IASIS Healthcare LLC - FORM 10-Q

IASIS Healthcare LLC - FORM 10-Q - August 14, 2015

Attached files

Attached files

IASIS Healthcare LLC Reports

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EX-31.2 - EXHIBIT 31.2 - IASIS Healthcare LLC	d81395dex312.htm
EX-31.1 - EXHIBIT 31.1 - IASIS Healthcare LLC	d81395dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

¨	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: 333-117362

IASIS HEALTHCARE LLC

(Exact name of registrant as specified in its charter)


DELAWARE		20-1150104
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

DOVER CENTRE 117 SEABOARD LANE, BUILDING E FRANKLIN, TENNESSEE		37067
(Address of principal executive offices)		(Zip Code)

(615) 844-2747

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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. YES ¨ NO x

(Note: As a voluntary filer not subject to the filing requirements of Sections 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months as if it were subject to such filing requirements.)

Indicate 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of August 14, 2015, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures about Market Risk			52
Item 4. Controls and Procedures			52

PART II. OTHER INFORMATION			53
Item 1. Legal Proceedings			53
Item 1A. Risk Factors			53
Item 6. Exhibits			53
Signatures			54

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)


	June 30, 2015		September 30, 2014
	*(Unaudited)*
ASSETS
Current assets
Cash and cash equivalents	$	307,630	$	341,180
Accounts receivable, net		322,187		305,654
Inventories		59,688		57,632
Deferred income taxes		1,003		1,987
Prepaid expenses and other current assets		227,341		216,563
Assets held for sale		—		50,151

Total current assets		917,849		973,167

Property and equipment, net		867,009		826,478
Goodwill		820,501		814,498
Other intangible assets, net		20,804		23,331
Other assets, net		58,816		62,362

Total assets	$	2,684,979	$	2,699,836

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	120,823	$	128,359
Salaries and benefits payable		60,944		71,121
Accrued interest payable		9,843		28,820
Medical claims payable		95,678		79,449
Other accrued expenses and current liabilities		91,997		73,491
Current portion of long-term debt, capital leases and other long-term obligations		11,985		12,690
Liabilities held for sale		—		9,171

Total current liabilities		391,270		403,101

Long-term debt, capital leases and other long-term obligations		1,833,215		1,841,110
Deferred income taxes		107,789		100,499
Other long-term liabilities		111,527		117,289

Non-controlling interests with redemption rights		113,233		108,156

Equity
Member’s equity		119,537		120,005
Non-controlling interests		8,408		9,676

Total equity		127,945		129,681

Total liabilities and equity	$	2,684,979	$	2,699,836

See accompanying notes.

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands)


	Quarter Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
Revenue
Acute care revenue before provision for bad debts	$	563,030		$	531,380		$	1,668,536		$	1,613,457
Less: Provision for bad debts		(88,097	)		(77,130	)		(258,175	)		(260,249	)

Acute care revenue		474,933			454,250			1,410,361			1,353,208
Premium, service and other revenue		211,361			178,498			642,298			503,212

Total revenue		686,294			632,748			2,052,659			1,856,420

Costs and expenses
Salaries and benefits (includes stock-based compensation of $1,231, $5,679, $4,937 and $10,033, respectively)		228,899			221,446			697,098			664,453
Supplies		81,505			75,104			241,696			227,415
Medical claims		172,475			165,943			524,506			436,754
Rentals and leases		19,258			18,198			57,055			54,444
Other operating expenses		124,395			110,337			351,362			311,586
Medicare and Medicaid EHR incentives		(2,035	)		(2,940	)		(7,685	)		(9,294	)
Interest expense, net		31,905			32,267			96,122			98,300
Depreciation and amortization		26,276			23,422			70,462			70,648
Management fees		1,250			1,250			3,750			3,750

Total costs and expenses		683,928			645,027			2,034,366			1,858,056

Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes		2,366			(12,279	)		18,293			(1,636	)
Gain (loss) on disposal of assets, net		20			2,102			(434	)		2,868

Earnings (loss) from continuing operations before income taxes		2,386			(10,177	)		17,859			1,232

Income tax expense		1,018			1,138			8,111			7,387

Net earnings (loss) from continuing operations		1,368			(11,315	)		9,748			(6,155	)

Earnings (loss) from discontinued operations, net of income taxes		1,084			(6,199	)		(2,222	)		(5,786	)

Net earnings (loss)		2,452			(17,514	)		7,526			(11,941	)

Net earnings attributable to non-controlling interests		(4,164	)		(2,453	)		(9,214	)		(8,857	)

Net loss attributable to IASIS Healthcare LLC	$	(1,712	)	$	(19,967	)	$	(1,688	)	$	(20,798	)

See accompanying notes.

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In Thousands)


	Quarter Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
Net earnings (loss)	$	2,452		$	(17,514	)	$	7,526		$	(11,941	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges		573			201			1,318			1,179

Other comprehensive income before income taxes		573			201			1,318			1,179
Change in income tax expense		(209	)		(75	)		(482	)		(438	)

Other comprehensive income, net of income taxes		364			126			836			741

Comprehensive income (loss)		2,816			(17,388	)		8,362			(11,200	)
Net earnings attributable to non-controlling interests		(4,164	)		(2,453	)		(9,214	)		(8,857	)

Comprehensive loss attributable to IASIS Healthcare LLC	$	(1,348	)	$	(19,841	)	$	(852	)	$	(20,057	)

See accompanying notes.

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

(In Thousands)


	Non-controlling Interests with Redemption Rights			Member’s Equity			Non- controlling Interests			Total Equity
Balance at October 1, 2014	$	108,156		$	120,005		$	9,676		$	129,681
Net earnings (loss)		9,228			(1,688	)		(14	)		(1,702	)
Distributions to non-controlling interests		(6,306	)		—			—			—
Repurchase of non-controlling interests		(423	)		659			(1,254	)		(595	)
Stock-based compensation		—			4,937			—			4,937
Other comprehensive income		—			836			—			836
Other		(2,640	)		6			—			6
Adjustment to redemption value of non-controlling interests with redemption rights		5,218			(5,218	)		—			(5,218	)

Balance at June 30, 2015	$	113,233		$	119,537		$	8,408		$	127,945

See accompanying notes.

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)


	Nine Months Ended June 30,
	2015			2014
Cash flows from operating activities
Net earnings (loss)	$	7,526		$	(11,941	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		70,462			70,648
Amortization of loan costs		5,913			5,559
Amortization of deferred gain on sale-leaseback transaction		(1,872	)		(1,872	)
Change in physician minimum revenue guarantees		2,852			2,177
Stock-based compensation		4,937			10,033
Deferred income taxes		5,929			(1,015	)
Income tax benefit from parent company		6			5
Loss (gain) on disposal of assets, net		434			(2,868	)
Loss from discontinued operations, net		2,222			5,786
Changes in operating assets and liabilities, net of the effect of acquisitions and divestitures:
Accounts receivable, net		(18,106	)		(6,792	)
Inventories, prepaid expenses and other current assets		(15,278	)		(53,406	)
Accounts payable, other accrued expenses and other accrued liabilities		(7,936	)		10,552
Income taxes and other transaction costs payable related to sale-leaseback of real estate		—			(22,270	)

Net cash provided by operating activities — continuing operations		57,089			4,596
Net cash provided by (used in) operating activities — discontinued operations		2,919			(15,140	)

Net cash provided by (used in) operating activities		60,008			(10,544	)

Cash flows from investing activities
Purchases of property and equipment		(106,604	)		(76,084	)
Cash paid for acquisitions, net		(11,324	)		(1,038	)
Cash received from divestiture		42,633			—
Proceeds from sale of assets		350			1,508
Change in other assets, net		(1,141	)		(219	)
Other, net		—			(3,025	)

Net cash used in investing activities — continuing operations		(76,086	)		(78,858	)
Net cash used in investing activities — discontinued operations		(341	)		(5,242	)

Net cash used in investing activities		(76,427	)		(84,100	)

Cash flows from financing activities
Payment of long-term debt, capital leases and other long-term obligations		(9,801	)		(10,084	)
Distributions to non-controlling interests		(6,306	)		(13,222	)
Cash paid for the repurchase of non-controlling interests		(1,018	)		(600	)
Other		—			(1,838	)

Net cash used in financing activities — continuing operations		(17,125	)		(25,744	)
Net cash used in financing activities — discontinued operations		(6	)		(100	)

Net cash used in financing activities		(17,131	)		(25,844	)

Change in cash and cash equivalents		(33,550	)		(120,488	)
Cash and cash equivalents at beginning of period		341,180			438,131

Cash and cash equivalents at end of period	$	307,630		$	317,643

Supplemental disclosure of cash flow information:
Cash paid for interest	$	111,847		$	111,152

Cash paid for income taxes, net	$	14,875		$	39,030

See accompanying notes.

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements as of and for the quarters and nine months ended June 30, 2015 and 2014, reflect the financial position, results of operations and cash flows of IASIS Healthcare LLC (“IASIS” or the “Company”). The Company’s sole member and parent company is IASIS Healthcare Corporation (“Holdings” or “IAS”).

IASIS provides high quality affordable healthcare services primarily in higher growth markets. At June 30, 2015, the Company owned or leased 16 acute care hospital facilities and one behavioral health hospital facility, with a total of 3,644 licensed beds, several outpatient service facilities and 144 physician clinics.

IASIS’ continuing operations are in various regions including:

•

Salt Lake City, Utah;

•

Phoenix, Arizona;

•

five cities in Texas, including Houston and San Antonio; and

•

West Monroe, Louisiana.

The Company also owns and operates Health Choice Arizona, Inc. and related entities (“Health Choice” or the “Plan”), a managed care organization and insurer that delivers healthcare services to 389,900 members through multiple health plans, accountable care networks and managed care solutions. The Plan is headquartered in Phoenix, Arizona, with offices in Tampa, Florida and Salt Lake City, Utah.

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet of the Company at September 30, 2014, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 15, 2015.

All information related to the quarter and nine months ended June 30, 2014, has been derived from the condensed consolidated financial statements and notes thereto included in the Company’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2014, which was filed with the SEC on May 15, 2015.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year or any other future periods.

Principles of Consolidation

The unaudited condensed consolidated financial statements include all subsidiaries and entities under common control of the Company. Control is generally defined by the Company as ownership of a majority of the voting interest of an entity. In addition, control is demonstrated in most instances when the Company is the sole general partner in a limited partnership. Significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates.

General and Administrative

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company include the IASIS corporate office costs (excluding stock-based compensation costs), which were $16.2 million and $11.5 million for the quarters ended June 30, 2015 and 2014, respectively, and $43.7 million and $39.9 million for the nine months ended June 30, 2015 and 2014, respectively.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents balances primarily with high credit quality financial institutions. The Company manages its credit exposure by placing its investments in U.S. Treasury securities or other high quality securities, and by periodically evaluating the relative credit standing of the financial institution.

As discussed in Note 3, cash generated from certain asset dispositions may be subject to prepayment requirements under our senior credit agreement and indenture.

As of June 30, 2015, the Company has restricted the use of $3.9 million of cash primarily for the purpose of maintaining certain minimum risk based capital requirements associated with Health Choice.

Stock-Based Compensation

Although IASIS has no stock option plan or outstanding stock options, the Company, through its parent, IAS, grants stock options for a fixed number of common shares and restricted stock units (“RSUs”) to its employees. The Company accounts for these stock-based incentive awards under the measurement and recognition provisions of Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation (“ASC 718”). Accordingly, the Company applies the fair value recognition provisions requiring all share-based payments to employees, including grants of employee stock options and RSUs, to be measured based on the grant-date fair value of the awards, with the resulting expense recognized in the income statement. In accordance with the provisions of ASC 718, the Company uses the Black-Scholes-Merton valuation model in determining the fair value of its share-based payments. Compensation cost for time-vested options and RSUs will generally be amortized on a straight-line basis over the requisite service periods of the awards, generally equal to the awards’ vesting periods, while compensation cost for options with market-based conditions are recognized on a graded schedule generally over the awards’ vesting periods.

Fair Value of Financial Instruments

The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which provides a single definition of fair value, establishes a framework for measuring fair value, and expands disclosures concerning fair value measurements. The Company applies these provisions to the valuation and disclosure of certain financial instruments. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: (i) Level 1, which is defined as quoted prices in active markets that can be accessed at the measurement date; (ii) Level 2, which is defined as inputs other than quoted prices in active markets that are observable, either directly or indirectly; and (iii) Level 3, which is defined as unobservable inputs resulting from the existence of little or no market data, therefore potentially requiring an entity to develop its own assumptions.

Cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, salaries and benefits payable, accrued interest payable, medical claims payable, and other accrued expenses and current liabilities are reflected in the accompanying consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s capital leases and other long-term financing obligations also approximate their carrying value as they bear interest at current market rates.

The carrying value and fair value of the Company’s senior secured term loan facility and its 8.375% senior notes due 2019 (the “Senior Notes”) as of June 30, 2015 and September 30, 2014, were as follows (in thousands):


	Carrying Amount				Fair Value
	June 30, 2015		September 30, 2014		June 30, 2015		September 30, 2014
Senior secured term loan facility	$	979,812	$	986,815	$	984,341	$	987,589
Senior Notes		846,955		846,479		880,709		893,563

The estimated fair value of the Company’s senior secured term loan facility and its Senior Notes were based upon quoted market prices at that date and are categorized as Level 2 within the fair value hierarchy.

The Company determines the fair value of its interest rate hedges in a manner consistent with that used by market participants in pricing hedging instruments, which includes using a discounted cash flow analysis based upon the terms of the agreements, the impact of the forward LIBOR curve and an evaluation of credit risk. Given the use of observable market assumptions and the consideration of credit risk, the Company has categorized the valuation of its interest rate hedges as Level 2.

Discontinued Operations

The following table provides the components of discontinued operations (in thousands):


	Quarter Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
Acute care revenue less provision for bad debts	$	(374	)	$	14,223		$	29,489		$	37,097
Earnings (loss) before income taxes		1,609			(9,484	)		(5,264	)		(8,431	)
Income tax benefit (expense) from discontinued operations		(525	)		3,285			3,042			2,645

Earnings (loss) from discontinued operations, net of income tax	$	1,084		$	(6,199	)	$	(2,222	)	$	(5,786	)

Effective October 1, 2013, the Company completed the sale of its Florida operations which primarily included three hospitals in the Tampa-St. Petersburg area and all related physician operations. Accordingly, the operating results and cash flows of the Florida operations are reported as discontinued operations for all periods presented. The aggregate proceeds from the sale were $144.8 million, which resulted in a gain on the sale of assets totaling $22.2 million during the first quarter of the fiscal year ended September 30, 2014. This gain was included in discontinued operations for the quarter ended December 31, 2013, and the nine months ended June 30, 2014.

On September 26, 2014, the Company approved and committed to a plan to dispose of its Nevada operations, which included one hospital in the Las Vegas area and all related physician operations. Accordingly, the operating results and cash flows of the Nevada operations are reported as discontinued operations for all periods presented. The sale of the Company’s Nevada operations closed January 22, 2015. A loss totaling $7.9 million related to the fair value of long-lived assets was recognized on the sale of the Company’s Nevada operations, of which $7.5 million was recognized in the fourth quarter of the fiscal year ended September 30, 2014. Proceeds received from the sale were $42.6 million, and are subject to a final working capital settlement at a future date.

Recent Accounting Pronouncements

Recently Issued

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment—Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). Among other provisions and in addition to expanded disclosures, ASU 2014-08 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, ASU 2014-08 requires disclosure about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale. The disclosure of this information is required for all of the same periods that are presented in the entity’s results of operations for the period. The provisions of ASU 2014-08 are effective prospectively for all disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted. The Company has not yet adopted ASU 2014-08.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. In addition, ASU 2014-09 will require new and enhanced disclosures. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. ASU 2014-09 was originally scheduled to become effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption was not permitted. In July 2015, the FASB decided that a deferral was necessary to provide companies adequate time to effectively implement the new standard. They deferred the effective date by one year, but will permit entities to adopt one year earlier if they so choose. The Company is currently evaluating the effect of the new revenue recognition guidance.

In February 2015, the FASB issued ASU 2015-2, “Consolidation” (“ASU 2015-2”). ASU 2015-2 includes amendments that are intended to improve targeted areas of consolidation for legal entities including reducing the number of consolidation models from four to two and simplifying the FASB ASC. The provisions of ASU 2015-2 are effective for annual periods beginning after December 15, 2015. The amendments may be applied retrospectively in previously issued financial statements for one or more years with a cumulative effect adjustment to retained earnings as of the beginning of the first year restated. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2015-2 will have on its financial position, results of operation, cash flows and financial disclosures.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance in the new standard is limited to the presentation of debt issuance costs. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2015-03 will have on its financial position, cash flows and financial disclosures.

2. REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Acute Care Revenue and Accounts Receivable

The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs (Medicare, Medicaid and TRICARE), managed care health plans, including Medicare and Medicaid managed health plans, commercial insurance companies and employers under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Additionally, the Company offers discounts through its uninsured discount program to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans, or charity care.

Acute care revenue is reported at the estimated net realizable amounts from third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted, if necessary, in future periods when final settlements are determined. The Company also records a provision for bad debts related to uninsured accounts, as well as co-insurance and deductible balances due from insured patients, to reflect its self-pay accounts receivable at the estimated amounts expected to be collected. The sources of the Company’s hospital net patient revenue by payor before its provision for bad debts are summarized as follows:


	Quarter Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
Medicare		19.0	%		20.3	%		19.8	%		20.6	%
Managed Medicare		10.2			10.1			10.3			10.1
Medicaid and managed Medicaid		12.3			13.4			12.6			12.7
Managed care and other		43.7			40.9			42.6			39.5
Self-pay		14.8			15.3			14.7			17.1

Total		100.0	%		100.0	%		100.0	%		100.0	%

Allowance For Doubtful Accounts

The provision for bad debts and the associated allowance for doubtful accounts relate primarily to amounts due directly from patients. The Company does not pursue collection of amounts related to patients who qualify for charity care under the Company’s guidelines; therefore, charity care accounts are deducted from gross revenue and are not included in the provision for bad debts.

The Company’s estimation of its allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of related collection efforts. The Company’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. The Company monitors accounts receivable balances and the effectiveness of reserve policies on a regular basis and reviews various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following:

•

Cash collections as a percentage of net patient revenue less bad debts;

•

Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

•

Revenue and volume trends by payor, particularly the self-pay components;

•

Trending of days revenue in accounts receivable;

•

Various allowance coverage statistics; and

•

Historical write-off and collection experience using a hindsight or look-back approach.

At June 30, 2015 and September 30, 2014, the Company’s net self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $264.3 million and $264.6 million, respectively. At June 30, 2015 and September 30, 2014, the Company’s allowance for doubtful accounts was $199.9 million and $207.4 million, respectively.

Premium, Service and Other Revenue

Health Choice is the Company’s managed care organization and insurer that serves health plan enrollees in Arizona and Utah. The Plan derives most of its revenue through a contract in Arizona with the Arizona Health Care Cost Containment System (“AHCCCS”) to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program.

Effective October 1, 2013, Health Choice entered into a contract with AHCCCS with an initial term of three years, and two one-year renewal options at the discretion of AHCCCS. The contract is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate the contract in the event of the unavailability of state or federal funding.

Health Choice also provides coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”) provider pursuant to a contract with the Centers for Medicare and Medicaid Services (“CMS”). The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members (i.e. those that are eligible for Medicare and Medicaid). The contract with CMS includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Health Choice’s contract with CMS has been extended through December 31, 2015.

In Arizona and surrounding states, the Plan subcontracts with hospitals, physicians and other medical providers to provide services to its Medicaid and Medicare enrollees in Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal counties, regardless of the actual costs incurred to provide these services.

The Plan’s contracts require the arrangement of healthcare services for enrolled patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates. Capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services. The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in excess of stated levels of up to $35,000 per claim, depending on the eligibility classification of the member. Qualified costs must be incurred during the contract year and are the lesser of the amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the contract with AHCCCS when healthcare costs exceed stated amounts as provided under the contract, including estimates of such costs at the end of each accounting period.

On March 10, 2014, Health Choice entered into a contract with a large national insurer to serve as a management services organization (“MSO”) to Medicaid enrollees in two separate geographic areas in the state of Florida. Under this contract, which covers 97,700 Medicaid enrollees, Health Choice receives an administrative fee based upon the number of members served.

The sources of Health Choice’s premium, service and other revenue by major product line are summarized as follows:


	Quarter Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
Medicaid and Medicaid MSO		86.8	%		84.7	%		85.6	%		86.8	%
MAPD SNP		12.2			14.9			13.2			12.8
Other		1.0			0.4			1.2			0.4

Total		100.0	%		100.0	%		100.0	%		100.0	%

3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt, capital leases and other long-term obligations consists of the following (in thousands):


	June 30, 2015		September 30, 2014
Senior secured term loan facility	$	979,812	$	986,815
Senior Notes		846,955		846,479
Capital leases and other long-term obligations		18,433		20,506

		1,845,200		1,853,800
Less current maturities		11,985		12,690

	$	1,833,215	$	1,841,110

As of June 30, 2015 and September 30, 2014, the senior secured term loan facility balance reflects an original issue discount (“OID”) of $2.1 million and $2.6 million, respectively, which is net of accumulated amortization of $3.0 million and $2.5 million, respectively. The Senior Notes balance reflects an OID of $2.9 million and $3.5 million, respectively, which is net of accumulated amortization of $3.2 million and $2.6 million, respectively.

As of June 30, 2015 and September 30, 2014, capital leases and other long-term obligations includes a financing obligation totaling $9.9 million and $10.4 million, respectively, resulting from the Company’s sale-leaseback transactions.

$1.325 Billion Senior Secured Credit Facilities

The Company is party to a senior credit agreement (the “Amended and Restated Credit Agreement”) for which IAS and certain of the Company’s subsidiaries serve as guarantors. The Amended and Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility maturing in May 2018 and (2) a $300.0 million senior secured revolving credit facility maturing in May 2016, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date of a repricing amendment, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require installment payments prior to maturity.

Borrowings under the senior secured term loan facility bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A., and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at the Company’s option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, the Company is required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain subsidiaries of the Company (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all future material wholly-owned subsidiaries of the Company, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of the equity interests of the Company and the Credit Facility Guarantors, (2) mortgage liens on all of the Company’s material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires the Company to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances, and from a percentage of annual excess cash flow.

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.

8.375% Senior Notes due 2019

The Company, together with its wholly owned subsidiary IASIS Capital Corporation (together, the “Issuers”), issued $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers’ wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the “Notes Guarantors”) (the “Indenture”). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis by certain of the Company’s subsidiaries.

On October 31, 2014, the Issuers completed an asset purchase offer for up to $210.0 million aggregate principal amount of the outstanding Senior Notes. The Issuers were required to make the offer to purchase under the terms of the Indenture governing the Senior Notes using excess proceeds from certain asset dispositions. The offer to purchase was made at 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest, to but excluding the redemption date. Holders validly tendered $0.1 million in aggregate principal amount of the Senior Notes, all of which were accepted by the Issuers. The Company made payment to settle all validly tendered Senior Notes on November 6, 2014. At June 30, 2015, the outstanding principal balance of the Senior Notes was $849.9 million.

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

The Issuers may redeem the Senior Notes, in whole or in part, at any time on or after May 15, 2015, at a price equal to 104.188% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, up to but excluding the redemption date. Each subsequent year the redemption price declines 2.093 percentage points until 2017, and thereafter, at which point the redemption price is equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.

The Indenture contains covenants that limit the Company’s (and its restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase the Company’s capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to the Company and its restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of the Company’s assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If the Company experiences certain kinds of changes of control, it must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, the Company will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

4. INTEREST RATE SWAPS

In August 2011, the Company executed forward starting interest rate swaps with Citibank N.A. and Barclays Bank PLC, as counterparties, with notional amounts totaling $350.0 million, with each agreement effective March 28, 2013 and expiring between September 30, 2014 and September 30, 2016. On September 30, 2014, interest rate swaps with notional amounts totaling $50.0 million at a rate of 1.6% expired under the terms of the related agreement. Under the remaining agreements, the Company is required to make quarterly fixed rate payments at annual rates ranging from 1.9% to 2.2%. The counterparties are obligated to make quarterly floating rate payments to the Company based on the three-month LIBOR rate, each subject to a floor of 1.25%. The Company completed an assessment of these cash flow hedges during the quarters and nine months ended June 30, 2015 and 2014, and determined that these hedges were highly effective. Accordingly, no gain or loss related to these hedges has been reflected in the accompanying condensed consolidated statements of operations, and the change in fair value has been included in accumulated other comprehensive loss as a component of member’s equity. The outstanding interest rate swaps at June 30, 2015 are as follows:


Effective dates	Total Notional Amounts
	(in thousands)
Effective from March 28, 2013 to September 30, 2015	$	100,000
Effective from March 28, 2013 to September 30, 2016		200,000

The fair value of the Company’s interest rate hedges at June 30, 2015 and September 30, 2014, reflect liability balances of $2.6 million and $3.9 million, respectively, and are included in other long-term liabilities in the accompanying condensed consolidated balance sheets. The fair value of the Company’s interest rate hedges reflects a liability because the effect of the forward LIBOR curve on future interest payments results in less interest due to the Company under the variable rate component included in the interest rate hedging agreements, as compared to the amount due the Company’s counterparties under the fixed interest rate component.

5. GOODWILL

The following table presents the changes in the carrying amount of goodwill (in thousands):


	Acute Care		Health Choice		Total
Balance at September 30, 2014	$	808,741	$	5,757	$	814,498
Adjustments related to acquisitions		6,003		—		6,003

Balance at June 30, 2015	$	814,744	$	5,757	$	820,501

6. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss, net of income taxes, are as follows (in thousands):


	June 30, 2015			September 30, 2014
Fair value of interest rate hedges	$	(2,577	)	$	(3,895	)
Income tax benefit		1,069			1,551

Accumulated other comprehensive loss	$	(1,508	)	$	(2,344	)

7. INCOME TAXES

For the quarter ended June 30, 2015, the Company recorded income tax expense of $1.0 million, resulting in an effective tax rate of 42.7%, compared to $1.1 million, for an effective tax rate of (11.2%) in the prior year quarter. For the nine months ended June 30, 2015, the Company recorded income tax expense of $8.1 million, for an effective tax rate of 45.4%, compared to $7.4 million, for an effective tax rate of 599.6% in the prior year period. The change in the effective tax rate was primarily attributable to the following: (1) a decrease in compensation deduction limitations applicable to certain health insurers, which were recorded in the prior year period but to which the Company is no longer subject in the current or prior year after final regulations issued during September 2014, (2) $1.5 million of income tax expense recorded in the prior year quarter related to an excess of cumulative compensation deductions over realized tax benefits upon the exercise of employee stock options, and (3) the increase in net earnings from continuing operations, which lessened the rate impact of nondeductible expenses, non-controlling interests, and state income taxes (including the Texas margins tax).

8. COMMITMENTS AND CONTINGENCIES

Net Revenue

The calculation of appropriate payments from the Medicare and Medicaid programs, including supplemental Medicaid reimbursement, as well as terms governing agreements with other third-party payors are complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered because of audits by the programs, rights of appeal and the application of numerous technical provisions. In the opinion of management, adequate provision has been made for adjustments that may result from such routine audits and appeals.

Professional, General and Workers’ Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment and personal injuries. To cover these types of claims, the Company maintains professional and general liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any such proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for professional and general liability claims using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At June 30, 2015 and September 30, 2014, the Company’s professional and general liability accrual for asserted and unasserted claims totaled $63.4 million and $66.5 million, respectively, with the current portion totaling $13.3 million during both respective periods.

The Company is subject to claims and legal actions in the ordinary course of business relative to workers’ compensation matters. To cover these types of claims, the Company maintains workers’ compensation insurance coverage with a self-insured retention. The Company accrues the costs of workers’ compensation claims based upon estimates derived from its claims experience.

Health Choice

Health Choice has entered into capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic and supplemental payments from AHCCCS and CMS. These services are provided regardless of the actual costs incurred to provide these services. The Plan receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes the capitated payments, together with reinsurance and other supplemental payments are sufficient to pay for the services Health Choice is obligated to deliver. As of June 30, 2015, the Company has provided performance guaranties in the form of a letter of credit totaling $57.5 million for the benefit of AHCCCS and a demand note totaling $12.0 million for the benefit of CMS to support its obligations under the Health Choice contracts to provide and pay for the healthcare services. The amount of these performance guaranties are generally based in part upon the membership in the Plan and the related capitation revenue paid to Health Choice.

Acquisitions

The Company has acquired and in the future may choose to acquire businesses with prior operating histories. Such businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures designed to conform business practices to its policies following the completion of any acquisition, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

Other

The Company has reached an agreement in principle with the U.S. Department of Justice (“DOJ”) and the Office of Inspector General of the U.S. Department of Health and Human Services (“OIG”) to fully resolve an investigation regarding propriety of Medicare coverage and reimbursement for certain of the Company’s hospitals’ Medicare claims for implantable cardioverter defibrillator (“ICD”) procedures. The government’s investigation was part of a nationwide investigation of numerous hospital operators regarding the necessity of, and billing for, implantation of certain ICD-related procedures. The Company denies allegations with respect to its hospitals’ practices in this area and the settlement is not an admission of liability. The Company, the DOJ and the OIG are in the process of documenting the final settlement agreement, which the Company expects will require a settlement payment in an amount immaterial to the Company.

9. SEGMENT INFORMATION

The Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):


	For the Quarter Ended June 30, 2015
	Acute Care			Health Choice		Eliminations			Consolidated
Acute care revenue before provision for bad debts	$	563,030		$	—	$	—		$	563,030
Less: Provision for bad debts		(88,097	)		—		—			(88,097	)

Acute care revenue		474,933			—		—			474,933
Premium, service and other revenue		—			211,361		—			211,361
Revenue between segments		4,520			—		(4,520	)		—

Total revenue		479,453			211,361		(4,520	)		686,294

Salaries and benefits (excludes stock-based compensation)		214,394			13,274		—			227,668
Supplies		81,341			164		—			81,505
Medical claims		—			176,995		(4,520	)		172,475
Rentals and leases		18,542			716		—			19,258
Other operating expenses		110,930			13,465		—			124,395
Medicare and Medicaid EHR incentives		(2,035	)		—		—			(2,035	)

Adjusted EBITDA⁽¹⁾		56,281			6,747		—			63,028

Interest expense, net		31,905			—		—			31,905
Depreciation and amortization		25,180			1,096		—			26,276
Stock-based compensation		1,231			—		—			1,231
Management fees		1,250			—		—			1,250

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes		(3,285	)		5,651		—			2,366

Gain on disposal of assets, net		20			—		—			20

Earnings (loss) from continuing operations before income taxes	$	(3,265	)	$	5,651	$	—		$	2,386


	For the Quarter Ended June 30, 2014
	Acute Care			Health Choice			Eliminations			Consolidated
Acute care revenue before provision for bad debts	$	531,380		$	—		$	—		$	531,380
Less: Provision for bad debts		(77,130	)		—			—			(77,130	)

Acute care revenue		454,250			—			—			454,250
Premium, service and other revenue		—			178,498			—			178,498
Revenue between segments		3,262			—			(3,262	)		—

Total revenue		457,512			178,498			(3,262	)		632,748

Salaries and benefits (excludes stock-based compensation)		206,838			8,929			—			215,767
Supplies		75,034			70			—			75,104
Medical claims		—			169,205			(3,262	)		165,943
Rentals and leases		17,750			448			—			18,198
Other operating expenses		97,278			13,059			—			110,337
Medicare and Medicaid EHR incentives		(2,940	)		—			—			(2,940	)

Adjusted EBITDA⁽¹⁾		63,552			(13,213	)		—			50,339

Interest expense, net		32,267			—			—			32,267
Depreciation and amortization		22,390			1,032			—			23,422
Stock-based compensation		5,679			—			—			5,679
Management fees		1,250			—			—			1,250

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes		1,966			(14,245	)		—			(12,279	)

Gain on disposal of assets, net		2,102			—			—			2,102

Earnings (loss) from continuing operations before income taxes	$	4,068		$	(14,245	)	$	—		$	(10,177	)


	For the Nine Months Ended June 30, 2015
	Acute Care			Health Choice		Eliminations			Consolidated
Acute care revenue before provision for bad debts	$	1,668,536		$	—	$	—		$	1,668,536
Less: Provision for bad debts		(258,175	)		—		—			(258,175	)

Acute care revenue		1,410,361			—		—			1,410,361
Premium, service and other revenue		—			642,298		—			642,298
Revenue between segments		12,356			—		(12,356	)		—

Total revenue		1,422,717			642,298		(12,356	)		2,052,659

Salaries and benefits (excludes stock-based compensation)		651,854			40,307		—			692,161
Supplies		241,230			466		—			241,696
Medical claims		—			536,862		(12,356	)		524,506
Rentals and leases		54,899			2,156		—			57,055
Other operating expenses		307,868			43,494		—			351,362
Medicare and Medicaid EHR incentives		(7,685	)		—		—			(7,685	)

Adjusted EBITDA⁽¹⁾		174,551			19,013		—			193,564

Interest expense, net		96,122			—		—			96,122
Depreciation and amortization		67,264			3,198		—			70,462
Stock-based compensation		4,937			—		—			4,937
Management fees		3,750			—		—			3,750

Earnings from continuing operations before loss on disposal of assets and income taxes		2,478			15,815		—			18,293

Loss on disposal of assets, net		(434	)		—		—			(434	)

Earnings from continuing operations before income taxes	$	2,044		$	15,815	$	—		$	17,859

Segment assets	$	2,286,227		$	398,752				$	2,684,979

Capital expenditures	$	104,853		$	1,751				$	106,604

Goodwill	$	814,744		$	5,757				$	820,501


	For the Nine Months Ended June 30, 2014
	Acute Care			Health Choice		Eliminations			Consolidated
Acute care revenue before provision for bad debts	$	1,613,457		$	—	$	—		$	1,613,457
Less: Provision for bad debts		(260,249	)		—		—			(260,249	)

Acute care revenue		1,353,208			—		—			1,353,208
Premium, service and other revenue		—			503,212		—			503,212
Revenue between segments		8,539			—		(8,539	)		—

Total revenue		1,361,747			503,212		(8,539	)		1,856,420

Salaries and benefits (excludes stock-based compensation)		630,760			23,660		—			654,420
Supplies		227,242			173		—			227,415
Medical claims		—			445,293		(8,539	)		436,754
Rentals and leases		53,279			1,165		—			54,444
Other operating expenses		283,143			28,443		—			311,586
Medicare and Medicaid EHR incentives		(9,294	)		—		—			(9,294	)

Adjusted EBITDA⁽¹⁾		176,617			4,478		—			181,095

Interest expense, net		98,300			—		—			98,300
Depreciation and amortization		67,511			3,137		—			70,648
Stock-based compensation		10,033			—		—			10,033
Management fees		3,750			—		—			3,750

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes		(2,977	)		1,341		—			(1,636	)

Gain on disposal of assets, net		2,868			—		—			2,868

Earnings (loss) from continuing operations before income taxes	$	(109	)	$	1,341	$	—		$	1,232

Segment assets	$	2,314,576		$	341,177				$	2,655,753

Capital expenditures	$	74,958		$	1,126				$	76,084

Goodwill	$	809,828		$	5,757				$	815,585

(1)

Adjusted EBITDA represents net earnings (loss) from continuing operations before net interest expense, income tax expense, depreciation and amortization, stock-based compensation, net gain (loss) on disposal of assets and management fees. Management fees represent monitoring and advisory fees paid to management companies affiliated with TPG and JLL. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the condensed consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Company’s Senior Secured Credit Facilities and may not be comparable to similarly titled measures of other companies.

10. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes described in Note 3 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s 100% owned existing domestic subsidiaries, other than non-guarantor subsidiaries, which include Health Choice and the Company’s non-wholly owned subsidiaries. The guarantees are subject to customary release provisions set forth in the Indenture for the Senior Notes.

Summarized condensed consolidating balance sheets at June 30, 2015 and September 30, 2014, condensed consolidating statements of operations for the quarters and nine months ended June 30, 2015 and 2014, condensed consolidating statements of comprehensive income (loss) for the quarters and nine months ended June 30, 2015 and 2014, and condensed consolidating statements of cash flows for the nine months ended June 30, 2015 and 2014, for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below.

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet (unaudited)

June 30, 2015

(in thousands)


	Parent Issuer		Subsidiary Guarantors			Subsidiary Non-Guarantors		Eliminations			Condensed Consolidated
Assets
Current assets
Cash and cash equivalents	$	—	$	273,473		$	34,157	$	—		$	307,630
Accounts receivable, net		—		62,342			259,845		—			322,187
Inventories		—		14,403			45,285		—			59,688
Deferred income taxes		1,003		—			—		—			1,003
Prepaid expenses and other current assets		—		69,620			157,721		—			227,341

Total current assets		1,003		419,838			497,008		—			917,849
Property and equipment, net		—		260,873			606,136		—			867,009
Intercompany		—		(144,619	)		144,619		—			—
Net investment in and advances to subsidiaries		2,039,816		—			—		(2,039,816	)		—
Goodwill		7,407		65,514			747,580		—			820,501
Other intangible assets, net		—		8,054			12,750		—			20,804
Other assets, net		18,279		23,303			17,234		—			58,816

Total assets	$	2,066,505	$	632,963		$	2,025,327	$	(2,039,816	)	$	2,684,979

Liabilities and Equity
Current liabilities
Accounts payable	$	—	$	42,937		$	77,886	$	—		$	120,823
Salaries and benefits payable		—		28,960			31,984		—			60,944
Accrued interest payable		9,843		(3,219	)		3,219		—			9,843
Medical claims payable		—		—			95,678		—			95,678
Other accrued expenses and current liabilities		—		44,446			47,551		—			91,997
Current portion of long-term debt, capital leases and other long-term obligations		10,071		1,914			22,458		(22,458	)		11,985
Deferred income taxes		—		—			—		—			—

Total current liabilities		19,914		115,038			278,776		(22,458	)		391,270
Long-term debt, capital leases and other long-term obligations		1,816,857		16,358			615,433		(615,433	)		1,833,215
Deferred income taxes		107,789		—			—		—			107,789
Other long-term liabilities		2,408		108,087			1,032		—			111,527

Total liabilities		1,946,968		239,483			895,241		(637,891	)		2,443,801
Non-controlling interests with redemption rights		—		113,233			—		—			113,233
Equity
Member’s equity		119,537		271,839			1,130,086		(1,401,925	)		119,537
Non-controlling interests		—		8,408			—		—			8,408

Total equity		119,537		280,247			1,130,086		(1,401,925	)		127,945

Total liabilities and equity	$	2,066,505	$	632,963		$	2,025,327	$	(2,039,816	)	$	2,684,979

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet (unaudited)

September 30, 2014

(in thousands)


	Parent Issuer		Subsidiary Guarantors			Subsidiary Non-Guarantors		Eliminations			Condensed Consolidated
Assets
Current assets
Cash and cash equivalents	$	—	$	325,555		$	15,625	$	—		$	341,180
Accounts receivable, net		—		66,165			239,489		—			305,654
Inventories		—		13,925			43,707		—			57,632
Deferred income taxes		1,987		—			—		—			1,987
Prepaid expenses and other current assets		—		52,961			163,602		—			216,563
Assets held for sale		—		50,151			—		—			50,151

Total current assets		1,987		508,757			462,423		—			973,167
Property and equipment, net		—		232,421			594,057		—			826,478
Intercompany		—		(82,478	)		82,478		—			—
Net investment in and advances to subsidiaries		2,053,712		—			—		(2,053,712	)		—
Goodwill		7,407		62,947			744,144		—			814,498
Other intangible assets, net		—		8,331			15,000		—			23,331
Other assets, net		23,067		23,055			16,240		—			62,362

Total assets	$	2,086,173	$	753,033		$	1,914,342	$	(2,053,712	)	$	2,699,836

Liabilities and Equity
Current liabilities
Accounts payable	$	—	$	47,843		$	80,516	$	—		$	128,359
Salaries and benefits payable		—		32,164			38,957		—			71,121
Accrued interest payable		28,820		(3,223	)		3,223		—			28,820
Medical claims payable		—		—			79,449		—			79,449
Other accrued expenses and current liabilities		—		47,905			25,586		—			73,491
Current portion of long-term debt, capital leases and other long-term obligations		10,071		2,619			23,176		(23,176	)		12,690
Liabilities held for sale		—		9,171			—		—			9,171

Total current liabilities		38,891		136,479			250,907		(23,176	)		403,101
Long-term debt, capital leases and other long-term obligations		1,823,545		17,565			521,216		(521,216	)		1,841,110
Deferred income taxes		100,499		—			—		—			100,499
Other long-term liabilities		3,233		113,466			590		—			117,289

Total liabilities		1,966,168		267,510			772,713		(544,392	)		2,461,999
Non-controlling interests with redemption rights		—		108,156			—		—			108,156
Equity
Member’s equity		120,005		367,691			1,141,629		(1,509,320	)		120,005
Non-controlling interests		—		9,676			—		—			9,676

Total equity		120,005		377,367			1,141,629		(1,509,320	)		129,681

Total liabilities and equity	$	2,086,173	$	753,033		$	1,914,342	$	(2,053,712	)	$	2,699,836

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations (unaudited)

For the Quarter Ended June 30, 2015

(in thousands)


	Parent Issuer			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Condensed Consolidated
Revenue
Acute care revenue before provision for bad debts	$	—		$	131,058		$	436,492		$	(4,520	)	$	563,030
Less: Provision for bad debts		—			(14,638	)		(73,459	)		—			(88,097	)

Acute care revenue		—			116,420			363,033			(4,520	)		474,933
Premium, service and other revenue		—			—			211,361			—			211,361

Total revenue		—			116,420			574,394			(4,520	)		686,294
Costs and expenses
Salaries and benefits		1,231			77,061			150,607			—			228,899
Supplies		—			20,750			60,755			—			81,505
Medical claims		—			—			176,995			(4,520	)		172,475
Rentals and leases		—			5,843			13,415			—			19,258
Other operating expenses		—			27,912			96,483			—			124,395
Medicare and Medicaid EHR incentives		—			(651	)		(1,384	)		—			(2,035	)
Interest expense, net		31,905			—			11,644			(11,644	)		31,905
Depreciation and amortization		—			11,415			14,861			—			26,276
Management fees		1,250			(9,132	)		9,132			—			1,250
Equity in earnings of affiliates		(22,573	)		—			—			22,573			—

Total costs and expenses		11,813			133,198			532,508			6,409			683,928
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes		(11,813	)		(16,778	)		41,886			(10,929	)		2,366
Gain on disposal of assets, net		—			7			13			—			20

Earnings (loss) from continuing operations before income taxes		(11,813	)		(16,771	)		41,899			(10,929	)		2,386
Income tax expense		1,018			—			—			—			1,018

Net earnings (loss) from continuing operations		(12,831	)		(16,771	)		41,899			(10,929	)		1,368
Gain (loss) from discontinued operations, net of income taxes		(525	)		1,609			—			—			1,084

Net earnings (loss)		(13,356	)		(15,162	)		41,899			(10,929	)		2,452
Net earnings attributable to non-controlling interests		—			(4,164	)		—			—			(4,164	)

Net earnings (loss) attributable to IASIS Healthcare LLC	$	(13,356	)	$	(19,326	)	$	41,899		$	(10,929	)	$	(1,712	)

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations (unaudited)

For the Quarter Ended June 30, 2014

(in thousands)


	Parent Issuer			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Condensed Consolidated
Revenue
Acute care revenue before provision for bad debts	$	—		$	127,116		$	407,526		$	(3,262	)	$	531,380
Less: Provision for bad debts		—			(13,293	)		(63,837	)		—			(77,130	)

Acute care revenue		—			113,823			343,689			(3,262	)		454,250
Premium, service and other revenue		—			—			178,498			—			178,498

Total revenue		—			113,823			522,187			(3,262	)		632,748
Costs and expenses
Salaries and benefits		5,679			74,174			141,593			—			221,446
Supplies		—			17,716			57,388			—			75,104
Medical claims		—			—			169,205			(3,262	)		165,943
Rentals and leases		—			6,014			12,184			—			18,198
Other operating expenses		—			21,008			89,329			—			110,337
Medicare and Medicaid EHR incentives		—			(941	)		(1,999	)		—			(2,940	)
Interest expense, net		32,267			—			12,232			(12,232	)		32,267
Depreciation and amortization		—			8,806			14,616			—			23,422
Management fees		1,250			(8,498	)		8,498			—			1,250
Equity in earnings of affiliates		(2,468	)		—			—			2,468			—

Total costs and expenses		36,728			118,279			503,046			(13,026	)		645,027
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes		(36,728	)		(4,456	)		19,141			9,764			(12,279	)
Gain on disposal of assets, net		—			2,102			—			—			2,102

Earnings (loss) from continuing operations before income taxes		(36,728	)		(2,354	)		19,141			9,764			(10,177	)
Income tax expense		1,138			—			—			—			1,138

Net earnings (loss) from continuing operations		(37,866	)		(2,354	)		19,141			9,764			(11,315	)
Earnings (loss) from discontinued operations, net of income taxes		5,667			(11,866	)		—			—			(6,199	)

Net earnings (loss)		(32,199	)		(14,220	)		19,141			9,764			(17,514	)
Net earnings attributable to non-controlling interests		—			(2,453	)		—			—			(2,453	)

Net earnings (loss) attributable to IASIS Healthcare LLC	$	(32,199	)	$	(16,673	)	$	19,141		$	9,764		$	(19,967	)

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations (unaudited)

For the Nine Months Ended June 30, 2015

(in thousands)


	Parent Issuer			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Condensed Consolidated
Revenue
Acute care revenue before provision for bad debts	$	—		$	385,815		$	1,295,077		$	(12,356	)	$	1,668,536
Less: Provision for bad debts		—			(38,766	)		(219,409	)		—			(258,175	)

Acute care revenue		—			347,049			1,075,668			(12,356	)		1,410,361
Premium, service and other revenue		—			—			642,298			—			642,298

Total revenue		—			347,049			1,717,966			(12,356	)		2,052,659
Costs and expenses
Salaries and benefits		4,937			236,135			456,026			—			697,098
Supplies		—			58,561			183,135			—			241,696
Medical claims		—			—			536,862			(12,356	)		524,506
Rentals and leases		—			18,179			38,876			—			57,055
Other operating expenses		—			67,251			284,111			—			351,362
Medicare and Medicaid EHR incentives		—			(2,115	)		(5,570	)		—			(7,685	)
Interest expense, net		96,122			—			35,866			(35,866	)		96,122
Depreciation and amortization		—			25,828			44,634			—			70,462
Management fees		3,750			(27,079	)		27,079			—			3,750
Equity in earnings of affiliates		(72,324	)		—			—			72,324			—

Total costs and expenses		32,485			376,760			1,601,019			24,102			2,034,366
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes		(32,485	)		(29,711	)		116,947			(36,458	)		18,293
Gain (loss) on disposal of assets, net		—			(519	)		85			—			(434	)

Earnings (loss) from continuing operations before income taxes		(32,485	)		(30,230	)		117,032			(36,458	)		17,859
Income tax expense		8,111			—			—			—			8,111

Net earnings (loss) from continuing operations		(40,596	)		(30,230	)		117,032			(36,458	)		9,748
Earnings (loss) from discontinued operations, net of income taxes		3,042			(5,264	)		—			—			(2,222	)

Net earnings (loss)		(37,554	)		(35,494	)		117,032			(36,458	)		7,526
Net earnings attributable to non-controlling interests		—			(9,214	)		—			—			(9,214	)

Net earnings (loss) attributable to IASIS Healthcare LLC	$	(37,554	)	$	(44,708	)	$	117,032		$	(36,458	)	$	(1,688	)

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations (unaudited)

For the Nine Months Ended June 30, 2014

(in thousands)


	Parent Issuer			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Condensed Consolidated
Revenue
Acute care revenue before provision for bad debts	$	—		$	382,918		$	1,239,078		$	(8,539	)	$	1,613,457
Less: Provision for bad debts		—			(50,443	)		(209,806	)		—			(260,249	)

Acute care revenue		—			332,475			1,029,272			(8,539	)		1,353,208
Premium, service and other revenue		—			—			503,212			—			503,212

Total revenue		—			332,475			1,532,484			(8,539	)		1,856,420
Costs and expenses
Salaries and benefits		10,033			230,801			423,619			—			664,453
Supplies		—			54,488			172,927			—			227,415
Medical claims		—			—			445,293			(8,539	)		436,754
Rentals and leases		—			17,809			36,635			—			54,444
Other operating expenses		—			59,539			252,047			—			311,586
Medicare and Medicaid EHR incentives		—			(2,830	)		(6,464	)		—			(9,294	)
Interest expense, net		98,300			—			36,816			(36,816	)		98,300
Depreciation and amortization		—			27,664			42,984			—			70,648
Management fees		3,750			(25,727	)		25,727			—			3,750
Equity in earnings of affiliates		(59,211	)		—			—			59,211			—

Total costs and expenses		52,872			361,744			1,429,584			13,856			1,858,056
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes		(52,872	)		(29,269	)		102,900			(22,395	)		(1,636	)
Gain (loss) on disposal of assets, net		—			3,080			(212	)		—			2,868

Earnings (loss) from continuing operations before income taxes		(52,872	)		(26,189	)		102,688			(22,395	)		1,232
Income tax expense		7,387			—			—			—			7,387

Net earnings (loss) from continuing operations		(60,259	)		(26,189	)		102,688			(22,395	)		(6,155	)
Earnings (loss) from discontinued operations, net of income taxes		2,645			(8,431	)		—			—			(5,786	)

Net earnings (loss)		(57,614	)		(34,620	)		102,688			(22,395	)		(11,941	)
Net earnings attributable to non-controlling interests		—			(8,857	)		—			—			(8,857	)

Net earnings (loss) attributable to IASIS Healthcare LLC	$	(57,614	)	$	(43,477	)	$	102,688		$	(22,395	)	$	(20,798	)

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended June 30, 2015 (unaudited)

(in thousands)


				Subsidiary			Subsidiary					Condensed
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Net earnings (loss)	$	(13,356	)	$	(15,162	)	$	41,899	$	(10,929	)	$	2,452
Other comprehensive income
Change in fair value of highly effective interest rate hedges		573			—			—		—			573

Other comprehensive income before income taxes		573			—			—		—			573
Change in income tax expense		(209	)		—			—		—			(209	)

Other comprehensive income, net of income taxes		364			—			—		—			364

Comprehensive income (loss)		(12,992	)		(15,162	)		41,899		(10,929	)		2,816
Net earnings attributable to non-controlling interests		—			(4,164	)		—		—			(4,164	)

Comprehensive income (loss) attributable to IASIS Healthcare LLC	$	(12,992	)	$	(19,326	)	$	41,899	$	(10,929	)	$	(1,348	)

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended June 30, 2014 (unaudited)

(in thousands)


				Subsidiary			Subsidiary				Condensed
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations		Consolidated
Net earnings (loss)	$	(32,199	)	$	(14,220	)	$	19,141	$	9,764	$	(17,514	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges		201			—			—		—		201

Other comprehensive income before income taxes		201			—			—		—		201
Change in income tax expense		(75	)		—			—		—		(75	)

Other comprehensive income, net of income taxes		126			—			—		—		126

Comprehensive income (loss)		(32,073	)		(14,220	)		19,141		9,764		(17,388	)
Net earnings attributable to non-controlling interests		—			(2,453	)		—		—		(2,453	)

Comprehensive income (loss) attributable to IASIS Healthcare LLC	$	(32,073	)	$	(16,673	)	$	19,141	$	9,764	$	(19,841	)

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Nine Months Ended June 30, 2015 (unaudited)

(in thousands)


				Subsidiary			Subsidiary					Condensed
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Net earnings (loss)	$	(37,554	)	$	(35,494	)	$	117,032	$	(36,458	)	$	7,526
Other comprehensive income
Change in fair value of highly effective interest rate hedges		1,318			—			—		—			1,318

Other comprehensive income before income taxes		1,318			—			—		—			1,318
Change in income tax expense		(482	)		—			—		—			(482	)

Other comprehensive income, net of income taxes		836			—			—		—			836

Comprehensive income (loss)		(36,718	)		(35,494	)		117,032		(36,458	)		8,362
Net earnings attributable to non-controlling interests		—			(9,214	)		—		—			(9,214	)

Comprehensive income (loss) attributable to IASIS Healthcare LLC	$	(36,718	)	$	(44,708	)	$	117,032	$	(36,458	)	$	(852	)

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Nine Months Ended June 30, 2014 (unaudited)

(in thousands)


	Parent Issuer			Subsidiary Guarantors			Subsidiary Non-Guarantors		Eliminations			Condensed Consolidated
Net earnings (loss)	$	(57,614	)	$	(34,620	)	$	102,688	$	(22,395	)	$	(11,941	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges		1,179			—			—		—			1,179

Other comprehensive income before income taxes		1,179			—			—		—			1,179
Change in income tax expense		(438	)		—			—		—			(438	)

Other comprehensive income, net of income taxes		741			—			—		—			741

Comprehensive income (loss)		(56,873	)		(34,620	)		102,688		(22,395	)		(11,200	)
Net earnings attributable to non-controlling interests		—			(8,857	)		—		—			(8,857	)

Comprehensive income (loss) attributable to IASIS Healthcare LLC	$	(56,873	)	$	(43,477	)	$	102,688	$	(22,395	)	$	(20,057	)

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended June 30, 2015 (unaudited)

(in thousands)


	Parent Issuer			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Condensed Consolidated
Cash flows from operating activities
Net earnings (loss)	$	(37,554	)	$	(35,494	)	$	117,032		$	(36,458	)	$	7,526
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			25,828			44,634			—			70,462
Amortization of loan costs		5,913			—			—			—			5,913
Amortization of deferred gain on sale-leaseback transaction		(1,872	)		—			—			—			(1,872	)
Change in physician minimum revenue guarantees		—			147			2,705			—			2,852
Stock-based compensation		4,937			—			—			—			4,937
Deferred income taxes		5,929			—			—			—			5,929
Income tax benefit from parent company		6			—			—			—			6
Loss (gain) on disposal of assets, net		—			519			(85	)		—			434
Loss (earnings) from discontinued operations, net		(3,042	)		5,264			—			—			2,222
Equity in earnings of affiliates		(72,324	)		—			—			72,324			—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net		—			1,735			(19,841	)		—			(18,106	)
Inventories, prepaid expenses and other
current assets		—			(19,658	)		4,380			—			(15,278	)
Accounts payable, other accrued expenses and other accrued liabilities		(20,463	)		(6,994	)		19,521			—			(7,936	)

Net cash provided by (used in) operating activities — continuing operations		(118,470	)		(28,653	)		168,346			35,866			57,089
Net cash provided by operating activities — discontinued operations		—			2,919			—			—			2,919

Net cash provided by (used in) operating activities		(118,470	)		(25,734	)		168,346			35,866			60,008

Cash flows from investing activities
Purchases of property and equipment		—			(56,063	)		(50,541	)		—			(106,604	)
Cash paid for acquisitions, net		—			(1,280	)		(10,044	)		—			(11,324	)
Cash received from divestiture		—			42,633			—			—			42,633
Proceeds from sale of assets		—			256			94			—			350
Change in other assets, net		—			(155	)		(986	)		—			(1,141	)

Net cash used in investing activities — continuing operations		—			(14,609	)		(61,477	)		—			(76,086	)
Net cash used in investing activities — discontinued operations		—			(341	)		—			—			(341	)

Net cash used in investing activities		—			(14,950	)		(61,477	)		—			(76,427	)

Cash flows from financing activities
Payment of long-term debt, capital leases and other long-term obligations		(7,652	)		(469	)		(1,680	)		—			(9,801	)
Distributions to non-controlling interests		—			(6,306	)		—			—			(6,306	)
Cash paid for the repurchase of non-controlling interests		—			(1,153	)		135			—			(1,018	)
Change in intercompany balances with affiliates, net		126,122			(3,464	)		(86,792	)		(35,866	)		—

Net cash provided by (used in) financing activities — continuing operations		118,470			(11,392	)		(88,337	)		(35,866	)		(17,125	)
Net cash used in financing activities — discontinued operations		—			(6	)		—			—			(6	)

Net cash provided by (used in) financing activities		118,470			(11,398	)		(88,337	)		(35,866	)		(17,131	)

Change in cash and cash equivalents		—			(52,082	)		18,532			—			(33,550	)
Cash and cash equivalents at beginning of period		—			325,555			15,625			—			341,180

Cash and cash equivalents at end of period	$	—		$	273,473		$	34,157		$	—		$	307,630

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended June 30, 2014 (unaudited)

(in thousands)


	Parent Issuer			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Condensed Consolidated
Cash flows from operating activities
Net earnings (loss)	$	(57,614	)	$	(34,620	)	$	102,688		$	(22,395	)	$	(11,941	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			27,664			42,984			—			70,648
Amortization of loan costs		5,559			—			—			—			5,559
Amortization of deferred gain on sale-leaseback transaction		(1,872	)		—			—			—			(1,872	)
Change in physician minimum revenue guarantees		—			133			2,044			—			2,177
Stock-based compensation		10,033			—			—			—			10,033
Deferred income taxes		(1,015	)		—			—			—			(1,015	)
Income tax benefit from parent company		5			—			—			—			5
Loss (gain) on disposal of assets, net		—			(3,080	)		212			—			(2,868	)
Loss (earnings) from discontinued operations, net		(2,645	)		8,431			—			—			5,786
Equity in earnings of affiliates		(59,211	)		—			—			59,211			—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net		—			(5,724	)		(1,068	)		—			(6,792	)
Inventories, prepaid expenses and other current assets		—			(18,427	)		(34,979	)		—			(53,406	)
Accounts payable, other accrued expenses and other accrued liabilities		(19,016	)		15,007			14,561			—			10,552
Income taxes and other transaction costs payable related to sale-leaseback of real estate		(18,901	)		(1,048	)		(2,321	)		—			(22,270	)

Net cash provided by (used in) operating activities — continuing operations		(144,677	)		(11,664	)		124,121			36,816			4,596
Net cash used in operating activities — discontinued operations		—			(15,140	)		—			—			(15,140	)

Net cash provided by (used in) operating activities		(144,677	)		(26,804	)		124,121			36,816			(10,544	)

Cash flows from investing activities
Purchases of property and equipment		—			(44,282	)		(31,802	)		—			(76,084	)
Cash paid for acquisitions, net		—			(1,038	)		—			—			(1,038	)
Proceeds from sale of assets		—			1,495			13			—			1,508
Change in other assets, net		—			(3,753	)		3,534			—			(219	)
Other, net		—			(2,724	)		(301	)		—			(3,025	)

Net cash used in investing activities — continuing operations		—			(50,302	)		(28,556	)		—			(78,858	)
Net cash used in investing activities — discontinued operations		—			(5,242	)		—			—			(5,242	)

Net cash used in investing activities		—			(55,544	)		(28,556	)		—			(84,100	)

Cash flows from financing activities
Payment of long-term debt, capital leases and other long-term obligations		(8,010	)		—			(2,074	)		—			(10,084	)
Distributions to non-controlling interests		—			(13,222	)		—			—			(13,222	)
Cash paid for the repurchase of non-controlling interest		—			(600	)		—			—			(600	)
Other		—			(1,838	)		—			—			(1,838	)
Change in intercompany balances with affiliates, net		152,687			(27,134	)		(88,737	)		(36,816	)		—

Net cash provided by (used in) financing activities — continuing operations		144,677			(42,794	)		(90,811	)		(36,816	)		(25,744	)
Net cash used in financing activities — discontinued operations		—			(100	)		—			—			(100	)

Net cash provided by (used in) financing activities		144,677			(42,894	)		(90,811	)		(36,816	)		(25,844	)

Change in cash and cash equivalents		—			(125,242	)		4,754			—			(120,488	)
Cash and cash equivalents at beginning of period		—			430,047			8,084			—			438,131

Cash and cash equivalents at end of period	$	—		$	304,805		$	12,838		$	—		$	317,643

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this report. Data for the quarters and nine months ended June 30, 2015 and 2014, have been derived from our unaudited condensed consolidated financial statements. References herein to “we,” “our” and “us” are to IASIS Healthcare LLC and its subsidiaries. References herein to “IAS” are to IASIS Healthcare Corporation, our parent company.

FORWARD-LOOKING STATEMENTS

Some of the statements we make in this report are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy (including possible acquisitions and dispositions), financing needs, projections of revenue, income or loss, capital expenditures and future operations. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties, among others discussed in this report, are detailed in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014 and as amended and restated in Item 1A. “Risk Factors” detailed in our Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”).

While we believe our assumptions are reasonable, it is very difficult to predict the impact of known factors, and, of course, it is impossible to anticipate all factors that could affect our actual results. These factors include, but are not limited to:

•

the effects of changes in governmental healthcare programs, principally Medicare, Medicaid and other federal healthcare programs, including limitations or reductions of levels of payments that our hospitals receive under such programs;

•

the effects related to implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), the possible enactment of additional federal or state healthcare reforms and possible amendments, changes or court challenges to such laws and other federal, state or local laws or regulations affecting the healthcare industry;

•

our managed care business’ ability to effectively manage costs of care, maintain its governmental contracts and achieve its service line expansion strategies;

•

the effects of a shift in volume or payor mix from commercial managed-care payors to self-pay and Medicaid;

•

increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts;

•

a reduction in or withholding of government-sponsored supplemental payments to our hospitals;

•

the effects of any inability to retain and negotiate reasonable contracts with managed care plans or if insured patients switch from traditional commercial insurance plans to exchange plans;

•

industry trends towards value-based purchasing and narrow networks and related competitive challenges to our hospitals;

•

possible changes in the Medicare, Medicaid and other state programs, including Medicaid supplemental reimbursement programs or waiver programs, that may impact reimbursement to healthcare providers and insurers;

•

controls imposed by Medicare and third-party payors to reduce admissions and length of stay;

•

competition to attract and retain quality physicians, nurses, technicians and other personnel;

•

the generally competitive nature of the healthcare industry;

•

the possibility of health pandemics and the related impacts on our operations and financial results;

•

a failure of our information systems or breach of our cyber-security protections;

•

the costs and operational challenges associated with information technology and medical equipment upgrades;

•

challenges associated with the implementation of electronic health records and coding systems;

•

compliance with extensive healthcare industry laws, regulations and investigations, including those with respect to patient privacy and physician-owned hospitals;

•

reliance upon services provided by third-party vendors;

•

the effects of local or national economic downturns on our business lines;

•

risks associated with our acquisition and development strategy, including liabilities assumed in acquisitions of facilities and physician practices and our need to effectively integrate acquired companies into our existing operations;

•

increased lease rates and amended lease terms at certain of our facilities in connection with sale-leaseback transactions;

•

the effectiveness of our reinvestment of proceeds from sale-leaseback transactions and asset dispositions;

•

timely completion of under-construction facilities;

•

risks associated with environmental, health and safety laws;

•

risks associated with labor laws;

•

potential adverse accounting impacts associated with goodwill carrying value;

•

our dependence upon the services of key executive management personnel;

•

risks related to our indebtedness and capital structure; and

•

other risk factors described in Item 1A. “Risk Factors”

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Form 10-Q speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

EXECUTIVE OVERVIEW

We are a healthcare services company delivering high-quality, cost-effective healthcare through a broad and differentiated set of capabilities and assets that includes acute care hospitals with related patient access points, and a diversified and growing managed care risk platform (“risk platform”). Our business model is centered on deploying our acute care expertise and risk platform, either separately or on an integrated basis, in attractive markets to manage population health, integrate the delivery and payment of healthcare services and ultimately expand our total market opportunities within our existing and new geographic markets. Our business consists of two operating segments: (i) our acute care operations, which, as of June 30, 2015, included 16 acute care hospitals, one behavioral hospital and multiple other access points, including 144 physician clinics, multiple outpatient surgical units, imaging centers, and investments in urgent care centers and on-site employer-based clinics, and (ii) our managed care operations, comprised of our diversified and growing risk platform, Health Choice Arizona, Inc. and related entities (“Health Choice”).

Acute Care Operations

As of June 30, 2015, we owned or leased 16 acute care hospital facilities and one behavioral health hospital facility with a total of 3,644 licensed beds, several outpatient service facilities and 144 physician clinics.

We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans to develop quality and outcome driven, cost-efficient and innovative reimbursement models. Our major acute care geographic markets include Salt Lake City, Utah; Phoenix, Arizona; five cities in Texas, including Houston, San Antonio and Odessa; and West Monroe, Louisiana.

Since our company was founded in 1998, we believe we have developed a reputation for operating hospitals that deliver high quality care in our markets at rates that are often more affordable than many other hospitals in our markets with larger local market share than us. Our corporate and divisional infrastructure allows us to leverage savings in information technology services, revenue cycle, hospital supplies, and labor force costs.

Managed Care Operations

Health Choice, headquartered in Phoenix, Arizona, began providing managed Medicaid services under contract with the Arizona Health Care Cost Containment System (“AHCCCS”) in 1990, making it one of the nation’s first Medicaid managed care plans. Under our ownership beginning in 1999, Health Choice has evolved into a managed care organization and insurer that, while growing its core managed Medicaid business, has expanded to serve certain Medicare Advantage and health insurance exchange (“Exchange”) members and is utilizing its population health management expertise to offer management and administrative services to other payors through its management services organization (“MSO”). In collaboration with our hospitals and affiliated physicians in certain of our markets, Health Choice also manages accountable care networks.

Health Choice represents one of our company’s key strategic assets, which we believe provides the Company with the ability to engage in innovative value-based purchasing initiatives and opportunities. Its leadership team has considerable experience in population health management, physician relations and network development. We believe Health Choice also deploys state of the art disease management and claims processing technology. In light of the current healthcare industry trends toward integrated delivery and clinical integration, we are seeking to bring Health Choice’s expertise and technology to bear as part of the accountable care networks we offer to other health plans.

As of June 30, 2015, Health Choice’s related entities delivered healthcare services to 389,900 members through multiple health plans, accountable care networks, MSO-related services and other managed care solutions. These members include 244,300 managed Medicaid members served primarily through Health Choice’s core health plan business in Arizona, 9,700 members participating in Health Choice’s Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”), 6,300 Arizona health insurance exchange plan members, 97,700 members of a large national insurer’s Florida managed Medicaid plan for whom Health Choice serves as a MSO, and 74,900 member lives managed through Health Choice’s accountable care networks, of which 43,000 members are included in Health Choice’s Utah Managed Medicaid and Arizona health insurance exchange plans.

Recent Developments

Health Choice integrated behavioral health joint venture. Earlier this fiscal year, Health Choice and its joint venture partner, the Northern Arizona Regional Behavioral Health Authority (“NARBHA”) won a competitive bid to begin operating an integrated acute and behavioral health plan in Northern Arizona in our 2016 fiscal year. Beginning on October 1, the joint venture, Health Choice Integrated Care LLC, is expected to provide standalone behavioral health benefits for approximately 225,000 plan members in Northern Arizona, and acute and behavioral care on an integrated basis for approximately 6,000 members who are seriously mentally ill. Health Choice owns 52% of the joint venture and NARBHA owns 48% of the joint venture.

Opening of Hospital in Lehi, Utah. On June 1, 2015, we opened our new expandable inpatient and outpatient hospital in fast-growing Lehi, Utah, called Mountain Point Medical Center, as a provider-based campus of Jordan Valley Medical Center. The campus provides a full range of services, including inpatient intensive care, obstetrics and surgical services. The campus also provides cardiology services, which includes a cardiac catheterization lab. Additional outpatient services include emergency, imaging, lab and outpatient surgery. The campus was designed to serve the growing transition to outpatient-related services and was constructed with the capability to expand depending on community need and demand for services in the Lehi area. A medical office building has been constructed immediately adjacent to, and connected with, the hospital to be occupied by primary care and multi-specialty physician groups practicing in the area. We incurred over $80 million in total costs to complete the construction and opening of this hospital campus. Mountain Point Medical Center will serve eight cities in northern Utah County and is in the fastest growing area within the state of Utah.

In-Market Acquisitions. During our third quarter of fiscal 2015, our hospital in Odessa, Texas, Odessa Regional Medical Center (“ORMC”), purchased the assets of Basin Healthcare Center, a 14-bed surgical hospital located near ORMC’s main campus. Basin has been renamed Odessa Regional Medical Center South Campus, and its addition increases ORMC’s capacity to deliver high quality services inpatient and outpatient services. Also, on August 7, 2015, we entered into an agreement to acquire the assets of Victory Medical Center (“Victory”) in Beaumont, Texas, which would become a campus of our facility in Port Arthur, Texas, The Medical Center of Southeast Texas. The closing of the Victory transaction is expected to occur in the fourth quarter of fiscal 2015 and is subject to certain conditions and requirements.

Sale of North Vista Hospital. Effective January 22, 2015, we closed a transaction for the sale of our Nevada operations, which primarily included North Vista Hospital, a 177-bed general acute care facility located in Las Vegas, Nevada. We intend to use proceeds from the sale in a variety of strategic initiatives aimed at growth in existing markets and expansion into new markets.

Revenue and Volume Trends

Total revenue for the quarter ended June 30, 2015, increased 8.5% to $686.3 million, compared to $632.7 million in the same prior year quarter. Total revenue for the nine months ended June 30, 2015, increased 10.6% to $2.05 billion, compared to $1.86 billion in the same prior year period. Total revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts, and premium, service and other revenue. Acute care revenue contributed $20.7 million to the increase in total revenue for the quarter ended June 30, 2015, compared to the same prior year quarter, while premium, service and other revenue of our managed care risk platform contributed $32.9 million to the increase in total revenue compared to the same prior year period. Acute care revenue contributed $57.2 million to the increase in total revenue for the nine months ended June 30, 2015, compared to the same prior year period, while premium, service and other revenue of our managed care risk platform contributed $139.1 million to the increase in total revenue compared to the same prior year period.

Acute Care Revenue

Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Acute care revenue is reported net of the provision for doubtful accounts. Other revenue includes medical office building rental income and other miscellaneous revenue.

Admissions increased 0.1% and 1.4% for the quarter and nine months ended June 30, 2015, respectively, compared to the same prior year periods. Adjusted admissions increased 2.3% and 3.5% for the quarter and nine months ended June 30, 2015, respectively, compared to the same prior year periods. For the quarter ended June 30, 2015, our volume was positively impacted by a 3.7% increase in emergency room visits and a 0.3% increase in outpatient surgeries, offset by a 1.6% decline in inpatient surgeries, all compared to the same prior year quarter. For the nine months ended June 30, 2015, our volume was positively impacted by a 6.1% increase in emergency room visits and a 0.3% increase in outpatient surgeries, offset by a 1.9% decline in inpatient surgeries, all compared to the same prior year period.

The following table provides the sources of our hospitals’ gross patient revenue by payor before discounts, contractual adjustments and the provision for bad debt:


	Quarter Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
Medicare		26.0	%		27.2	%		26.8	%		27.8	%
Managed Medicare		15.4			14.6			15.2			14.7
Medicaid and managed Medicaid		21.1			22.3			21.5			21.4
Managed care and other		32.3			30.5			31.2			30.0
Self-pay		5.2			5.4			5.3			6.1

Total		100.0	%		100.0	%		100.0	%		100.0	%

As a result of the Health Reform Law, our gross revenue by payor has experienced a shift from self-pay to Medicaid, managed Medicaid, and managed care payors in comparison to the prior year periods. The shift to Medicaid and managed Medicaid is primarily a result of Arizona’s expansion of its Medicaid program under the Health Reform Law, which became effective January 1, 2014. Additionally, we have benefited from individuals enrolling in Exchanges in our markets, as well as from improvements in employment and other economic factors in the markets we serve.

The following table provides the sources of our hospitals’ net patient revenue by payor before the provision for bad debts:


	Quarter Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
Medicare		19.0	%		20.3	%		19.8	%		20.6	%
Managed Medicare		10.2			10.1			10.3			10.1
Medicaid and managed Medicaid		12.3			13.4			12.6			12.7
Managed care and other		43.7			40.9			42.6			39.5
Self-pay		14.8			15.3			14.7			17.1

Total		100.0	%		100.0	%		100.0	%		100.0	%

Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 2.4% and 1.0% for the quarter and nine months ended June 30, 2015, respectively, both compared to the same prior year periods.

See “Item 1 — Business — Sources of Acute Care Revenue” and “Item 1 — Business — Government Regulation and Other Factors” included in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, filed with the SEC on May 15, 2015, for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In those sections, we also discussed the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by the Centers for Medicare and Medicaid Services (“CMS”) that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also discussed in such Annual Report on Form 10-K/A.

Premium, Service and Other Revenue

Premium, service and other revenue generated by Health Choice, our managed care operations, represented 30.8% and 31.3% of our total revenue for the quarter and nine months ended June 30, 2015, respectively, compared to 28.2% and 27.1% in the same prior year periods.

Health Choice contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted healthcare providers. Most of its premium revenue is derived through a contract with AHCCCS, the state agency that administers Arizona’s Medicaid program. The contract requires Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Health Choice also contracts with CMS to provide coverage as a MAPD SNP. This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid). In accordance with CMS regulations, SNPs are now expected to meet additional requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

One notable provision of the Health Reform Law is the annual health insurer fee (“HIF”) that applies to most health plans, including commercial health plans and Medicaid managed care plans like Health Choice. While characterized as a “fee” in the text of the Health Reform Law, the intent of Congress was to impose a broad based health insurance industry excise tax, with the understanding that the tax could be passed on to consumers, most likely through higher commercial insurance premiums. However, because Medicaid is a government-funded program, Medicaid health plans have no alternative but to look to their respective state partners for payment to offset the impact of this tax. Arizona has agreed to reimburse all of the managed Medicaid plans for the economic impact of this fee. In addition to the reimbursement of the fee, the state of Arizona has agreed to reimburse insurers for the impact resulting from these fees being treated as non-deductible for income tax purposes. For the quarter and nine months ended June 30, 2015, we recognized expense for the HIF totaling $2.9 million and $8.8 million, respectively, which was offset by expected reimbursement from the state of Arizona of $3.9 million and $11.5 million, respectively.

Other Industry Items Impacting Our Company

The following section discusses updates to recent trends included in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital and managed care industries, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and health plan operations and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.

The Impact of Health Reform

We believe that the Health Reform Law, which has expanded healthcare coverage through the growth of Exchanges, private sector coverage and expanded Medicaid coverage has, since its implementation, reduced the level of uncompensated care we provide to uninsured individuals. In its June 2015 King v. Burwell decision, the U.S. Supreme Court settled a significant challenge to the Health Reform Law’s effectiveness in reducing the number of uninsured individuals. The Court upheld the current subsidy model, which makes premium subsidies available for health insurance policies purchased through both state and federally-operated Exchanges. The benefits realized from expanded healthcare coverage under the Health Reform Law have generally offset the reductions required by the law in the growth in Medicare payments and the decreases in disproportionate share hospital (“DSH”) payments, which have adversely affected our government reimbursement. While we anticipate these trends will continue, because of the many variables, including the law’s complexity, continued delays or exceptions to employer mandates, possible amendments or changes, the possibility of future court challenges to the law and possible reductions in funding by Congress and future reductions in Medicare and Medicaid reimbursement, the long-term effect of the Health Reform Law on our Company, including how individuals and businesses will respond to the new choices and obligations, is not yet fully known. We cannot predict the impact on our Company of these continuing developments with respect to the Health Reform Law.

State Medicaid Budgets

In recent years, the states in which we operate experienced budget constraints as a result of increased costs and lower than expected tax collections. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. In previous years, the states in which we operate responded to these budget concerns by decreasing funding for Medicaid and other healthcare programs, or by making structural changes that resulted in a reduction in hospital reimbursement and by imposing more restrictive Medicaid eligibility requirements. In addition, many states have received waivers from CMS in order to implement or expand managed Medicaid programs. If additional Medicaid program changes are implemented in the future in the states in which we operate, our revenue and earnings could be significantly and adversely impacted.

Texas

The Texas legislature and the Texas Health and Human Services Commission (“THHSC”) recommended expanding Medicaid managed care enrollment in the state, and in December 2011, CMS approved a five-year Medicaid waiver that: (1) allows Texas to expand its Medicaid managed care program while preserving hospital funding; (2) provides incentive payments for improvements in healthcare delivery; and (3) directs more funding to hospitals that serve large numbers of uninsured patients. All of our acute care hospitals in Texas currently receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs for the quarters and nine months ended June 30, 2015 and 2014, was $25.0 million and $58.3 million, respectively, compared to $17.6 million and $53.6 million in the prior year periods. Under the Medicaid waiver, funds are distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities’ care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination will be controlled primarily by government-owned public hospitals that serve the surrounding geographic areas. Complexities of the underlying methodologies in determining the funding for the state’s Medicaid supplemental reimbursement programs, along with a lack of sufficient resources at THHSC to administer the programs, has resulted in a delay in related reimbursements. As of June 30, 2015 and September 30, 2014, we had $83.1 million and $90.2 million, respectively, in receivables due to our Texas hospitals in connection with these supplemental reimbursement programs, which includes $25.3 million and $34.9 million, respectively, of amounts due under Texas Medicaid DSH. During the nine months ended June 30, 2015, we have received $79.8 million related to the receivables for Texas supplemental reimbursement programs. Subsequent to June 30, 2015, we have received an additional $30.4 million related to these receivables.

The THHSC has adopted rules to change the Texas Medicaid DSH methodology for the state’s fiscal year 2015. Texas has appropriated $140.0 million for fiscal year 2015 to stabilize and improve the Texas Medicaid DSH program, including providing rate adjustments to recognize improvements in quality of patient care, the most appropriate use of care, and patient outcomes. During the quarter and nine months ended June 30, 2015, we recognized $4.5 million and $21.6 million, respectively, in Texas Medicaid DSH revenue, compared to $7.5 million and $22.6 million in the same prior year periods.

Arizona

Beginning in July 2011, in an effort to control its budgeted expenditures and balance its budget, the state of Arizona implemented a plan to reduce its eligible Medicaid beneficiaries, particularly childless adults. Following implementation of this plan by the state of Arizona, Health Choice experienced a significant decline through the end of our fiscal year 2013 in its enrollees, premium revenue and related earnings.

Effective January 1, 2014, Arizona expanded its Medicaid program under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults that had previously been eliminated. The expansion of the state’s Medicaid program under the Health Reform Law could potentially result in the addition of approximately 350,000 people to its Medicaid rolls. Primarily as a result of the Medicaid expansion, enrollment under Health Choice’s Medicaid product line increased 17.2% for the quarter ended June 30, 2015, compared to the same prior year quarter. This growth included a significant increase in newly enrolled childless adults that typically have higher medical utilization and acuity levels prior to effective management of their care. As a result, we experienced increased medical costs in the prior year periods as we began to serve this newly enrolled population. In addition, in connection with the expanded Medicaid coverage, the state implemented a provider fee assessment effective January 1, 2014, to fund a portion of the expanded eligibility related to the childless adult population. During the quarter and nine months ended June 30, 2015, we incurred $2.9 million and $7.2 million, respectively, in provider fee assessments compared to $1.3 million and $2.6 million in the same prior year periods.

Further, while the Arizona legislature approved an expansion of Medicaid in 2013 which became effective on January 1, 2014, a lawsuit filed by several state lawmakers has challenged the legality of a provider fee assessed to all providers and used to help pay for Arizona’s Medicaid expansion. The suit was dismissed by the trial court, based on a finding that the plaintiffs did not have standing to sue; however, on December 31, 2014, the Arizona Supreme Court ruled that the plaintiffs in the case had standing to sue, and the case is now moving forward in the trial court. On July 30, 2015, oral arguments were heard by the Arizona Superior Court, and the judge is expected to issue a ruling in the near term. If the legality of the provider fee used to help fund Arizona’s Medicaid expansion is successfully challenged in court, this may result in the loss of certain funding for the state’s Medicaid program, which could potentially result in changes that restrict eligibility and increase the number of uninsured individuals and adversely affecting our operations in Arizona.

Arizona’s Medicaid expansion in 2014, and Health Choice’s related increase in enrolled members and premium revenue, followed a period of several years during which AHCCCS tightened Medicaid eligibility standards in Arizona and decreased capitation rates paid to managed Medicaid contractors, reflecting state government budgetary pressures and a struggling state economy. These efforts have impacted both our acute care and managed care operations.

Uncompensated Care

While the amount of uncompensated care, including discounts to the uninsured, bad debts and charity care, we deliver to the communities we serve continues to remain high in comparison to historical levels, we have experienced declines in self-pay volume and revenue since the implementation of the Health Reform Law. During the quarter and nine months ended June 30, 2015, our uncompensated care as a percentage of acute care revenue was 20.3% and 20.4%, respectively, compared to 19.9% and 21.5% in the same prior year periods. During the quarter ended June 30, 2015, our self-pay admissions represented 5.9% of our total admissions, compared to 6.1% in the same prior year quarter. During the nine months ended June 30, 2015, our self-pay admissions represented 6.0% of our total admissions, compared to 7.1% in the same prior year period. We believe the improvement in our uncompensated care as a percentage of acute care revenue and our self-pay admissions mix can be attributed primarily to the impact of Medicaid expansion in the state of Arizona, as well as improvements in employment and other economic factors in our markets, which has resulted in lower self-pay volume and revenue for the quarter and nine months ended June 30, 2015, compared to the same prior year periods.

We anticipate uninsured volumes will continue to decline in the near future as the impact of the Health Reform Law is fully realized. However, if we were to experience growth in uninsured volume and revenue, our uncompensated care may increase and our results of operations would be adversely affected.

The percentages of our insured and uninsured net hospital receivables are summarized as follows ⁽¹⁾:


	June 30, 2015			September 30, 2014
Insured receivables		78.1	%		81.0	%
Uninsured receivables		21.9			19.0

Total		100.0	%		100.0	%

The percentages of hospital net receivables in summarized aging categories are as follows ⁽¹⁾:


	June 30, 2015			September 30, 2014
0 to 90 days		63.1	%		63.2	%
91 to 180 days		20.0			18.0
Over 180 days		16.9			18.8

Total		100.0	%		100.0	%

⁽¹⁾	Excludes hospital receivables related to our discontinued Nevada operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014. Our critical accounting policies are further described under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2014.

Stock-based compensation. We account for stock-based compensation awards in accordance with Accounting Standards Codification (“ASC”) 718—Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. Our stock-based compensation plans include programs for stock options and restricted stock awards.

We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:

Expected term—The expected term represents the period that stock-based awards are expected to be outstanding. We used the simplified method to determine the expected term, which is calculated as the average of the time-to-vesting and the contractual life of the awards.

Expected volatility—Since we are currently privately held and do not have any trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded peer companies over a period equal to the expected term of the awards. When selecting comparable publicly traded peer companies on which we based our expected stock price volatility, we selected companies with comparable characteristics to us, including enterprise value, risk profiles, and with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the award.

Expected dividend—No recurring dividends have been authorized and we do not expect to pay cash dividends in the foreseeable future. Therefore, we used an expected dividend yield of zero.

In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from our estimates, we might be required to record adjustments to stock-based compensation in future periods. These assumptions represent our best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future.

SELECTED OPERATING DATA

The following table sets forth certain unaudited operating data from continuing operations for each of the periods presented.


	Quarter Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
Acute care operations (1)
Number of acute care hospital facilities at end of period		16			15			16			15
Licensed beds at end of period (2)		3,644			3,601			3,644			3,601
Average length of stay (days) (3)		4.9			5.0			5.0			5.0
Occupancy rates (4)		47.1	%		47.8	%		49.3	%		48.6	%
Admissions (5)		24,961			24,930			76,643			75,576
Adjusted admissions (6)		48,127			47,032			143,616			138,771
Patient days (7)		122,793			123,985			383,983			378,095
Adjusted patient days (6)		236,756			233,904			719,518			694,248
Surgeries		16,525			16,579			49,107			49,334
Emergency room visits		108,380			104,560			324,325			305,578
Net patient revenue per adjusted admission (8)	$	9,962		$	9,608		$	9,906		$	9,615

Managed care operations
Health plan lives (9)		260,200			213,000			260,200			213,000
MSO lives (10)		97,700			—			97,700			—
Accountable care network lives (11)		32,000			—			32,000			—

Total lives		389,900			213,000			389,900			213,000

Medical loss ratio (12)		87.4	%		97.4	%		87.4	%		89.4	%

(1)	Excludes the impact of our Nevada operations, which are reflected in discontinued operations.

(2)	Includes St. Luke’s Behavioral Hospital in Phoenix, Arizona.

(3)	Represents the average number of days that a patient stayed in our hospitals.

(4)	Calculated by dividing the average daily number of inpatients by the weighted-average number of beds in service.

(5)	Represents the total number of patients admitted to our hospitals that qualify for inpatient status. Management and investors use this number as a general measure of inpatient volume.

(6)	Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions (or adjusted patient days) by multiplying admissions (or patient days) by gross patient revenue and then dividing that number by gross inpatient revenue.

(7)	Represents the number of days our beds were occupied by inpatients over the period.

(8)	Includes the impact of the provision for bad debts as a component of revenue.

(9)

Represents total lives enrolled across all health plan product lines. Includes dual-eligible lives, which are members eligible for Medicare and Medicaid benefits, under Health Choice’s contract with CMS to provide coverage as a MAPD SNP totaling 9,700 and 8,000 as of June 30, 2015 and 2014, respectively.

(10)	Represents lives enrolled in Health Choice’s MSO that provides management and administrative services to a large national insurer’s Medicaid plan members in the Tampa and “Panhandle” regions of Florida.

(11)	Represents attributed health plan member lives from other third-party payors for which Health Choice Preferred accountable care networks manage medical care and participating providers and Health Choice share associated financial risks.

(12)	Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

RESULTS OF OPERATIONS SUMMARY

Consolidated

The following table sets forth, for the periods presented, the results of our consolidated operations expressed in dollar terms and as a percentage of total revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.


	Quarter Ended June 30, 2015				Quarter Ended June 30, 2014				Nine Months Ended June 30, 2015				Nine Months Ended June 30, 2014
($ in thousands):	Amount		%		Amount		%		Amount		%		Amount		%
Revenue
Acute care revenue before provision for bad debts	$	563,030			$	531,380			$	1,668,536			$	1,613,457
Less: Provision for bad debts		(88,097)				(77,130)				(258,175)				(260,249)

Acute care revenue		474,933		69.2%		454,250		71.8%		1,410,361		68.7%		1,353,208		72.9%
Premium, service and other revenue		211,361		30.8%		178,498		28.2%		642,298		31.3%		503,212		27.1%

Total revenue		686,294		100.0%		632,748		100.0%		2,052,659		100.0%		1,856,420		100.0%
Costs and expenses
Salaries and benefits		228,899		33.4%		221,446		35.0%		697,098		34.0%		664,453		35.8%
Supplies		81,505		11.9%		75,104		11.9%		241,696		11.8%		227,415		12.3%
Medical claims		172,475		25.1%		165,943		26.2%		524,506		25.6%		436,754		23.5%
Rentals and leases		19,258		2.8%		18,198		2.9%		57,055		2.8%		54,444		2.9%
Other operating expenses		124,395		18.1%		110,337		17.4%		351,362		17.1%		311,586		16.8%
Medicare and Medicaid EHR incentives		(2,035)		(0.3%)		(2,940)		(0.5%)		(7,685)		(0.4%)		(9,294)		(0.5%)
Interest expense, net		31,905		4.6%		32,267		5.1%		96,122		4.7%		98,300		5.3%
Depreciation and amortization		26,276		3.8%		23,422		3.7%		70,462		3.4%		70,648		3.8%
Management fees		1,250		0.2%		1,250		0.2%		3,750		0.2%		3,750		0.2%

Total costs and expenses		683,928		99.7%		645,027		101.9%		2,034,366		99.1%		1,858,056		100.1%
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes		2,366		0.3%		(12,279)		(1.9%)		18,293		0.9%		(1,636)		(0.1%)
Gain (loss) on disposal of assets, net		20		0.0%		2,102		0.3%		(434)		(0.0%)		2,868		0.2%

Earnings (loss) from continuing operations before income taxes		2,386		0.3%		(10,177)		(1.6%)		17,859		0.9%		1,232		0.1%
Income tax expense		1,018		0.1%		1,138		0.2%		8,111		0.4%		7,387		0.4%

Net earnings (loss) from continuing operations		1,368		0.2%		(11,315)		(1.8%)		9,748		0.5%		(6,155)		(0.3%)
Earnings (loss) from discontinued operations, net of income taxes		1,084		0.2%		(6,199)		(1.0%)		(2,222)		(0.1%)		(5,786)		(0.3%)

Net earnings (loss)		2,452		0.4%		(17,514)		(2.8%)		7,526		0.4%		(11,941)		(0.6%)
Net earnings attributable to non-controlling interests		(4,164)		(0.6%)		(2,453)		(0.4%)		(9,214)		(0.4%)		(8,857)		(0.5%)

Net earnings (loss) attributable to IASIS Healthcare LLC	$	(1,712)		(0.2%)	$	(19,967)		(3.2%)	$	(1,688)		(0.1%)	$	(20,798)		(1.1%)

Acute Care Operations

The following table and discussion sets forth, for the periods presented, the results of our acute care operations expressed in dollar terms and as a percentage of total acute care revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.


	Quarter Ended June 30, 2015				Quarter Ended June 30, 2014				Nine Months Ended June 30, 2015				Nine Months Ended June 30, 2014
($ in thousands):	Amount		%		Amount		%		Amount		%		Amount		%
Acute care revenue
Acute care revenue before provision for bad debts	$	563,030			$	531,380			$	1,668,536			$	1,613,457
Less: Provision for bad debts		(88,097)				(77,130)				(258,175)				(260,249)

Acute care revenue		474,933		99.1%		454,250		99.3%		1,410,361		99.1%		1,353,208		99.4%
Revenue between segments (1)		4,520		0.9%		3,262		0.7%		12,356		0.9%		8,539		0.6%

Total acute care revenue		479,453		100.0%		457,512		100.0%		1,422,717		100.0%		1,361,747		100.0%
Costs and expenses
Salaries and benefits		215,625		45.0%		212,517		46.5%		656,791		46.2%		640,793		47.1%
Supplies		81,341		17.0%		75,034		16.4%		241,230		17.0%		227,242		16.7%
Rentals and leases		18,542		3.9%		17,750		3.9%		54,899		3.9%		53,279		3.9%
Other operating expenses		110,930		23.1%		97,278		21.3%		307,868		21.6%		283,143		20.8%
Medicare and Medicaid EHR incentives		(2,035)		(0.4%)		(2,940)		(0.6%)		(7,685)		(0.5%)		(9,294)		(0.7%)
Interest expense, net		31,905		6.7%		32,267		7.1%		96,122		6.8%		98,300		7.2%
Depreciation and amortization		25,180		5.3%		22,390		4.9%		67,264		4.7%		67,511		4.9%
Management fees		1,250		0.3%		1,250		0.3%		3,750		0.3%		3,750		0.3%

Total costs and expenses		482,738		100.7%		455,546		99.6%		1,420,239		99.8%		1,364,724		100.2%
Earnings (loss) from continuing operatoins before gain (loss) on disposal of assets and income taxes		(3,285)		(0.7%)		1,966		0.4%		2,478		0.2%		(2,977)		(0.2%)
Gain (loss) on disposal of assets, net		20		0.0%		2,102		0.5%		(434)		(0.0%)		2,868		0.2%

Earnings (loss) from continuing operations before income taxes	$	(3,265)		(0.7%)	$	4,068		0.9%	$	2,044		0.1%	$	(109)		(0.0%)

(1)	Revenue between segments is eliminated in our consolidated results.

Quarters Ended June 30, 2015 and 2014

Total acute care revenue — Total acute care revenue for the quarter ended June 30, 2015, was $479.5 million, an increase of $21.9 million or 4.8% compared to $457.5 million in the same prior year quarter. The increase in total acute care revenue during the quarter ended June 30, 2015, is comprised primarily of an increase in adjusted admissions of 2.3% and an increase in net patient revenue per adjusted admission of 2.4%, both compared to the same prior year quarter.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue for the quarters ended June 30, 2015 and 2014, of $1.9 million and $0.5 million, respectively.

Salaries and benefits — Salaries and benefits expense for the quarter ended June 30, 2015, was $215.6 million, or 45.0% of total acute care revenue, compared to $212.5 million, or 46.5% of total acute care revenue in the same prior year quarter. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 44.7% for the quarter ended June 30, 2015, compared to 45.2% in the same prior year quarter. The improvement in our salaries and benefits expense as a percentage of total acute care revenue, excluding the impact of stock-based compensation, is the result of leveraging our growth in total acute care revenue compared to the prior year.

Supplies — Supplies expense for the quarter ended June 30, 2015, was $81.3 million, or 17.0% of total acute care revenue, compared to $75.0 million, or 16.4% of total acute care revenue in the same prior year quarter. The increase in supplies expense as a percentage of total acute care revenue is primarily attributable to an increase in implant costs associated with the growth in certain cardiac and orthopedic surgical procedures, as well as an increase in drug costs.

Other operating expenses — Other operating expenses for the quarter ended June 30, 2015, were $110.9 million, or 23.1% of total acute care revenue, compared to $97.3 million, or 21.3% of total acute care revenue in the same prior year quarter. Excluding expenses related to our supplemental Medicaid reimbursement programs in Texas, other operating expenses as a percentage of total revenue were 21.4% for the quarter ended June 30, 2015, compared to 20.0% in the same prior year quarter. This increase in other operating expenses as a percentage of total acute care revenue is due primarily to $5.9 million in non-recurring costs associated with certain legal settlements, our parent company’s ongoing initial public offering process and the recent restatement of prior period financial statements.

Nine Months Ended June 30, 2015 and 2014

Total acute care revenue — Total acute care revenue for the nine months ended June 30, 2015, was $1.42 billion, an increase of $61.0 million or 4.5% compared to $1.36 billion in the same prior year period. The increase in total acute care revenue during the nine months ended June 30, 2015, is comprised primarily of an increase in adjusted admissions of 3.5% and an increase in net patient revenue per adjusted admission of 1.0%.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue of $4.0 million and $4.7 million for the nine months ended June 30, 2015 and 2014, respectively.

Salaries and benefits — Salaries and benefits expense for the nine months ended June 30, 2015, was $656.8 million, or 46.2% of total acute care revenue, compared to $640.8 million, or 47.1% of total acute care revenue in the same prior year period. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 45.8% for the nine months ended June 30, 2015, compared to 46.3% in the same prior year period. The improvement in our salaries and benefits expense as a percentage of total acute care revenue, excluding the impact of stock-based compensation, is the result of the implementation of labor cost reduction initiatives and leveraging our growth in total acute care revenue.

Supplies — Supplies expense for the nine months ended June 30, 2015, was $241.2 million, or 17.0% of total acute care revenue, compared to $227.2 million, or 16.7% of total acute care revenue in the same prior year period. The increase in supplies expense as a percentage of total acute care revenue is primarily attributable to an increase in implant costs associated with the growth in certain cardiac and orthopedic surgical procedures, as well as an increase in drug costs.

Other operating expenses — Other operating expenses for the nine months ended June 30, 2015, were $307.9 million, or 21.6% of total acute care revenue, compared to $283.1 million, or 20.8% of total acute care revenue in the same prior year period. Excluding expenses related to our supplemental Medicaid reimbursement programs in Texas, other operating expenses as a percentage of total revenue were 20.0% for the nine months ended June 30, 2015, compared to 19.5% in the same prior year period. This increase in other operating expenses as a percentage of total acute care revenue is due primarily to $7.6 million in non-recurring costs associated with certain legal settlements, our parent company’s ongoing initial public offering process and the recent restatement of prior period financial statements.

Managed Care Operations

The following table and discussion sets forth, for the periods presented, the results of our managed care operations expressed in dollar terms and as a percentage of premium, service and other revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.


	Quarter Ended June 30, 2015					Quarter Ended June 30, 2014						Nine Months Ended June 30, 2015					Nine Months Ended June 30, 2014
($ in thousands):	Amount		%			Amount			%			Amount		%			Amount		%
Premium, service and other revenue
Premium revenue	$	202,486		95.8	%	$	173,718			97.3	%	$	614,110		95.6	%	$	498,126		99.0	%
Service and other revenue		8,875		4.2	%		4,780			2.7	%		28,188		4.4	%		5,086		1.0	%

Premium, service and other revenue		211,361		100.0	%		178,498			100.0	%		642,298		100.0	%		503,212		100.0	%
Costs and expenses
Salaries and benefits		13,274		6.3	%		8,929			5.0	%		40,307		6.3	%		23,660		4.7	%
Supplies		164		0.1	%		70			0.0	%		466		0.1	%		173		0.0	%
Medical claims (1)		176,995		83.7	%		169,205			94.8	%		536,862		83.6	%		445,293		88.5	%
Rentals and leases		716		0.3	%		448			0.3	%		2,156		0.3	%		1,165		0.2	%
Other operating expenses		13,465		6.4	%		13,059			7.3	%		43,494		6.8	%		28,443		5.7	%
Depreciation and amortization		1,096		0.5	%		1,032			0.6	%		3,198		0.5	%		3,137		0.6	%

Total costs and expenses		205,710		97.3	%		192,743			108.0	%		626,483		97.5	%		501,871		99.7	%

Earnings (loss) before income taxes	$	5,651		2.7	%	$	(14,245	)		(8.0	%)	$	15,815		2.5	%	$	1,341		0.3	%

(1)	Medical claims paid to our hospitals of $4.5 million and $3.3 million for the quarters ended June 30, 2015 and 2014, respectively, and $12.4 million and $8.5 million for the nine months ended June 30, 2015 and 2014, respectively, are eliminated in our consolidated results.

Quarters Ended June 30, 2015 and 2014

Premium revenue — Premium revenue was $202.5 million for the quarter ended June 30, 2015, an increase of $28.8 million or 16.6%, compared to $173.7 million in the same prior year quarter. The increase in premium revenue is driven by membership growth in all of our health plan product lines. For the quarter ended June 30, 2015, total health plan lives served across all product lines increased 83.1% compared to the same prior year quarter. For the quarter ended June 30, 2015, enrollment in our Medicare and Medicaid health plan product lines increased 21.5% and 18.4%, respectively, compared to the same prior year quarter. Premium revenue for our managed Medicaid product line continues to be favorably impacted by the state of Arizona’s expansion of the Medicaid program in connection with the Health Reform Law. For the quarter ended June 30, 2015, premium revenue on a per member per month basis for our health plan products decreased 2.6% compared to the same prior year quarter, primarily as a result of changes in member mix.

Service and other revenue — Service and other revenue was $8.9 million for the quarter ended June 30, 2015, an increase of $4.1 million or 85.4%, compared to $4.8 million in the same prior year quarter. This increase was primarily driven by our MSO subsidiary, which began operations on June 1, 2014.

Salaries and benefits — Salaries and benefits expense for the quarter ended June 30, 2015, was $13.3 million, or 6.3% of premium, service and other revenue, compared to $8.9 million, or 5.0% of premium, service and other revenue in the same prior year quarter. Salaries and benefits expense in the quarter ended June 30, 2015, compared to the same prior year quarter, has been impacted by additional employees associated with our new MSO subsidiary, which began operations on June 1, 2014.

Medical claims — Prior to eliminations, medical claims expense was $177.0 million for the quarter ended June 30, 2015, compared to $169.2 million in the same prior year quarter. Medical claims expense as a percentage of premium revenue (“medical loss ratio” or “MLR”) related to our health plan products was 87.4% for the quarter ended June 30, 2015, compared to 97.4% in the same

prior year quarter. The MLR for the quarter ended June 30, 2014, included increased medical costs associated with newly enrolled childless adult members resulting from the expansion of Arizona’s Medicaid program effective January 1, 2014. This newly enrolled population typically experiences more frequent medical utilization and higher acuity levels prior to effective management of their care. The reduced MLR for the quarter ended June 30, 2015, reflects the impact of effectively managing the care of these newly enrolled members.

Other operating expenses — Other operating expenses for the quarter ended June 30, 2015, were $13.5 million, or 6.4% of premium, service and other revenue, compared to $13.1 million, or 7.3% of premium, service and other revenue in the same prior year quarter. The improvement in our other operating expenses as a percentage of premium, service and other revenue is the result of the growth in total revenue of our managed care operations.

Nine Months Ended June 30, 2015 and 2014

Premium revenue — Premium revenue was $614.1 million for the nine months ended June 30, 2015, an increase of $116.0 million or 23.3%, compared to $498.1 million in the same prior year period. The increase in premium revenue is driven by membership growth in all of our health plan product lines. For the nine months ended June 30, 2015, total lives served across all product lines increased 83.1% compared to the same prior year period. For the nine months ended June 30, 2015, enrollment in our Medicare and Medicaid product lines increased 23.2% and 14.1%, respectively, compared to the same prior year period. Premium revenue for our Medicaid product line has been favorably impacted by the expansion of the Medicaid program in connection with the Health Reform Law. For the nine months ended June 30, 2015, premium revenue on a per member per month basis for our health plan products increased 2.4% compared to the same prior year period.

Service and other revenue — Service and other revenue was $28.2 million for the nine months ended June 30, 2015, compared to $5.1 million in the same prior year period. This increase was primarily driven by our MSO subsidiary, which began operations on June 1, 2014. We also recognized $11.5 million of revenue related to the HIF assessed in connection with the Health Reform Law, compared to $3.9 million in the same prior year period.

Salaries and benefits — Salaries and benefits expense for the nine months ended June 30, 2015, was $40.3 million, or 6.3% of premium, service and other revenue, compared to $23.7 million, or 4.7% of premium, service and other revenue in the same prior year period. Salaries and benefits in the nine months ended June 30, 2015, compared to the same prior year period has been impacted by additional employees associated with our new MSO subsidiary, which began operations on June 1, 2014.

Medical claims — Prior to eliminations, medical claims expense was $536.9 million for the nine months ended June 30, 2015, compared to $445.3 million in the same prior year period. Medical claims expense as a percentage of premium revenue or MLR related to our health plan products was 87.4% for the nine months ended June 30, 2015, compared to 89.4% in the same prior year period. The MLR for the nine months ended June 30, 2015, included increased medical costs associated with newly enrolled childless adult members resulting from the expansion of Arizona’s Medicaid program effective January 1, 2014. This newly enrolled population typically experiences more frequent medical utilization and higher acuity levels prior to effective management of their care. The reduced MLR for the nine months ended June 30, 2015, reflects the impact of effectively managing the care of these newly enrolled members.

Other operating expenses — Other operating expenses for the nine months ended June 30, 2015, were $43.5 million, or 6.8% of premium, service and other revenue, compared to $28.4 million, or 5.7% of premium, service and other revenue in the same prior year period. Other operating expenses for the nine months ended June 30, 2015, included the impact of $8.8 million in incremental HIF-related expenses and a $1.7 million increase in business development costs compared to the same prior year period.

LIQUIDITY AND CAPITAL RESOURCES

Overview of Cash Flow Activities for the Nine Months Ended June 30, 2015 and 2014

Our cash flows are summarized as follows (in thousands):


	Nine Months Ended June 30,
	2015			2014
Cash flows from operating activities	$	60,008		$	(10,544	)
Cash flows from investing activities	$	(76,427	)	$	(84,100	)
Cash flows from financing activities	$	(17,131	)	$	(25,844	)

Operating Activities

Cash flows provided by operating activities were $60.0 million for the nine months ended June 30, 2015, compared to cash flows used in operating activities of $10.5 million in the same prior year period. The prior year cash flows from operating activities were impacted by the payment of $22.3 million in income taxes, transaction fees and other costs associated with the sale-leaseback of certain real estate, along with delays in certain Texas supplemental reimbursement. During the first nine months of fiscal 2015, we have collected $79.8 million in receivables related to the Texas Medicaid supplemental reimbursement programs. Subsequent to June 30, 2015, we have received an additional $30.4 million related to these receivables.

At June 30, 2015, we had $526.6 million in net working capital, compared to $529.1 million at September 30, 2014, both excluding assets and liabilities held for sale. Net accounts receivable increased $16.5 million to $322.2 million at June 30, 2015, from $305.7 million at September 30, 2014. Our days revenue in accounts receivable at June 30, 2015, were 54, compared to 55 at September 30, 2014 and 54 at June 30, 2014.

Investing Activities

Cash flows used in investing activities were $76.4 million for the nine months ended June 30, 2015, compared to $84.1 million in the same prior year period. Purchases of property and equipment for the nine months ended June 30, 2015, were $106.6 million, which includes $28.0 million related to the construction of a new greenfield hospital campus in Lehi, Utah, compared to $76.1 million in the same prior year period. Also included in the first nine months of fiscal 2015 are $42.6 million in proceeds received from the sale of our Nevada operations.

Financing Activities

Cash flows used in financing activities were $17.1 million for the nine months ended June 30, 2015, compared to $25.8 million in the same prior year period. The nine months ended June 30, 2014, included distributions to non-controlling interest holders of $6.4 million associated with the sale-leaseback of certain hospital real estate.

Capital Resources

As of June 30, 2015, we had the following debt arrangements:

•

up to $1.325 billion senior secured credit facilities; and

•

$849.9 million in 8.375% senior notes due 2019

At June 30, 2015, amounts outstanding under our senior secured credit facilities consisted of $981.9 million in term loans. In addition, we had $83.7 million in letters of credit outstanding under the revolving credit facility. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 4.5% for both the quarters and the nine month periods ended June 30, 2015 and 2014.

$1.325 Billion Senior Secured Credit Facilities

We are a party to a senior credit agreement (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility maturing in May 2018 and (2) a $300.0 million senior secured revolving credit facility maturing in May 2016, of which up to

$150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date of a repricing amendment, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require principal installment payments prior to maturity. On September 12, 2014, the Amended and Restated Credit Agreement was amended to, among other things, extend the deadline by which we must reinvest the proceeds of certain asset sales from 12 months to 24 months.

Borrowings under the senior secured term loan facility bear interest at a rate per annum equal to, at our option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at our option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, we are required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain of our subsidiaries (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all of our future material wholly owned subsidiaries, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of our equity interests and those of the Credit Facility Guarantors, (2) mortgage liens on all of our material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires us to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances, and from a percentage of annual excess cash flow.

8.375% Senior Notes due 2019

We and IASIS Capital Corporation (together, the “Issuers”) issued an $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers’ wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the “Notes Guarantors”) (the “Indenture”). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries.

On October 31, 2014, the Issuers completed an offer to purchase up to $210.0 million aggregate principal amount of its outstanding Senior Notes. The Issuers were required to make the offer to purchase under the terms of the Indenture governing the Senior Notes using excess proceeds from certain asset dispositions. The offer to purchase was made at a price equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest, to but excluding the redemption date. Holders validly tendered $0.1 million in aggregate principal amount of the Senior Notes, all of which were accepted by the Issuers. We made payment to settle all validly tendered Senior Notes on November 6, 2014. At June 30, 2015, the outstanding principal balance of the Senior Notes was $849.9 million.

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

We may redeem the Senior Notes in whole or in part, at any time on or after the dates set forth below, for the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions. Each subsequent year the redemption price declines 2.093 percentage points until 2017, and thereafter, at which point the redemption price is equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.


Date	Percentage
May 15, 2015		104.188	%
May 15, 2016		102.094	%
May 15, 2017 and thereafter		100.000	%

The Indenture contains covenants that limit our (and our restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase our capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to us and our restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If we experience certain kinds of changes of control, we must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, we will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

Credit Ratings

The table below summarizes our corporate rating, as well as our credit ratings for the Senior Secured Credit Facilities and Senior Notes as of the date of this filing:


	Moody’s	Standard & Poor’s
Corporate credit	B2	B
Senior secured term loan facility	Ba3	B
Senior secured revolving credit facility	Ba3	BB-
Senior Notes	Caa1	CCC+
Outlook	Stable	Stable

Other

We executed interest rate swaps with Citibank, N.A. (“Citibank”) and Barclays Bank PLC (“Barclays”), as counterparties, with notional amounts totaling $350.0 million, of which $50.0 million expired on September 30, 2014. The remaining agreements were effective March 28, 2013 and expire September 30, 2015 and September 30, 2016. Under these remaining agreements, we are required to make quarterly fixed rate payments to the counterparties at annual rates ranging from 1.9% to 2.2%. The counterparties are obligated to make quarterly floating rate payments to us based on the three-month LIBOR rate, each subject to a floor of 1.25%. The interest rate swaps outstanding at June 30, 2015 are as follows:


	Total Notional Amounts
Effective Dates	(in thousands)
Effective from March 28, 2013 to September 30, 2015	$	100,000
Effective from March 28, 2013 to September 30, 2016		200,000

Capital Expenditures

We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our Senior Secured Credit Facilities and other capital sources that may become available. We expect our capital expenditures for fiscal 2015 to be $130 million to $140 million, including the following significant expenditures:

•

$65 million to $70 million for growth and new business projects, including approximately $28.0 million which has been expended related to our new hospital campus, Mountain Point Medical Center, in Lehi, Utah which opened in June 2015;

•

$45 million to $50 million in replacement or maintenance related projects at our hospitals; and

•

$20 million in hardware and software costs related to information systems projects, including healthcare IT stimulus initiatives.

Liquidity

We rely on cash generated from our operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, federal and state budget initiatives, weather-related catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, leverage capacity and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014 and as amended and restated in Item 1A. “Risk Factors” included in our Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2014, as filed with the SEC on May 15, 2015.

Including available cash at June 30, 2015, we have available liquidity as follows (in millions):


Cash and cash equivalents	$	307.6
Available capacity under our senior secured revolving credit facility		216.3

Net available liquidity at June 30, 2015	$	523.9

Net available liquidity assumes 100% participation from all lenders currently committed under our senior secured revolving credit facility. In addition to our available liquidity, we expect to generate sufficient operating cash flows in fiscal 2015. We also intend to utilize proceeds from our financing activities as needed.

Based upon our current level of operations and anticipated growth, we currently believe we have sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over the next three years. In evaluating the sufficiency of our liquidity for both the short-term and long-term, we have considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our Senior Secured Credit Facilities, compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities.

We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you, however, that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our Senior Secured Credit Facilities, or otherwise, to enable us to grow our business, service our indebtedness, or make anticipated capital expenditures and tax payments. For more information, see our risk factors detailed in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, and as amended and restated in Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2014, as filed with the SEC on May 15, 2015.

One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For more information, see our risk factors detailed in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, and as amended and restated in Item 1A. “Risk Factors” included in our Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2014, as filed with the SEC on May 15, 2015.

SEASONALITY

The patient volumes and total revenue of our healthcare operations are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At June 30, 2015, the following components of our Senior Secured Credit Facilities bear interest at variable rates at specified margins above either the agent bank’s alternate base rate or the LIBOR rate: (i) a $1.025 billion, seven-year term loan; and (ii) a $300.0 million, five-year revolving credit facility. As of June 30, 2015, we had outstanding variable rate debt of $981.9 million.

We have managed our market exposure to changes in interest rates by implementing a comprehensive interest rate hedging strategy that includes converting variable rate debt to fixed rate debt. We have executed interest rate swaps for non-trading and non-speculative purposes with Citibank and Barclays, as counterparties, with notional amounts totaling $350.0 million, of which $50.0 million expired on September 30, 2014. The remaining agreements were effective March 28, 2013 and expire between September 30, 2015 and September 30, 2016, and have annual rates ranging from 1.9% to 2.2%. Our interest rate hedging agreements expose us to credit risk in the event of non-performance by our counterparties, Citibank and Barclays. However, we do not anticipate non-performance by either of our counterparties.

Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness, a 0.125% increase in current interest rates would have no estimated impact on pre-tax earnings and cash flows for the next twelve month period given the 1.25% LIBOR floor that exists in our Senior Secured Credit Facilities.

We currently believe we have adequate liquidity to fund operations as noted above through the generation of operating cash flows, cash on hand and access to our senior secured revolving credit facility. Our ability to borrow funds under our senior secured revolving credit facility is subject to, among other things, the financial viability of the participating financial institutions. While we do not anticipate any of our current lenders defaulting on their obligations, we are unable to provide assurance that any particular lender will not default at a future date.

Item 4. Controls and Procedures

Evaluations of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports.

Remediation of Material Weakness

In connection with the restatement of our consolidated financial statements with respect to the third and fourth fiscal quarters of our 2014 fiscal year and the first quarter of the 2015 fiscal year, our Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, identified a material weakness in the internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. For these periods, our management identified a lack of sufficient controls regarding appropriate segregation of duties with respect to our managed care business’ accounting for estimated program settlements under our largest state managed Medicaid contract. A lack of appropriate segregation of duties occurred because the managed care division finance employee charged with reviewing journal entries with respect to such program settlements also prepared the related supporting schedules.

In light of this deficiency, the Company has devoted significant efforts and resources to the remediation and improvement of its internal controls. The following are among the changes implemented by the Company since identification of this deficiency: (1) adoption of additional levels of corporate oversight to ensure that the preparation of supporting schedules with respect to these program settlement estimates and review of the related journal entries are undertaken by separate individuals; (2) adding levels of substantive review with respect to such estimated program settlements; and (3) providing additional training and education for, and increasing communication among, corporate finance and managed care finance division employees involved in the reporting of such program settlement estimates. We have conducted testing of the design and operating effectiveness of our remediation efforts in this area. We believe that the controls that we have implemented have remediated this material weakness in our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to supplement or modify certain of the remediation efforts described above.

Changes in Internal Control Over Financial Reporting

Except as described above, during the period covered by this report, there have been no changes in our internal controls that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We have reached an agreement in principle with the U.S. Department of Justice (“DOJ”) and the Office of Inspector General of the U.S. Department of Health and Human Services (“OIG”) to fully resolve an investigation regarding propriety of Medicare coverage and reimbursement for certain of our hospitals’ Medicare claims for implantable cardioverter defibrillator (“ICD”) procedures. The government’s investigation was part of a nationwide investigation of numerous hospital operators regarding the necessity of, and billing for, implantation of certain ICD-related procedures. We deny allegations with respect to our hospitals’ practices in this area and the settlement is not an admission of liability. We, the DOJ and the OIG are in the process of documenting the final settlement agreement, which we expect will require a settlement payment of an amount that is immaterial to our financial results.

Item 1A. Risk Factors

Reference is made to the factors set forth under the caption “Forward-Looking Statements” in Part I, Item 2 of this Form 10-Q and other risk factors described in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, as amended and restated in our Form 10-Q/A for the quarterly period ended December 31, 2014, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, as amended and restated in our Form 10-Q/A for the quarterly period ended December 31, 2014.

Item 6. Exhibits

(a)	List of Exhibits:

Exhibits: See the Index to Exhibits at the end of this report, which is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX


Exhibit No.		Description

31.1		Certification of Principal Executive Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from our quarterly report on Form 10-Q for the quarter ended June 30, 2015, filed with the SEC on August 14, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the condensed consolidated balance sheets at June 30, 2015 and September 30, 2014, (ii) the condensed consolidated statements of operations for the quarters and nine months ended June 30, 2015 and 2014, (iii) the condensed consolidated statements of comprehensive income (loss) for the quarters and nine months ended June 30, 2015 and 2014, (iv) the condensed consolidated statement of equity, (v) the condensed consolidated statements of cash flows for the nine months ended June 30, 2015 and 2014, and (vi) the notes to the condensed consolidated financial statements (tagged as blocks of text). (1)

(1)

The XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

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