Results of Operations

Overview

On June 30, 2009, Health Management Associates, Inc. and its subsidiaries ("we," "our" or "us") operated 56 hospitals with a total of 8,121 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 June 30, 2009, which we refer to as the 2009 Three Month Period, we experienced net revenue growth over the three months ended June 30, 2008, which we refer to as the 2008 Three Month Period, of approximately 4.5%. Such growth primarily resulted from: (i) increased admissions and emergency room visits; (ii) favorable case mix trends; and
(iii) improvements in reimbursement rates. Income from continuing operations and diluted earnings per share from continuing operations increased approximately $7.1 million and $0.02, respectively, during the 2009 Three Month Period when compared to the 2008 Three Month Period. The primary factors contributing to this year-over-year increase in profitability were (i) decreased interest costs and (ii) stable salaries and benefits expense notwithstanding a 4.5% net revenue increase. Partially offsetting these items during the 2009 Three Month Period were (i) increases in our provision for doubtful accounts and supplies expense and (ii) declines in our gains on sales of assets and interest and other income.

In light of the ongoing domestic recession, turbulence in the worldwide credit markets and uncertainties about economic conditions for the remainder of 2009 and beyond, we have implemented several company-wide cost containment measures. Our initiatives were designed to position our company to remain profitable and strategically flexible while continually providing the highest level of patient care. The cost containment measures that have been implemented to date include, among other things, 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 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, hospital admissions and emergency room visits increased during the 2009 Three Month Period by approximately 5.1% and 5.6%, respectively; however, our corresponding surgical volume declined 1.0%. We continue to pursue strategic action plans that were previously initiated at certain hospitals to address unfavorable operating trends. These plans include, 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, including establishing orthopedic, cardiology and neurology/neurosurgery centers of excellence. Furthermore, we continue to invest significant resources in physician recruitment and retention, emergency room operations and capital projects at our hospitals. As a result, recent company-wide investments to enhance and upgrade our emergency room clinical systems contributed, in large part, to the meaningful gains in emergency room visits and hospital admissions during the 2009 Three Month Period. We believe that our strategic initiatives, coupled with resourceful streamlined corporate oversight and centralized support, 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 our knowledgeable experienced 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.

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 6.7% during the 2008 Three Month Period to 7.3% 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 ongoing domestic recession. 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 June 30,
                                                     2009                               2008
                                                               Percent                            Percent
                                                               of Net                             of Net
                                              Amount           Revenue           Amount           Revenue
                                          (in thousands)                     (in thousands)

Net revenue                              $      1,155,453        100.0 %    $      1,105,367        100.0 %

Operating expenses:
Salaries and benefits                             448,115         38.8               448,617         40.6
Supplies                                          164,756         14.3               149,248         13.5
Provision for doubtful accounts                   141,505         12.2               124,837         11.3
Depreciation and amortization                      60,561          5.2                59,626          5.4
Rent expense                                       25,412          2.2                22,681          2.0
Other operating expenses                          202,962         17.6               196,637         17.8

Total operating expenses                        1,043,311         90.3             1,001,646         90.6


Income from operations                            112,142          9.7               103,721          9.4

Other income (expense):
Gains on sales of assets, net                       1,999          0.2                 6,633          0.6
Interest and other income, net                        309           -                  2,721          0.3
Interest expense                                  (54,282 )       (4.7 )             (62,956 )       (5.7 )
Losses on early extinguishment of debt                 -            -                   (700 )       (0.1 )
Write-offs of deferred financing costs               (250 )         -                   (868 )       (0.1 )


Income from continuing operations
before income taxes                                59,918          5.2                48,551          4.4
Provision for income taxes                        (20,620 )       (1.8 )             (16,308 )       (1.5 )


Income from continuing operations        $         39,298          3.4 %    $         32,243          2.9 %

                                               Three Months Ended June 30,                            Percent
                                                2009                 2008          Change             Change

Total Hospitals
Occupancy                                           44.8 %               44.3 %        50      bps*       n/a
Patient days                                     325,577              317,431       8,146                 2.6 %
Admissions                                        77,580               73,809       3,771                 5.1 %
Adjusted admissions                              135,801              129,646       6,155                 4.7 %
Emergency room visits                            348,824              330,416      18,408                 5.6 %
Surgeries                                         68,994               69,692        (698 )              (1.0 )%
Outpatient revenue percent                          47.3 %               48.5 %      (120 )    bps        n/a
Inpatient revenue percent                           52.7 %               51.5 %       120      bps        n/a

* basis points

Net revenue during the 2009 Three Month Period was approximately $1,155.5 million as compared to $1,105.4 million during the 2008 Three Month Period. This change represented an increase of $50.1 million or 4.5%. Such increase resulted from: (i) increased admissions and emergency room visits; (ii) favorable case mix trends; and (iii) increases in reimbursement rates. Hospital net revenue per adjusted admission increased approximately 1.1% 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 12.2% of net revenue as compared to 11.3% 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. Both of these factors can be attributed, in part, to the ongoing domestic recession.

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 24.6% and 23.1%, respectively. The 150 basis point 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 38.8% during the 2009 Three Month Period from 40.6% during the 2008 Three Month Period. This decline was primarily due to our 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 13.5% during the 2008 Three Month Period to 14.3% during the 2009 Three Month Period. This increase was primarily due to more cardiology and neuro-surgery procedures having been performed during the 2009 Three Month Period, which resulted in our utilization of a larger quantity of costly cardiac and spinal implant devices and related supplies.

Other operating expenses as a percent of net revenue decreased from 17.8% during the 2008 Three Month Period to 17.6% during the 2009 Three Month Period. This change is primarily due to reductions in advertising/marketing and travel costs, partially offset by increased collection agency fees, costs for repairs and maintenance and professional fees.

During the 2009 Three Month Period and the 2008 Three Month Period, we recorded gains on sales of assets of approximately $2.5 million and $6.6 million, respectively, from sales of home health agencies. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding these transactions.

Interest and other income declined from approximately $2.7 million during the 2008 Three Month Period to $0.3 million during the 2009 Three Month Period. This decline during the 2009 Three Month Period was primarily due to (i) lower interest-bearing cash balances and (ii) lower rates of return in the marketplace for our interest-bearing cash. As described at Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1, we received approximately $300.0 million on March 31, 2008 from an affiliate of Novant Health, Inc., which significantly increased our interest-bearing cash balances during the 2008 Three Month Period.

Interest expense decreased from approximately $63.0 million during the 2008 Three Month Period to $54.3 million during the 2009 Three Month Period. Such decrease was primarily due to (i) a lower average outstanding principal balance on our $2.75 billion seven-year term loan (the "Term Loan") during the 2009 Three Month Period as compared to the 2008 Three Month Period and (ii) a significant reduction of interest expense on our 1.50% Convertible Senior Subordinated Notes due 2023 (the "2023 Notes"), substantially all of which were repurchased during 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 2008 Three Month Period, we repurchased certain of the 2023 Notes, yielding a total loss on the early extinguishment of debt of approximately $0.7 million. See Note 2(d) to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding the 2023 Notes.

Our effective income tax rates were approximately 34.4% and 33.6% during the 2009 Three Month Period and the 2008 Three Month Period, respectively. Net income attributable to noncontrolling interests, which is not tax-effected in our consolidated financial statements, diluted our effective income tax rates by approximately 440 and 420 basis points during the 2009 Three Month Period and the 2008 Three Month Period, respectively. 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. Moreover, the favorable impact from the finalization of certain of our federal income tax returns and the lapsing of certain state statutes of limitations during 2008 did not recur in 2009.

2009 Six Month Period Compared to the 2008 Six Month Period

The tables below summarize our operating results for the six months ended
June 30, 2009 and 2008, which we refer to as the 2009 Six Month Period and the
2008 Six Month Period, respectively. All of our hospitals were in operation
during the entirety of the 2009 Six Month Period and the 2008 Six Month Period.



                                                               Six Months Ended June 30,
                                                    2009                                   2008
                                                              Percent                                   Percent
                                                              of Net                                    of Net
                                             Amount           Revenue           Amount                  Revenue
                                         (in thousands)                     (in thousands)

Net revenue                             $      2,343,476        100.0 %    $      2,257,871               100.0 %

Operating expenses:
Salaries and benefits                            912,328         38.9               916,420                40.6
Supplies                                         330,194         14.1               306,121                13.6
Provision for doubtful accounts                  285,488         12.2               253,807                11.2
Depreciation and amortization                    121,477          5.2               117,084                 5.2
Rent expense                                      50,722          2.2                44,816                 2.0
Other operating expenses                         408,648         17.4               391,810                17.3

Total operating expenses                       2,108,857         90.0             2,030,058                89.9


Income from operations                           234,619         10.0               227,813                10.1

Other income (expense):
Gains on sales of assets, net                      1,887          0.1               209,953                 9.3
Interest and other income, net                       557           -                  3,848                 0.2
Interest expense                                (109,293 )       (4.7 )            (127,250 )              (5.7 )
Gains (losses) on early
extinguishment of debt, net                       16,735          0.7                  (700 )                -
Write-offs of deferred financing
costs                                               (444 )         -                 (1,497 )              (0.1 )


Income from continuing operations
before income taxes                              144,061          6.1               312,167                13.8
Provision for income taxes                       (50,686 )       (2.1 )            (118,134 )              (5.2 )


Income from continuing operations       $         93,375          4.0 %    $        194,033                 8.6 %


                                          Six Months Ended June 30,                                     Percent
                                              2009             2008             Change                  Change

Total Hospitals
Occupancy                                           46.9 %       47.4 %                 (50 )    bps*       n/a
Patient days                                     682,390      683,205                  (815 )              (0.1 )%
Admissions                                       160,941      157,360                 3,581                 2.3 %
Adjusted admissions                              276,472      270,231                 6,241                 2.3 %
Emergency room visits                            703,643      693,772                 9,871                 1.4 %
Surgeries                                        137,337      140,225                (2,888 )              (2.1 )%
Outpatient revenue percent                          47.1 %       47.7 %                 (60 )    bps        n/a
Inpatient revenue percent                           52.9 %       52.3 %                  60      bps        n/a

* basis points

Net revenue during the 2009 Six Month Period was approximately $2,343.5 million as compared to $2,257.9 million during the 2008 Six Month Period. This change represented an increase of $85.6 million or 3.8%. Such increase resulted from:
(i) increased admissions and emergency room visits; (ii) favorable case mix trends; and (iii) increases in reimbursement rates. Hospital net revenue per adjusted admission increased approximately 2.7% during the 2009 Six Month Period as compared to the 2008 Six 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 Six Month Period increased 100 basis points to 12.2% of net revenue as compared to 11.2% of net revenue during the 2008 Six 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 (approximately 6.8% and 6.5% of total admissions during the 2009 Six Month Period and the 2008 Six Month Period, respectively) and (ii) co-payments and deductibles due from underinsured patients, which subject us to a higher risk of collection. Both of these factors can be attributed, in part, to the ongoing domestic recession. During the 2009 Six Month Period and the 2008 Six Month Period, our Uncompensated Patient Care Percentage, which is described above under the heading "2009 Three Month Period Compared to the 2008 Three Month Period," was determined to be 24.2% and 22.9%, respectively. The 130 basis point increase during the 2009 Six 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 38.9% during the 2009 Six Month Period from 40.6% during the 2008 Six Month Period. This decline was primarily due to our 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 Six Month Period to 14.1% during the 2009 Six Month Period. This increase was primarily due to more cardiology and neuro-surgery procedures having been performed during the 2009 Six Month Period, which resulted in our utilization of a larger quantity of costly cardiac and spinal implant devices and related supplies.

Other operating expenses as a percent of net revenue increased from 17.3% during the 2008 Six Month Period to 17.4% during the 2009 Six Month Period. This change is primarily due to increased costs for repairs and maintenance, professional fees, collection agency fees and utilities, partially offset by reductions in advertising/marketing and travel costs.

During the 2008 Six Month Period, we recorded gains 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 and $6.6 million from the sale of three home health agencies. The sale of a home health agency during the 2009 Six Month Period yielded a gain of $2.5 million. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding these transactions and other related matters.

Interest and other income declined from approximately $3.8 million during the 2008 Six Month Period to $0.6 million during the 2009 Six Month Period. This decline during the 2009 Six Month Period was primarily due to (i) lower interest-bearing cash balances and (ii) lower rates of return in the marketplace for our interest-bearing cash. As described at Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1, we received approximately $300.0 million on March 31, 2008 from an affiliate of Novant Health, Inc., which significantly increased our interest-bearing cash balances during the second half of the 2008 Six Month Period.

Interest expense decreased from approximately $127.3 million during the 2008 Six Month Period to $109.3 million during the 2009 Six Month Period. Such decrease was primarily due to (i) a lower average outstanding principal balance on the Term Loan during the 2009 Six Month Period as compared to the 2008 Six Month Period and (ii) a significant reduction of interest expense on the 2023 Notes, substantially all of which were repurchased during 2008. Partially offsetting these reductions was greater interest expense on 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 Six Month Period, we repurchased certain of the 2028 Notes, yielding a total gain on the early extinguishment of debt of approximately $16.7 million. During the 2008 Six Month Period, we repurchased certain of the 2023 Notes, yielding a total loss on the early extinguishment of debt of $0.7 million. See "Liquidity, Capital Resources and Capital Expenditures" below and Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding the 2028 Notes and the 2023 Notes.

Our effective income tax rates were approximately 35.2% and 37.8% during the 2009 Six Month Period and the 2008 Six Month Period, respectively. Net income attributable to noncontrolling interests, which is not tax-effected in our consolidated financial statements, diluted our effective income tax rates by approximately 360 and 80 basis points during the 2009 Six Month Period and the 2008 Six Month Period, respectively. Our provision for income taxes during the 2009 Six Month Period was adversely impacted by adjustments pertaining to stock-based compensation and the related additional paid-in capital pool of . . .