Results of Operations

Overview

As of October 30, 2009, Health Management Associates, Inc. and its subsidiaries ("we," "our" or "us") operated 54 hospitals with a total of 7,926 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. See Note 9 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding a hospital system in Fort Smith, Arkansas that we plan to acquire before the end of 2009.

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. Such discontinued operations were not material to our consolidated results of operations during the periods presented herein, other than the following items that occurred during the nine months ended September 30, 2008: (i) a long-lived asset and goodwill impairment charge of approximately $23.1 million; (ii) a gain of $42.0 million from the sale of a 27% equity interest in a limited liability company that owned and operated two of our general acute care hospitals; and (iii) a charge of $7.9 million for the estimated cost of partially subsidizing certain third party physician practice losses.

During the three months ended September 30, 2009, which we refer to as the 2009 Three Month Period, we experienced net revenue growth over the three months ended September 30, 2008, which we refer to as the 2008 Three Month Period, of approximately 5.8%. Such growth primarily resulted from increased admissions and emergency room visits and improvements in reimbursement rates. Income from continuing operations and diluted earnings per share from continuing operations
(attributable to common stockholders of Health Management Associates, Inc.)
increased approximately $11.3 million and $0.04, 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 lower interest costs and reduced salaries and benefits expense. Partially offsetting these items during the 2009 Three Month Period were increases in our provision for doubtful accounts and effective income tax rate.

In light of the downturn in the economy, volatility in the 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 economic downturn, including levels of unemployment that are substantially higher than historical trends, 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 5.4% and 12.9%, respectively; however, our corresponding surgical volume declined 0.2%. We believe that the 2009 outbreak of H1N1 influenza ("swine flu") contributed to the growth in our emergency room visits and hospital admissions during the 2009 Three Month Period, including an increase of approximately 10.9% in admissions with upper respiratory diagnoses. Although the level of H1N1 influenza activity has continued to increase in the United States and is now widespread in 46 states, we cannot predict what its ultimate impact will be on our business and results of operations.

We continue to pursue strategic action plans that were previously initiated at our 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 improve 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 ambulatory surgical centers and 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 growth in emergency room visits and hospital admissions during the 2009 Three Month Period. We believe that our strategic initiatives, coupled with appropriate 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 to be the highest rated health care provider of any hospital system in the country, as measured by Medicare. With our knowledgeable and

experienced clinical affairs leadership to support this critical quality initiative, we measure the appropriate performance objectives, increase accountability for achieving those objectives and recognize 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 accommodate 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 7.0% during the 2008 Three Month Period to 7.7% 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 economy and correspondingly higher levels of unemployment. 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 September 30,
                                                     2009                               2008
                                                               Percent                            Percent
                                                               of Net                             of Net
                                              Amount           Revenue           Amount           Revenue
                                          (in thousands)                     (in thousands)

Net revenue                              $      1,121,903        100.0 %    $      1,060,224       100.0  %

Operating expenses:
Salaries and benefits                             438,202         39.1               440,624         41.6
Supplies                                          154,262         13.7               145,786         13.8
Provision for doubtful accounts                   143,745         12.8               120,039         11.3
Depreciation and amortization                      60,424          5.4                58,543          5.5
Rent expense                                       25,532          2.3                23,006          2.2
Other operating expenses                          202,147         18.0               190,302         17.9

Total operating expenses                        1,024,312         91.3               978,300         92.3


Income from operations                             97,591          8.7                81,924          7.7

Other income (expense):
Gains on sales of assets, net                          90           -                  1,201          0.1
Interest and other income, net                        942          0.1                 1,352          0.1
Interest expense                                  (54,300 )       (4.8 )             (59,716 )       (5.6 )
Loss on early extinguishment of debt                 (533 )       (0.1 )                  -            -


Income from continuing operations
before income taxes                                43,790          3.9                24,761          2.3
Provision for income taxes                        (12,495 )       (1.1 )              (4,784 )       (0.4 )


Income from continuing operations        $         31,295          2.8 %    $         19,977          1.9 %

                                                Three Months Ended
                                                   September 30,                               Percent
                                                 2009         2008        Change               Change

Total Hospitals
Occupancy                                          42.5 %       42.2 %        30      bps *        n/a
Patient days                                    306,871      298,107       8,764                   2.9 %
Admissions                                       74,890       71,063       3,827                   5.4 %
Adjusted admissions (admissions adjusted for
outpatient volume)                              135,033      126,237       8,796                   7.0 %
Emergency room visits                           355,213      314,750      40,463                  12.9 %
Surgeries                                        66,337       66,438        (101 )                (0.2 )%
Outpatient revenue percent                         50.2 %       49.3 %        90      bps          n/a
Inpatient revenue percent                          49.8 %       50.7 %       (90 )    bps          n/a

* basis points

Net revenue during the 2009 Three Month Period was approximately $1,121.9 million as compared to $1,060.2 million during the 2008 Three Month Period. This change represented an increase of $61.7 million, or 5.8%. Net revenue per admission increased approximately 0.4% during the 2009 Three Month Period as compared to the 2008 Three Month Period. The growth in net revenue and net revenue per admission were primarily due to increased admissions and emergency room visits and improvements in reimbursement rates, partially offset by unfavorable movement in our payor mix.

Our provision for doubtful accounts during the 2009 Three Month Period increased 150 basis points to 12.8% 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) 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 downturn in the economy and correspondingly higher levels of unemployment.

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 25.7% and 23.6%, respectively. The 210 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 39.1% during the 2009 Three Month Period from 41.6% during the 2008 Three Month Period. This decline was primarily due to our company-wide cost containment measures, most of which were implemented late in 2008, 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. Additionally, the 2008 Three Month Period included incremental costs attributable to a change in our Chief Executive Officer during September 2008.

Other operating expenses as a percent of net revenue increased from 17.9% during the 2008 Three Month Period to 18.0% during the 2009 Three Month Period. This change is primarily due to modest increases in costs for repairs and maintenance, professional fees and recruiting fees, partially offset by reductions in travel and utility costs.

Interest expense decreased from approximately $59.7 million during the 2008 Three Month Period to $54.3 million during the 2009 Three Month Period. Such decrease was primarily due to (i) lower average outstanding principal balances on our $2.75 billion seven-year term loan (the "Term Loan") and our 3.75% Convertible Senior Subordinated Notes due 2028 (the "2028 Notes") during the 2009 Three Month Period as compared to the 2008 Three Month Period and (ii) a 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.

We repurchased certain of the 2028 Notes during the 2009 Three Month Period, which resulted in a loss on the early extinguishment of debt of approximately $0.5 million. See "Liquidity, Capital Resources and Capital Expenditures" below and Note 2(c) to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding the 2028 Notes.

Our effective income tax rates were approximately 28.5% and 19.3% 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 480 and 440 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 favorably impacted by: (i) the finalization of certain federal and state income tax returns; (ii) the satisfactory conclusion of a state tax audit; and (iii) the lapsing of certain state statutes of limitations. Partially offsetting these items were adjustments during 2009 pertaining to stock-based compensation and the related additional paid-in capital pool of excess income tax benefits. Our provision for income taxes during the 2008 Three Month Period was favorably impacted by: (i) the finalization of certain federal and state income tax returns; (ii) the satisfactory resolution of two Internal Revenue Service examinations; and
(iii) the lapsing of certain state statutes of limitations.

2009 Nine Month Period Compared to the 2008 Nine Month Period

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



                                                            Nine Months Ended September 30,
                                                    2009                                      2008
                                                                 Percent                                   Percent
                                                                 of Net                                    of Net
                                            Amount               Revenue           Amount                  Revenue
                                        (in thousands)                         (in thousands)

Net revenue                          $           3,418,373         100.0 %    $      3,270,548               100.0 %

Operating expenses:
Salaries and benefits                            1,332,265          39.0             1,339,165                41.0
Supplies                                           480,051          14.1               447,026                13.7
Provision for doubtful accounts                    419,872          12.3               364,472                11.1
Depreciation and amortization                      179,198           5.2               173,150                 5.3
Rent expense                                        75,060           2.2                66,841                 2.0
Other operating expenses                           602,497          17.6               573,667                17.5

Total operating expenses                         3,088,943          90.4             2,964,321                90.6


Income from operations                             329,430           9.6               306,227                 9.4

Other income (expense):
Gains on sales of assets, net                        1,936           0.1               169,140                 5.1
Interest and other income, net                       1,499            -                  5,200                 0.2
Interest expense                                  (163,485 )        (4.8 )            (186,932 )              (5.7 )
Gains (losses) on early
extinguishment of debt, net                         16,202           0.5                  (700 )                -
Write-offs of deferred financing
costs                                                 (444 )          -                 (1,497 )              (0.1 )


Income from continuing operations
before income taxes                                185,138           5.4               291,438                 8.9
Provision for income taxes                         (62,392 )        (1.8 )            (105,963 )              (3.2 )


Income from continuing operations    $             122,746           3.6 %    $        185,475                 5.7 %


                                       Nine Months Ended September 30,                                     Percent
                                             2009                 2008             Change                  Change

Total Hospitals
Occupancy                                             45.3 %        45.6 %                 (30 )    bps*       n/a
Patient days                                       977,160       967,551                 9,609                 1.0 %
Admissions                                         232,798       225,243                 7,555                 3.4 %
Adjusted admissions (admissions
adjusted for outpatient volume)                    405,140       389,998                15,142                 3.9 %
Emergency room visits                            1,034,071       983,470                50,601                 5.1 %
Surgeries                                          200,807       203,262                (2,455 )              (1.2 )%
Outpatient revenue percent                            48.0 %        48.1 %                 (10 )    bps        n/a
Inpatient revenue percent                             52.0 %        51.9 %                  10      bps        n/a

* basis points

Net revenue during the 2009 Nine Month Period was approximately $3,418.4 million as compared to $3,270.5 million during the 2008 Nine Month Period. This change represented an increase of $147.9 million, or 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. These items were partially offset by unfavorable movement in our payor mix during the 2009 Nine Month Period. Net revenue per admission increased approximately 1.1% during the 2009 Nine Month Period as compared to the 2008 Nine 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 Nine Month Period increased 120 basis points to 12.3% of net revenue as compared to 11.1% of net revenue during the 2008 Nine Month Period. This change is primarily due to an increase in (i) uninsured patients in the mix of patients that we serve (approximately 7.0% and 6.7% of total admissions during the 2009 Nine Month Period and the 2008 Nine 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 downturn in the economy and correspondingly higher levels of unemployment. During the 2009 Nine Month Period and the 2008 Nine 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 24.5% and 23.0%, respectively. The 150 basis point increase during the 2009 Nine 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 39.0% during the 2009 Nine Month Period from 41.0% during the 2008 Nine Month Period. This decline was primarily due to our company-wide cost containment measures, most of which were implemented late in 2008, 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 13.7% during the 2008 Nine Month Period to 14.1% during the 2009 Nine Month Period. This increase was primarily due to more cardiology and neuro-surgery procedures having been performed during the 2009 Nine 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 17.5% during the 2008 Nine Month Period to 17.6% during the 2009 Nine Month Period. This change is primarily due to increased costs for repairs and maintenance, professional fees, collection agency fees, recruiting fees and utilities, partially offset by reductions in advertising/marketing and travel costs.

During the 2008 Nine Month Period, we recorded gains on sales of assets of approximately (i) $161.4 million from the sale of a 27% equity interest in a limited liability company that then owned/leased and operated five of our general acute care hospitals in North Carolina and South Carolina and (ii) $7.8 million from sales of three home health agencies, a nursing home and a health care billing operation. The sale of a home health agency during the 2009 Nine 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 $5.2 million during the 2008 Nine Month Period to $1.5 million during the 2009 Nine Month Period. This decline during the 2009 Nine Month Period was primarily due to (i) lower weighted average 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 part of the 2008 Nine Month Period.

Interest expense decreased from approximately $186.9 million during the 2008 Nine Month Period to $163.5 million during the 2009 Nine Month Period. Such decrease was primarily due to (i) a lower average outstanding principal balance on the Term Loan during the 2009 Nine Month Period as compared to the 2008 Nine Month Period and (ii) a significant reduction of interest expense on 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 2009 Nine Month Period, we repurchased certain of the 2028 Notes, which yielded a net gain on the early extinguishment of debt of approximately $16.2 million. During the 2008 Nine Month Period, we repurchased certain of the 2023 Notes, which resulted in losses on the early extinguishment of debt aggregating $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 33.7% and 36.4% during the 2009 Nine Month Period and the 2008 Nine 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 380 and 140 basis points during the 2009 Nine Month Period and the . . .