Effects of Inflation and Seasonality

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Effects of Inflation and Seasonality

The healthcare industry is very labor intensive and salaries and benefits are subject to inflationary pressures as are rising supply costs which tend to escalate as vendors pass on the rising costs through price increases. Inflation has not had a material impact on the results of operations over the last three years. Although the Company cannot predict its ability to continue to cover future cost increases, management believes that through adherence to cost containment policies, labor management and reasonable price increases, the effects of inflation on future operating margins should be manageable. However, the Company’s ability to pass on these increased costs associated with providing healthcare to Medicare and Medicaid patients is limited due to various federal, state and local laws which have been enacted that, in certain cases, limit the Company’s ability to increase prices. Under the terms of BBA-97, there were no price increases in the rates paid to hospitals through September 30, 1998 and the modest price increases that were effective since October 1, 1998 have been more than offset by the negative impact of other BBA-97 related changes. In addition, as a result of increasing regulatory and competitive pressures and a continuing industry wide shift of patients into managed care plans, the Company’s ability to maintain margins through price increases to non-Medicare patients is limited.

The Company’s business is seasonal, with higher patient volumes and net patient service revenue in the first and fourth quarters of the Company’s year. This seasonality occurs because, generally, more people become ill during the winter months, which results in significant increases in the number of patients treated in the Company’s hospitals during those months.

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