Results of Operations

Overview

On March 31, 2009, Health Management Associates, Inc. and its subsidiaries ("we," "our" or "us") operated 56 hospitals with a total of 8,082 licensed beds in non-urban communities in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Washington and West Virginia.

Unless specifically indicated otherwise, the following discussion excludes our discontinued operations, which are identified at Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1. Other than a 2008 long-lived asset and goodwill impairment charge of $23.1 million and a 2008 charge of $7.9 million for the estimated cost of partially subsidizing certain third party physician practice losses, such discontinued operations were not material to our consolidated results of operations during the periods presented herein.

During the three months ended March 31, 2009, which we refer to as the 2009 Three Month Period, we experienced net revenue growth over the three months ended March 31, 2008, which we refer to as the 2008 Three Month Period, of approximately 3.1%. Such growth primarily resulted from favorable case mix trends and improvements in reimbursement rates. During the 2009 Three Month Period, income from continuing operations declined by approximately $107.7 million when compared to the 2008 Three Month Period. This decline was largely due to a 2008 gain of $203.4 million from the sale of a 27% minority equity interest in our seven general acute care hospitals in North Carolina and South Carolina. Excluding such gain, our income from continuing operations during the 2009 Three Month Period increased by approximately $16.8 million. The primary factors contributing to this year-over-year increase in profitability were:
(i) lower costs for salaries and benefits; (ii) decreased interest costs; and
(iii) gains totaling $16.7 million from the early extinguishment of debt during the 2009 Three Month Period. Partially offsetting these items was an increase in our provision for doubtful accounts during the 2009 Three Month Period.

In light of the downturn in the domestic economy, turbulence in the worldwide credit markets and uncertainties about economic conditions in 2009 and beyond, we recently implemented several company-wide cost containment measures. The initiatives that we undertook were designed to position our company to remain profitable and strategically flexible while continually providing the highest level of patient care. Among other things, the cost containment measures that we have implemented to date include personnel reductions, postponements of merit pay increases, new hire limitations and modifications to certain employee benefit plans. There can be no assurances that our actions will adequately address a severe or prolonged domestic recession and/or other economic headwinds that we may face.

At our hospitals, all of which were in operation during the entirety of the 2009 Three Month Period and the 2008 Three Month Period, surgical volume, hospital admissions and emergency room visits decreased during the 2009 Three Month Period by approximately 3.1%, 0.2% and 2.3%, respectively. These declines were primarily due to the current downturn in the domestic economy and an extra day during the 2008 Three Month Period for leap year. We have implemented action plans at certain hospitals to address unfavorable operating trends, including, among other things, hiring new management teams, modifying physician employment agreements, renegotiating payor contracts and initiating patient, physician and employee satisfaction surveys. In this regard, our prime objective is to stabilize operations in the areas of patient volume, operating margins, uninsured/underinsured patient levels and the provision for doubtful accounts. We also seek opportunities for market development in the communities that our hospitals serve. Furthermore, we continue to invest significant resources in physician recruitment and retention, emergency room operations and capital projects at our hospitals. We believe that our strategic initiatives will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions.

We have also taken the steps that we believe are necessary to achieve industry leadership in clinical quality. Our vision is that over the next two to three years we will be the highest rated health care provider of any hospital system in the country, as measured by Medicare. With new clinical affairs leadership to support this critical quality initiative, we are now measuring the appropriate performance objectives, increasing accountability for achieving those objectives and recognizing the leaders whose quality indicators and clinical outcomes demonstrate improvement.

Outpatient services continue to play an important role in the delivery of health care in our markets, with approximately half of our net revenue during both the 2009 Three Month Period and the 2008 Three Month Period generated on an outpatient basis. Recognizing the importance of these services, we have improved many of our health care facilities to meet the outpatient needs of the communities that they serve. We have also invested substantial capital in many of our hospitals and clinics during the past several years, resulting in improvements and enhancements to our diagnostic imaging and ambulatory surgical services. We believe that, as a result of our continuous operational focus, our adjusted admissions, which adjust admissions for outpatient volume, increased approximately 0.1% during the 2009 Three Month Period when compared to the 2008 Three Month Period.

Economic conditions and changes in commercial health insurance benefit plans over the past several years have contributed to an increase in the number of uninsured and underinsured patients seeking health care in the United States. Although this general industry trend has affected us, we experienced a decline in self-pay admission activity during the year ended December 31, 2008 when compared to the year ended December 31, 2007. More recently, our self-pay admissions as a percent of total admissions increased from approximately 6.2% during the 2008 Three Month Period to 6.4% during the 2009 Three Month Period. There can be no assurances that our self-pay admissions will not continue to grow in future periods, especially in light of the downturn in the domestic economy. We regularly evaluate our self-pay policies and programs and consider changes or modifications as circumstances warrant.

Critical Accounting Policies and Estimates Update

Other than the accounting and financial reporting changes required under U.S. generally accepted accounting principles that are further discussed at Note 7 to the Interim Condensed Consolidated Financial Statements in Item 1, there were no material changes to our critical accounting policies and estimates during the 2009 Three Month Period.

2009 Three Month Period Compared to the 2008 Three Month Period

The tables below summarize our operating results for the 2009 Three Month Period
and the 2008 Three Month Period.



                                                          Three Months Ended March 31,
                                                      2009                             2008
                                                               Percent                          Percent
                                                               of Net                           of Net
                                               Amount          Revenue          Amount          Revenue
                                           (in thousands)                   (in thousands)
Net revenue                               $      1,188,023       100.0 %   $      1,152,504       100.0 %

Operating expenses:
Salaries and benefits                              464,213        39.1              467,803        40.6
Supplies                                           165,438        13.9              156,873        13.6
Provision for doubtful accounts                    143,983        12.1              128,970        11.2
Depreciation and amortization                       60,916         5.1               57,458         5.0
Rent expense                                        25,310         2.2               22,135         1.9
Other operating expenses                           205,686        17.3              195,173        16.9

Total operating expenses                         1,065,546        89.7            1,028,412        89.2


Income from operations                             122,477        10.3              124,092        10.8

Other income (expense):
Gains (losses) on sales of assets, net                (112 )        -               203,320        17.6
Interest and other income, net                         248          -                 1,127         0.1
Interest expense                                   (55,011 )      (4.6 )            (64,294 )      (5.6 )
Gains on early extinguishment of debt               16,735         1.4                   -           -
Write-offs of deferred financing costs                (194 )        -                  (629 )      (0.1 )


Income from continuing operations
before income taxes                                 84,143         7.1              263,616        22.8
Provision for income taxes                         (30,066 )      (2.5 )           (101,826 )      (8.8 )


Income from continuing operations         $         54,077         4.6 %   $        161,790        14.0 %

                                              Three Months Ended March 31,                        Percent
                                                2009                2008          Change          Change
Total Hospitals
Occupancy                                            49.6 %              51.1 %     (150 ) bps*       n/a
Patient days                                      356,813             365,774     (8,961 )           (2.4 )%
Admissions                                         83,361              83,551       (190 )           (0.2 )%
Adjusted admissions                               140,649             140,515        134              0.1 %
Emergency room visits                             354,819             363,356     (8,537 )           (2.3 )%
Surgeries                                          68,347              70,533     (2,186 )           (3.1 )%
Outpatient revenue percent                           46.9 %              47.0 %      (10 ) bps        n/a
Inpatient revenue percent                            53.1 %              53.0 %       10  bps         n/a

* basis points

Net revenue during the 2009 Three Month Period was approximately $1,188.0 million as compared to $1,152.5 million during the 2008 Three Month Period. This change represented an increase of $35.5 million or 3.1%. Substantially all such increase resulted from reimbursement rate increases and favorable case mix trends. Net revenue per adjusted admission increased approximately 3.0% during the 2009 Three Month Period as compared to the 2008 Three Month Period. The factors contributing to such change included increased patient acuity and the favorable effects of renegotiated agreements with certain commercial health insurance providers.

Our provision for doubtful accounts during the 2009 Three Month Period increased 90 basis points to 12.1% of net revenue as compared to 11.2% of net revenue during the 2008 Three Month Period. This change is primarily due to an increase in (i) the prevalence of uninsured patients in the mix of patients that we serve and (ii) co-payments and deductibles due from underinsured patients, which subject us to a higher risk of collection.

Our consistently applied accounting policy is that accounts written off as charity and indigent care are not recognized in net revenue and, accordingly, such amounts have no impact on our provision for doubtful accounts. However, as a measure of our fiscal performance, we routinely aggregate amounts pertaining to our (i) provision for doubtful accounts, (ii) uninsured self-pay patient discounts and (iii) foregone/unrecognized revenue for charity and indigent care and then we divide the resulting total by the sum of our (i) net revenue,
(ii) uninsured self-pay patient discounts and (iii) foregone/unrecognized revenue for charity and indigent care. We believe that this fiscal measure, which we refer to as our Uncompensated Patient Care Percentage, is important because it provides us with key information regarding the aggregate level of patient care for which we do not receive remuneration. During the 2009 Three Month Period and the 2008 Three Month Period, our Uncompensated Patient Care Percentage was determined to be 23.8% and 22.7%, respectively. The increase during the 2009 Three Month Period reflects, among other things, a larger provision for doubtful accounts for our self-pay patients.

Salaries and benefits as a percent of net revenue decreased to 39.1% during the 2009 Three Month Period from 40.6% during the 2008 Three Month Period. The corresponding percentages for our hospital operations were 37.3% and 39.1%, respectively. These declines were primarily due to our recently implemented company-wide cost containment measures, such as headcount reductions, new hire limitations, lower personnel turnover, postponements of merit pay increases and a suspension of substantially all matching contributions to our 401(k) plan.

Supplies as a percent of net revenue increased from 13.6% during the 2008 Three Month Period to 13.9% during the 2009 Three Month Period. This increase was primarily due to more cardiology procedures during the 2009 Three Month Period, which resulted in our utilization of a larger quantity of costly cardiac implant devices and related supplies.

Other operating expenses as a percent of net revenue increased from 16.9% during the 2008 Three Month Period to 17.3% during the 2009 Three Month Period. This change is primarily due to increased costs for repairs and maintenance, professional fees and utilities, partially offset by a reduction in our advertising and marketing costs.

During the 2008 Three Month Period, we recorded a gain of approximately $203.4 million from the sale of a 27% equity interest in a limited liability company that owns/leases and operates our seven general acute care hospitals in North Carolina and South Carolina. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding this transaction and other related matters.

Interest expense decreased from approximately $64.3 million during the 2008 Three Month Period to $55.0 million during the 2009 Three Month Period. Such decrease was primarily due to (i) a lower average outstanding principal balance under our $2.75 billion seven-year term loan during the 2009 Three Month Period as compared to the 2008 Three Month Period and (ii) a significant reduction of the interest expense from our 1.50% Convertible Senior Subordinated Notes due 2023, substantially all of which were repurchased during 2008. Partially offsetting these reductions was interest expense from the 3.75% Convertible Senior Subordinated Notes due 2028 (the "2028 Notes") that we sold on May 21, 2008. See "Liquidity, Capital Resources and Capital Expenditures" below and Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt arrangements.

During the 2009 Three Month Period, we repurchased certain of the 2028 Notes, yielding a total gain on the early extinguishment of debt of approximately $16.7 million. See "Liquidity, Capital Resources and Capital Expenditures" below and Note 2(b) to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding the 2028 Notes.

Our effective income tax rates were approximately 35.7% and 38.6% during the 2009 Three Month Period and the 2008 Three Month Period, respectively. During 2009, our effective income tax rate was lower due to an increase in the net income attributable to noncontrolling interests, which is not tax-effected in our consolidated financial statements. Our provision for income taxes during the 2009 Three Month Period was adversely impacted by adjustments pertaining to stock-based compensation and the related additional paid-in capital pool of excess income tax benefits.

Liquidity, Capital Resources and Capital Expenditures

Liquidity

Our cash flows from continuing operating activities provide the primary source
of cash for our ongoing business needs. Below is a summary of our recent cash
flow activity (in thousands).



                                                             Three Months Ended
                                                                  March 31,
                                                             2009          2008
    Sources (uses) of cash and cash equivalents:
    Operating activities                                   $ 116,736     $ 145,128
    Investing activities                                     (60,781 )     (48,470 )
    Financing activities                                     (98,367 )     238,980
    Discontinued operations                                    1,685        (4,757 )

    Net increase (decrease) in cash and cash equivalents   $ (40,727 )   $ 330,881

Operating Activities

Our cash flows from continuing operating activities decreased approximately $28.4 million, or 19.6%, during the 2009 Three Month Period when compared to the 2008 Three Month Period. This decrease primarily related to net federal and state income tax refunds of approximately $42.3 million during the 2008 Three Month Period, as compared to $13.2 million during the 2009 Three Month Period. Our cash flows during the 2009 Three Month Period were favorably impacted by lower interest payments than the 2008 Three Month Period.

Investing Activities

Cash used in investing activities during the 2009 Three Month Period included approximately $65.2 million of additions to property, plant and equipment, consisting primarily of renovation and expansion projects at certain of our facilities. Partially offsetting such cash outlays was a net decrease in our restricted funds of $3.7 million.

Cash used in investing activities during the 2008 Three Month Period included
(i) approximately $46.8 million of additions to property, plant and equipment, consisting primarily of renovation and expansion projects at certain of our facilities, and (ii) an increase in restricted funds of $2.9 million. Partially offsetting these cash outlays were cash receipts of $3.5 million from the sale of discontinued operations (consisting of property, plant and equipment used in our former physician practices in North Carolina and South Carolina). See Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our discontinued operations.

Financing Activities

During the 2009 Three Month Period, we made principal payments on long-term debt and capital lease obligations of approximately $29.1 million, including an $18.4 million mandatory annual Excess Cash Flow payment (as described below under "Capital Resources"). We also paid (i) $59.3 million to repurchase certain of our 2028 Notes in the open market and (ii) $12.7 million to noncontrolling shareholders, including the first annual distribution under our seven-hospital joint venture arrangement in North Carolina and South Carolina. See Note 2(b) and Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding the 2028 Notes and our joint venture activity, respectively.

During the 2008 Three Month Period, our financing activities included cash paid by noncontrolling shareholders of approximately $302.9 million. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our joint venture activity. During the 2008 Three Month Period, we made principal payments on long-term debt and capital lease obligations of $62.1 million, including a $47.7 million mandatory annual Excess Cash Flow payment (as described below under "Capital Resources"), and we paid $1.8 million to noncontrolling shareholders.

Discontinued Operations

Cash provided by our discontinued operations during the 2009 Three Month Period was approximately $1.7 million and the corresponding cash used in operating our discontinued operations during the 2008 Three Month Period was $4.8 million. We do not believe that the exclusion of such amounts from our consolidated cash flows in future periods will have a material effect on our liquidity or financial position. See Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our discontinued operations.

Days Sales Outstanding

Days sales outstanding, or DSO, is calculated by dividing quarterly net revenue by the number of days in the quarter. The result is divided into the net accounts receivable balance at the end of the quarter to obtain our DSO. We believe that this statistic is an important measure of collections on our accounts receivable, as well as our liquidity. Our DSO was 50 days at both March 31, 2009 and December 31, 2008.

Income Taxes

Other than certain state net operating loss carryforwards, we believe that it is more likely than not that carrybacks, reversals of existing taxable temporary differences and future taxable income will allow us to realize the deferred tax assets that are recognized in our consolidated balance sheets.

Capital Resources

Sales of Assets and Related Activities

In addition to our current initiatives to increase patient volume and operating profit, our plans to enhance cash flow during 2009 and beyond may also include sales of: (i) hospitals and other health care business units that no longer meet our long-term strategic objectives; (ii) certain hospital assets; and (iii) the residual assets of our discontinued operations. We are also considering joint venture opportunities at several of our hospitals to supplement our cash flow. These potential transactions are collectively referred to herein as our "Strategic Transactions." As discussed at Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 and Note 4 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008, we recently completed certain Strategic Transactions. There can be no assurances that we will successfully initiate and complete any additional Strategic Transactions on satisfactory terms, if at all, or that any future Strategic Transactions will not cause us to recognize a loss in our consolidated financial statements. Furthermore, our senior secured credit facilities, as described at Note 2(a) to the Interim Condensed Consolidated Financial Statements in Item 1, contain certain covenants that may limit the Strategic Transactions that we would otherwise complete.

Credit Facilities

Senior Secured Credit Facilities. On March 1, 2007, we completed a recapitalization of our balance sheet (the "Recapitalization") wherein we entered into agreements for $3.25 billion in new variable rate senior secured credit facilities (the "Credit Facilities"). The Credit Facilities were initially used to fund a special cash dividend and repay all amounts outstanding under a predecessor revolving credit agreement. The Credit Facilities consist of a seven-year $2.75 billion term loan (the "Term Loan") and a $500.0 million six-year revolving credit facility (the "Revolving Credit Agreement").

The Term Loan requires (i) quarterly principal payments to amortize approximately 1% of the loan's face value during each year of the loan's term and (ii) a balloon payment for the remaining outstanding loan balance at the termination of the agreement. We are also required to repay principal under the Term Loan in an amount that can be as much as 50% of our annual Excess Cash Flow, as such term is defined in the loan agreement. Based on the annual Excess Cash Flow generated during the year ended December 31, 2008, we repaid approximately $18.4 million of principal during the 2009 Three Month Period. In total, our mandatory principal payments under the Credit Facilities for the year ending December 31, 2009, including the annual Excess Cash Flow payment, will be approximately $44.7 million. During the Revolving Credit Agreement's six-year term, we are obligated to pay commitment fees based on the amounts available for borrowing. Additionally, the Revolving Credit Agreement has a $75.0 million standby letter of credit limit. Amounts outstanding under the Credit Facilities may be repaid at our option at any time, in whole or in part, without penalty.

We can elect whether interest on the Credit Facilities, which is generally payable quarterly in arrears, is calculated using LIBOR or prime as its base rate. The effective interest rate includes a spread above our selected base rate and is subject to modification in certain circumstances. Additionally, we may elect differing base interest rates for the Term Loan and the Revolving Credit Agreement. During 2007, as required by the agreements underlying the Credit Facilities, we entered into a receive variable/pay fixed interest rate swap contract that provides for us to pay a fixed interest rate of 6.7445% on the notional amount of such contract for the seven-year term of the Term Loan. Notwithstanding this contractual arrangement, we remain ultimately responsible for all amounts due and payable under the Term Loan. Therefore, we are exposed to financial risk in the event of nonperformance by one or more of the counterparties to the interest rate swap contract. See Note 5 to the Interim Condensed Consolidated Financial Statements in Item 1 regarding the estimated fair value of our interest rate swap contract. At March 31, 2009, approximately $31.6 million of the Term Loan's outstanding balance was not covered by the interest rate swap contract and, accordingly, such amount was subject to the Credit Facilities' variable interest rate provisions (i.e., an effective interest rate of approximately 3.0% on both March 31, 2009 and May 1, 2009).

Although there were no amounts outstanding under the Revolving Credit Agreement on May 1, 2009, standby letters of credit in favor of third parties of approximately $42.7 million reduced the amount available for borrowing thereunder to $457.3 million on such date. Our effective interest rate on the variable rate Revolving Credit Agreement was approximately 2.8% on May 1, 2009.

We intend to fund the Term Loan's quarterly interest payments, required annual principal payments and mandatory annual Excess Cash Flow payments with available cash balances, cash provided by operating activities, cash proceeds from our Strategic Transactions and/or borrowings under the Revolving Credit Agreement.

Demand Promissory Note. We maintain a $20.0 million unsecured Demand Promissory Note in favor of a bank for use as a working capital line of credit in . . .