s shares to approve such sale.
Registration Rights Agreement
     In connection with the Purchase Agreement with GTCR, we entered into the Registration Rights Agreement, dated May 4, 2005. At any time, GTCR may request registration under the Securities Act of all or any portion of its registrable securities of Holdings. GTCR may request an unlimited number of both short-form and long-form registrations. Holdings must give prompt written notice of its intent to register any securities in order to allow for piggy-back registration rights of the holders of registrable securities. Whenever the holders of registrable securities have requested that any registrable securities be registered pursuant to the Registration Rights Agreement, Holdings

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must use its best efforts to effect the registration and the sale of such registrable securities in accordance with the intended method of disposition.
Professional Services Agreement
     In connection with the Purchase Agreement, Capella and GTCR Golder Rauner II, L.L.C. entered into a Professional Services Agreement, dated May 4, 2005, as amended by that Amendment No. 1 to Professional Services Agreement, dated November 30, 2005, in order to provide financial and management consulting services to the Company. GTCR Golder Rauner II, L.L.C. agreed to consult on matters including, but not limited to, corporate strategy, budgeting of future corporate investments, acquisition and divestiture strategies and debt and equity financings in exchange for an annual fee of $100,000, which has been subsequently increased to $150,000 per the terms of the Professional Service Agreement. The Professional Services Agreement also provides that at the time of any debt financing prior to our initial public offering, Capella shall pay to GTCR Golder Rauner II, L.L.C. a placement fee in an amount mutually determined between us and GTCR Golder Rauner II, L.L.C., or its affiliate, provided that such placement fee shall not exceed one percent of the gross amount of such debt financing. The agreement will continue until GTCR and its affiliates no longer own at least 10% of the Holdings common stock and Holdings preferred stock issued under the Purchase Agreement. The Professional Services Agreement also calls for GTCR to be reimbursed by Capella for certain out of pocket expenses incurred in connection with the rendering of various services under this agreement.
Redemption of Preferred Stock
     In September 2010, Mr. Anderson’s employment agreement was amended in connection with his transition from Capella’s President to Vice-Chair and Co-Founder. In connection with this amendment, Holdings redeemed from Mr. Anderson 954.31 shares of Holdings preferred stock for $954,310. Mr. Anderson had previously purchased 732.291 shares of preferred stock from Holdings for $1,000 per share and received an additional 222.019 shares of Holdings preferred stock as payment-in-kind interest on the Holding preferred stock. The shares redeemed represented all of the outstanding shares of Holdings preferred stock owned by Mr. Anderson.
Repayment of Indebtedness to Holdings
     In connection with their employment with Capella, certain executive officers of Capella previously acquired shares of Holdings common stock by issuing promissory notes to Holdings as payment for such shares. Below is a discussion of the promissory notes issued by the executive officers, each of which, excluding Ms. Warren, was outstanding in 2010 and subsequently repaid in 2011 as described below.
     Mr. Anderson
     In February 2008, Mr. Anderson issued a promissory note to Holdings in the principal amount of $137,915 as payment for 137.915 shares of Holdings preferred stock issued by Holdings. In September 2010, in connection with an amendment to Mr. Anderson’s employment agreement with Holdings and Capella, the interest rate payable under the promissory note was amended to be the prime rate as of September 1, 2010 plus one percent per annum. Effective May 31, 2011, in consideration of a reduction of the full amount owed under such promissory note, Holdings redeemed 41,754 shares of Holding common stock owned by Mr. Anderson, which shares had a fair market value equal to the outstanding balance under the promissory note as of such date. Immediately prior to repayment of the promissory note, the aggregate outstanding balance under the promissory note was $158,664.50, of which $137,915 was outstanding principal. In addition, Holdings redeemed 7,032 shares of Holdings common stock from Mr. Anderson for cash in the amount of $26,721.60 to assist Mr. Anderson in the payment of taxes with respect to the redeemed shares.
     Mr. Brumfield
     In February 2006, pursuant to the terms of his employment agreement, Mr. Brumfield issued a promissory note to Holdings in the principal amount of $157,975 as payment for 315,950 shares of Holdings common stock issued by Holdings. The interest rate payable under the promissory note was equal to the prime rate as of February 17, 2006 plus one percent per annum. Effective May 31, 2011, in consideration of a reduction of the full amount owed under such promissory note, Holdings redeemed 56,429 shares of Holdings common stock owned by Mr. Brumfield,

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which shares had a fair market value equal to the outstanding balance under the promissory note as of such date. Immediately prior to repayment of the promissory note, the aggregate outstanding balance under the promissory note was $214,428.02, of which $157,975 was outstanding principal. In addition, Holdings redeemed 8,308 shares of Holdings common stock from Mr. Brumfield for cash in the amount of $31,570.40 to assist Mr. Brumfield in the payment of taxes with respect to the redeemed shares.
     Mr. Wall
     In November 2005, pursuant to the terms of his employment agreement, Mr. Wall paid cash and issued a promissory note to Holdings in the principal amount of $136,965 as payment for 473,930 shares of Holdings common stock issued by Holdings. The interest rate payable under the promissory note was equal to the prime rate as of November 7, 2005 plus one percent per annum. In May 2006, pursuant to the terms of an amendment to his employment agreement, Mr. Wall issued an additional promissory note to Holdings in the initial principal amount of $78,975 as payment for 157,950 shares of Holdings common stock issued by Holdings. The interest rate payable under the additional promissory note was equal to the prime rate as of May 12, 2006 plus one percent per annum. On June 10, 2011, in connection with his resignation as Senior Vice President, General Counsel and Secretary of Capella, Holdings redeemed 77,897 shares of Holdings common stock owned by Mr. Wall in consideration of a reduction of the full amount owed under both promissory notes, which shares had a fair market value equal to the aggregate outstanding balance under the promissory notes. Immediately prior to repayment of the promissory notes, the aggregate outstanding balance under the promissory notes was approximately $296,010, of which $215,940 was outstanding principal. For additional information, please refer to the section below entitled “— Departure Terms.”
     Ms. Warren
     In October 2005, pursuant to the terms of her employment agreement, Ms. Warren issued a promissory note to Holdings in the principal amount of $394,948 as payment for 789,896 shares of Holdings common stock issued by Holdings. In July 2008, Ms. Warren repaid her promissory note to Holdings by obtaining third-party financing. Effective May 31, 2011, Holdings redeemed 148,599 shares of Holdings common stock from Ms. Warren for cash in the amount of $564,676.20, which represented the fair market value of such shares as of such date and was equal to the principal amount of the promissory note issued to Holdings plus interest paid on the Holdings and third-party notes since inception plus an amount necessary to assist Ms. Warren in the payment of taxes with respect to the redeemed shares. Ms. Warren intends to use the proceeds of the redemption to repay a portion of the outstanding balance under the third-party promissory note.
     Mr. Wiechart
      In November 2009, Mr. Wiechart issued a promissory note to Holdings in the initial principal amount of $1,590,000 as payment for 600,000 shares of common stock in Holdings. Mr. Wiechart was to repay $766,632 in principal, and the balance of $823,368 was scheduled to be forgiven over a three year period, provided that Mr. Wiechart continued employment with Capella, as a form of deferred compensation in connection with recruiting Mr. Wiechart to join Capella. In August 2011, Mr. Wiechart’s employment agreement was amended, effective May 31, 2011, to cancel the obligation to repay principal of $823,368 due on the note and to provide for liquidated damages of the same amount, subject to certain conditions, if Mr. Wiechart does not continue employment with Capella. In addition, effective May 31, 2011, Mr. Wiechart paid Holdings cash in the amount of $448,785.33 and Holdings redeemed 120,000 shares of Holdings common stock owned by Mr. Wiechart with a value of $456,000, each as payment by Mr. Wiechart of the aggregate balance of $904,785.33 of principal and interest due on the note.
Departure Terms
     Effective June 10, 2011, Mr. Wall resigned as Capella’s Senior Vice President, General Counsel and Secretary pursuant to a letter agreement confirming the terms of his departure. Among other terms, the letter agreement provided for a mutual release between Mr. Wall and Capella, effected the repayment of Mr. Wall’s outstanding promissory notes to Holdings (see “ — Repayment of Indebtedness to Holdings — Mr. Wall” above) and established the formula for the applicable per-share purchase price in the event that Holdings exercises its right to repurchase shares of Holdings common stock acquired by Mr. Wall in connection with his employment agreement.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
     All of Capella’s capital stock is owned by our parent company, Holdings. The table below presents information with respect to the beneficial ownership of Holdings common stock and Holdings preferred stock as of June 30, 2011 by (a) any person or group who beneficially owns more than five percent of Holdings common stock or Holdings preferred stock, (b) each of Capella’s directors and Named Executive Officers and (c) all directors and executive officers of Capella as a group. The percentages provided in the table are based on 62,430,215 shares of Holdings common stock and 280,228.235 shares of Holdings preferred stock outstanding as of June 30, 2011.
                                 
            Percentage of           Percentage of
    Shares of Common   Common Stock   Shares of Preferred   Preferred Stock
    Stock Beneficially   Beneficially   Stock Beneficially   Beneficially
Name of Beneficial Holder(1)   Owned(4)   Owned   Owned(4)   Owned
GTCR(2)
    50,000,000 (5)     80.1 %     278,616.794 (7)     99.4 %
Daniel S. Slipkovich
    4,880,522 (6)     7.8       1,596.059       *  
Denise W. Warren
    799,247     1.3              
D. Andrew Slusser
    1,108,721       1.8       15.382       *  
Howard T. Wall(3)
    553,983     *              
Michael A. Wiechart
    480,000       *              
J. Thomas Anderson
    3,771,511     6.0              
Joseph P. Nolan
                       
David S. Katz
                       
Robert Z. Hensley
    12,500       *              
All directors and executive officers as a group (11 persons)
    11,970,197       19.2       1,611.441       *  
 
*   Less than one percent.
 
(1)   Each owner has agreed to vote their shares in accordance with the Stockholders Agreement. See “Certain Relationships and Related Transactions — Stockholders Agreement.”
 
(2)   The address of GTCR and Messrs. Nolan and Katz is 300 N. LaSalle Street, Suite 5600, Chicago, Illinois 60654.
 
(3)   Mr. Wall resigned as Capella’s Senior Vice President, General Counsel and Secretary effective June 10, 2011.
 
(4)   Beneficial ownership includes voting or investment power with respect to securities and includes shares that an individual has a right to acquire within 60 days after June 30, 2011.
 
(5)   Includes 42,342,800, 7,431,200 and 226,000 shares owned by GTCR Fund VIII, L.P., GTCR Fund VIII/B, L.P. and GTCR Co-Invest II, L.P., respectively. Messrs. Katz and Nolan are principals of GTCR and as such may be deemed to be a beneficial owner of these three funds. Messrs. Katz and Nolan disclaim beneficial ownership of such funds.
 
(6)   Includes 789,888 shares owned by Mr. Slipkovich with financial rights that do not vest until a sale of the Company or an initial public offering but for which Mr. Slipkovich currently has voting power.
 
(7)   Includes 235,948.304, 41,409.142 and 1,259.348 shares owned by GTCR Fund VIII, L.P., GTCR Fund VIII/B, L.P. and GTCR Co-Invest II, L.P., respectively.

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DESCRIPTION OF OTHER INDEBTEDNESS
Asset Based Loan
     In June 2010, we completed a comprehensive refinancing plan. Under the Refinancing, we entered into a senior secured asset based loan, or the ABL, simultaneously with the closing of the offering of the outstanding notes with Bank of America, N.A. as administrative agent and collateral agent, and Banc of America Securities LLC and Citigroup Global Markets Inc. as joint lead arrangers.
     The ABL consists of a $100.0 million senior secured asset-based revolving credit facility maturing on December 29, 2014. The ABL includes capacity available for the issuance of letters of credit and for borrowings on same-day notice, referred to as swingline loans. In addition, upon the occurrence of certain events, we may request that the ABL be increased by an aggregate amount not to exceed $25.0 million, in minimum increments of $5.0 million, subject to receipt of commitments by existing lenders or other financing institutions and the satisfaction of certain other conditions.
     Availability under the ABL is subject to a borrowing base of 85% of eligible accounts receivable less customary reserves.
     Interest Rate and Fees
     Borrowings under the ABL bear interest at a rate equal to, at our option, either (a) LIBOR for deposits in dollars plus an applicable margin, or (b) the higher of (1) the prime rate of Bank of America, N.A., (2) the federal funds effective rate plus 0.50%, or (3) the one-month LIBOR rate plus 1.00%, plus an applicable margin. The applicable margin currently in effect for borrowings is 2.25% with respect to base borrowings and 3.25% with respect to LIBOR borrowings. The applicable margin in effect for borrowings may be reduced to 2.00% with respect to base rate borrowings and 3.00% with respect to LIBOR borrowings, or increased to 2.50% with respect to base rate borrowings and 3.50% for LIBOR borrowings, subject to our fixed charge coverage ratio.
     In addition to paying interest on outstanding principal under the ABL, we are required to pay a commitment fee to the lenders under the revolving credit facilities in respect of the unutilized commitments thereunder. The current commitment fee rate is 0.75% per annum. The commitment fee rate reduces to 0.50% in any month if the average daily unused portion of the ABL during the preceding month is equal to or less than 50% of the principal amount of the ABL. We must also pay customary letter of credit fees.
     Repayment of Principal
     Principal amounts outstanding under the ABL are due and payable in full at maturity, 54 months from the date of the closing of the ABL.
     Guarantee and Security
     Our direct and indirect, material wholly-owned subsidiaries are either co-borrowers or guarantors of indebtedness under the ABL. All obligations under the ABL, and the guarantees of those obligations, are secured, subject to permitted liens and other exceptions, by a first-priority lien on substantially all our accounts, inventory, deposit accounts and securities accounts, and any chattel paper, instruments, letter-of-credit rights, general intangibles, documents, supporting obligations, books, records, commercial tort claims, proceeds and products related thereto, and of each guarantor.
     Certain Covenants and Events of Default
     The ABL contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
    incur additional indebtedness;

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    issue certain capital stock;
 
    repay certain indebtedness;
 
    amend organizational documents;
 
    create liens;
 
    enter into sale and leaseback transactions;
 
    engage in mergers or consolidations;
 
    sell or transfer assets;
 
    pay dividends and distributions or repurchase our capital stock;
 
    make investments, loans, guarantees or advances;
 
    prepay certain subordinated indebtedness, subject to exceptions for repayments of certain intercompany indebtedness;
 
    make certain acquisitions;
 
    engage in certain transactions with affiliates;
 
    amend material agreements governing certain subordinated indebtedness; and
 
    change the nature of our business.
     In addition, the ABL requires that, if at any time our availability under the ABL does not meet certain thresholds, we will be required to maintain a minimum fixed charge coverage ratio. The ABL also contains certain customary affirmative covenants and events of default. At December 31, 2010 and June 30, 2011, we were in compliance with all debt covenants that were subject to testing at such dates.

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THE EXCHANGE OFFER
General
     We hereby offer, upon the terms and subject to the conditions set forth in this prospectus and in the accompanying letter of transmittal (which together constitute the exchange offer), to exchange up to $500 million aggregate principal amount of our 91/4% Senior Notes due 2017, which we refer to in this prospectus as the outstanding notes, for a like aggregate principal amount of our 91/4% Senior Notes due 2017, which we refer to in this prospectus as the exchange notes, properly tendered on or prior to the expiration date and not withdrawn as permitted pursuant to the procedures described below. The exchange offer is being made with respect to all of the outstanding notes.
     As of the date of this prospectus, $500 million aggregate principal amount of the outstanding notes is outstanding. This prospectus, together with the letter of transmittal, is first being sent on or about September 30, 2011 to all holders of outstanding notes known to us. Our obligation to accept outstanding notes for exchange pursuant to the exchange offer is subject to certain conditions set forth under “— Certain Conditions to the Exchange Offer” below. We currently expect that each of the conditions will be satisfied and that no waivers will be necessary.
Purpose and Effect of the Exchange Offer
     We and the guarantors have entered into a registration rights agreement with the initial purchasers of the outstanding notes in which we and the guarantors agreed to file a registration statement relating to an offer to exchange the outstanding notes for exchange notes. We also agreed to use our reasonable best efforts to cause the exchange offer registration statement to become effective under the Securities Act no later than September 27, 2011 and to keep the exchange offer open for a period of no less than 30 days after the date notice of the exchange offer is given to the holders of the outstanding notes. The exchange notes will have terms substantially identical to the outstanding notes, except that the exchange notes will not contain terms with respect to transfer restrictions, registration rights and additional interest for failure to observe certain obligations in the registration rights agreement. The outstanding notes were issued on June 28, 2010.
     As set forth in the registration rights agreement, we will use reasonable best efforts to cause the SEC to declare effective a shelf registration statement with respect to the resale of the outstanding notes and keep the registration statement effective continuously, supplemented and amended as required, for a period ending on the earlier of (i) 180 days from the date on which the exchange offer registration statement is declared effective and (ii) the date on which a broker-dealer is no longer required to deliver a prospectus in connection with market-making or other trading activities.
     If we fail to comply with certain obligations under the registration rights agreement, we will be required to pay additional interest to holders of the outstanding notes.
     Each holder of outstanding notes that wishes to exchange outstanding notes for transferable exchange notes in the exchange offer will be required to make the following representations:
    it is not an affiliate of Capella;
 
    it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the exchange notes;
 
    it is acquiring the exchange notes in its ordinary course of business; and
 
    it is not acting on behalf of any person who could not truthfully make the foregoing representations.
     Any broker-dealer who acquired outstanding notes from us in the initial offering for its own account as a result of market-making activities or other trading activities (other than outstanding notes acquired directly from Capella),

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may exchange such notes pursuant to the exchange offer; however, such broker-dealer may be deemed to be an “underwriter” within the meaning of the Securities Act and must, therefore, deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of the exchange notes received by such broker-dealer in the exchange offer, which prospectus delivery requirement may be satisfied by the delivery by such broker-dealer of this prospectus.
Resale of Exchange Notes
     Based on interpretations of the SEC staff set forth in no action letters issued to unrelated third parties, we believe that exchange notes issued under the exchange offer in exchange for outstanding notes may be offered for resale, resold and otherwise transferred by any exchange note holder without compliance with the registration and prospectus delivery provisions of the Securities Act, if: