Management's Analysis of Operations and Financial Performance

For the Month of June 2011

Operating income for the month of June 2011 was a loss of $ 441,318, when normalized for restructuring costs, and excess of revenue over expenses was a loss of$ 1,017,154 when compared to an operating loss of $ 3,067,989 and a loss in excess of revenue over expenses of$ 3,488,206 tor the month ofJune 2010. EBIDA was $ 542,417, normalized tor restructuring costs, for June 2011 as compared to a loss of$ 2,012,408 in June 2010. The lower operating income and loss in excess in revenues over expenses in June 2010 was the result of a one time adjustment to bad debt reserves of $ 2 million due largely to the impact ofthe economy.

Net revenue was $ 15,519,284, a decrease of 0.7% ti·om June 2010. Admissions were 824, which were 6 admissions lower than at this time last tis cal year. Outpatient volumes, primarily imaging services, are down approximately 400 cases compared to volumes experienced tive to six months ago.

Total operating expense was $ 15,960,602, normalized tor restructuring costs, a 14.6% reduction fi-om the prior year. In addition to the $2 million bad debt reserve adjustment, this decrease in operating expense was primarily the result of cost reduction initiatives put into place in March 2011 which included a reduction in labor force of approximately 115 fbll time equivalents, approximate monthly savings of $540,000. Labor costs were down 11.7% compared to June 2010.

Net non-operating expense was $ 575,836 tor June 2011 , when compared to $ 420,217 tor the same month last fiscal year, an increase of37.0%. This increase is primarily related to lower interest earnings on deposits as well as a $70k reduction in market value of an investment as compared to amounts realized in June 2010.

Cash and cash equivalents decreased by $ 1,196,3 50 at month end 06/30/11 as compared to an increase at 06/30/10 of$ 28,016. At the end ofJune 2011 , total cash and cash equivalents were $32,673, 133 or the equivalent of34 days cash on hand. Net cash Hows fi-om operations was a decrease of$ 239,194 for the month compared to an increase of $ 896,882 last year. This decrease in overall cash t10ws was due to approximately $700,000 in reorganization costs paid in the month. There are signiticant cost rep011 settlement items pending that will increase cash t10ws by approximately $3 million. These settlements have been through the tinal stages of audit review at the tiscal intermediary but to date nothing has been paid. Taking this additional cash item into consideration would bring the overall cash position up to approximately $36 million, the equivalent of 41 days cash on hand.

Hospital management is continuing to work with Navigant Consulting to assist in implementing previously identitied savings opp011unities in operational perioflllance. Projected annual savings ti·om these eHorts are summarized below and are either in the

process of being realized or will begin to be realized by the end of the iiscal year or at the beginning oftiscal year 2012 :

Labor Producti vity Care lvlanagelnent Clinical Documentation Revenue Cycle l'vlanaged Care

$6,500,000 $2,187,500 $1 ,280,000 $1 ,680,000 $1 ,950,000

TOMBALL REGIONAL HOSPITAL PROFIT .\ LOSS STATEMENT NORM ALIZED FOR RE STRUCTING COSTS OF U.176mil AS OF FYTD 06130/11

CURRENT FYTD PRIOR FYTD VAR U VAR '/, 06130/11 06130/10

GROSS REVENUE INPATIENT 2ffi.276.114 293.416.794 (12.140.600) OUTPATIENT 168.138.428 139 .653.099 28.485.329 EMERGENCY 72.389.859 66.278.616 6.111.243 SKILLED NURSING 12.872.114 12.%.428 (34 .314) SURGERY CENTER ::6.300.623 (::6.300.623) SPORTS MEDICINE 5.588.138 4.424 .293 1.163.845 PSYCHlA.TRIC REHABCARE 23.001.607 19.~1.765 3.819.842 HOME HEAl.TH 2.183.621 2.255.535 (71.914) CA.NCER CENTER 8.117.046 5.026.741 3.09].3]5 THE HERITAGE ~:!J4 ~7~ 5 ~2Q ~7Q "~15 ~~4l

TOTAL PATIENT REVENUE 582.671.603 591.U~.26~ (8 .572.661) ·lA'/,

DEDUCTIONS FROM REVENUE MEDICARE 183.853.782 185.853.466 (1.999.684) MEDICARE HMO 43.169.232 39.685.654 3 .483.578 MEDICAJ D 11.475.610 9.525.703 1.949.,m MEDICAJ D HMO 14 .599.885 14.151.827 448.058 BLUE CROSS 44.9'33.548 45.5::6.053 (537.505) COMMERClA.L 8.488.ffi4 7.375.777 1.113.007 ceo 56.452.878 62.888.283 (6 .435.405) ~MO 19.941.139 16.6%.::1]2 3.244.837 INDIGENT 5.Em.663 5.852.248 (43.585) COURTESY DISCOUNTS 2.COJ.283 2.5%.375 (5%.092) OTHER 4 274937 4 477 5ffi QQ2569]

TOTAL DEDUCTIONS 395.063.821 39HJ9 .1 9~ H~.627 0.1'/,

NET PATIENT REVENUE 187.607.782 196 .605.070 (8 .997 .288) ..t.6 '/,

OTHER OPERATING REVENUE RENTAl. INCOME 429.243 452.138 (22.5%) TELEYlSION RENTAl. INCOME CAFETARlA. SAl.ES 692.629 821.383 (128.754) HEATHERWOOD PROFESSIONAL BLDG OTHER 1 038 251 2014 099 t;l75848]

TOTAL OTHER OPERATING REVENUE 2.160.1 23 3.287 .620 (1.127 A97)

TOTAL NET REVENUE 189.767.905 199 .892.690 (10.12U 85) .5 .1'/,

OPERATING EXPENSE SAlARIES & WAGES 58.553 .359 62.~4 .,m (4.431.543) OVERTIME 2.392.93] 3.479.777 (1.Cffi.847) VAC HOL & SICK 6.643.873 6.748.83] (104 .957) STATE UNEMPLOY TAX 540.055 207.::64 332.691 GROUP INSURA.N CE 7.048.462 6.442.788 605.674 WORKERS COMPENSATION 441.479 559.13] (117.651) OTHER EMPLOYEE BENEFITS 1.144.276 1.117.[69 27.207 PENSION 3.C)]) .333 3.256.164 (252.831) ACCOUNTING & LEGAl. 843.264 560.791 282.473 COLLECTION FEES 581.101 450.844 13].257 COST OF SAl.ES 16.589.022 17.814.609 (1.225.587) DEPARTMENT SUPPLIES 11.'*!7.458 14 .472.469 (2.565.011) PROYlSION FOR BAD DEBT 41.651.182 39.914.402 1.7::6.700 EQUIPMENT RENTAl. 2.547.016 1.4%.917 1.050.099 INSURA.N CE·GENERAl. 347.924 3%.979 (49.055) INSURA.N CE·MA.LPRACTICE 85.937 126.562 (40.625) REPAJ R & MA.lNTENANCE 3.742.972 3.031.556 711.416 MED SPEC FEES 624 .648 945.948 (321.3)]) POSTAGE 72.519 125.544 (53.025) PUBLIC RELATIONS 587.192 489.%9 97.223 PURCHASED SERYlCES 13.283.358 11.077 .735 2.205.623 CONTRACT LABOR 1.261.769 947.019 31 4 .750 MEMBERSHIP DUES 212.372 245.ffi9 (33.497) TELEPHONE 323.628 322.162 1.466 EDUCATION SEMINARS 111.893 155.395 (43.497) TRAVEL & ENTERTAJNMENT 105.346 117.231 (11.885) UTILITIES 3.655.691 3.929.635 (273.944) PHYSIC lA.N RECRUITMENT 652.285 853.465 (201.100) ADVERTISING 645.762 356.~4 288.778 PERSONNEL RECRUITMENT 126.'*!7 110.%6 15.941 OFFICE RENTAl.S ::03.167 33.765 274 .402 JCA.HO ACCREDITATION 65.465 19.420 46.045 BOND EXPENSE·TRUSTEE 17.458 16.51)] %e CREDIT CARD COMMISSION 148.008 149.5ffi (1.418) MISCELLANEOUS 5::6.295 378.544 157.751 DEPREClA.TION & AM ORT 12645591 11 115993 1 529 5~

TOTAL OPERATING EXPENSE 1 93A~8 .082 19H 52.803 (1.oo~.72 1 ) -0 .5'/,

OPERATING MARGIN (3 .680.177) 5.H9.887 (9 .1 20.06~) OPERATING MARGIN II ·1.9 '/, 2.7'/, ..t.7',\

NET NON·OPERATING EXPENSE INTEREST INCOME· HOSPITAl. 420.335 740.200 (319.945) INTEREST INCOME· TRUSTEE 258.558 542.883 (284 .325) GAJ N!l.OSS ON SAl.E OF ASSETS (1.558.265) (129) (1.558.1::6) INTEREST EXPENSE rz 03] 459] rz 500 500] 478121

TOTAL NON OPERATING REVENUE (7 .909 .831) (6 .225 .5~6) (1.68~.285) 27.1'/,

EXCESS MARGIN (11.590.008) (785 .659) (10.80U~9) EXCESS MARGIN II .6 .1'/, -O A'/, .5 .7',\

REORG COSTS 4.176.400 4 .176.400

EXCESS MARGIN LESS REORG COSTS (15.766AU) (785 .659) (14.eBJ.755)

TOMBALL RE GIONAL HOSPITAL PROFIT .\ LOSS STATEMENT _ NORM ALIZED FOR RE STRUCTURING COSTS OF S1.011MIL

FOR THE MONTH OF JUNE 2011

CURRENT PRIOR VAR U VAR '/,

06130/11 06130/10 GROSS REVENUE

INPATIENT 24 ,097,393 23,425,Effi 671,532 OUTPATIENT 14,::69,249 13,355,570 1,013,679 EMERGENCY 5,641,058 5,467,007 173,971 SKILLED NURSING 1,004 ,789 1,009,::ffi (4 ,571) SURGERY CENTER

SPORTS MEDICINE 542,637 435,63] 10n)]? PSYCH lA.TRIC

REHABCARE 2,058,993 1,777,403 281,5~ HOME HEALTH 172,703 170,001 2,622 CA.NCER CENTER 487,414 575,913 (CIB,499) THE HERITAGE 462 55~ (462 55~l

TOTAL PATIENT REVENUE ~8 .H~.Ul ~6.159A69 1.61U 72 3.6'/,

DEDUCTIONS FROM REVENUE

MEDICARE 15,465,977 14,458,205 1,[1]7,772 MEDICARE HMO 3,234,485 2,884 ,561 349,924 MEDICAJ D 870,461 569,007 3]1,394

MEDICAJ D HMO 1,523,564 1,3]4,316 219,248 BLUE CROSS 3,009,837 3,691,924 117,913 COMMERClA.L 89],635 473,273 417,::62 ceo 4,626,794 4 ,932,%7 (lll,173) ~MO 1,632,539 1,885,929 (253,39]) INDIGENT 489,794 462,769 27,025 COURTESY DISCOUNTS 179,733 207,995 (28,262) OTHER ::69167 415%6 (46799]

TOTAL DEDUCTIONS 33 .092 .986 31.286.972 1.806.0U 5.8'/,

NET PATIENT REVENUE 1 5 . 3~1.255 15A72 A91 (HUH) -0.8 '/,

OTHER OPERATIN G REVENUE

RENTAL INCOME 34 ,145 37,678 (3,533) TELEYlSION RENTAL INCOME CAFETARlA. SALES 50,750 70,745 (19,995) HEATHERWOOD PROFESSIONAL BLDG OTHER 93134 46352 46782

TOTAL OTHER OPERATIN G REVENUE 118.029 15U 15 23.25~

TOTAL NET REVENUE 1 5,5 1 9 .28~ 15.621 .272 (101.988) -0.1'/,

OPERATIN G EXPENSE

SAlARIES & WAGES 4,423,689 5,214,005 (7~,376) OVERTIME 219,395 248,382 (28,,£7) VAC HOL & SICK 4%,827 741,[1]3 (244,176) STATE UNEMPLOY TAX 26,603 15,391 11,212 GROUP INSURA.N CE 001,248 542,546 258,702 WORKERS COMPENSATION 'E.'ffi 32,272 4,094 OTHER EMPLOYEE BENEFITS 94 ,847 94 ,654 ,~,

PENSION 220,617 269,152 (48,535) ACCOUNTING & LEGAL 57,792 57,51)] "" COLLECTION FEES 56,656 42,285 14,371 COST OF SALES 1 ,467,348 1,631,582 (164 ,234) DEPARTMENT SUPPLIES ~.W 1,078,627 (122,318) PROYlSION FOR BAD DEBT 3,73],238 5,159,942 (1,429,704) EQUIPMENT RENTAL 220,859 100,740 120,119 INSURA.N CE-GENERAL 3.'"' 3],628 (5,348) INSURA.N CE-MA,lPRACTICE 14 ,992 21,593 (6,601) REPAJ R & MAJNTENANCE W.% 3]2,816 (4,231) MED SPEC FEES 34 ,747 70,918 (::6,171) POSTAGE 1,432 11,524 (10,092) PUBLIC RELATIONS 63,449 31,709 31,740 PURCHASED SERYlCES 1,218,029 1,194,750 23,279 CONTRACT LABOR 119,%4 97,832 22,152 MEMBERSHIP DUES 16,417 24,156 (7,739) TELEPHONE 28,024 27,453 ," EDUCATION SEMINARS 26,409 16,699 9,710 TRAVEL & ENTERTAJNMENT 14 ,002 7,382 ,om UTILITIES 3]3,533 340,639 (37,100) PHYSIC lA.N RECRUITMENT (138,757) 100,052 (244,009) ADVERTISING 68,148 65,%8 2,100 PERSONNEL RECRUITMENT '.M 4 ,392 (2,792) OFFICE RENTALS 43,497 16,371 27,126 JCA.HO ACCREDITATION BOND EXPENSE-TRUSTEE 2,333 1,375 ~ CREDIT CAR D COMMISSION 9,120 13,321 (4,201) MISCELLANEOUS 17,189 25,%1 (a,772) DEPREClA.TION & AM ORT %3735 1 055581 1l1846]

TOTAL OPERATIN G EXPENSE 15.960.602 18.695 .261 (2.n~.659) _U.6'/,

OPERATIN G MARGIN (~~1. 3 1 8) (3 .061 .989) 2.626 .611

OPERATIN G MARGIN II -2.8 '/, _1 9.6'/, 16.8',\

NET NON_OPERATIN G EXPENSE

INTEREST INCOME - HOSPITAL 16,ffi7 51,973 (35,100) INTEREST INCOME - TRUSTEE (48,007) 158,157 (200,%4) GAJ N!LOSS ON SALE OF ASSETS INTEREST EXPENSE (5435%] (§3] 347] ffi 451

TOTAL NON OPERATIN G REVENUE ('515 .836) (HO.211) (155 .619) 31 .0 '/,

EXCESS MARGIN (1.0 11 .1 5~) (3 A88 .206) 2AJ1.052 EXCESS MARGIN II -6 .6 '/, -22 .3'/, 15.8',\

RE ORG COSTS 1,011,400 1,011,400

EXCESS MARGIN LE SS RE ORG COSTS (2 .028,560) (3 A88 .206) 1 ,459,646

TOMBALL REGIONAL HOSPITAL BALANCE SHEET AS OF 06f30111

CURRENT YR PRIOR YR VAR $$ CASH

CASH IN BANK 14,798,865 6,636,760 INVESTMENTS 3,354,406 23,539,246 FUNDS HELD BY TRUSTEE 14,509,649 14,718,199 DEPRECIATION RESERVE 10,213 10,111

TOTAL CASH ON HAND 32.673.1 33 44.904.316 (12.231.1 82)

PATIENT ACCTS RECEIVABLE GROSS PATIENT ACCTS RECEIVABLE 74,371,442 76,126,502

RESERVES FOR CONTRACTUALS & ALLOWANCES (53,184,457) (55,270,602)

NET PATIENT ACCTS RECEIVABLE 21.1 86.985 20.855.900 331.084

YEAR END SETILE 3,489,107 3,828,564

OTHER ACCTS RECEIVABLE 2,230,318 4,249,269

NET ACCOUNTS RECEIVABLE 5.71 9.425 8.077.833 (2 .358.408)

INVENTORY 4,031,052 4,095,948 PREPAID EXPENSES 1,146,271 1,366,293

TOTAL CURRENT ASSETS 64.756.866 79.300.290 (14.543.424)

PROPERTY. PLANT & EQUIPMENT LAND 14,938,366 15,445,196

BUILDING 129,537,029 144,919,766 LAND IMPROVEMENTS 8,411,497 8,685,784 FIXED EQUIPMENT 21,825,045 21,805,171

MOVEABLE EQUIPMENT 80,756,249 77,186,074 CONSTRUCTION IN PROGRESS 729,363 2,413,884

Total Cost 256.1 97.550 270.455.874 LESS ACCUMULATED DEPRECIATION (131,428,702) (125,653,515)

NET PROPERTY. PLANT and EQUIPMENT 124.768.848 144.802.359 (20.033.511 )

OTHER ASSETS UNAMORT BOND FINANCE COSTS 1,153,445 1,347,180

UNAMORT NON-COMPETE VALUE 62,222 78,222 UNAMORT GOODYVlLL 2,171,607 2,569,897 INSURANCE TRUST FUND 226,646 142,177

TOTAL OTHER ASSETS 3.613.921 4.1 37.476 (523.555)

TOTAL ASSETS 193.1 39.635 228.240.1 25 (35 .1 00.490)

ACCOUNTS PAYABLE 2,783,602 2,696,254 87.348

ACCRUED EXPENSES ACCRUED ACCOUNTS PAYABLE 11,223,035 11,945,410 ACCRUED PAYROLL 2,023,025 2,527,161 ACCRUED VAC & SICK 4,608,317 5,042,890

ACCRUED INTEREST EXPENSE 2,870,025 3,319,245

TOTAL CURRENT LIABILITIES 23.508.004 25.530.961 (2 .022.958)

LONG TERM DEBT WORKERS COMP RESERVE 72,831 72,831 MALPRACTICE RESERVE 500,992 500,992

DEFERRED INCOME 489,672 564,417

LONG TERM DEBT 1999 SERIES 61,709,431 75,599,793

LONG TERM DEBT 2005 SERIES 40,024,149 41,238,515 LONG TERM DEBT - LEASES 16,494,571 18,451,423

TOTAL LONG TERM DEBT 11 9.291.646 136.427.971 (17 .1 36.325)

TOTAL LIABILITIES 142.799.650 161.958.932 (19.1 59.283)

EQUITY

FUND BALANCE- PRIOR YEAR 74,866,077 75,652,756 FUND BALANCE- CURRENT YEAR (15,766,414) (786,679) INTERCOMPANY EQUITY TRANSFERS (747,118) (572,324)

1989 LOSS DUE TO REFINANCING (4,146,036) (4,146,036) 1993 LOSS DUE TO REFINANCING (3,635,243) (3,635,243) 1999 LOSS DUE TO REFINANCING (231,281) (231,281)

TOTAL EQUITY 50.339.985 66.281.1 93 (15.941.208)

TOTAL LIABILITIES & EQUITY 193.1 39.635 228.240.1 25 (35 .1 00.490)

Patient Utilization

Certain statistics relating to admissions, patient days, outpatient services and other statistica l information for th fi sca l yea r ended June 30, 2011 and 2010 for the Hospital are set forth below:

TOMBALL REGIONAL HOSPITAL Utilization Statistical Overview

30-Jun-11 30-Jun-10

ADMISSIONS: Acute Care 8,749 9,596

Medica re (includes Managed Care) 4, 370 4,764 Medica id (includes Managed Care) 664 662 All Other 3,7 15 4,1 70

SNF 533 559 Psychiatric Rehabilitation 582 536

Total Admissions (All Units) 9,864 10,691

Observation Cases 3,667 4, 555 Total Admissions/OBS Cases 13,531 15,246

OCCUPANCY: Acute Care 44.4% 51. 2% SNF 87.7% 91. 2% Psychiatric 0.0% 0.0% Rehabilitation 76.1 % 70.3% LENGTH OF STAY: Acute Care 4. 6 4. 8

Medica re 5.3 5.6 Medica id 4. 9 6.3 All Other 3.6 3.6

SNF 10.2 10.1 Psychiatric 00 00 Rehabilitation 12.4 12.4 Average Length of Stay (All Units) 5.3 5.5 PATIENT DAYS: Acute Care 39,907 45,950

Medica re (includes Managed Care) 23,331 26,815 Medica id (includes Managed Care) 3,280 4,1 55 All Other 13,296 14,980

SNF 5,444 5,660 Psychiatric Rehabilitation 7,223 6,672

Total Patient Days (All Units) 52 ,574 58,282 Outpatients 82,323 77,757 Inpatient Surgeries 1, 973 1, 77 1 Outpatient Surgeries 2,583 3,870

Total Surgeries 4, 556 5,641 Newborn Admissions 758 803 Emergency Room Visits 30,1 91 31,787 Home Hea lth Visits 11,394 12,492 Case Mix Index 1. 2825 1. 3246 Full Time Equiva lents 1,1 98 1, 362

Patient Utilization

Certain statistics relating to admissions, patient days, outpatient services and other statistica l information for th month ended June 30, 2011 and 2010 for the Hospital are set forth below:

TOMBALL REGIONAL HOSPITAL Utilization Statistical Overview

30-Jun-11 30-Jun-10

ADMISSIONS: Acute Care 730 739

Medica re (includes Managed Care) 376 351 Medica id (includes Managed Care) 53 58 All Other 301 330

SNF 43 44 Psychiatric Rehabilitation 51 47

Total Admissions (All Units) 824 830

Observation Cases 267 313 Total Admissions/OBS Cases 1, 091 1,143

OCCUPANCY: Acute Care 40.5% 45.0% SNF 83.7% 91. 8% Psychiatric 0.0% 0.0% Rehabilitation 76.1 % 69.4% LENGTH OF STAY: Acute Care 4. 2 4. 6

Medica re 4. 8 5.5 Medica id 3.7 4. 8 All Other 3.6 3.7

SNF 10.3 11.0 Psychiatric 00 00 Rehabilitation 12.0 11.9 Average Length of Stay (All Units) 5.0 5.4 PATIENT DAYS: Acute Care 3,087 3,434

Medica re (includes Managed Care) 1, 807 1, 923 Medica id (includes Managed Care) 196 280 All Other 1, 084 1, 231

SNF 441 484 Psychiatric Rehabilitation 613 559

Total Patient Days (All Units) 4,141 4,477

Outpatients 6,512 7,1 05 Inpatient Surgeries 153 206 Outpatient Surgeries 222 231

Total Surgeries 375 437

Newborn Admissions 47 61 Emergency Room Visits 2,434 2,614 Home Hea lth Visits 810 984 Case Mix Index 1. 27 19 1. 3299 Full Time Equiva lents 1, 064 1, 373

Sources of Patient Revenues

Approximately 57% of the Hospital's gross revenues was derived from the Medicare and Medica id programs for the fi scal year ending June 30, 2011. The table below illustrates the percentages of the Hospital's gross patient revenues by payor source for each fi scal years ended June 30, 20 11 through 2006.

TOMBALL REGIONAL HOSPITAL Patient Revenue by Payor Source Fiscal Years Ended June 30, 2010 Through 2006

2011 2010 2009 2008 2007 2006 Medicare 50.7% 48% 48% 48% 47% 48% Medica id 6.2% 6% 6% 6% 7% 6% Commercial 2.1 % 2% 2% 2% 3% 3% Managed Care 31.6% 35% 35% 35% 35% 35% Self Pay 8.4% 8% 8% 8% 7% 7% Other 1.0% 1% 1% 1% 1% 1% Total Payor Mix 100% 100% 100% 100% 100% 100%