UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		for the fiscal year ended December 31, 2009 or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      to

Commission file number 0-20488

Psychiatric Solutions, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		23-2491707 (I.R.S. Employer Identification No.)

Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code)

(615) 312-5700
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title Of Each Class		Name of Each Exchange On Which Registered
Common Stock, $.01 par value		NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes     o No

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes     þ No

     Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those Sections.

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes     o No

     Indicated by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes     o No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes     þ No

     As of June 30, 2009, the aggregate market value of the shares of common stock of the registrant held by non-affiliates of the registrant was approximately $1.0 billion. For purposes of calculating such aggregate market value, shares owned by directors, executive officers and 5% beneficial owners of the registrant have been excluded.

     As of February 22, 2010, 56,263,260 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s definitive proxy statement for its 2010 annual meeting of stockholders to be held on May 18, 2010 are incorporated by reference into Part III of this Form 10-K.

 

 

INDEX

		PAGE
PART I			3
Item 1. Business			3
Item 1A. Risk Factors			12
Item 1B. Unresolved Staff Comments			18
Item 2. Properties			18
Item 3. Legal Proceedings			20
Item 4. Submission of Matters to a Vote of Security Holders			20
PART II			21
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			21
Item 6. Selected Financial Data			21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			31
Item 8. Financial Statements and Supplementary Data			31
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			31
Item 9A. Controls and Procedures			32
Item 9B. Other Information			32
PART III			32
Item 10. Directors, Executive Officers and Corporate Governance			32
Item 11. Executive Compensation			33
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			33
Item 13. Certain Relationships and Related Transactions, and Director Independence			33
Item 14. Principal Accountant Fees and Services			33
PART IV			34
Item 15. Exhibits and Financial Statement Schedules			34
Index to Financial Statements			34
Signatures
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1

PART I

     Unless the context otherwise requires, all references in this Annual Report on Form 10-K to “Psychiatric Solutions,” “the Company,” “we,” “us” or “our” mean Psychiatric Solutions, Inc. and its consolidated subsidiaries.

Item 1. Business

Overview

     We are a leading provider of inpatient behavioral health care services in the United States. We operate 94 inpatient behavioral health care facilities with approximately 11,000 beds in 32 states, Puerto Rico, and the U.S. Virgin Islands. In 2009, we opened Rolling Hills Hospital, an 80-bed inpatient facility in Franklin, Tennessee, acquired a 131-bed inpatient behavioral health care facility located in Fargo, North Dakota, acquired a 90-bed inpatient behavioral health care facility located in Panama City, Florida, and sold our employee assistance program (“EAP”) business for approximately $68.5 million, net of fees and expenses. We generated revenue of approximately $1.8 billion and $1.7 billion for the years ended December 31, 2009 and 2008, respectively. We believe that our primary focus on the provision of inpatient behavioral health care services allows us to operate more efficiently and provide higher quality care than our competitors.

     Our inpatient behavioral health care facilities accounted for 93.0% of our revenue for the year ended December 31, 2009. These inpatient facilities offer a wide range of inpatient behavioral health care services for children, adolescents and adults. We offer these services through a combination of acute inpatient behavioral facilities and residential treatment centers (“RTCs”). Our acute inpatient behavioral facilities provide the most intensive level of care, including 24-hour skilled nursing observation and care, daily interventions and oversight by a psychiatrist and intensive, highly coordinated treatment by a physician-led team of mental health professionals. Our RTCs offer longer term treatment programs primarily for children and adolescents with chronic behavioral health problems. Our RTCs provide physician-led, multi-disciplinary treatments that address the overall medical, psychiatric, social and academic needs of the patients.

     Other behavioral health care services accounted for 7.0% of our revenue for the year ended December 31, 2009. This portion of our business primarily consists of our contract management business and a managed care plan in Puerto Rico. Our contract management business involves the development, organization and management of behavioral health and rehabilitation programs within medical/surgical hospitals.

     Psychiatric Solutions was incorporated in the State of Delaware in 1988. Our principal executive offices are located at 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067. Our telephone number is (615) 312-5700. Information about Psychiatric Solutions and our filings with the Securities and Exchange Commission can be found at our website at www.psysolutions.com.

Our Industry

     According to the National Association of Psychiatric Health Systems’ 2008 Annual Survey, an estimated 26.2% of Americans ages 18 and older, or slightly more than one in four adults, suffer from a diagnosable mental disorder in a given year, and about 6%, or about one in seventeen, suffer from a serious mental illness.

     The behavioral health care industry is highly fragmented with only a few large national providers. During the 1990s, the behavioral health care industry experienced a significant contraction following a long period of growth. The reduction was largely driven by third-party payors who decreased reimbursement, implemented more stringent admission criteria and decreased the authorized length of stay. We believe this reduced capacity has resulted in an underserved patient population.

     Reduced capacity, mental health parity legislation, and increased demand for behavioral health care services have resulted in favorable industry fundamentals over the last several years. Behavioral health care providers have enjoyed increased reimbursement rates and admissions and stabilized lengths of stay. According to the National Association of Psychiatric Health Systems, inpatient admissions increased approximately 3.5% from 2006 to 2007, and total inpatient days of care increased 3.2% from 2006 to 2007. In order to meet strong demand, facilities have been adding beds resulting in a 2% increase in licensed beds within existing facilities from 2006 to 2007. Following a rapid decrease during the early 1990s, inpatient average length of stay stabilized between 9 and 11 days from 1997 to 2007. The inpatient average length of stay was 9.7 days and 9.6 days in 2007 and 2006, respectively. The average inpatient net revenue per day in 2007 was $616 for facilities with less than fifty beds, $685 for facilities with between fifty and one hundred beds and $615 for facilities with more than one hundred beds. The average residential net revenue per day in 2007 was $346 for facilities with less than fifty beds, $420 for facilities with between fifty and one hundred beds and $358 for facilities with more than one hundred beds. Total patient days of care decreased 3.3% from 2006 to 2007 for RTC facilities, while average length of stay increased 2.4% to 168 days in 2007 from 164 days in 2006.

Our Competitive Strengths

     We believe the following competitive strengths contribute to our strong market share in each of our markets and will enable us to continue to successfully grow our business and increase our profitability:

	•		Singular focus on behavioral health care — We focus primarily on the provision of inpatient behavioral health care services. We believe this allows us to operate more efficiently and provide higher quality care than our competitors. In addition, we believe our focus and reputation have helped us to develop important relationships and extensive referral networks within our markets and to attract and retain qualified behavioral health care professionals.
	•		Strong and sustainable market position — Our inpatient facilities have an established presence in each of our markets, and many of our owned and leased inpatient facilities have the leading market share in their respective service areas. We believe that the relationships and referral networks we have established will further enhance our presence within our markets. In addition, many of the states in which we operate require a certificate of need to open a behavioral health care facility, which may be difficult to obtain and may further preclude new market participants.
	•		Demonstrated ability to identify and integrate acquisitions — We attribute part of our success in integrating acquired inpatient facilities to our due diligence review of these facilities prior to completing the acquisitions as well as our ability to retain key employees at the acquired facilities. We employ a disciplined acquisition strategy that is based on defined criteria including quality of service, return on invested capital and strategic benefits. We also have a comprehensive post-acquisition strategic plan to facilitate the integration of acquired facilities that includes improving facility operations, retaining and recruiting psychiatrists and expanding the breadth of services offered by the facilities.
	•		Diversified payor mix and revenue base — As we have grown our business, we have focused on diversifying our sources of revenue. For the year ended December 31, 2009, we received 28.7% of our revenue from Medicaid, 13.5% from Medicare, 37.5% from HMO/PPO, commercial and private payors, 14.9% from various state agencies and 5.4% from other payors. We receive Medicaid payments from more than 30 states. Substantially all of our Medicaid payments relate to the care of children and adolescents. We believe that children and adolescents are a patient class that is less susceptible to reductions in reimbursement rates. For the year ended December 31, 2009, no single inpatient facility represented more than 2.2% of our revenue.
	•		Experienced management team — Our senior management team has extensive experience in the health care industry. Joey A. Jacobs, our Chairman, President and Chief Executive Officer, has over 30 years of experience in various capacities in the health care industry. Our senior management operates as a cohesive, complementary group and has extensive operating knowledge of our industry and understanding of the regulatory environment in which we operate. Our senior managers employ conservative fiscal policies and have a successful track record in both operating our core business and integrating acquired assets.
	•		Consistent free cash flow and minimal maintenance capital requirements — We generate consistent free cash flow by profitably operating our business, actively managing our working capital and having low maintenance capital expenditure requirements. As the behavioral health care business does not require the procurement and replacement of expensive medical equipment, our maintenance capital expenditure requirements are less than that of other facility-based health care providers. Historically, our maintenance capital expenditures have amounted to approximately 2% to 3% of our revenue. In addition, our accounts receivable management is less complex than medical/surgical hospital providers because there are fewer billing codes for inpatient behavioral health care services.

Our Growth Strategy

     We have experienced significant growth in our operations as measured by the number of our facilities, admissions, patient days, revenue and net income. We intend to continue growing our business and increasing our profitability by improving the performance of our inpatient facilities and through strategic acquisitions. The principal elements of our growth strategy are to:

•

Continue to Drive Same-Facility Growth — We increased our same-facility revenue by approximately 5.3% for the year ended December 31, 2009 compared to the year ended December 31, 2008. Same-facility revenue also increased by approximately 8.4%, 6.9%, and 9.0% for the years ended December 31, 2008, 2007, and 2006, respectively, compared to the immediately preceding years. Same-facility revenue refers to the comparison of the inpatient facilities we owned during a prior period with the comparable period in the subsequent period, adjusted for closures and combinations for comparability purposes. We intend to continue to increase our same-facility revenue by increasing our admissions and patient days and obtaining annual reimbursement rate increases. We plan to accomplish these goals by:

	•		continuing to provide high quality service;
	•		expanding bed capacity at our facilities to meet demand;
	•		expanding our services and developing new services to take advantage of increased demand in select markets where we operate;
	•		building and expanding relationships that enhance our presence in local and regional markets; and

•

developing formal marketing initiatives and expanding referral networks.

	•		Grow Through Strategic Acquisitions — Our industry is highly fragmented and we plan to selectively pursue the acquisition of additional inpatient behavioral health care facilities. There are approximately 500 freestanding acute and residential treatment facilities in the United States and the top two providers operate approximately one-third of these facilities. We believe there are a number of acquisition candidates available at attractive valuations. We believe our focus on inpatient behavioral health care provides us with a strategic advantage when assessing a potential acquisition. We employ a disciplined acquisition strategy that is based on defined criteria, including quality of service, return on invested capital and strategic benefits.
	•		Enhance Operating Efficiencies — Our management team has extensive experience in the operation of multi-facility health care services companies. We intend to focus on improving our profitability by maintaining appropriate staffing ratios, controlling contract labor costs and reducing supply costs through group purchasing. We believe that our focus on efficient operations increases our profitability and will attract qualified behavioral health care professionals and patients.

Services

Inpatient Behavioral Health Care Facilities

     We operate 86 owned and 8 leased inpatient behavioral health care facilities. These facilities offer a wide range of inpatient behavioral health care services for children, adolescents and adults. Our inpatient facilities work closely with mental health professionals, including: licensed professional counselors, therapists and social workers; psychiatrists; non-psychiatric physicians; emergency rooms; school systems; insurance and managed care organizations; company-sponsored EAPs; and law enforcement and community agencies that interact with individuals who may need treatment for mental illness or substance abuse. During the year ended December 31, 2009, our inpatient behavioral health care facilities produced approximately 93.0% of our revenue.

     Through the diversity of programming and levels of care available, a patient can receive a seamless treatment experience from acute care to residential long-term care to group home living to outpatient treatment. This seamless system provides the continuity of care needed to step the patient down and allow the patient to develop and use successful coping skills and treatment interventions to sustain long-term treatment success. Treatment modalities include comprehensive assessment, multi-disciplinary treatment planning including the patient and family, group, individual and family therapy services, medical and dental services, educational services, recreational services and discharge planning services. Specialized interventions such as skills training include basic daily living skills, social skills, work/school adaptation skills and symptom management skills. Collateral consultations are provided to significant others such as family members, teachers, employers and other professionals when needed to help the patient successfully reintegrate back into his or her world. Disorders treated and services offered at our inpatient facilities include:

     Acute inpatient hospitalization is the most intensive level of care offered and typically involves skilled nursing observation and care, daily oversight by a psychiatrist, and intensive, highly coordinated treatment by a physician-led team of mental health professionals. Every patient admitted to our acute inpatient facilities is assessed by a medical doctor within 24 hours of admission. Patients with non-complex medical conditions are monitored during their stay by the physician and nursing staff at the inpatient facility. Patients with more complex medical needs are referred to more appropriate facilities for diagnosis and stabilization prior to treatment. Patients admitted to our acute inpatient facilities also receive comprehensive nursing and psychological assessments within 24 to 72 hours of admission. Oversight and management of a patient’s medication is performed by licensed psychiatrists on staff at the facility, and individual, family, and group therapy is performed by licensed counselors as appropriate to the patient’s assessed needs. Education regarding a patient’s illnesses is also provided by trained mental health professionals.

     Our RTCs provide longer term treatment programs for children and adolescents with long-standing behavioral/mental health problems. Our RTCs provide twenty-four hour care which includes individualized therapy that usually consists of one-on-one sessions with a licensed counselor, as well as process and rehabilitation group therapy. Another key component of the treatment of children and adolescents in our inpatient facilities is family therapy. Participation of the child’s or adolescent’s immediate family is strongly encouraged in order to increase the chance of success once the resident is discharged. Medications for residents are managed by

licensed psychiatrists while they remain at the inpatient facility. Our RTCs also provide academic programs conducted by certified teachers to child and adolescent residents. These programs are individualized for each resident upon admission. Upon discharge, academic reports are forwarded to the resident’s school. Specialized programs for children and adolescents in our RTCs include programs for sexually reactive children, sex offenders, reactive attachment disorders, and children and adolescents who are developmentally delayed with a behavioral component. Our RTCs often receive out-of-state referrals to their programs due to the lack of specialized programs for these disorders within a patient’s own state.

     Our inpatient facilities’ programs are designed to meet the needs of various referral sources to provide services to patients with multiple issues and specialized needs. We believe that our success rate with these difficult to treat cases has expanded our network of referrals. The services provided at each inpatient facility are continually assessed and monitored through an ongoing quality improvement program. The purpose of this program is to strive for the highest quality of care possible for individuals with behavioral health issues, and includes regular site visits to each inpatient facility in order to assess compliance with legal and regulatory standards, as well as adherence to our compliance program. Standardized performance measures based on a national outcomes measurement database comparing our inpatient facilities’ performance with national norms are also reported and reviewed and corrective steps are taken when necessary.

Other Behavioral Health Care Services

     Other behavioral health care services accounted for 7.0% of our revenue for the year ended December 31, 2009. This portion of our business primarily consists of our contract management business and a managed care plan in Puerto Rico.

     Through our contract management business we develop, organize and manage behavioral health and rehabilitation programs within third-party general medical/surgical hospitals. Our broad range of services can be customized into individual programs that meet specific inpatient facility and community requirements. Our contract management business is dedicated to providing high quality programs with integrity, innovation and sufficient flexibility to develop customized individual programs. We provide our customers with a variety of management options, including clinical and management infrastructure, personnel recruitment, staff orientation and supervision, corporate consultation and performance improvement plans. Under the management contracts, the hospital is the actual provider of the mental health services and utilizes its own facilities, support services, and generally its own nursing staff in connection with the operation of its programs. Our management contracts generally have an initial term of two to five years and are extended for successive one-year periods unless terminated by either party.

Seasonality of Services

     Due to the large number of children and adolescent patients served, our inpatient behavioral health care facilities typically experience lower patient volumes and revenue during the summer months, the year-end holidays and other periods when school is out of session.

Marketing

     Our local and regional marketing is led by clinical and business development representatives at each of our inpatient facilities. These individuals manage relationships among a variety of referral sources in their respective communities. Our national marketing efforts are focused on increasing the census at our RTCs from various state referral sources by developing relationships and identifying contracting opportunities in their respective territories.

Competition

     The inpatient behavioral health care industry is highly fragmented and is subject to continual changes in the method in which services are provided and the types of companies providing such services. We primarily compete with regional and local competitors. Some of our competitors are owned by governmental agencies and supported by tax revenue and others are owned by nonprofit corporations and may be supported to a large extent by endowments and charitable contributions.

     In addition, we compete for patients with other providers of mental health care services, including other inpatient behavioral health care facilities, medical/surgical hospitals, independent psychiatrists and psychologists. We also compete with hospitals, nursing homes, clinics, physicians’ offices and staffing companies for the services of registered nurses and other professionals. We attempt to differentiate ourselves from our competition through our singular focus on the provision of behavioral health care services, our reputation for the quality of our services, recruitment of first rate medical staff and accessibility to our facilities. In addition, we believe that the active development of our referral network and participation in selected managed care provider panels enable us to successfully compete for patients in need of our services.

Reimbursement

     Our inpatient owned and leased facilities receive payment for services from the federal government, primarily under the Medicare program; state governments, primarily under their respective Medicaid programs; private insurers, including managed care plans; and directly from patients. Most of our inpatient behavioral health facilities are certified as providers of Medicare and/or Medicaid

services by the appropriate governmental authorities. The requirements for certification are subject to change, and, in order to remain qualified for such programs, it may be necessary for us to make changes from time to time in our inpatient facilities, equipment, personnel and services. If an inpatient facility loses its certification, it will be unable to receive payment under the Medicare or Medicaid programs. Although we intend to continue participating in such programs, there can be no assurance that we will continue to qualify for participation.

     Patient service revenue is recorded net of contractual adjustments at the time of billing by our patient accounting systems at the amount we expect to collect. This amount is calculated automatically by our patient accounting systems based on contractually determined rates, or amounts reimbursable by Medicare or Medicaid under provisions of cost or prospective reimbursement formulas, or a combination thereof. Most payments are determined based on negotiated per-diem rates. An estimate of contractual allowances is manually recorded for unbilled services based upon these contractually negotiated rates.

     Any co-payments and deductibles due from patients are estimated at the time of admission based on the patient’s insurance plan, and payment of these amounts is requested prior to discharge. If the payment is not received prior to discharge or completion of service, collection efforts are made through our normal billing and collection process.

     Our consolidated day’s sales outstanding were 49 and 52 for the years ended December 31, 2009 and 2008, respectively.

Medicare

     Medicare provides insurance benefits to persons age 65 and over and some disabled persons. The Centers for Medicare and Medicaid Services (“CMS”) implemented a three-year transition period to reimbursement based on an inpatient services prospective payment system (“PPS”) from reimbursement based on a reasonable cost basis, starting with the cost reporting periods beginning on or after January 1, 2005. PPS was fully implemented for cost reporting periods beginning on or after January 1, 2008. Inpatient psychiatric facilities received a 2.19% increase in the Medicare prospective base rate beginning July 1, 2009.

     Under CMS regulations, the PPS base per diem is adjusted for specific patient and facility characteristics that increase the cost of patient care. Payment rates for individual inpatient facilities are adjusted to reflect geographic differences in wages and rural providers and teaching facilities receive an increased payment adjustment. Additionally, the base rate is adjusted by factors that influence the cost of an individual patient’s care, such as each patient’s diagnosis related group, certain other medical and psychiatric comorbidities (i.e., other coexisting conditions that may complicate treatment) and age. Because the cost of inpatient behavioral care tends to be greatest at admission and a few days thereafter, the per diem rate is adjusted for each day to reflect the number of days the patient has been in the facility. Medicare pays this per diem amount, as adjusted, regardless of whether it is more or less than a hospital’s actual costs. Please see www.cms.hhs.gov/InpatientPsychFacilPPS for additional information.

     Medicare generally deducts from the amount of its payments to hospitals an amount for patient “deductible or coinsurance,” or the amount that the patient is expected to pay. These deductible or coinsurance amounts that are not paid by the patient result in “bad debts.” Medicare will reimburse 70% of these bad debts to the extent that neither a Medicare patient, a guarantor or any secondary payor for that patient pays the Medicare coinsurance amount, provided that a reasonable collection effort or the patient’s indigence is documented.

Recovery Audit Contractors

     In 2005, CMS began using recovery audit contractors (“RACs”) to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private auditing firms examining Medicare claims filed by health care providers. The RAC program began as a demonstration project in three states (New York, California, and Florida), and was made permanent by the Tax Relief and Health Care Act of 2006. The Act required CMS to have RACs in place in all 50 states no later than 2010.

     RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process.

     RACs are paid a contingency fee based on the overpayments they identify and collect. Therefore, we anticipate that RACs will review claims submitted by our facilities in an attempt to identify possible overpayments. Although we believe the claims for reimbursement submitted to the Medicare program are accurate, we cannot predict whether we will be subject to RAC audits in the future, or if audited, what the result of such audits might be.

Medicaid

     Medicaid, a joint federal-state program that is administered by the respective states, provides health care benefits to qualifying individuals who are unable to afford medical care. All Medicaid funding is generally conditioned upon financial appropriations to state Medicaid agencies by the state legislatures. Many states face pressures to control their budgets, which has led some state

legislatures to reduce such appropriations.

     Some states may adopt health care reform measures that could modify the manner in which all health services are delivered and reimbursed, especially with respect to Medicaid recipients and other individuals funded by public resources. Most states have applied for and been granted federal waivers from current Medicaid regulations in order to allow them to serve some or all of their Medicaid participants through managed care providers. The majority of our Medicaid payments relate to the care of children and adolescents. We believe that children and adolescents are a patient class that is less susceptible to reductions in reimbursement rates.

Managed Care and Commercial Insurance Carriers

     Our inpatient facilities are also reimbursed for certain behavioral health care services by private payors including health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”), commercial insurance companies, employers and individual private payors. Our inpatient facilities offer discounts from established charges to certain large group purchasers of health care services. Generally, patients covered by HMOs, PPOs and other private insurers are responsible for payment of certain co-payments and deductibles.

     The Mental Health Parity Act of 1996 (“MHPA”) was a federal law that required annual or lifetime limits for mental health benefits be no lower than the dollar limits for medical/surgical benefits offered by a group health plan. MHPA applied to group health plans or health insurance coverage offered in connection with a group health plan that offered both mental health and medical/surgical benefits. However it did not require plans to offer mental health benefits. MHPA was scheduled to “sunset” on December 31, 2003; however, MHPA has been extended several times on a year to year basis, most recently through the end of 2009. The Mental Health and Addiction Equity Parity Act of 2008 (the “2008 MHPA”) was passed in October of 2008 and will take effect for plan years beginning after July 1, 2010. The 2008 MHPA will substantially increase the mental health benefits protection afforded by MHPA and will expand the coverage of MHPA to include substance abuse treatment. On February 2, 2010, CMS published interim final rules governing implementation of the 2008 MHPA. Among the changes in the interim final rules is an expansion of the parity requirements for aggregate lifetime and annual dollar limits to include protections for substance use disorder benefits. Approximately 45 states have also enacted some form of mental health parity laws.

Annual Cost Reports

     All facilities participating in the Medicare program and some Medicaid programs, whether paid on a reasonable cost basis or under a PPS, are required to meet certain financial reporting requirements. Federal regulations require submission of annual cost reports identifying costs associated with the services provided by each facility to Medicare beneficiaries and Medicaid recipients. Annual cost reports required under Medicare and some Medicaid programs are subject to routine governmental audits, which may result in adjustments to the amounts ultimately determined to be due to us under those reimbursement programs for periods prior to full implementation of PPS. These audits often require several years to reach the final determination of amounts earned under the programs. Nonetheless, once the Medicare fiscal intermediaries have issued a final Notice of Program Reimbursement (“NPR”) after an audit, any disallowances of claimed costs are due and payable within 30 days of receipt of the NPR. Providers have rights to appeal, and it is common to contest issues raised in audits of prior years’ cost reports.

Regulation and Other Factors

Licensure, Certification and Accreditation

     Health care facilities are required to comply with extensive regulation at the federal, state and local levels. Under these laws and regulations, health care facilities must meet requirements for state licensure as well as additional qualifications to participate in government programs, including the Medicare and Medicaid programs. These requirements relate to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, maintenance of adequate records, hospital use, rate-setting, and compliance with building codes and environmental protection laws. Facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation.

     All of the inpatient facilities operated by us are properly licensed under applicable state laws. Most of the inpatient facilities operated by us are certified under Medicare and/or Medicaid programs and accredited by The Joint Commission, a functional prerequisite to participation in the Medicare and Medicaid programs. Should any of our inpatient facilities lose its accreditation by The Joint Commission, or otherwise lose its certification under the Medicare and/or Medicaid programs, that inpatient facility may be unable to receive reimbursement from the Medicare and/or Medicaid programs. If a provider for whom we provide contract management services is excluded from any federal health care program, no services furnished by that provider would be reimbursed by any federal health care program. If one of our facilities is excluded from a federal health care program, that facility would not be eligible for reimbursement by any federal health care program. Additionally, many private third-party payors require Joint Commission accreditation and/or Medicare certification in order to contract with a facility.

     We believe that the inpatient facilities we own and operate are in substantial compliance with current applicable federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to

change and, in order to remain qualified, it may be necessary for us to affect changes in our inpatient facilities, equipment, personnel and services. Additionally, certain of the employed and contracted personnel working at our inpatient facilities are subject to state laws and regulations governing their particular area of professional practice.

Fraud and Abuse Laws

     Participation in the Medicare and/or Medicaid programs is heavily regulated by federal law and CMS regulation. If a hospital fails to substantially comply with the numerous federal laws governing that facility’s activities, the facility’s participation in the Medicare and/or Medicaid programs may be terminated and/or civil or criminal penalties may be imposed.

     The portion of the Social Security Act commonly known as the “Anti-Kickback Statute” prohibits the payment, receipt, offer or solicitation of anything of value with the intent of generating referrals or orders for services or items covered by a federal or state health care program. Violations of the Anti-Kickback Statute may be punished by criminal or civil penalties, exclusion from federal and state health care programs, imprisonment and damages up to three times the total dollar amount involved. While evidence of intent is a prerequisite to any finding that the Anti-Kickback Statute has been violated, the statute has been interpreted broadly by federal regulators and courts to prohibit the payment of anything of value if even one purpose of the payment is to influence the referral of Medicare or Medicaid business.

     The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal health care program. HIPAA created civil penalties for proscribed conduct, including upcoding and billing for medically unnecessary goods or services. HIPAA established new enforcement mechanisms to combat fraud and abuse. These new mechanisms include a bounty system, where a portion of any payments recovered is returned to the government agencies, as well as a whistleblower program. HIPAA also expanded the categories of persons that may be excluded from participation in federal and state health care programs.

     The Office of Inspector General (the “OIG”) of the Department of Health and Human Services (“HHS”) is responsible for identifying fraud and abuse activities in government programs. In order to fulfill its duties, the OIG performs audits, investigations and inspections.

     The OIG is authorized to publish regulations outlining activities and business relationships that would be deemed not to violate the Anti-Kickback Statute. These regulations are known as “safe harbor” provisions. The safe harbor provisions delineate standards that, if complied with, protect conduct that might otherwise be deemed to violate the Anti-Kickback Statute. While compliance with the safe harbor provisions effectively insulates a practice from being found in violation of the Anti-Kickback Statute, the failure of a particular activity to comply with the safe harbor provisions does not mean that the activity violates the Anti-Kickback Statute. Rather, failure to comply with the safe harbor provisions simply denies us the opportunity to avail ourselves of the affirmative defense of safe harbor compliance. We have a variety of financial relationships with physicians who refer patients to our owned and leased facilities, as well as to behavioral health and rehabilitation programs we manage, including employment contracts, professional service agreements with independent contractor agreements and medical/clinical director agreements. We use our best efforts to structure each of our arrangements, especially each of our business relationships with physicians, to fit as closely as possible within the applicable safe harbors. We cannot guarantee that these arrangements will not be scrutinized by government authorities or, if scrutinized, that they will be determined to be in compliance with the Anti-Kickback Statute or other applicable laws. If we violate the Anti-Kickback Statute, we would be subject to criminal and civil penalties and/or possible exclusion from participating in Medicare, Medicaid or other governmental health care programs.

     We provide unit management services to acute care hospitals. Some of our management agreements provide for fees payable to us that are not fixed fees, but may vary based on revenue, the level of services rendered or the number of patients treated in the unit. We believe that the management fees reflect fair market value for the services rendered and are not determined in a manner that takes into account the volume or value of any referrals. These management agreements satisfy many but not all of the requirements of the Personal Services and Management Contract Safe Harbor. We believe our management agreements comply with the Anti-Kickback Statute. As discussed above, the preamble to the Safe Harbor regulations specifically indicates that the failure of a particular business arrangement to comply with a Safe Harbor does not determine whether the arrangement violates the Anti-Kickback Statute.

     The Social Security Act also includes a provision commonly known as the “Stark Law.” This law prohibits physicians from referring Medicare and Medicaid patients to health care entities in which they or any of their immediate family members have an ownership or other financial interest for the furnishing of any “designated health services”. These types of referrals are commonly known as “self referrals.” A violation of the Stark Law may result in a denial of payment, require refunds to patients and the Medicare program, civil monetary penalties of up to $15,000 for each violation, civil monetary penalties of up to $100,000 for circumvention schemes, civil monetary penalties of up to $10,000 for each day that an entity fails to report required information, exclusion from the Medicare and Medicaid programs and other federal programs, and additionally could result in penalties for false claims. There are ownership and compensation arrangement exceptions for many customary financial arrangements between physicians and facilities, including employment contracts, personal services agreements, leases and recruitment agreements. We have structured our financial arrangements with physicians to comply with the statutory exceptions included in the Stark Law and subsequent regulations. However, future Stark Law regulations may interpret provisions of this law in a manner different from the manner in which we have interpreted them. We cannot predict the effect such future regulations will have on us.

     Many states in which we operate also have adopted, or are considering adopting, laws similar to the Anti-Kickback Statute and/or the Stark Law. Some of these state laws, commonly known as “all payor” laws, apply even if the government is not the payor. These statutes typically provide criminal and civil penalties as remedies. While there is little precedent for the interpretation or enforcement of these state laws, we have attempted to structure our financial relationships with physicians and others in accordance with these laws. However, if a state determines that we have violated such a law, we may be subject to criminal and civil penalties.

Emergency Medical Treatment and Active Labor Act

     The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal law that requires any Medicare participating hospital to conduct an appropriate medical screening examination, within the capabilities of the facility, of every person who presents at the hospital seeking treatment on an urgent basis. If the patient is suffering from an emergency medical condition, the facility must either stabilize that condition or make an appropriate transfer of the patient to a facility that can stabilize the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patient’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient, or if the hospital delays appropriate treatment, in order to first inquire about the patient’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program. In addition, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another hospital’s violation of the law can bring a civil suit against the hospital.

     The regulations adopted to implement EMTALA do not provide an abundance of specific guidance. These regulations effectively limit the types of emergency services that a hospital subject to EMTALA is required to provide to those services that are within the capability of the hospital. Although we believe that our inpatient behavioral health care facilities comply with the EMTALA regulations, we cannot predict whether CMS will implement additional requirements in the future or the cost of compliance with any such regulations.

The Federal False Claims Act

     The federal False Claims Act prohibits providers from, among other things, knowingly submitting false claims for payment to the federal government. This law has been used not only by the federal government, but also by individuals who bring an action on behalf of the government under the law’s “qui tam” or “whistleblower” provisions. When a private party brings a qui tam action under the federal False Claims Act, the defendant will generally not be aware of the lawsuit until the government determines whether it will intervene in the litigation.

     Civil liability under the federal False Claims Act can be up to three times the actual damages sustained by the government plus civil penalties for each separate false claim. There are many potential bases for liability under the federal False Claims Act, including claims submitted pursuant to a referral found to violate the Anti-Kickback Statute or the Stark Law. Although liability under the federal False Claims Act arises when an entity knowingly submits a false claim for reimbursement to the federal government, or knowingly and improperly avoids or decreases an obligation to pay money to the federal government, the federal False Claims Act defines the term “knowingly” broadly. Although simple negligence will not give rise to liability under the federal False Claims Act, submitting a claim with reckless disregard to its truth or falsity can constitute the knowing submission of a false claim. Additionally, the Fraud Enforcement and Recovery Act of 2009 (“FERA”) substantially broadened the scope of the False Claims Act. Most notably, FERA expands the definition of “false claim” to include claims made to contractors for funds spent on the government’s behalf and the retention of government overpayments, expands whistleblower protections, eases restrictions on the flow of information between the government and qui tam relators, and increases funding for government investigation and prosecution of alleged false claims. From time to time, companies in the health care industry, including us, may be subject to actions under the federal False Claims Act.

HIPAA Transaction, Privacy and Security Requirements

     HIPAA requires health plans, health care clearinghouses and health care providers (“Covered Entities”) to use standard data formats and code sets when electronically transmitting information in connection with various transactions, including health claims and equivalent encounter information, health care payment and remittance advice and health claim status, and establishes standards to protect the confidentiality, availability and integrity of health information maintained by Covered Entities, regardless of format. In 2009, the Health Information Technology for Economic and Clinical Health Act (“HITECH”) amended HIPAA to include a requirement that Covered Entities, such as us, self-report breaches of unsecured protected health information to affected patients, the HHS, and in some cases, the media. HITECH also modifies the responsibilities of HIPAA “business associates,” such as our managed unit division, and substantially increases the civil monetary penalties for HIPAA violations. We believe our inpatient facilities and, where applicable, other operations are in substantial compliance with the HIPAA regulations.

Other Medical Record Disclosure Laws

     Disclosure of health records relating to drug and alcohol treatment is regulated by the Federal Confidentiality of Alcohol and Drug Abuse Patient Records law. This law prohibits the disclosure and use of alcohol and drug abuse patient records that are maintained by any federally assisted alcohol and drug abuse programs. The privacy protections afforded substance abuse treatment records are much more stringent than the HIPAA privacy rules and in most cases permit disclosure only when the patient has specifically consented to disclosure. Violations of this law could result in criminal penalties, including fines of up to $500 for first offenses and up to $5,000 for each subsequent offense.

     Additionally, some states have laws specifically dealing with the disclosure of medical records related to treatment for substance abuse and/or mental health disorders. Both HIPAA and the Federal Confidentiality of Alcohol and Drug Abuse Patient Records law provide a baseline level of protection for disclosure of health records. As such, they supersede state laws that are more lenient on the same subject. However, the federal laws give way to any state law that provides more stringent protection of health records.

Certificates of Need (“CON”)

     The construction of new health care facilities, the acquisition or expansion of existing facilities, the transfer or change of ownership and the addition of new beds, services or equipment may be subject to laws in certain states that require prior approval by state regulatory agencies. These CON laws generally require that a state agency determine the public need for construction or acquisition of facilities or the addition of new services. Failure to obtain necessary state approval can result in the inability to expand facilities, add services, or complete an acquisition. Violations of these state laws may result in the imposition of civil sanctions or revocation of a facility’s license.

Corporate Practice of Medicine and Fee Splitting

     Some states have laws that prohibit unlicensed persons or business entities, including corporations or business organizations that own hospitals, from employing physicians. Some states also have adopted laws that prohibit direct and indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violation of these restrictions include loss of a physician’s license, civil and criminal penalties and rescission of business arrangements. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. Although we attempt to structure our arrangements with health care providers to comply with the relevant state laws and the few available regulatory interpretations, there can be no assurance that government officials charged with responsibility for enforcing these laws will not assert that we, or certain transactions in which we are involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with our interpretation.

Health Care Industry Investigations

     Significant media and public attention has focused in recent years on the hospital industry. Because the law in this area is complex and constantly evolving, ongoing or future governmental investigations or litigation may result in interpretations that are inconsistent with industry practices, including our practices. It is possible that governmental entities could initiate investigations of, or litigation against, inpatient facilities owned, leased, or managed by us in the future and that such matters could result in significant penalties as well as adverse publicity.

Risk Management

     As is typical in the health care industry, we are subject to claims and legal actions by patients in the ordinary course of business. To cover these claims, we maintain professional malpractice liability insurance and general liability insurance in amounts we believe to be sufficient for our operations, although it is possible that some claims may exceed the scope of the coverage in effect. At various times in the past, the cost of malpractice insurance and other liability insurance has fluctuated significantly. Therefore, there can be no assurance that such insurance will continue to be available at reasonable prices which would allow us to maintain adequate levels of coverage.

Conversion Legislation

     Many states have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have such legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets. These legislative and administrative efforts primarily focus on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the not-for-profit seller. These reviews and, in some instances, approval processes can add additional time to the closing of a not-for-profit hospital acquisition. Future actions by state legislators or attorneys general may seriously delay or even prevent our ability to acquire certain hospitals.

Regulatory Compliance Program

     We are committed to ethical business practices and to operating in accordance with all applicable laws and regulations. Our compliance program was established to ensure that all employees have a solid framework for business, legal, ethical, and employment practices. Our compliance program establishes mechanisms to aid in the identification and correction of any actual or perceived violations of any of our policies or procedures or any other applicable rules and regulations. We have appointed a Chief Compliance Officer as well as compliance coordinators at each inpatient facility. The Chief Compliance Officer heads our Compliance Committee, which consists of senior management personnel and two members of our board of directors. Employee training is a key component of the compliance program. All employees receive training during orientation and annually thereafter.

Insurance

     We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. Our operations have professional and general liability insurance in umbrella form for claims in excess of a $3.0 million self-insured retention with an insured excess limit of $75.0 million. The self-insured reserves for professional and general liability risks are calculated based on historical claims, demographic factors, industry trends, severity factors, and other actuarial assumptions calculated by an independent third-party actuary. This estimated accrual for professional and general liabilities could be significantly affected should current and future occurrences differ from historical claim trends and expectations. We have utilized our captive insurance company to manage the self-insured retention. While claims are monitored closely when estimating professional and general liability accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in these estimates.

Employees

     As of December 31, 2009, we employed approximately 23,000 employees, of whom approximately 16,000 are full-time employees. Approximately 22,000 employees staff our owned and leased inpatient behavioral health care facilities, approximately 1,100 employees staff our other behavioral health care businesses and approximately 200 employees are in corporate management including finance, accounting, legal, operations management, development, reimbursement, compliance, risk management, information systems, internal audit and human resources. We consider our employee relations to be in good standing.

Available Information

     We make available free of charge through our website, which you can find at www.psysolutions.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Segments

     See Note 13 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for financial information about our segments, as defined by U.S. generally accepted accounting principles.

Executive Officers

     Information regarding our executive officers is set forth in Part III, Item 10 of this Annual Report on Form 10-K and is incorporated herein by reference.

Item 1A.		Risk Factors

     The following are some of the risks and uncertainties that could cause our actual financial condition, results of operations, business and prospects to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K or our other filings with the SEC. These risks, as well as the risks described in “Reimbursement,” “Regulation and Other Factors,” and “Forward-Looking Statements” should be carefully considered before making an investment decision regarding us. The risks and uncertainties described below are not the only ones we face and there may be additional risks that we are not presently aware of or that we currently consider not likely to have a significant impact. If any of the following risks actually occurred, our business, financial condition and operating results could suffer, and the trading price of our common stock could decline.

If we fail to comply with extensive laws and government regulations, we could suffer penalties, lose our licenses or be excluded from health care programs. Also, any changes to the laws and regulations governing our business, or the interpretation and enforcement of those laws or regulations, could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

     The health care industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

	•		licensure and certification;
	•		relationships with physicians and other referral sources;

	•		quality of medical services;
	•		qualifications of medical and support personnel;
	•		confidentiality of health-related information and medical records;
	•		billing for services;
	•		cost reporting;
	•		operating policies and procedures; and
	•		addition of facilities and services.

     Among these laws are the Anti-Kickback Statute and the Stark Law. These laws impact the relationships that we may have with physicians and other referral sources. The OIG has enacted safe harbor regulations that outline practices that are deemed protected from prosecution under the Anti-Kickback Statute. Our current financial relationships with physicians and other referral sources may not qualify for safe harbor protection under the Anti-Kickback Statute. Failure to meet a safe harbor does not mean that the arrangement automatically violates the Anti-Kickback Statute, but may subject the arrangement to greater scrutiny. Further, we cannot guarantee that practices that are outside of a safe harbor will not be found to violate the Anti-Kickback Statute.

     Additionally, we are subject to various routine and non-routine reviews, audits and investigations by the Medicare and Medicaid programs and other federal and state governmental agencies, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements.

     If we fail to comply with the Anti-Kickback Statute, the Stark Law or other applicable laws and regulations, we could be subjected to criminal penalties, civil penalties and exclusion of one or more of our inpatient facilities from participation in the Medicare, Medicaid and other federal and state health care programs. In addition, if we do not operate our inpatient facilities in accordance with applicable law, our inpatient facilities may lose their licenses or the ability to participate in third party reimbursement programs. If we become subject to material fines or, if other sanctions or other corrective actions are imposed on us, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

     While we believe we are in substantial compliance with all applicable laws, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality, and could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows by:

	•		increasing our liability;
	•		increasing our administrative and other costs by requiring us to make changes in our inpatient facilities, equipment or personnel;
	•		increasing or decreasing mandated services;
	•		forcing us to restructure our relationships with referral sources and providers; or
	•		requiring us to implement additional or different programs and systems.

     A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, financial condition, results of operations or prospects and our business reputation could suffer significantly. In addition, we are unable to predict whether other legislation or regulations at the federal or state level will be adopted or the effect such legislation or regulations will have on us.

Health care reform measures could adversely affect our business.

     The United States Congress is currently considering a variety of bills intended to significantly reform the U.S. health care system. All versions of the proposed legislation are intended, among other things, to increase access to health insurance and slow the rate of growth of health care spending. Any adopted reform measures could adversely impact the amount paid for services we provide to our patients who are covered by Medicare, Medicaid and other governmental agencies or third party payors. While we cannot predict what, if any, legislative or regulatory proposals will be adopted, adoption of such proposals could affect our reimbursement and materially harm our business, financial condition and results of operations.

The economic downturn and continued deficit spending by the federal government and state budget pressures may result in a reduction in payments and covered services. Lower reimbursement rates for our services would have an adverse effect on our business, financial condition and results of operations.

     Approximately 57.1% of our revenue comes from the Medicare and Medicaid programs and various state agencies. Continued deficit spending due to adverse developments in the United States and global economies, bailout programs directed at specific industries and other governmental measures could lead to a reduction in federal government expenditures, including governmentally funded programs such as Medicare and Medicaid. In addition, state budget pressures may cause reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for our services. Reductions in expenditures for these programs could have a material adverse effect on our business and our consolidated financial condition, results of operations and cash flows.

     Many of the patients admitted to the units we manage for acute care hospitals are eligible for Medicare coverage. As a result, the providers rely upon payment from Medicare for the services. Many of the patients are also eligible for Medicaid payments. To the extent that a hospital deems revenue for a program we manage to be inadequate, it may seek to terminate its contract with us or not renew the contract. Similarly, we may not add new management contracts if prospective customers do not believe that such programs will generate sufficient revenue.

Government investigations may reduce our earnings. Companies within the health care industry continue to be the subject of federal and state investigations, which increases the risk that we may become subject to additional investigations in the future.

     Both federal and state government agencies as well as private payors are devoting increased attention and resources to anti-fraud initiatives against health care providers and have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of health care organizations. These investigations relate to a wide variety of topics, including:

	•		cost reporting and billing practices;
	•		quality of care;
	•		financial relationships with referral sources;
	•		medical necessity of services provided; and
	•		treatment of indigent patients, including emergency medical screening and treatment requirements.

     The OIG and the U.S. Department of Justice have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Moreover, health care providers are subject to civil and criminal false claims laws, including the federal False Claims Act, which allows private parties to bring whistleblower lawsuits against private companies doing business with or receiving reimbursement under federal health care programs. Some states have adopted similar state whistleblower and false claims provisions. Publicity associated with the substantial amounts paid by other health care providers to settle these lawsuits may encourage our current and former employees and other health care providers to bring whistleblower lawsuits.

     In July 2008, we received a subpoena from the United States Department of Justice requesting certain information regarding one of our inpatient facilities in Chicago, Illinois. We have been cooperating, and will continue to cooperate, with the Department of Justice in connection with its investigation. A hold prohibiting admissions to this facility of patients in the custody of the Illinois Department of Children and Family Services remains in effect. We are uncertain when the hold will be removed. The outcome of the Department of Justice’s inquiry is uncertain, and adverse developments or outcomes can result in adverse publicity, significant expenses, monetary damages, penalties or injunctive relief against us that could significantly reduce our earnings and cash flows and harm our business.

The volatility and disruption of the capital and credit markets and adverse changes in the United States and global economies could impact our ability to access both available and affordable financing, and without such financing, we may be unable to achieve our objectives for strategic acquisitions and internal growth.

     The United States and global capital and credit markets have been experiencing extreme volatility and disruption at unprecedented levels. Significant declines in the United States housing market, including falling home prices, the increasing number of foreclosures and higher unemployment rates, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions or have increased their rates significantly compared to the prior year.

     Our acquisition program requires capital resources. Likewise, the operation of existing inpatient facilities requires ongoing capital expenditures for renovation, expansion and the upgrade of equipment and technology. While we intend to finance strategic acquisitions and internal growth with cash flows from operations and borrowings under our revolving credit facility, we may require sources of capital in addition to those presently available to us. Due to the existing uncertainty in the capital and credit markets, as well as our level of indebtedness and restrictions set forth in our debt agreements, additional capital may not be available on terms acceptable to us or at all, and this may result in our inability to achieve objectives for strategic acquisitions and capital expenditures.

Further, in the event we need additional funds, and we are unable to raise the necessary funds on acceptable terms, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected. If we are not able to obtain additional financing, then we may not be able to consummate acquisitions or undertake capital expenditures.

As a provider of health care services, we are subject to claims and legal actions by patients and others.

     We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. Facilities acquired by us may have unknown or contingent liabilities, including liabilities related to patient care and liabilities for failure to comply with health care laws and regulations, which could result in large claims and significant defense costs. Although we generally seek indemnification covering these matters from prior owners of facilities we acquire, material liabilities for past activities of acquired facilities may exist and such prior owners may not be able to satisfy their indemnification obligations. We are also susceptible to being named in claims brought related to patient care and other matters at inpatient facilities owned by third parties and managed by us.

     A stockholder lawsuit alleging violation of federal securities laws was filed during the third quarter of 2009. We believe the lawsuit is without merit and are defending it vigorously. We believe the ultimate outcome of the lawsuit will not have a material adverse effect on our results of operations, financial position or cash flows; however, there can be no assurance that an adverse determination will not have a material adverse effect on us.

     To protect ourselves from the cost of these claims, professional malpractice liability insurance and general liability insurance coverage is maintained in amounts and with self-insured retention common in the industry. We have professional and general liability insurance in umbrella form for claims in excess of a $3.0 million self-insured retention with an insured excess limit of $75.0 million for all of our inpatient facilities. The self-insured reserves for professional and general liability risks are calculated based on historical claims, demographic factors, industry trends, severity factors and other actuarial assumptions calculated by an independent third-party actuary. This estimated accrual for professional and general liabilities could be significantly affected should current and future occurrences differ from historical claim trends and expectations. We have utilized our captive insurance company to manage the self-insured retention. While claims are monitored closely when estimating professional and general liability accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in these estimates. There are no assurances that our insurance will cover all claims (e.g., claims for punitive damages) or that claims in excess of our insurance coverage will not arise. A successful lawsuit against us that is not covered by, or is in excess of, our insurance coverage may have a material adverse effect on our business, financial condition and results of operations. This insurance coverage may not continue to be available at a reasonable cost, especially given the significant increase in insurance premiums generally experienced in the health care industry.

We depend on our ability to attract and retain key management personnel.

     We are highly dependent on our senior management team, which has many years of experience addressing the broad range of concerns and issues relevant to our business. Our senior management team includes the talented managers of our divisions, who have extensive experience in all aspects of health care. The loss of key management or the inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

The agreements governing our indebtedness contain various covenants that limit our discretion in the operation of our business and our failure to satisfy requirements in these agreements could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

     Our senior secured credit facilities and the indentures governing the 7³/4% Senior Subordinated Notes due 2015 (the “7³/4% Notes”) contain, among other things, covenants that may restrict our ability and our subsidiary guarantors’ ability to finance future operations or capital needs or to engage in other business activities. These debt instruments restrict, among other things, our ability and the ability of our subsidiaries to:

	•		incur additional indebtedness and issue preferred stock;
	•		redeem or repurchase stock, pay dividends or make other distributions;
	•		make certain restricted payments and investments;
	•		create liens;
	•		sell assets, including the capital stock of our restricted subsidiaries;
	•		merge or consolidate with other entities; and
	•		engage in transactions with affiliates.

     In addition, our senior secured credit facilities require us to meet specified financial ratios and tests that may require that we take action to reduce our debt or act in a manner contrary to our business objectives. Events beyond our control, including changes in general business and economic conditions, may affect our ability to meet the specified financial ratios and tests. We cannot assure you that we will meet the specified ratios and tests or that the lenders under our senior secured credit facilities will waive any failure to meet the specified ratios or tests. A breach of any of these covenants would result in a default under our senior secured credit facilities and any resulting acceleration thereunder may result in a default under the indentures governing the 7³/4% Notes. If an event of default under our senior secured credit facilities occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable, and terminate their commitments to make further extensions of credit (including our ability to borrow under our revolving credit facility). Any breach or default under our debt agreements could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Our substantial indebtedness could adversely affect our financial condition and our ability to fulfill other obligations.

     As of December 31, 2009, our total outstanding indebtedness was approximately $1.2 billion. Our indebtedness could have a material adverse effect on our business and consolidated financial position, results of operations and cash flows and impair our ability to fulfill other obligations in several ways, including:

	•		increasing our vulnerability to general adverse economic and industry conditions;
	•		requiring that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions and general corporate requirements;
	•		limiting our ability to obtain additional financing to fund future capital expenditures, acquisitions, working capital and general corporate requirements; and
	•		placing us at a competitive disadvantage to our competitors that have less indebtedness.

     In the event we incur additional indebtedness, the risks described above could increase.

Acquired businesses expose us to increased operating risks.

     Acquisitions of inpatient facilities and other businesses may strain our resources, including management, information systems, regulatory compliance and other areas. Acquisitions expose us to additional business and operating risk and uncertainties, including:

	•		our ability to effectively manage the expanded activities;
	•		our ability to realize our investment in the increased number of inpatient facilities and other businesses;
	•		our exposure to unknown liabilities; and
	•		our ability to meet contractual obligations.

     If we are unable to manage the acquired businesses efficiently or effectively, or are unable to attract and retain additional qualified management personnel to run the expanded operations, it could have a material adverse effect on our business, financial condition and results of operations.

If we fail to integrate or improve, where necessary, the operations of existing and acquired inpatient facilities, we may be unable to achieve our growth strategy, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

     We may be unable to maintain or increase the profitability of, or operating cash flows at, existing behavioral health care facilities and acquired inpatient facilities, fully integrate the operations of an acquired facility or business in an efficient and cost-effective manner or otherwise achieve the intended benefit of our growth strategy. To the extent that we are unable to enroll in third party payor plans in a timely manner following an acquisition, we may experience a decrease in cash flow or profitability. The failure to effectively integrate any acquired businesses could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

     Hospital acquisitions generally require a longer period to complete than acquisitions in many other industries and are subject to additional regulatory uncertainty. Many states have adopted legislation regarding the sale or other disposition of facilities operated by not-for-profit entities. In other states that do not have specific legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste. These legislative and administrative efforts focus primarily on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the non-profit seller. In addition, the acquisition of facilities in certain states requires advance regulatory approval under “certificate of need” or state licensure regulatory regimes. These state-level procedures could seriously delay or even prevent us from acquiring inpatient facilities, even after significant transaction costs have been incurred, and prevent us from achieving our growth strategy, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

We depend on our relationships with physicians and other health care professionals who provide services at our inpatient facilities.

     Our business depends upon the efforts and success of the physicians and other health care professionals who provide health care services at our inpatient facilities and the strength of the relationships with these physicians and other health care professionals.

     Our business and consolidated financial condition, results of operations and cash flows could be adversely affected if a significant number of physicians or a group of physicians:

	•		terminate their relationship with, or reduce their use of, our inpatient facilities;
	•		fail to maintain acceptable quality of care or to otherwise adhere to professional standards;
	•		suffer damage to their reputation; or
	•		exit the market entirely.

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

     Each year we are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing the effectiveness of internal control over financial reporting. During the course of our annual testing we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price.

We may be required to spend substantial amounts to comply with legislative and regulatory initiatives relating to privacy and security of patient health information and standards for electronic transactions.

     There are currently numerous legislative and regulatory initiatives at the federal and state levels addressing patient privacy and security concerns. In particular, federal regulations issued under HITECH require our facilities to comply with additional standards to protect the privacy, security and integrity of health care information. These regulations may require extensive administrative requirements, technical and physical information security requirements, restrictions on the use and disclosure of individually identifiable patient health and related financial information and have provided patients with additional rights with respect to their health information. Compliance with these regulations requires substantial expenditures, which could negatively impact our financial results. In addition, our management has spent, and may spend in the future, substantial time and effort on compliance measures.

Forward-Looking Statements

     This Annual Report on Form 10-K and other materials we have filed or may file with the Securities and Exchange Commission (the “SEC”), as well as information included in oral statements or other written statements made, or to be made, by our senior management, contain, or will contain, disclosures that are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “project,” “continue,” “should” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including those set forth below, which could significantly affect our current plans and expectations and future financial condition and results.

     We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports.

     While it is not possible to identify all these factors, we continue to face many risks and uncertainties that could cause actual results to differ from those forward-looking statements, including:

	•		risks inherent to the health care industry, including the impact of unforeseen changes in regulation and the potential adverse impact of government investigations, liabilities and other claims asserted against us;
	•		uncertainty as to changes in U.S. general economic activity and the impact of these changes on our business;

	•		economic downturn resulting in efforts by federal and state health care programs and managed care companies to reduce reimbursement rates for our services;
	•		health care reform proposals that, if adopted, could adversely impact reimbursement rates for our services;
	•		potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional inpatient facilities on favorable terms;
	•		our ability to comply with applicable licensure and accreditation requirements;
	•		our ability to comply with extensive laws and government regulations related to billing, physician relationships, adequacy of medical care and licensure;
	•		our ability to retain key employees who are instrumental to our operations;
	•		our ability to successfully integrate and improve the operations of acquired inpatient facilities;
	•		our ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act;
	•		our substantial indebtedness and adverse changes in credit markets impacting our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs;
	•		our ability to maintain favorable and continuing relationships with physicians and other health care professionals who use our inpatient facilities;
	•		our ability to ensure confidential information is not inappropriately disclosed and that we are in compliance with federal and state health information privacy standards;
	•		our ability to comply with federal and state governmental regulation covering health care-related products and services on-line, including the regulation of medical devices and the practice of medicine and pharmacology;
	•		our ability to obtain adequate levels of general and professional liability insurance;
	•		future trends for pricing, margins, revenue and profitability that remain difficult to predict in the industries that we serve;
	•		fluctuations in the market value of our common stock;
	•		negative press coverage of us or our industry that may affect public opinion; and
	•		those risks and uncertainties described from time to time in our filings with the SEC.

     We caution you that the factors listed above, as well as the risk factors included in this Annual Report on Form 10-K, may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statements.

Item 1B.		Unresolved Staff Comments.

     We have no unresolved SEC staff comments.

Item 2.		Properties.

     We operate 94 owned or leased inpatient behavioral health care facilities with approximately 11,000 licensed beds in 32 states, Puerto Rico, and the U.S. Virgin Islands. The following table sets forth the name, location, number of licensed beds and the acquisition date for each of our owned and leased inpatient behavioral health care facilities.

										Date
Facility		Location		Beds				Own/Lease		Acquired/Opened
Cypress Creek Hospital		Houston, TX			96			Own		9/01
West Oaks Hospital		Houston, TX			160			Own		9/01
Texas NeuroRehab Center		Austin, TX			151			Own		11/01
Holly Hill Hospital		Raleigh, NC			152			Own		12/01
Riveredge Hospital		Forest Park, IL			224			Own		7/02

										Date
Facility		Location		Beds				Own/Lease		Acquired/Opened
Jefferson Trail Treatment Center for Children		Charlottesville, VA			100			Lease		4/03
Cedar Springs Hospital		Colorado Springs, CO			110			Own		4/03
Laurel Ridge Treatment Center		San Antonio, TX			252			Own		4/03
San Marcos Treatment Center		San Marcos, TX			265			Own		4/03
Shadow Mountain Behavioral Health System		Tulsa, OK			209			Own		4/03
Laurel Oaks Behavioral Health Center		Dothan, AL			115			Own		6/03
Hill Crest Behavioral Health Services		Birmingham, AL			205			Own		6/03
Gulf Coast Treatment Center		Fort Walton Beach, FL			168			Own		6/03
Manatee Palms Youth Services		Bradenton, FL			60			Own		6/03
Havenwyck Hospital		Auburn Hills, MI			184			Own		6/03
Heartland Behavioral Health Services		Nevada, MO			159			Own		6/03
Brynn Marr Hospital		Jacksonville, NC			88			Own		6/03
Benchmark Behavioral Health System		Woods Cross, UT			151			Own		6/03
Macon Behavioral Health Treatment Center		Macon, GA			155			Own		6/03
Manatee Adolescent Treatment Services		Bradenton, FL			85			Own		6/03
Gulf Coast RTCs		Crestview, FL			254†			Lease		6/03
Alliance Health Center		Meridian, MS			194			Own		11/03
Calvary Center		Phoenix, AZ			50			Lease		12/03
Brentwood Hospital		Shreveport, LA			200			Own		3/04
Brentwood Behavioral Healthcare of Mississippi		Flowood, MS			107			Own		3/04
Palmetto Lowcountry Behavioral Health		North Charleston, SC			112			Own		5/04
Palmetto Pee Dee Behavioral Health		Florence, SC			59			Own		5/04
Fort Lauderdale Hospital		Fort Lauderdale, FL			100			Lease		6/04
Millwood Hospital		Arlington, TX			120			Lease		6/04
Pride Institute		Eden Prairie, MN			42			Own		6/04
Summit Oaks Hospital		Summit, NJ			126			Own		6/04
North Spring Behavioral Healthcare		Leesburg, VA			77			Own		6/04
Peak Behavioral Health Services		Santa Teresa, NM			84			Own		6/04
Alhambra Hospital		Rosemead, CA			97			Own		7/05
Belmont Pines Hospital		Youngstown, OH			102			Own		7/05
Brooke Glen Behavioral Hospital		Fort Washington, PA			146			Own		7/05
Columbus Behavioral Center		Columbus, IN			61			Own		7/05
Cumberland Hospital		New Kent, VA			136			Own		7/05
Fairfax Hospital		Kirkland, WA			133			Own		7/05
Fox Run Hospital		St. Clairsville, OH			100			Own		7/05
Fremont Hospital		Fremont, CA			96			Own		7/05
Heritage Oaks Hospital		Sacramento, CA			76			Own		7/05
Intermountain Hospital		Boise, ID			125			Own		7/05
Meadows Hospital		Bloomington, IN			78			Own		7/05
Mesilla Valley Hospital		Las Cruces, NM			168			Own		7/05
Montevista Hospital		Las Vegas, NV			101			Own		7/05
Pinnacle Pointe Hospital		Little Rock, AR			124			Own		7/05
Sierra Vista Hospital		Sacramento, CA			72			Own		7/05
Streamwood Behavioral Health		Streamwood, IL			371			Own		7/05
Valle Vista Hospital		Greenwood, IN			102			Own		7/05
West Hills Hospital		Reno, NV			95			Own		7/05
Willow Springs Center		Reno, NV			76			Own		7/05
Canyon Ridge Hospital		Chino, CA			106			Own		8/05
Atlantic Shores Hospital		Fort Lauderdale, FL			72			Own		1/06
Wellstone Regional Hospital		Jeffersonville, IN			100			Own		1/06
Diamond Grove Center		Louisville, MS			55			Own		5/06
Hickory Trail Hospital		DeSoto, TX			86			Own		7/06
National Deaf Academy		Mount Dora, FL			132			Own		7/06
Windmoor Healthcare		Clearwater, FL			100			Own		9/06
University Behavioral Center		Orlando, FL			104			Own		9/06
Sandy Pines Hospital		Tequesta, FL			80			Own		9/06
Cumberland Hall		Hopkinsville, KY			64			Own		12/06
Panamericano		Cidra, Puerto Rico			240			Own		12/06
The Pines Residential Treatment Center		Portsmouth, VA			424			Own		12/06

										Date
Facility		Location		Beds				Own/Lease		Acquired/Opened
Palmetto Summerville		Summerville, SC			60			Lease		12/06
Three Rivers Residential Treatment — Midlands Campus		West Columbia, SC			59			Own		12/06
Virgin Islands Behavioral Services		St. Croix, U.S. Virgin Islands			30			Own		12/06
Virginia Beach Psychiatric Center		Virginia Beach, VA			100			Own		12/06
Three Rivers Behavioral Health		West Columbia, SC			118			Own		01/07
Copper Hills Youth Center		West Jordan, UT			153			Own		05/07
MeadowWood Behavioral Health System		New Castle, DE			58			Own		05/07
High Point Treatment Center		Cooper City, FL			68			Own		05/07
Focus by the Sea		St. Simons, GA			101			Own		05/07
Arrowhead Behavioral Health		Maumee, OH			42			Own		05/07
Friends Hospital		Philadelphia, PA			219			Own		05/07
Kingwood Pines Hospital		Kingwood, TX			78			Own		05/07
Windsor-Laurelwood Center		Willoughby, OH			160			Lease		05/07
Lighthouse Care Center of Augusta		Augusta, GA			106			Own		05/07
Lighthouse Care Center of Conway		Conway, SC			108			Own		05/07
Michiana Behavioral Health Center		Plymouth, IN			80			Own		05/07
Poplar Springs Hospital		Petersburg, VA			199			Own		05/07
River Park Hospital		Huntington, WV			187			Own		05/07
Lighthouse Care Center of Berkley		Summerville, SC			*			Own		05/07
Austin Lakes Hospital		Austin, TX			48			Lease		08/07
The Hughes Center for Exceptional Children		Danville, VA			56			Own		09/07
The Brook — Dupont		Louisville, KY			66			Own		03/08
River Point Behavioral Health		Jacksonville, FL			99			Own		03/08
The Brook — KMI		Louisville, KY			106			Own		03/08
The Vines		Ocala, FL			88			Own		03/08
Wekiva Springs		Jacksonville, FL			68			Own		03/08
Lincoln Prairie Behavioral Health Center		Springfield, IL			80			Own		05/08
Rolling Hills Hospital		Franklin, TN			80			Own		01/09
Prairie St. John’s		Fargo, ND			131			Own		09/09
Emerald Coast Behavioral Hospital		Panama City, FL			90			Own		09/09

     In addition, our principal executive offices are located in approximately 65,000 square feet of leased space in Franklin, Tennessee. We do not anticipate that we will experience any difficulty in renewing our lease upon its expiration in February 2012, or obtaining different space on comparable terms if such lease is not renewed. We believe our executive offices and our hospital properties and equipment are generally well maintained, in good operating condition and adequate for our present needs.

Item 3.		Legal Proceedings.

     A stockholder lawsuit alleging violations of federal securities laws was filed during the third quarter of 2009. We believe the lawsuit is without merit and are defending it vigorously.

     We are subject to various claims and legal actions that arise in the ordinary course of our business. In the opinion of management, we are not currently a party to any proceeding that would have a material adverse effect on our financial condition or results of operations.

Item 4.		Submission of Matters to a Vote of Security Holders.

     None.

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     Our common stock trades on The NASDAQ Global Select Market under the symbol “PSYS”. The table below sets forth, for the calendar quarters indicated, the high and low sales prices per share for our common stock as reported on The NASDAQ Global Select Market.

		High				Low
2008
First Quarter		$	34.31			$	27.17
Second Quarter		$	39.62			$	30.45
Third Quarter		$	40.90			$	32.89
Fourth Quarter		$	39.00			$	22.86
2009
First Quarter		$	28.74			$	12.49
Second Quarter		$	23.25			$	13.03
Third Quarter		$	30.14			$	20.98
Fourth Quarter		$	27.99			$	17.63

     At the close of business on February 22, 2009, there were approximately 191 holders of record of our common stock.

     We currently intend to retain future earnings for use in the expansion and operation of our business. Our Credit Agreement, as amended, prohibits us from paying dividends on our common stock. Also, the indenture governing our 7³/₄% Notes provides certain financial conditions that must be met in order for us to pay dividends. Subject to the terms of applicable contracts, the payment of any future cash dividends will be determined by our Board of Directors in light of conditions then-existing, including our earnings, financial condition and capital requirements, restrictions in financing agreements, business opportunities and conditions, and other factors.

     Item 6. Selected Financial Data.

     The selected financial data presented below for the years ended December 31, 2009, 2008 and 2007, and at December 31, 2009 and 2008, are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected financial data for the years ended December 31, 2006 and 2005, and at December 31, 2007, 2006 and 2005, are derived from our audited consolidated financial statements not included herein. The audited consolidated financial statements for the years ended December 31, 2006 and 2005 and at December 31, 2007, 2006 and 2005 have been reclassified for discontinued operations. The selected financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Psychiatric Solutions, Inc.
Selected Financial Data
As of and for the Years Ended December 31,

		2009				2008				2007				2006				2005
		(In thousands, except per share amounts and operating data)
Income Statement Data:
Revenue		$	1,805,361			$	1,696,116			$	1,414,700			$	991,724			$	689,408
Costs and expenses:
Salaries, wages and employee benefits			1,005,204				938,363				787,301				559,715				377,762
Other operating expenses			452,356				438,499				365,258				255,206				193,851
Provision for doubtful accounts			36,414				34,334				27,343				19,364				13,678
Depreciation and amortization			44,778				38,843				30,113				20,001				14,335
Interest expense			71,549				75,982				73,887				39,967				26,169
Other expenses			—				—				8,179				—				21,871
Total costs and expenses			1,610,301				1,526,021				1,292,081				894,253				647,666
Income from continuing operations before income taxes			195,060				170,095				122,619				97,471				41,742
Provision for income taxes			74,889				64,457				46,200				36,785				16,080
Income from continuing operations		$	120,171			$	105,638			$	76,419			$	60,686			$	25,662
Net income attributable to PSI stockholders		$	117,617			$	104,953			$	76,208			$	60,632			$	27,154
Basic earnings per share from continuing operations attributable to PSI stockholders		$	2.16			$	1.89			$	1.40			$	1.15			$	0.57
Basic earnings per share attributable to PSI stockholders		$	2.12			$	1.89			$	1.40			$	1.15			$	0.61
Shares used in computing basic earnings per share			55,564				55,408				54,258				52,953				44,792
Diluted earnings per share from continuing operations attributable to PSI stockholders		$	2.14			$	1.87			$	1.37			$	1.12			$	0.55
Diluted earnings per share attributable to PSI stockholders		$	2.10			$	1.87			$	1.37			$	1.12			$	0.59
Shares used in computing diluted earnings per share			56,116				56,267				55,447				54,169				46,296
Balance Sheet Data:
Cash		$	6,815			$	51,271			$	39,970			$	18,520			$	54,533
Working capital			177,918				233,906				161,681				103,287				138,843
Property and equipment, net			931,730				820,453				678,012				529,658				368,977
Total assets			2,507,240				2,505,990				2,179,505				1,581,746				1,176,131
Total debt			1,187,079				1,314,397				1,172,024				743,307				482,389
Stockholders’ equity			1,030,335				889,885				754,742				627,779				539,712
Operating Data:
Number of facilities at period end			94				91				86				70				55
Number of licensed beds			11,290				10,520				9,931				8,114				6,396
Admissions			177,967				163,616				138,454				106,451				76,795
Patient days			2,881,063				2,749,658				2,406,368				1,875,635				1,413,231
Average length of stay			16				17				17				18				18

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

     The following discussion and analysis should be read in conjunction with the selected financial data and the accompanying consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K.

Overview

     Our business strategy is to acquire inpatient behavioral health care facilities and improve operating results within our inpatient facilities and our other behavioral health care operations. From 2001 to 2004, we acquired 34 inpatient behavioral health care facilities. During 2005, we acquired 20 inpatient behavioral health care facilities in the acquisition of Ardent Health Services, Inc. and one other inpatient facility. During 2006, we acquired 19 inpatient behavioral health care facilities, including nine inpatient facilities with the acquisition of the capital stock of Alternative Behavioral Services, Inc. on December 1, 2006. During 2007, we acquired 16 inpatient behavioral health care facilities, including 15 inpatient facilities in the acquisition of Horizon Health Corporation (“Horizon Health”). During 2008, we acquired five inpatient behavioral health care facilities from United Medical Corporation (“UMC”) and opened Lincoln Prairie Behavioral Health Center, an 80-bed inpatient facility in Springfield, Illinois. During 2009, we opened Rolling Hills Hospital, an 80-bed inpatient facility in Franklin, Tennessee, acquired two inpatient behavioral health care facilities, and completed the sale of our EAP business.

     We strive to improve the operating results of our inpatient behavioral health care operations by providing the highest quality service, expanding referral networks and marketing initiatives and meeting increased demand for behavioral health care services by expanding our services and developing new services. We also attempt to improve operating results by maintaining appropriate staffing ratios, controlling contract labor costs and reducing supply costs through group purchasing. Our same-facility revenue from owned and leased inpatient facilities increased 5.3% for the year ended December 31, 2009 compared to the year ended December 31, 2008, primarily as a result of increases in same-facility patient days and same-facility revenue per patient day. Same-facility patient days increased 3.5% and same-facility revenue per patient day increased 1.8% in 2009 compared to 2008. Same-facility growth refers to the comparison of each inpatient facility owned during 2008 with the comparable period in 2009, adjusted for closures and combinations for comparability purposes.

     Income from continuing operations before income taxes increased to $195.1 million, or 10.8% of revenue, for the year ended December 31, 2009 compared to $170.1 million, or 10.0% of revenue, for the same period of 2008. This increase in income from continuing operations before income taxes for the year ended December 31, 2009 compared to the same period of 2008 was primarily the result of same-facility revenue growth at our behavioral health care facilities of 5.3% for 2009 as compared to 2008 and a reduction in interest expense as a percentage of revenue to 4.0% in 2009 compared to 4.5% in 2008.

Sources of Revenue

Patient Service Revenue

     Patient service revenue is generated by our inpatient facilities for services provided to patients on an inpatient and outpatient basis within the inpatient behavioral health care facility setting. Patient service revenue is recorded at our established billing rates less contractual adjustments. Contractual adjustments are recorded to state our patient service revenue at the amount we expect to collect for the services provided based on amounts reimbursable by Medicare or Medicaid under provisions of cost or prospective reimbursement formulas or amounts due from other third-party payors at contractually determined rates. Patient service revenue comprised approximately 93.0% of our total revenue in 2009.

Other Revenue

     Other behavioral health care services accounted for 7.0% of our revenue for the year ended December 31, 2009. This portion of our business primarily consists of our contract management business and a managed care plan in Puerto Rico. Our contract management business involves the development, organization and management of behavioral health and rehabilitation programs within medical/surgical hospitals. Services provided are recorded as revenue at contractually determined rates in the period the services are rendered, provided that collectability of such amounts is reasonably assured.

Results of Operations

     The following table illustrates our consolidated results of operations from continuing operations for the years ended December 31, 2009, 2008 and 2007 (dollars in thousands):

		Results of Operations, Consolidated Psychiatric Solutions
		For the Year Ended December 31,
		2009								2008								2007
		Amount				%				Amount				%				Amount				%
Revenue		$	1,805,361				100.0	%		$	1,696,116				100.0	%		$	1,414,700				100.0	%
Salaries, wages, and employee benefits (including share-based compensation of $17,505, $19,913 and $16,104 in 2009, 2008 and 2007, respectively)			1,005,204				55.7	%			938,363				55.3	%			787,301				55.7	%
Professional fees			166,785				9.2	%			162,491				9.6	%			135,803				9.6	%
Supplies			92,572				5.1	%			92,393				5.5	%			77,738				5.5	%
Provision for doubtful accounts			36,414				2.0	%			34,334				2.0	%			27,343				1.9	%
Other operating expenses			192,999				10.7	%			183,615				10.8	%			151,717				10.7	%
Depreciation and amortization			44,778				2.5	%			38,843				2.3	%			30,113				2.1	%
Interest expense, net			71,549				4.0	%			75,982				4.5	%			73,887				5.2	%
Other expenses:
Loss on refinancing long-term debt			—				0.0	%			—				0.0	%			8,179				0.6	%
Income from continuing operations before income taxes			195,060				10.8	%			170,095				10.0	%			122,619				8.7	%
Provision for income taxes			74,889				4.1	%			64,457				3.8	%			46,200				3.3	%
Income from continuing operations			120,171				6.7	%			105,638				6.2	%			76,419				5.4	%
Less: Net income attributable to noncontrolling interest			(93	)			0.0	%			(604	)			0.0	%			(285	)			0.0	%
Income from continuing operations attributable to PSI stockholders		$	120,078				6.7	%		$	105,034				6.2	%		$	76,134				5.4	%

Year Ended December 31, 2009 Compared To Year Ended December 31, 2008

     The following table compares key total facility statistics and same-facility statistics for 2009 and 2008 for owned and leased inpatient facilities:

		Year Ended December 31,								%
		2009				2008				Change
Total facility results:
Revenue (in thousands)		$	1,678,449			$	1,571,141				6.8	%
Number of facilities at period end			94				91				3.3	%
Admissions			177,967				163,616				8.8	%
Patient days			2,881,063				2,749,658				4.8	%
Average length of stay			16.2				16.8				-3.6	%
Revenue per patient day		$	583			$	571				2.1	%
Same-facility results:
Revenue (in thousands)		$	1,654,258			$	1,571,141				5.3	%
Number of facilities at period end			91				91				0.0	%
Admissions			174,874				163,616				6.9	%
Patient days			2,845,536				2,749,658				3.5	%
Average length of stay			16.3				16.8				-3.0	%
Revenue per patient day		$	581			$	571				1.8	%

     Revenue. Revenue from continuing operations increased $109.2 million, or 6.4%, to $1.8 billion for the year ended December 31, 2009 compared to the year ended December 31, 2008. Revenue from owned and leased inpatient facilities increased $107.3 million, or 6.8%, to $1.7 billion in 2009 compared to 2008. The increase in revenue from owned and leased inpatient facilities relates primarily to same-facility growth in patient days of 3.5% and revenue per patient day of 1.8%. Other revenue was $126.9 million in 2009 compared to $125.0 million in 2008.

     Salaries, wages, and employee benefits. Salaries, wages and employee benefits (“SWB”) expense was $1.0 billion in 2009 compared to $938.4 million in 2008, an increase of $66.8 million, or 7.1%. SWB expense includes $17.5 million and $19.9 million of shared-based compensation expense for the years ended December 31, 2009 and 2008, respectively. Based on our stock option and

restricted stock grants outstanding at December 31, 2009, we estimate remaining unrecognized share-based compensation expense to be approximately $31.3 million with a weighted-average remaining amortization period of 2.1 years. Excluding share-based compensation expense, SWB expense was $987.7 million, or 54.7% of total revenue, in 2009 compared to $918.5 million, or 54.2% of total revenue, in 2008. SWB expense for owned and leased inpatient facilities was $905.5 million in 2009, or 53.9% of revenue. Same-facility SWB expense for owned and leased inpatient facilities was $891.9 million in 2009, or 53.9% of revenue, compared to $842.5 million in 2008, or 53.6% of revenue. This increase in same-facility SWB expense for owned and leased inpatient facilities is primarily the result of a shift from utilization of contract labor included in professional fees to the utilization of employees and an increase in health insurance claims for health insurance coverage for our employees and their dependents. SWB expense for other operations was $48.5 million in 2009 compared to $49.0 million in 2008. SWB expense for our corporate office was $51.2 million, including $17.5 million in share-based compensation, for 2009 compared to $46.4 million, including $19.9 million in share-based compensation, for 2008. This increase in SWB for our corporate office primarily relates to the increase in corporate employees to support our operations and an increase in incentive compensation expense.

     Professional fees. Professional fees were $166.8 million in 2009, or 9.2% of total revenue, compared to $162.5 million in 2008, or 9.6% of total revenue. Professional fees for owned and leased inpatient facilities were $150.3 million in 2009, or 9.0% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $148.3 million in 2009, or 9.0% of revenue, compared to $142.9 million in 2008, or 9.1% of revenue. Professional fees for other operations and our corporate office decreased to $16.5 million in 2009 compared to $19.5 million in 2008.

     Supplies. Supplies expense was $92.6 million in 2009, or 5.1% of total revenue, compared to $92.4 million in 2008, or 5.5% of total revenue. Supplies expense for owned and leased inpatient facilities was $91.9 million in 2009, or 5.5% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $90.6 million in 2009, or 5.5% of revenue, compared to $91.6 million in 2008, or 5.8% of revenue.

     Provision for doubtful accounts. The provision for doubtful accounts was $36.4 million in 2009, or 2.0% of total revenue, compared to $34.3 million in 2008, or 2.0% of total revenue. The provision for doubtful accounts at owned and leased inpatient facilities comprised substantially all of our provision for doubtful accounts.

     Other operating expenses. Other operating expenses consist primarily of rent, utilities, insurance, travel, and repairs and maintenance expenses. Other operating expenses were $193.0 million in 2009, or 10.7% of total revenue, compared to $183.6 million in 2008, or 10.8% of total revenue. Other operating expenses for owned and leased inpatient facilities were $133.4 million in 2009, or 7.9% of revenue. Same-facility other operating expenses for owned and leased inpatient facilities were $131.7 million in 2009, or 8.0% of revenue, compared to $131.8 million in 2008, or 8.4% of revenue. This decrease in other operating expenses as a percent of revenue is primarily a result of a normalization of professional and general liability reserve activity compared with 2008. Other operating expenses for other operations and our corporate office increased to $59.6 million in 2009 compared to $51.6 million in 2008. This increase in other operating expenses for other operations and our corporate office was primarily the result of claims expense from a new at-risk contract within our managed care plan in Puerto Rico.

     Depreciation and amortization. Depreciation and amortization expense increased to $44.8 million in 2009 compared to $38.8 million in 2008, primarily as a result of depreciation on expansion projects at existing inpatient facilities and facilities acquired/opened in 2008 and 2009.

     Interest expense, net. Interest expense, net of interest income, decreased to $71.5 million in 2009 compared to $76.0 million in 2008 primarily as a result of a reduction in interest rates on our variable rate debt.

     Income attributable to noncontrolling interest. We own controlling interests in two joint ventures that own two of our inpatient behavioral health care facilities. Income attributable to noncontrolling interest represents the pro rata portion of each joint venture’s net profit belonging to the noncontrolling partner.

     Loss from discontinued operations, net of taxes. The loss from discontinued operations, net of income tax effect, was $2.5 million for the year ended December 31, 2009 compared to $81,000 for the year ended December 31, 2008. During 2009, we completed the sale of our EAP business, elected to close and make The Oaks Treatment Center and Cumberland Hall of Chattanooga available for sale, and terminated one contract with a South Carolina juvenile justice agency. We also elected to close and make Nashville Rehabilitation Hospital available for sale and transferred its behavioral health services to Rolling Hills Hospital in the first quarter of 2009. During the year ended December 31, 2008, we elected to dispose of a leased inpatient facility and terminate two contracts with a Puerto Rican juvenile justice agency to manage inpatient facilities. Accordingly, these operations are included in discontinued operations.

Year Ended December 31, 2008 Compared To Year Ended December 31, 2007

     The following table compares key total facility statistics and same-facility statistics for 2008 and 2007 for owned and leased inpatient facilities.

		Year Ended December 31,								%
		2008				2007				Change
Total facility results:
Revenue (in thousands)		$	1,571,141			$	1,314,203				19.6	%
Number of facilities at period end			91				86				5.8	%
Admissions			163,616				138,454				18.2	%
Patient days			2,749,658				2,406,368				14.3	%
Average length of stay			16.8				17.4				-3.4	%
Revenue per patient day		$	571			$	546				4.6	%
Same-facility results:
Revenue (in thousands)		$	1,419,904			$	1,309,453				8.4	%
Number of facilities at period end			86				86				0.0	%
Admissions			144,563				137,830				4.9	%
Patient days			2,472,292				2,399,812				3.0	%
Average length of stay			17.1				17.4				-1.7	%
Revenue per patient day		$	574			$	546				5.1	%

     Revenue. Revenue from continuing operations increased $281.4 million, or 19.9%, to $1.7 billion for the year ended December 31, 2008 compared to the year ended December 31, 2007. Revenue from owned and leased inpatient facilities increased $256.9 million, or 19.6%, to $1.6 billion in 2008 compared to 2007. The increase in revenue from owned and leased inpatient facilities relates primarily to the acquisitions of Horizon Health in 2007 and five inpatient facilities from UMC in 2008. The remainder of the increase in revenue from owned and leased inpatient facilities is primarily attributable to same-facility growth in patient days of 3.0% and revenue per patient day of 5.1%. Other revenue was $125.0 million in 2008 compared to $100.5 million in 2007, an increase of $24.5 million, resulting primarily from the management contract business purchased in the Horizon Health acquisition.

     Salaries, wages, and employee benefits. SWB expense was $938.4 million in 2008 compared to $787.3 million in 2007, an increase of $151.1 million, or 19.2%. SWB expense includes $19.9 million and $16.1 million of shared-based compensation expense for the years ended December 31, 2008 and 2007, respectively. Excluding share-based compensation expense, SWB expense was $918.5 million, or 54.2% of total revenue, in 2008 compared to $771.2 million, or 54.5% of total revenue, in 2007. SWB expense for owned and leased inpatient facilities was $843.0 million in 2008, or 53.7% of revenue. Same-facility SWB expense for owned and leased inpatient facilities was $759.3 million in 2008, or 53.5% of revenue, compared to $707.3 million in 2007, or 54.0% of revenue. SWB expense for other operations increased to $49.0 million in 2008 compared to $35.1 million in 2007, primarily as a result of the management contract business purchased in the Horizon Health acquisition. SWB expense for our corporate office was $46.4 million, including $19.9 million in share-based compensation, for 2008 compared to $41.5 million, including $16.1 million in share-based compensation, for 2007.

     Professional fees. Professional fees were $162.5 million in 2008, or 9.6% of total revenue, compared to $135.8 million in 2007, or 9.6% of total revenue. Professional fees for owned and leased inpatient facilities were $143.0 million in 2008, or 9.1% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $128.2 million in 2008, or 9.0% of revenue, compared to $120.8 million in 2007, or 9.2% of revenue. Professional fees for other operations and our corporate office increased to $19.5 million in 2008 compared to $14.2 million in 2007, primarily due to the other operations acquired in the Horizon Health acquisition.

     Supplies. Supplies expense was $92.4 million in 2008, or 5.5% of total revenue, compared to $77.7 million in 2007, or 5.5% of total revenue. Supplies expense for owned and leased inpatient facilities was $91.6 million in 2008, or 5.8% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $81.2 million in 2008, or 5.7% of revenue, compared to $76.7 million in 2007, or 5.9% of revenue. Supplies expense for other operations as well as our corporate office consisted primarily of office supplies and is negligible to our supplies expense overall.

     Provision for doubtful accounts. The provision for doubtful accounts was $34.3 million in 2008, or 2.0% of total revenue, compared to $27.3 million in 2007, or 1.9% of total revenue. The provision for doubtful accounts at owned and leased inpatient facilities comprised substantially all of our provision for doubtful accounts.

     Other operating expenses. Other operating expenses consist primarily of rent, utilities, insurance, travel, and repairs and maintenance expenses. Other operating expenses were $183.6 million in 2008, or 10.8% of total revenue, compared to $151.7 million in 2007, or 10.7% of total revenue. Other operating expenses for owned and leased inpatient facilities were $132.0 million in 2008, or 8.4% of revenue. Same-facility other operating expenses for owned and leased inpatient facilities were $118.2 million in 2008, or 8.3% of revenue, compared to $104.3 million in 2007, or 8.0% of revenue. The increase in same-facility other operating expenses for owned and leased inpatient facilities was primarily the result of an increase in our self-insured reserves for professional and general liability risks, which is primarily due to the revised assessment of certain claims at amounts higher than originally anticipated and the

actuarial implications of such revisions. Other operating expenses for other operations and our corporate office increased to $51.6 million in 2008 compared to $46.3 million in 2007, primarily due to the management contract business purchased in the Horizon Health acquisition.

     Depreciation and amortization. Depreciation and amortization expense increased to $38.8 million in 2008 compared to $30.1 million in 2007, primarily as a result of the acquisitions of inpatient facilities and capital expenditures during 2007 and 2008.

     Interest expense, net. Interest expense, net of interest income, increased to $76.0 million in 2008 compared to $73.9 million in 2007 primarily as a result of an increase in our long-term debt offset by a reduction in our overall effective interest rate. We borrowed $443.2 million in May 2007 to finance the Horizon Health acquisition and borrowed $149.3 million in 2008 to finance the acquisition of five inpatient behavioral health care facilities from UMC, acquisitions of EAP businesses that were later moved to discontinued operations, capital expenditures and other general corporate purposes. In February 2009, as part of an amendment to our revolving credit facility, the interest rate margins on borrowings based on LIBOR were increased to a range of 5.0% to 5.75% depending upon a certain leverage ratio. This interest rate margin was 1.5% at December 31, 2008. For further information on the February 2009 amendment to our revolving credit facility, see Liquidity and Capital Resources within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     Income attributable to noncontrolling interest. During 2008 and 2007, we owned a controlling interest in a joint venture that owned one of our inpatient behavioral health care facilities. Income attributable to noncontrolling interest represents the pro rata portion of each joint venture’s net profit belonging to the noncontrolling partner.

     Loss on refinancing of long-term debt. During 2007 we incurred a loss on refinancing long-term debt of $8.2 million that consisted primarily of the amount above par value we paid to repurchase our 10⁵/₈% Senior Subordinated Notes due 2013 (“10⁵/₈ Notes”), the write-off of capitalized financing costs associated with our 10⁵/₈% Notes and the amount paid to exit the related interest rate swap agreements.

     (Loss) income from discontinued operations, net of taxes. The loss from discontinued operations, net of income tax effect, was $81,000 for the year ended December 31, 2008 compared to income from discontinued operations, net of income tax effect, of $74,000 for the year ended December 31, 2007. During 2009, we completed the sale of our EAP business, elected to close and make The Oaks Treatment Center and Cumberland Hall of Chattanooga available for sale, and terminated one contract with a South Carolina juvenile justice agency. We also elected to close and make Nashville Rehabilitation Hospital available for sale. During the year ended December 31, 2008, we elected to dispose of a leased inpatient facility and recorded a $1.9 million write-down to fair value of the assets held-for-sale for this facility. Additionally, two contracts with a Puerto Rican juvenile justice agency to manage inpatient facilities were terminated in 2008. During the year ended December 31, 2007, we elected to dispose of one inpatient facility. Accordingly these operations are included in discontinued operations.

Liquidity and Capital Resources

     We currently have $295.7 million available for borrowings under our $300 million revolving credit facility. Additionally, our cash flow from continuing operating activities was $205.4 million for the year ended December 31, 2009 and we had $177.9 million of working capital at December 31, 2009. We believe that our cash flow from operations, revolving credit facility availability and working capital are sufficient to fund our known future cash requirements for operations and capital expenditures. We historically spend approximately 2% to 3% of our revenue on routine capital expenditures and currently have plans for construction projects with expected costs of approximately $57 million over the next year, which will add approximately 300 new beds to our inpatient facilities.

     As part of our long-term growth strategy we are actively seeking acquisitions that fit our corporate growth strategy and may acquire additional inpatient behavioral health care facilities and other operations as well as incur expenditures for the expansion of our inpatient facilities. Management continually assesses our capital needs and, should the need arise, we will seek additional financing, including debt or equity, to fund potential acquisitions, facility expansions, repayment of indebtedness or for other corporate purposes. In negotiating such financing, there can be no assurance that we will be able to raise additional capital on terms satisfactory to us. Failure to obtain additional financing on reasonable terms could have a negative effect on our plans to acquire additional inpatient psychiatric facilities or expand our facilities.

     Working capital at December 31, 2009 was $177.9 million, including cash and cash equivalents of $6.8 million, compared to working capital of $233.9 million, including cash and cash equivalents of $51.3 million, at December 31, 2008. The $44.5 million decrease in cash and cash equivalents is primarily a result of principal payments in excess of borrowings to reduce debt by $127.9 million, cash used for acquisitions of $32.9 million and capital expenditures of $150.0 million, offset by cash provided by continuing operations of $205.4 million and cash received on the sale of our EAP business of $68.5 million, net of fees and expenses. The net reduction in debt included a $229.3 million reduction in our revolving credit facility such that there was no balance outstanding at December 31, 2009, thereby increasing our borrowing availability to $295.7 million from $63.9 million at December 31, 2008.

     Working capital includes net current assets held for sale of discontinued operations totaling $19.3 million and $72.3 million at December 31, 2009 and 2008, respectively. At December 31, 2008, the net current assets held for sale included assets and liabilities of

our EAP business that was sold in the fourth quarter of 2009 for approximately $68.5 million, net of fees and expenses. Excluding net current assets held for sale of discontinued operations, working capital was $158.6 million and $161.6 million at December 31, 2009 and 2008, respectively. This change in working capital is primarily attributable to increases in accounts receivable of $8.0 million and decreases in other accrued liabilities of $19.0 million to purchase a hospital building previously leased and current maturities under our revolving credit facility of $29.3 million, offset by decreases in cash of $44.5 million, income tax receivable of $6.3 million and deferred tax assets of $4.5 million, and an increase in accrued interest expense of $4.8 million.

     Cash provided by continuing operating activities was $205.4 million in 2009 compared to $139.3 million in 2008. The increase in cash flows from continuing operating activities was primarily the result of cash provided by improved operating results, improved collections on accounts receivable and a reduction in payments for income taxes and interest. Income tax payments decreased to $49.9 million in 2009 compared to $68.1 million in 2008, primarily as a result of applying income tax overpayments for 2008 to income taxes due for 2009. Interest payments decreased to $62.0 million in 2009 compared to $79.8 million in 2008, primarily due to decreasing interest rates on our variable rate debt and timing of interest payments. During 2009, the balance of accounts receivable increased $3.9 million, net of acquisitions, compared to an increase of $17.8 million, net of acquisitions, during 2008, primarily as a result of improved collections on our accounts receivables. The increase in the balance of accounts receivable, net of acquisitions, during 2008 was primarily the result of post-acquisition receivables generated in 2008 from the five facilities acquired from UMC in March 2008, for which no accounts receivable were purchased. Our consolidated days sales outstanding were 49 and 52 at December 31, 2009 and 2008, respectively.

     Billings for patient accounts receivable are generally submitted to the payor within three days of the patient’s discharge or completion of services. Interim billings may be utilized for patients with extended lengths of stay. We verify within a reasonable period of time that claims submitted to third-party payors have been received and are being processed by such payors. Follow-up regarding the status of each claim is made on a periodic basis until payment on the claim is received. Billing notices for self-pay accounts receivable are distributed on a periodic basis. Self-pay accounts receivable are turned over to collection agencies once internal collection efforts have been exhausted. Accounts receivable under our inpatient management contracts are billed at least monthly. Follow-up collection efforts are made on a periodic basis until payment is received. Our allowance for doubtful accounts for patient receivables primarily consists of patient accounts that are greater than 180 days past the patient’s discharge date. Our allowance for doubtful accounts for receivables due under our inpatient management contracts primarily consists of amounts that are specifically identified as potential collection issues. Accounts receivable are not written off until collection within a reasonable period of time is deemed unlikely.

     Cash used by continuing investing activities was $181.7 million in 2009 compared to $244.4 million in 2008. Cash used in investing activities in 2009 primarily consisted of $130.7 million paid for purchases of fixed assets, $32.9 million paid for acquisitions and $19.3 million paid for the acquisition of the real estate of previously leased facilities. Cash used for routine and expansion capital expenditures was approximately $53.3 million and $77.4 million, respectively, for the year ended December 31, 2009. We expect expansion expenditures to continue during 2010 as a result of planned capital expansion projects and the construction of new facilities, which are expected to add approximately 300 new beds to our inpatient facilities. We define expansion capital expenditures as those that increase the capacity of our facilities or otherwise enhance revenue. Routine or maintenance capital expenditures were 3.0% of our net revenue for 2009. Cash provided by discontinued investing activities in 2009 primarily consisted of $68.5 million in proceeds from the sale of our EAP business, net of fees and expenses. Cash used in continuing investing activities in 2008 consisted primarily of $121.2 million in cash paid for acquisitions and $121.9 million paid for purchases of fixed assets. Acquisitions in 2008 consisted primarily of five inpatient behavioral health care facilities acquired from UMC. Cash used in discontinued investing activities in 2008 consisted primarily of cash paid for acquisitions of EAP businesses.

     Cash used in financing activities was $136.8 million in 2009 compared to cash provided by financing activities of $155.7 million in 2008. Cash used in financing activities for 2009 consisted primarily of $229.3 million of net payments on our revolving credit facility, $9.9 million paid for loan and issuance costs and $5.1 million principal payments on long-term debt, offset by $106.5 million received from the issuance of $120 million of our 7³/₄% Notes at a discount of 11.25%. Cash provided by financing activities in 2008 primarily resulted from $149.3 million borrowed under our revolving credit facility used to finance the acquisition of five inpatient behavioral health care facilities from UMC and certain EAP acquisitions, capital expenditures and other general corporate purposes.

     We have filed a universal shelf registration statement on Form S-3 and an acquisition shelf registration statement on Form S-4. The universal shelf registration statement permits us to sell, in one or more public offerings, an indeterminate amount of our common stock, common stock warrants, preferred stock and debt securities, or any combination of such securities, at prices and on terms satisfactory to us. The acquisition shelf registration statement enables us to issue up to 5 million shares of our common stock in one or more business combination transactions, including acquisitions by us of other businesses, assets, properties or securities. To date, no securities have been issued pursuant to either registration statement.

Obligations and Commitments

		Payments Due by Period (in thousands)
						Less than												More than
		Total				1 year				1-3 years				3-5 years				5 years
Long-term debt (1):
Senior Credit Facility:
Senior secured term loan facility, expiring on July 1, 2012 and bearing interest of 2.0% at December 31, 2009		$	564,875			$	3,750			$	561,125			$	—			$	—
7 3/4% Senior Subordinated Notes due July 15, 2015			582,666				—				—				—				582,666
Mortgage loans on facilities, maturing in 2036, 2037 and 2038 bearing fixed interest rates of 5.7% to 7.6%			32,850				450				988				1,118				30,294
			1,180,391				4,200				562,113				1,118				612,960
Lease and other obligations			86,786				14,872				20,988				14,410				36,516
Total contractual obligations		$	1,267,177			$	19,072			$	583,101			$	15,528			$	649,476

     The fair value of our $470.0 million in principal amount of 7³/₄% Notes was approximately $453.6 million and $343.7 million as of December 31, 2009 and 2008, respectively. The fair value of our $120.0 million in principal amount of 7³/₄% Notes issued in May 2009 was approximately $111.6 million as of December 31, 2009. The fair value of our senior secured term loan facility was approximately $536.6 million as of December 31, 2009. The fair values of our revolving credit facility and senior secured term loan facility were approximately $195.5 million and $446.4 million, respectively, as of December 31, 2008. The carrying value of our other long-term debt, including current maturities, of $39.5 million and $40.6 million at December 31, 2009 and 2008, respectively, approximated fair value. We had $564.9 million of variable rate debt outstanding under our senior secured term loan facility as of December 31, 2009. At our December 31, 2009 borrowing level, a hypothetical 10% increase in interest rates would decrease our annual net income and cash flows by approximately $0.7 million.

Impact of Inflation and Economic Trends

     Although inflation has not had a material impact on our results of operations, the health care industry is very labor intensive and salaries and benefits are subject to inflationary pressures as are supply costs, which tend to escalate as vendors pass on the rising costs through price increases. Some of the freestanding owned, leased and managed inpatient behavioral health care facilities we operate are experiencing the effects of the tight labor market, including a shortage of nurses, which has caused and may continue to cause an increase in our SWB expense in excess of the inflation rate. Although we cannot predict our ability to cover future cost increases, management believes that through adherence to cost containment policies, labor management and reasonable price increases, the effects of inflation on future operating margins should be manageable. Our ability to pass on increased costs associated with providing health care to Medicare and Medicaid patients is limited due to various federal, state and local laws which have been enacted that, in certain cases, limit our ability to increase prices. In addition, as a result of increasing regulatory and competitive pressures and a continuing industry wide shift of patients into managed care plans, our ability to maintain margins through price increases to non-Medicare patients is limited.

     The behavioral health care industry is typically not directly impacted by periods of recession, erosions of consumer confidence or other general economic trends as most health care services are not considered a component of discretionary spending. However, our inpatient facilities may be indirectly negatively impacted to the extent such economic conditions result in decreased reimbursements by federal or state governments or managed care payors. Discussion concerning the current economic downturn is included in Part I, Item 1A under the caption “Risk Factors.” We are not aware of any economic trends that would prevent us from being able to remain in compliance with all of our debt covenants and to meet all required obligations and commitments in the near future.

Critical Accounting Policies

     Our consolidated financial statements have been prepared in accordance with GAAP. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses included in the financial statements. Estimates are based on historical experience and other information currently available, the results of which form the basis of such estimates. While we believe our estimation processes are reasonable, actual results could differ from our estimates. The following represent the estimates considered most critical to our operating performance and involve the most subjective and complex assumptions and assessments.

     Allowance for Doubtful Accounts

     Our ability to collect outstanding patient receivables from third-party payors is critical to our operating performance and cash flows.

     The primary collection risk with regard to patient receivables lies with uninsured patient accounts or patient accounts for which primary insurance has paid, but the portion owed by the patient remains outstanding. We estimate the allowance for doubtful accounts primarily based upon the age of the accounts since the patient discharge date. We continually monitor our accounts receivable balances and utilize cash collection data to support our estimates of the provision for doubtful accounts. Significant changes in payor mix or business office operations could have a significant impact on our results of operations and cash flows.

     The primary collection risk with regard to receivables due under our inpatient management contracts is attributable to contractual disputes. We estimate the allowance for doubtful accounts for these receivables based primarily upon the specific identification of potential collection issues. As with our patient receivables, we continually monitor our accounts receivable balances and utilize cash collection data to support our estimates of the provision for doubtful accounts.

     Allowances for Contractual Discounts

     The Medicare and Medicaid regulations are complex and various managed care contracts may include multiple reimbursement mechanisms for different types of services provided in our inpatient facilities and cost settlement provisions requiring complex calculations and assumptions subject to interpretation. We estimate the allowance for contractual discounts on a payor-specific basis by comparing our established billing rates with the amount we determine to be reimbursable given our interpretation of the applicable regulations or contract terms. Most payments are determined based on negotiated per-diem rates. While the services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from our estimates, these differences are deemed immaterial. Additionally, updated regulations and contract renegotiations occur frequently necessitating continual review and assessment of the estimation process by our management. We periodically compare the contractual rates on our patient accounting systems with the Medicare and Medicaid reimbursement rates or the third-party payor contract for accuracy. We also monitor the adequacy of our contractual adjustments using financial measures such as comparing cash receipts to net patient revenue adjusted for bad debt expense.

     As of December 31, 2009, our patient accounts receivable balance for third-party payors was $235.0 million. A theoretical 1% change in the amounts due from third-party payors at December 31, 2009 could have an after tax effect of approximately $1.5 million on our financial position and results of operations.

     The following table presents the percentage by payor of our net revenue for the years ended December 31, 2009 and 2008 and related accounts receivable at year end:

		For the Year Ended December 31,
		2009								2008
		Net Revenue				Accounts Receivable				Net Revenue				Accounts Receivable
Medicaid			29	%			24	%			30	%			26	%
Commercial/HMO/Private Pay			37	%			42	%			36	%			41	%
Medicare			14	%			12	%			13	%			10	%
State agency			15	%			16	%			15	%			17	%
Other			5	%			6	%			6	%			6	%
			100	%			100	%			100	%			100	%

     The following table presents the percentage by aging category of our accounts receivable at December 31, 2009 and 2008:

		At December 31,
		2009				2008
0 - 30 days			64	%			64	%
31 - 60 days			14	%			13	%
61 - 90 days			8	%			8	%
91 - 120 days			5	%			5	%
121 - 150 days			3	%			4	%
151 - 180 days			3	%			4	%
> 180 days			3	%			2	%
Total			100	%			100	%

     Our consolidated day’s sales outstanding were 49 and 52 for the years ended December 31, 2009 and 2008, respectively. Our consolidated collections as a percentage of net revenue less bad debt expense was 101.5% and 99.9% for the years ended December 31, 2009 and 2008, respectively.

     Professional and General Liability

     We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. Our operations have professional and general liability insurance in umbrella form for claims in excess of $3.0 million with an insured excess limit of $75.0 million. The self-insured reserves for professional and general liability risks are estimated based on historical claims, demographic factors, industry trends, severity factors, and other actuarial assumptions calculated by an independent third-party actuary. This estimated accrual for professional and general liabilities could be significantly affected should current and future occurrences differ from historical claim trends and expectations. We have utilized our captive insurance company to manage the self-insured retention. While claims are monitored closely when estimating professional and general liability accruals, the complexity of the claims and wide range of potential outcomes often limits timely adjustments to the assumptions used in these estimates.

     Income Taxes

     As part of our process for preparing our consolidated financial statements, our management is required to compute income taxes in each of the jurisdictions in which we operate. This process involves estimating the current tax benefit or expense of future deductible and taxable temporary differences. The tax effects of future deductible and taxable temporary differences are recorded as deferred tax assets and liabilities which are components of our balance sheet. Management then assesses our ability to realize the deferred tax assets based on reversals of deferred tax liabilities and, if necessary, estimates of future taxable income. A valuation allowance for deferred tax assets is established when we believe that it is more likely than not that the deferred tax asset will not be realized. Management must also assess the impact of our acquisitions on the realization of deferred tax assets subject to a valuation allowance to determine if all or a portion of the valuation allowance will be offset by reversing taxable differences or future taxable income of the acquired entity. To the extent the valuation allowance can be reversed due to the estimated future taxable income of an acquired entity, then our valuation allowance is reduced accordingly as an adjustment to purchase price.

     In order to apply GAAP, we are required to make significant judgments regarding the recognition and measurement of each tax position. Changes in these judgments may materially affect the estimate of our effective tax rate and our operating results.

     Share-Based Compensation

     We record share-based compensation expense for the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of such awards. We utilize the Black-Scholes option pricing model to estimate the grant-date fair value of our stock options. The Black-Scholes model includes certain variables and assumptions that require judgment, such as the expected volatility of our stock price and the expected term of our stock options. Additionally, judgment is in the estimation of forfeitures over the vesting period of share-based awards.

Item 7A.		Quantitative and Qualitative Disclosures About Market Risk.

     Our interest expense is sensitive to changes in the general level of interest rates. With respect to our interest-bearing liabilities, approximately $615.5 million of our long-term debt outstanding at December 31, 2009 was subject to a weighted-average fixed interest rate of 8.0%. Our variable rate debt is comprised of our senior secured term loan facility, which had $564.9 million outstanding at December 31, 2009 and on which interest is generally payable at LIBOR plus 1.75%.

     A hypothetical 10% increase in interest rates would decrease our net income and cash flows by approximately $0.7 million on an annual basis based upon our borrowing level at December 31, 2009. In the event we draw on our revolving credit facility and/or interest rates change significantly, we expect management would take actions intended to further mitigate our exposure to such change by targeting a portion of our debt portfolio to be maintained at fixed rates and periodically entering into interest rate swap agreements. Information on quantitative and qualitative disclosure about market risk is included in Part II, Item 7 of this Annual Report on Form 10-K under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Item 8.		Financial Statements and Supplementary Data.

     Information with respect to this Item is contained in our consolidated financial statements indicated in the Index on Page F-1 of this Annual Report on Form 10-K.

Item 9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

     None.

Item 9A. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

     We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us (including our consolidated subsidiaries) in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported on a timely basis.

Management’s Report on Internal Control Over Financial Reporting

     Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report of management’s assessment of the design and operating effectiveness of our internal controls as part of this report. Our independent registered public accounting firm also reported on the effectiveness of our internal control over financial reporting. Management’s report and the independent registered public accounting firm’s report are included in our 2009 consolidated financial statements beginning with the index on page F-1 of this report under the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm.”

Changes in Internal Control Over Financial Reporting

     There has been no change in our internal control over financial reporting during the fourth quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

     None.

PART III

Item 10. Directors and Executive Officers and Corporate Governance.

Directors

     The information relating to our directors set forth in the Company’s Proxy Statement relating to the 2009 Annual Meeting of Stockholders under the caption “Proposal 1: Election of Directors” and “Corporate Governance — Committees of the Board of Directors — Audit Committee” is incorporated herein by reference.

Executive Officers of the Registrant

     The executive officers of the Company are:

Name		Age				Officer Since		Positions
Joey A. Jacobs			56			April 1997		President and Chief Executive Officer
Ronald M. Fincher			56			October 2008		Chief Operating Officer
Jack E. Polson			43			August 2002		Executive Vice President, Chief Accounting Officer
Brent Turner			44			February 2003		Executive Vice President, Finance and Administration
Christopher L. Howard			43			September 2005		Executive Vice President, General Counsel and Secretary

     Joey A. Jacobs, President and Chief Executive Officer. Mr. Jacobs serves as President and Chief Executive Officer and was one of our co-founders in April 1997. Prior to our founding, Mr. Jacobs served for 21 years in various capacities with HCA Inc. (“HCA,” also formerly known as Hospital Corporation of America, Columbia and Columbia/HCA), most recently as President of the Tennessee Division. Mr. Jacobs’ background at HCA also includes serving as President of HCA’s Central Group, Vice President of the Western Group, Assistant Vice President of the Central Group and Assistant Vice President of the Salt Lake City Division.

     Ronald M. Fincher, Chief Operating Officer. Mr. Fincher has served as Chief Operating Officer since January 14, 2010, after being appointed Co-Chief Operating Officer on October 13, 2008. He had served the company as a Division President since April 2003. As a Division President, Mr. Fincher was responsible for managing the operations of several of our inpatient behavioral health care facilities. Prior to joining us, Mr. Fincher served as a Regional Vice President of Universal Health Services, Inc. from 2000 until 2003.

     Jack E. Polson, Executive Vice President, Chief Accounting Officer. Mr. Polson has served as an Executive Vice President since September 2006 and as Chief Accounting Officer since August 2002. Prior to being appointed Chief Accounting Officer, Mr. Polson had served as Controller since June 1997. From June 1995 until joining us, Mr. Polson served as Controller for Columbia Healthcare Network, a risk-bearing physician health organization. From May 1992 until June 1995, Mr. Polson served as an Internal Audit Supervisor for HCA.

     Brent Turner, Executive Vice President, Finance and Administration. Mr. Turner has served as the Executive Vice President, Finance and Administration since August 2005 and previously had served as the Vice President, Treasurer and Investor Relations since February 2003. From April 2002 until joining us, Mr. Turner served as Executive Vice President and Chief Financial Officer of a privately-held owner and operator of schools for children with learning disabilities. From November 2001 until March 2002, Mr. Turner served as Senior Vice President of Business Development for The Brown Schools, Inc., a provider of educational and therapeutic services for at-risk youth. From 1996 until January 2001, Mr. Turner was employed by Corrections Corporation of America, a private prison operator, serving as Treasurer from 1998 to 2001.

     Christopher L. Howard, Executive Vice President, General Counsel and Secretary. Mr. Howard has served as the Executive Vice President, General Counsel and Secretary since September 2005. Prior to joining us, Mr. Howard was a member of Waller Lansden Dortch & Davis, LLP, a law firm based in Nashville, Tennessee.

Code of Ethics

     We adopted a Code of Ethics that applies to all of our directors, officers and employees. The Code of Ethics is available on our website at www.psysolutions.com. We will disclose any amendment to, other than technical, administrative or non-substantive amendments, or waiver of our Code of Ethics granted to a director or executive officer by filing a Current Report on Form 8-K disclosing the amendment or waiver within four business days. Upon the written request of any person, we will furnish, without charge, a copy of our Code of Ethics. Requests should be directed to Psychiatric Solutions, Inc., 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067, Attention: Christopher L. Howard, Esq., Executive Vice President, General Counsel and Secretary.

Section 16(a) Compliance

     The information relating to Section 16(a) beneficial ownership reporting compliance set forth in our Proxy Statement relating to the 2010 Annual Meeting of Stockholders under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

Item 11. Executive Compensation.

     The information set forth in our Proxy Statement relating to the 2010 Annual Meeting of Stockholders under the caption “Compensation Discussion and Analysis” and “Executive Compensation” is incorporated herein by reference. The “Compensation Committee Report” also included in the Proxy Statement is expressly not incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

     The information set forth in our Proxy Statement relating to the 2010 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation – Equity Compensation Plan Information” is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

     The information set forth in our Proxy Statement relating to the 2010 Annual Meeting of Stockholders under the caption “Corporate Governance – Standards of Independence for the Board of Directors” and “Certain Relationships and Related Transactions” is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

     The information set forth in our Proxy Statement relating to the 2010 Annual Meeting of Stockholders under the caption “Proposal 3: Ratification of Appointment of Independent Registered Public Accounting Firm” is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this Annual Report on Form 10-K:

1. Consolidated Financial Statements: The consolidated financial statements of Psychiatric Solutions are included as follows:

		Page
Report of Independent Registered Public Accounting Firm		F-2
Management’s Report on Internal Control Over Financial Reporting		F-3
Report of Independent Registered Public Accounting Firm		F-4
Consolidated Balance Sheets		F-5
Consolidated Statements of Income		F-6
Consolidated Statements of Stockholders’ Equity		F-7
Consolidated Statements of Cash Flows		F-8
Notes to Consolidated Financial Statements		F-10

2. Financial Statement Schedules.

All schedules are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes in this report.

3. Exhibits. The exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index on pages 34 through 37.

(b) Exhibits.

Exhibit
Number		Description
3.1		Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on March 9, 1998 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 1998).
3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on August 5, 2002 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2002).
3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on March 21, 2003 (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement, filed on January 22, 2003).
3.4		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on December 15, 2005 (incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005).
3.5		By-Laws (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K filed on November 6, 2007).
4.1		Reference is made to Exhibits 3.1 through 3.5.
4.2		Common Stock Specimen Certificate (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
4.3		Indenture, dated as of July 6, 2005, by and among Psychiatric Solutions, Inc., the Guarantors named therein and Wachovia Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on July 8, 2005).
4.4		Form of Notes (included in Exhibit 4.3).

Exhibit
Number		Description
4.5		Seventeenth Supplemental Indenture, dated as of May 31, 2007, among Psychiatric Solutions, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on June 1, 2007).
4.6		Purchase Agreement, dated as of May 4, 2009, among Psychiatric Solutions, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, and Banc of America Securities LLC, Barclays Capital Inc., Citigroup Global Markets Inc., J.P. Morgan Securities Inc. and RBC Capital Markets Corporation. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on May 8, 2009).
4.7		Indenture, dated as of May 7, 2009, among Psychiatric Solutions, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on May 8, 2009).
4.8		Form of Notes (included in Exhibit 4.8) (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on May 8, 2009).
4.9		Registration Rights Agreement, dated as of May 7, 2009, among Psychiatric Solutions, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, and Banc of America Securities LLC, Barclays Capital Inc., Citigroup Global Markets Inc., J.P. Morgan Securities Inc. and RBC Capital Markets Corporation (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K, filed on May 8, 2009).
10.1†		Employment Agreement, dated as of May 10, 2007, between Joey A. Jacobs and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10 to the Company’s Current Report on Form 8-K, filed on May 15, 2007).
10.2†		Form of Indemnification Agreement executed by each director of Psychiatric Solutions, Inc. and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
10.3		ISDA Master Agreement, dated as of November 29, 2007, between Merrill Lynch Capital Services, Inc. and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed on May 6, 2008).
10.4		Second Amended and Restated Credit Agreement, dated as of July 1, 2005, by and among Psychiatric Solutions, Inc., the subsidiaries named as guarantors thereto, Citicorp North America, Inc., as term loan facility administrative agent, co-syndication agent and documentation agent, Bank of America, N.A., as revolving loan facility administrative agent, collateral agent swing line lender and co-syndication agent, and the various other agents and lenders party thereto. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on July 8, 2005).
10.5		Amendment No. 1 to Psychiatric Solutions, Inc.’s Second Amended and Restated Credit Agreement, dated as of December 1, 2006, by and between Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier Behavioral Solutions, Inc., Alternative Behavioral Services, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, Citicorp North America, Inc., as Term Loan Facility Administrative Agent, Bank of America, N.A., as Revolving Credit Facility Administrative Agent, Citigroup Global Markets Inc. and Banc of America Securities LLC, as the Arrangers (incorporated by reference to Exhibit 10 to the Company’s Current Report on Form 8-K, filed on December 7, 2006).
10.6		Amendment No. 2 to Second Amended and Restated Credit Agreement, dated as of December 1, 2006, by and among Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier Behavioral Solutions, Inc., Alternative Behavioral Services, Inc., Horizon Health Corporation, ABS LINCS PR, Inc., First Hospital Panamericano, Inc., FHCHS of Puerto Rico, Inc., First Corrections — Puerto-Rico, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, Citicorp North America, Inc., as term loan facility administrative agent, Bank of America, N.A., as revolving credit facility administrative agent, Citigroup Global Markets Inc. and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers and joint book-running managers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on June 1, 2007).

Exhibit
Number		Description
10.7		Incremental Facility Amendment, dated as of February 25, 2009, to the Second Amended and Restated Credit Agreement, as amended, by and among Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier Behavioral Solutions, Inc., Alternative Behavioral Services, Inc., Horizon Health Corporation, Community Cornerstones, Inc., FHP — Puerto Rico, Inc., First Hospital Panamericano, Inc., FHCHS of Puerto Rico, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, the incremental revolving credit lenders party thereto, Citicorp North America, Inc., as term loan facility administrative agent, Bank of America, N.A., as revolving credit facility administrative agent, Barclays Bank PLC, as syndication agent, and General Electric Capital Corporation, JPMorgan Chase Bank, N.A. and Fifth Third Bank, as documentation agents, (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009).
10.8		Amendment No. 4 to Second Amended and Restated Credit Agreement, as amended, dated as of September 25, 2009, by and among Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier Behavioral Solutions, Inc., Alternative Behavioral Services, Inc., Horizon Health Corporation, Community Cornerstones, Inc., First Corrections Puerto Rico, Inc., First Hospital Panamericano, Inc., FHCHS of Puerto Rico, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, the incremental revolving credit lenders party thereto, Citicorp North America, Inc. as term loan facility administrative agent, and Bank of America, N.A., as revolving credit facility administrative agent. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
10.9†		Amended and Restated Psychiatric Solutions, Inc. Equity Incentive Plan, as amended by an Amendment adopted on May 4, 2004 (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement, filed on April 9, 2004).
10.10†		Second Amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement, filed on April 22, 2005).
10.11†		Third Amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan (incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement, filed on April 21, 2006).
10.12†		Fourth Amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement, filed on April 10, 2008).
10.13†		Psychiatric Solutions, Inc. Executive Performance Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement, filed on April 21, 2006).
10.14†		Form of Nonstatutory Stock Option Agreement under the 1997 Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
10.15†		Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).
10.16†		Amended and Restated Psychiatric Solutions, Inc. Outside Directors’ Non-Qualified Stock Option Plan (incorporated by reference to Appendix C to the Company’s Definitive Proxy Statement, filed on April 14, 2003).
10.17†		Amendment to the Amended and Restated Psychiatric Solutions, Inc. Outside Directors’ Stock Option Plan (incorporated by reference to Appendix B to the Company’s Definitive Proxy Statement, filed on April 22, 2005).
10.18†		Form of Outside Directors’ Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended April 30, 1997).
10.19†		Summary of Director Compensation (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
10.20†		Outside Director Retainer Increase (incorporated by reference to the Company’s Current Report on Form 8-K, filed on October 20, 2008).
10.21†		Psychiatric Solutions, Inc. Outside Directors’ Stock Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement, filed on April 9, 2009).

Exhibit
Number		Description
10.22†		Psychiatric Solutions, Inc. 2009 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on March 6, 2009).
10.23†		Psychiatric Solutions, Inc. Amended 2009 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 24, 2009).
10.24†		Psychiatric Solutions, Inc. 2009 Cash Bonus Plans (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on March 6, 2009).
10.25†		Psychiatric Solutions, Inc. 2010 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on December 24, 2009).
21.1*		List of Subsidiaries.
23.1*		Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
31.1*		Certification of the Chief Executive Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Chief Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certifications of the Chief Executive Officer and Chief Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

PSYCHIATRIC SOLUTIONS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		PAGE
Report of Independent Registered Public Accounting Firm		F-2
Management’s Report on Internal Control over Financial Reporting		F-3
Report of Independent Registered Public Accounting Firm		F-4
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2009 and 2008		F-5
Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007		F-6
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007		F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007		F-8
Notes to Consolidated Financial Statements		F-10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Psychiatric Solutions, Inc.

     We have audited the accompanying consolidated balance sheets of Psychiatric Solutions, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Psychiatric Solutions, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Psychiatric Solutions, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Nashville, Tennessee
February 25, 2010

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

     Our accompanying consolidated financial statements have been audited by the independent registered public accounting firm of Ernst & Young LLP. Reports of the independent registered public accounting firm, including the independent registered public accounting firm’s report on our internal control over financial reporting, are included in this document.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Psychiatric Solutions, Inc.

     We have audited Psychiatric Solutions, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Psychiatric Solutions, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, Psychiatric Solutions, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

     We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Psychiatric Solutions, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 of Psychiatric Solutions, Inc. and our report dated February 25, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Nashville, Tennessee
February 25, 2010

PSYCHIATRIC SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

		December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	6,815			$	51,271
Accounts receivable, less allowance for doubtful accounts of $51,894 and $48,383, respectively			249,439				241,459
Other current assets			105,166				174,780
Total current assets			361,420				467,510
Property and equipment:
Land			188,097				172,184
Buildings			775,887				662,513
Equipment			117,434				95,509
Less accumulated depreciation			(149,688	)			(109,753	)
			931,730				820,453
Cost in excess of net assets acquired			1,153,111				1,139,242
Other assets			60,979				78,785
Total assets		$	2,507,240			$	2,505,990
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	35,397			$	34,609
Salaries and benefits payable			81,129				83,539
Other accrued liabilities			62,036				81,065
Current portion of long-term debt			4,940				34,391
Total current liabilities			183,502				233,604
Long-term debt, less current portion			1,182,139				1,280,006
Deferred tax liability			81,137				69,471
Other liabilities			25,790				28,067
Total liabilities			1,472,568				1,611,148
Redeemable noncontrolling interests			4,337				4,957
Stockholders’ equity:
Common stock, $0.01 par value, 125,000 shares authorized; 56,226 and 55,934 issued and outstanding, respectively			562				559
Additional paid-in capital			627,476				608,341
Accumulated other comprehensive loss			—				(3,695	)
Retained earnings			402,297				284,680
Total stockholders’ equity			1,030,335				889,885
Total liabilities and stockholders’ equity		$	2,507,240			$	2,505,990

See accompanying notes.

PSYCHIATRIC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share amounts)

		Year Ended December 31,
		2009				2008				2007
Revenue		$	1,805,361			$	1,696,116			$	1,414,700
Salaries, wages and employee benefits (including share-based compensation of $17,505, $19,913 and $16,104 for the years ended December 31, 2009, 2008 and 2007, respectively)			1,005,204				938,363				787,301
Professional fees			166,785				162,491				135,803
Supplies			92,572				92,393				77,738
Rentals and leases			20,131				20,635				18,939
Other operating expenses			172,868				162,980				132,778
Provision for doubtful accounts			36,414				34,334				27,343
Depreciation and amortization			44,778				38,843				30,113
Interest expense			71,549				75,982				73,887
Loss on refinancing long-term debt			—				—				8,179
			1,610,301				1,526,021				1,292,081
Income from continuing operations before income taxes			195,060				170,095				122,619
Provision for income taxes			74,889				64,457				46,200
Income from continuing operations			120,171				105,638				76,419
(Loss) income from discontinued operations, net of (benefit from) provision for income taxes of $(3,239), $1,528 and $707 for 2009, 2008 and 2007, respectively			(2,461	)			(81	)			74
Net income			117,710				105,557				76,493
Less: Net income attributable to noncontrolling interests			(93	)			(604	)			(285	)
Net income attributable to PSI stockholders		$	117,617			$	104,953			$	76,208
Basic earnings per share:
Income from continuing operations attributable to PSI stockholders		$	2.16			$	1.89			$	1.40
(Loss) income from discontinued operations, net of taxes			(0.04	)			—				—
Net income attributable to PSI stockholders		$	2.12			$	1.89			$	1.40
Diluted earnings per share:
Income from continuing operations attributable to PSI stockholders		$	2.14			$	1.87			$	1.37
(Loss) income from discontinued operations, net of taxes			(0.04	)			—				—
Net income attributable to PSI stockholders		$	2.10			$	1.87			$	1.37
Shares used in computing per share amounts:
Basic			55,564				55,408				54,258
Diluted			56,116				56,267				55,447
Amounts attributable to PSI stockholders:
Income from continuing operations, net of taxes		$	120,078			$	105,034			$	76,134
(Loss) income from discontinued operations, net of taxes			(2,461	)			(81	)			74
Net income attributable to PSI stockholders		$	117,617			$	104,953			$	76,208