Summary of AMN HEALTHCARE SERVICES INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are "forward-looking statements." See "Special Note Regarding Forward-Looking Statements" below.

Overview

We are the largest healthcare staffing company in the United States. As the largest nationwide provider of travel nurse and allied staffing services, locum tenens (temporary physician staffing) and physician permanent placement services, we recruit physicians, nurses, and allied healthcare professionals, our "healthcare professionals", nationally and internationally and place them on assignments of variable lengths and in permanent positions at acute-care hospitals, physician practice groups and other healthcare settings, including rehabilitation centers, radiology imaging facilities, dialysis clinics and pharmacies throughout the United States. We also offer a managed services program in which we manage the multiple clinical vendors for client, as well as recruitment process outsourcing services, where we provide recruitment for permanent clinical positions for our clients.

Physicians, nurses and allied healthcare professionals join us on temporary assignments for a wide variety of reasons that include: seeking flexible work opportunities, exploring different areas of the country and diverse practice settings, building clinical skills and experience by working at prestigious healthcare facilities, avoiding the demands and political environment of working as permanent staff and working through life and career transitions, and as a means of access into a permanent staff position with our clients.

Our hospital and healthcare facility clients utilize our temporary staffing services to cost-effectively manage both short and long-term shortages in their staff due to a variety of circumstances such as a lack of qualified, specialized local healthcare professionals, attrition, leave schedules, new unit openings, and to identify candidates for permanent positions. In addition to providing continuity of care and quality patient care, we believe hospitals, healthcare facilities and other clients contract with us due to our access to a large national network of quality temporary and permanent healthcare professionals, our ability to meet their specific staffing needs, our flexible staffing assignment lengths, our excellent reputation and our reliable and superior customer service.

The demand and overlap of clients seeking physicians for both temporary and permanent assignments provide us an opportunity to cross-sell our physician placement services. The physician permanent placement market has solid long-term growth potential due to client demand for physicians that enable our clients to generate revenue. Physicians are significant drivers of revenue, influencing many hospitals, healthcare facilities and physician practice groups to devote the resources necessary to recruit them. While this demand creates significant competition for a limited supply of physicians, our national reach and brand awareness positions us well in this environment.

Our staffing services are marketed to two distinct customer groups:
(1) healthcare professionals and (2) hospitals, physician practice groups and other healthcare centers. We use distinct brands to market our differentiated services throughout the healthcare staffing spectrum.

We use a multi-brand recruiting strategy to enhance our ability to successfully attract healthcare professionals in the United States and internationally. We market our staffing opportunities to healthcare professionals under recruitment brands including American Mobile Healthcare, Medical Express, NurseChoice, NursesRx, Med Travelers, Platinum Select Staffing, Rx Pro Health, O'Grady Peyton International, Staff Care and Merritt, Hawkins & Associates. Each brand has a distinct clinician focus, market strengths and brand reputation. We regularly assess the strength and value of our brands so as to focus our resources on building and differentiating our brands. In early 2009, we decided to consolidate our eight travel nurse brands into five brands, to better leverage the brand awareness and brand equity of our stronger brands. Once implemented, our brand

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portfolio will be supported by a more streamlined operating structure with the opportunity for greater, more distinct differentiation for each of the healthcare professional-facing brands, and greater leveraging of brand equity and awareness across our facility client-facing brands.

At the end of 2008, we had healthcare professionals on assignment at approximately 3,000 different healthcare facility clients. We provide staffing services mainly to acute-care and sub-acute healthcare facilities, physician groups, dialysis centers, clinics, radiology imaging facilities and retail and mail-order pharmacies. We market our nurse staffing services to hospitals and healthcare facilities generally under one brand, AMN Healthcare, as a single staffing provider with access to healthcare professionals from several nurse recruitment brands. We market our locum tenens staffing and physician permanent placement services under the brand names Staff Care and Merritt, Hawkins & Associates, respectively, and market our allied healthcare staffing services to hospitals and healthcare professionals under the brand names Med Travelers, Platinum Select Staffing and Rx Pro Health. Rx Pro Health is a pharmacy staffing company that we acquired in May 2007, and Platinum Select Staffing is an allied healthcare staffing company, whose assets we acquired in February 2008.

Our large number of hospital, healthcare facility and other clients provides us with the opportunity to offer temporary positions typically in all 50 states and in a variety of work environments and clinical settings. In addition, we provide our temporary healthcare professionals with an attractive benefits package that may include free or subsidized housing, free or reimbursed travel, competitive wages, professional development opportunities, professional liability insurance, and, for employed professionals, a 401(k) plan and health insurance. We believe that we attract temporary healthcare professionals due to our long-standing reputation for providing a high level of service, our numerous job opportunities, our benefit packages, our innovative marketing programs and word-of-mouth referrals from our thousands of current and former healthcare professionals.

Our clients include hospitals and healthcare systems such as Georgetown University Hospital, HCA, NYU Medical Center, Stanford Health Care, UCLA Medical Center, The University of Chicago Hospitals, and Mayo Health System. We also provide services to government facilities, sub-acute healthcare facilities, physician practice groups, dialysis centers, clinics and schools.

For the year ended December 31, 2008, we recorded revenue of $1,217.2 million, as compared to revenue of $1,164.0 million and $1,081.7 million for the years ended December 31, 2007 and 2006, respectively. We recorded net income of $34.4 million for the year ended December 31, 2008, as compared to net income of $36.4 million and $35.3 million for the years ended December 31, 2007 and 2006, respectively.

Recently, we have taken a number of steps to proactively reduce costs to ensure we are achieving operational synergies and that we are the right size to accommodate the decline in travel nursing and allied orders. Together with managing open positions toward the end of 2008, in the first quarter of 2009, the Company reduced headcount in certain corporate and operational areas, and announced the closure of our Huntersville, North Carolina office and the strategic decision to phase out the use of selected nurse brands as discussed above. See "Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 14, Subsequent Events", for additional information. Also, see additional information in the Company's Current Report on Form 8-K dated February 24, 2009.

Recent Trends

In January 2009, SIA revised its growth estimates of U.S. temporary healthcare staffing industry revenues, from its previous estimates released in September 2008. SIA's estimates are based on staffing company self-reported estimates. SIA's January 2009 report anticipates that for 2008, revenue for the industry (which includes per diem nurse staffing, a segment in which we do not participate) will have grown by 3.5% over the prior year to $11.7 billion, the same as SIA's September 2008 estimate. At the same time, SIA lowered its forecast for overall healthcare staffing revenue growth in 2009 to 1.5% from its previous estimate of 3.5% growth, made in September 2008. For the segments in which we provide temporary healthcare staffing services, SIA's estimates of industry revenue in 2008 are: $2.4 billion for travel nursing, $1.9 billion for locum tenens and $3.4 billion for allied healthcare. For 2009, the anticipated revenues (and segment growth/reduction over the prior year) for these

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segments are: for travel nursing: $2.4 billion (a 1% reduction in revenue growth from 2008); for locum tenens: $2.1 billion (a 14% increase over 2008); for allied: $3.6 billion (a 4.5% increase over 2008); and for per diem nursing, the segment in which we do not participate: $3.8 billion (a 5.0% decrease over 2008).

Our nurse and allied healthcare staffing segment, our largest reporting segment, experienced a strong demand and tight supply environment during 2005 and early 2006. During 2007 and increasingly throughout 2008, this segment experienced lower demand. The lower demand was driven by several factors, including hospital admission levels, budget concerns given the economic environment, and hospitals' increased reliance on permanent labor to meet staffing needs both generally and on an incremental basis by reducing hours, shifts and/or assignments available for temporary workers. The increased role played by vendor management service companies in our industry also affected demand and revenues, through tightening pricing and impacting our client relationships and client loyalty. Toward the end of 2008, and into 2009, demand decreased considerably in the nurse and allied segment, we believe due to widespread and unprecedented economic conditions. We believe the effects on our clients reducing demand include:
reduced census levels due partially to lower volume of elective surgeries; lower permanent staff attrition rates due to high general unemployment; reduced insurance and Medicare reimbursement levels and anticipated additional future reductions; severely constricted budgets for both private institutions and publicly-supported facilities; and perhaps a forbearance or reluctance to contract for future services due to uncertainty regarding future patient admission levels and general anxiety regarding receivables and available credit. In the allied staffing division, demand varies considerably by specialty; for example, orders for imaging specialists down, as a result of the Medicare reimbursement changes, while lab techs orders continue to rise.

We recruit a small percentage of nurses from international channels through our OGP brand to meet our facility clients' long-term staffing needs. During 2008, revenue from OGP was about 3% of our consolidated revenue. Our continued utilization of this international supply channel is reliant upon an increase or exemption from current permanent immigrant visa quotas. Since late 2006, the number of permanent immigrant visas available for nurses overseas has been limited as a result of these quotas, which has significantly constricted our ability to place any new international nurses on assignment. We continue to support federal legislation that would have the effect of increasing the permanent visas available for nurses. However, we have also taken steps to reduce our infrastructure and staff attributed to international recruiting and shift resources as appropriate.

Locum tenens physicians are used by our hospitals, healthcare facility and physician practice group clients to fill temporary vacancies due to vacation and leave schedules, and increasingly, to bridge the gap while these clients seek permanent candidates. SIA estimated that the locum tenens market will continue to be the fastest-growing segment of the healthcare staffing industry in 2009. While demand remains solid across most specialties, with high growth particularly in behavioral health and primary care, we continue to see declines in radiology attributable to reimbursement levels. Generally, we saw a slight softening in the end of 2008 and beginning of 2009, and recognize demand may be further affected in the future by general economic conditions.

While our services are not directly paid by Medicare, we have experienced a continued reduction in demand for radiologists and radiology imaging professionals due to changes in Medicare reimbursement for these services. We have incurred additional bad debt expenses as a result of the negative impact these Medicare changes have had on certain clients in the radiology sector.

Critical Accounting Principles and Estimates

We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to asset impairment, accruals for self-insurance and compensation and related benefits, accounts receivable and contingencies and litigation, valuation and recognition of share-based payments and

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income taxes. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions.

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

Goodwill and Intangible Assets

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, we perform annual impairment analyses to assess the recoverability of the goodwill and indefinite lived intangibles. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Valuation techniques consistent with the market approach and income approach are used to measure the fair value of each reporting unit. Significant judgments are required to estimate the fair value of reporting units include estimating future cash flows, and determining appropriate discount rates, growth rates, company control premium and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. Testing is required between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. Such an event may occur if, for an extended period of time, the market value of our common stock plus a control premium were less than the carrying value of our equity. We performed the annual impairment test at October 31, 2007 and 2008 and determined there was no impairment of goodwill. We also performed impairment testing at December 31, 2008 due to the continued downturn of economic environment, and determined there was no impairment of goodwill. During our annual testing at October 31, 2008 and additional testing at December 31, 2008, a control premium and average stock price close to the testing dates were utilized. This control premium is based on detailed analysis that considers appropriate industry, market, economic and other pertinent factors, including indications of such premium from data on recent acquisition transactions. The control premium is reviewed periodically, taking into consideration current industry, market and economic conditions along with other factors or available information specific to our business. If our stock price continues to decline, which will cause further deterioration of the market value of our equity, we may have to perform additional impairment testing that could result in an impairment charge in 2009.

SFAS No. 142 also requires that intangible assets with estimable useful lives continue to be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment evaluation is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of assets and liabilities. We assess potential impairments to intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recovered. Our judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of our businesses, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use, including estimates of future cash flows, volumes, market penetration and discount rates, are consistent with our internal planning. If these estimates or their related assumptions change in the future, we may be required to record an impairment charge on all or a portion of our long-lived intangible assets. Furthermore, we cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on our reported asset values. Future events could cause us to conclude that impairment indicators exist and that long-lived intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have an adverse impact on our results of

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operations. We have analyzed our amortizable long-lived assets for impairment in accordance with the provisions of SFAS No. 144 and determined that there is no impairment at December 31, 2008 and 2007.

If we are required to record an impairment charge in the future, it could have an adverse impact on our results of operations.

Professional Liability Reserve

We maintain an accrual for professional liability self-insured retention limits, which is included in accounts payable and accrued expenses and other long-term liabilities in our consolidated balance sheets. We determine the adequacy of this undiscounted accrual by evaluating our historical experience and trends, loss reserves established by our insurance carriers, management and third party administrators, as well as through the use of independent actuarial studies. We obtain actuarial studies on a regular basis that use our historical claims data and industry data to determine the appropriate reserves for incurred, but not reported, professional liability claims for each year. For the nurse and allied healthcare staffing segment, reserves for reported claims are based upon loss reserves established by management and our third party administrators. For the locum tenens staffing segment, reserves for reported claims are based upon the actuarial studies of historical claims data and industry data.

Self-Insured Health Benefit Claims Reserve

We maintain an accrual for self-insured health benefits we provide to our corporate employees and temporary nurse and allied healthcare professionals, which is included in accrued compensation and benefits in our consolidated balance sheets. We determine the adequacy of this undiscounted accrual by evaluating our historical experience and trends related to both health insurance claims and payments, information provided to us by our insurance broker and third party administrator and industry experience and trends. If such information indicates that our accruals are overstated or understated, we reduce or provide for additional accruals. Our accrual is based on (i) a monthly average of our actual historical health insurance claim amounts and (ii) the average period of time from the date the claim is incurred to the date that it is reported to us and paid. We believe this is the best estimate of the amount of incurred, but not reported, self-insured health benefit claims at year-end. Historically, our accrual for health insurance has been adequate to provide for incurred claims and has fluctuated with increases or decreases in the average number of plan participants, changes in our claims experience and changes in the reporting and payment processing time for claims.

Workers Compensation Reserve

We maintain an accrual for workers compensation self-insured retention limits, which is included in accrued compensation and benefits and other long-term liabilities in our consolidated balance sheets. We determine the adequacy of these undiscounted accruals by evaluating our historical experience and trends, loss reserves established by our insurance carriers and third party administrators, as well as through the use of independent actuarial studies. We obtain updated actuarial studies on a semi-annual basis that use our payroll and actual claims data, as well as industry data, to determine the appropriate reserve both for reported claims and incurred, but not reported, claims for each policy year. The actuarial study for workers compensation provides us with the estimated losses for prior policy years and an estimated percentage of payroll compensation to be accrued for the current year. We record our accruals based on the amounts provided in the actuarial study, and we believe this is the best estimate of our liability.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. We maintain an allowance for doubtful accounts for estimated credit losses resulting from collection risks, including the inability of our customers to make required payments under contractual agreements. The allowance

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for doubtful accounts is reported as a reduction of accounts receivable in our consolidated balance sheets. We determine the adequacy of this allowance by evaluating historical delinquency and write-off trends, the financial condition and credit risk and histories of each customer, historical payment trends as well as the current economic conditions and the impact of such conditions on our customers' liquidity and overall financial condition. If the financial condition of our customers deteriorates, affecting their ability to make payments, additional allowances would be provided. We also maintain a sales allowance to reserve for potential credits issued to customers. The amount of the reserve is determined based on historical credits issued.

Contingent Liabilities

We are subject to various claims and legal actions in the ordinary course of our business. Some of these matters include tax, payroll and employee-related matters and investigations by governmental agencies regarding our employment practices. As we become aware of such claims and legal actions, we provide accruals if the exposures are probable and estimable. If an adverse outcome of such claims and legal actions is reasonably possible, we assess materiality and provide disclosure, as appropriate.

Staff Care, Inc., an indirect wholly owned subsidiary of the Company, is the subject of an assessment by the California Employment Development Department ("EDD") with respect to the payment of certain payroll related taxes in connection with locum tenens and allied providers, for the period between April 1, 2001 and June 30, 2007. We have appealed the EDD's assessment as we do not believe the assessment has merit. However, on September 5, 2008 we made a payment to the EDD in the amount of $2.3 million to cease the accrual of interest while the appeal is pending. Of the $2.3 million payment, $1.8 million was related to periods prior to the MHA acquisition in November 2005 and $0.5 million was related to the post-acquisition period. The $1.8 million related to the pre-acquisition period is fully indemnified by the former MHA selling shareholders, and we retain a holdback of $4.7 million for such pre-acquisition contingency matters, which is recorded in other long-term liabilities in the accompanying consolidated balance sheet as of December 31, 2008. There is potential exposure subsequent to the assessment period, but we believe the exposure to be immaterial to our consolidated financial statements.

Our hospital, healthcare facility and physician practice clients may also become subject to claims, governmental inquiries and investigations and legal actions to which we may become a party relating to services provided by our professionals. From time to time, and depending upon the particular facts and circumstances, we may be subject to indemnification obligations under our contracts with our hospital, healthcare facility and physician practice clients relating to these matters.

We currently are not aware of any other pending or threatened litigation that would be considered reasonably likely to have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Share-Based Payments

We account for our share-based employee compensation plans under the provisions of revised SFAS No. 123 (SFAS No. 123R), Share-Based Payment, which requires companies to expense the estimated fair value of share-based awards over the requisite employee service period. The measurement of stock-based compensation cost is based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, our stock price volatility, dividend rate, risk free interest rate, and award forfeiture rate. The input factors to use in the valuation model are based on subjective future expectations combined with management judgment. We estimate the fair value of stock options and stock appreciation rights granted using the Black-Scholes valuation model and the assumptions shown in Note 11(b) to the accompanying consolidated financial

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statements. We use historical data to estimate pre-vesting equity award forfeitures and record stock- based compensation expense only for those awards that are expected to vest. We estimate the expected term based on historical exercise patterns, including data related to equity award exercises, post-vesting termination and equity award contractual term. We base the dividend yield assumption on historical dividend payouts, which are zero. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of our equity awards. After consideration of both our implied volatility and historical volatility, we determined our historical volatility to . . .