NOTE 1 — INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Reporting Entity

On November 17, 2006, HCA Inc. was acquired by a private investor group, including affiliates of, or funds sponsored by Bain Capital Partners, LLC, Kohlberg Kravis Roberts & Co., BAML Capital Partners and HCA founder, Dr. Thomas F. Frist Jr. (collectively, the “Investors”) and by members of management and certain other investors. The transaction was accounted for as a recapitalization in our financial statements, with no adjustments to the historical basis of our assets and liabilities.

On November 22, 2010, HCA Inc. reorganized by creating a new holding company structure (the “Corporate Reorganization”). HCA Holdings, Inc. became the new parent company, and HCA Inc. became HCA Holdings, Inc.’s wholly-owned direct subsidiary. As part of the Corporate Reorganization, HCA Inc.’s outstanding shares of common stock were automatically converted, on a share for share basis, into identical shares of HCA Holdings, Inc.’s common stock. As a result of the Corporate Reorganization, HCA Holdings, Inc. was deemed the successor registrant to HCA Inc. under the Exchange Act.

During March 2011, we completed the initial public offering of 87,719,300 shares of our common stock at a price of $30.00 per share (before deducting underwriter discounts, commissions and other related offering expenses). Certain of our stockholders also sold 57,410,700 shares of our common stock in this offering. We did not receive any proceeds from the shares sold by the selling stockholders. Our common stock is traded on the New York Stock Exchange (symbol “HCA”).

The Investors provided management and advisory services to the Company pursuant to a management agreement among HCA Inc. and the Investors executed in connection with the Investors’ acquisition of HCA Inc. in November 2006. The management agreement was terminated pursuant to its terms upon completion of the initial public offering of our common stock during March 2011, and the Company paid the Investors a final fee of $181 million.

HCA Holdings, Inc. is a holding company whose affiliates own and operate hospitals and related health care entities. The term “affiliates” includes direct and indirect subsidiaries of HCA Holdings, Inc. and partnerships and joint ventures in which such subsidiaries are partners. At September 30, 2012, these affiliates owned and operated 162 hospitals, 112 freestanding surgery centers and provided extensive outpatient and ancillary services. HCA Holdings, Inc.’s facilities are located in 20 states and England. The terms “Company,” “HCA,” “we,” “our” or “us,” as used herein and unless otherwise stated or indicated by context, refer to HCA Inc. and its affiliates prior to the Corporate Reorganization and to HCA Holdings, Inc. and its affiliates after the Corporate Reorganization. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of HCA and the term “employees” refers to employees of affiliates of HCA.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature.

The majority of our expenses are “costs of revenues” items. Costs that could be classified as general and administrative would include our corporate office costs, which were $62 million and $53 million for the quarters ended September 30, 2012 and 2011, respectively, and $174 million and $162 million for the nine months ended September 30, 2012 and 2011, respectively. Operating results for the quarter and the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2011.

Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from the patients and third-party payers. Third-party payers include federal and state agencies (under Medicare, Medicaid and other programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record a provision for doubtful accounts related to uninsured accounts to record the net self pay accounts receivable at the estimated amounts we expect to collect. Our revenues from third-party payers, the uninsured and other revenues for the quarters and nine months ended September 30, 2012 and 2011 are summarized in the following tables (dollars in millions):


	Quarter
	2012			Ratio			2011			Ratio
Medicare	$	1,949			24.2	%	$	1,844			25.4	%
Managed Medicare		720			8.9			610			8.4
Medicaid		378			4.7			453			6.2
Managed Medicaid		380			4.7			311			4.3
Managed care and other insurers		4,422			54.8			3,855			53.1
International (managed care and other insurers)		253			3.1			232			3.2

		8,102			100.4			7,305			100.6
Uninsured		576			7.1			508			7.0
Other		215			2.7			185			2.5

Revenues before provision for doubtful accounts		8,893			110.2			7,998			110.1
Provision for doubtful accounts		(831	)		(10.2	)		(740	)		(10.1	)

Revenues	$	8,062			100.0	%	$	7,258			100.0	%


	Nine Months
	2012			Ratio			2011			Ratio
Medicare	$	6,251			25.4	%	$	5,715			26.1	%
Managed Medicare		2,199			8.9			1,806			8.2
Medicaid		1,188			4.8			1,440			6.6
Managed Medicaid		1,080			4.4			946			4.3
Managed care and other insurers		13,340			54.3			11,486			52.4
International (managed care and other insurers)		779			3.2			698			3.2

		24,837			101.0			22,091			100.8
Uninsured		1,757			7.1			1,390			6.3
Other		651			2.7			596			2.7

Revenues before provision for doubtful accounts		27,245			110.8			24,077			109.8
Provision for doubtful accounts		(2,666	)		(10.8	)		(2,164	)		(9.8	)

Revenues	$	24,579			100.0	%	$	21,913			100.0	%

Basis of Presentation (continued)

The increase in revenues for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 includes two adjustments (Rural Floor Provision Settlement and Supplemental Security Income (“SSI”) ratios) related to Medicare revenues for prior periods. The net effect of the Medicare adjustments was an increase of $188 million to revenues. The Rural Floor Provision Settlement was signed on April 5, 2012. As a result of the agreement, we received additional Medicare payments of approximately $271 million during June 2012. This amount was recorded as an increase to Medicare revenues for the quarter ended March 31, 2012. During March 2012, the Centers for Medicare & Medicaid Services (“CMS”) issued new SSI ratios used for calculating Medicare Disproportionate Share Hospital (“DSH”) reimbursement for federal fiscal years ending September 30, 2006 through September 30, 2009. As a result, we recalculated our DSH reimbursement for all applicable periods. The cumulative impact of this retroactive adjustment was a reduction in Medicare revenues of approximately $83 million. This adjustment was recorded as a reduction to Medicare revenues during the quarter ended March 31, 2012. The net effect of these adjustments (and related expenses) added $170 million to income before income taxes, or $0.22 per diluted share, for the nine months ended September 30, 2012.

We previously reported $51 million and $90 million of Medicaid and Medicare electronic health record (“EHR”) incentives for the quarter and nine months ended September 30, 2011, respectively, in the line item “Revenues” in our condensed consolidated income statements. These amounts have been reclassified and are now included in the line item “Electronic health record incentive income” in our condensed consolidated comprehensive statements of operations for the quarter and nine months ended September 30, 2011.

Certain prior year amounts have been reclassified to conform to the current year presentation.