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CORRESP
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    letterbody.htm

    March 27,
2009

    VIA EDGAR
TRANSMISSION

                Securities
      and Exchange Commission

                Division
      of Corporation Finance

                450
      Fifth Street, N.W.

                Washington,
      D.C. 20549

                Attn:
      John Reynolds, Assistant
Director

                Re:

                Supplemental
      Response

                Form
      10-K for Fiscal Year Ended December 31, 2007 (“2007 Form
      10-K”)

                Filed
      March 17, 2008

                Forms
      10-Q for Quarter Ended September 30, 2008 (September 30, 2008
      10-Q)

                File
      No. 001-31932

                Ladies
      and Gentlemen:

    Reference
is made to the letter received by Hythiam, Inc. (the “Company”) from
Mr. Reynolds, Assistant Director of the Securities and Exchange Commission
(the “Staff”), dated February 20, 2009 (the “Comment Letter”) relating to the
Staff’s comments on the 2007 Form 10-K and September 30, 2008 10-Q. The
Company’s responses to the Staff’s comments contained in the Comment Letter are
set forth below. For the convenience of the Staff, each of the Staff’s comments
has been duplicated below and is set forth in italics immediately prior to the
corresponding response.

    Form 10-K for Fiscal Year
Ended December 31, 2007

    Management’s Discussion and
Analysis of Financial Condition and Results of Operations, page
36

    Liquidity and Capital
Resources, page 49

              1.

              We have reviewed your response
      to our prior comment one, noting that you do not believe cash operating
      expenditures is a non-GAAP measure. We understand that this disclosure is
      useful to investors however cash operating expenditures is not a defined
      GAAP term. Please include the definition of how you calculate this
      measure. If you continue to believe that this measure provides useful
      information to investors regarding your financial condition and results of
      operations, according to Item 10(e) of Regulation S-K, please
      provide:

                ●

              A
      presentation, with equal or greater prominence, of the most directly
      comparable financial measure calculated and presented in accordance with
      GAAP, and

              ●

              A
      reconciliation (by schedule or other clearly understandable method), which
      shall be quantitative for historical non-GAAP measures presented, and
      quantitative for forward-looking information, of the differences between
      the non-GAAP financial measure disclosed with the most directly comparable
      financial measure calculated and presented in accordance with
      GAAP.

    RESPONSE: Going forward, we
don’t intend to use the ‘cash operating expenditure’ term in our public filings.
However, if we decide to use any non-GAAP measure that we consider to be useful
to investors, we will provide a definition of how we calculate the measure,
present the most directly comparable GAAP financial measure with equal or
greater prominence and provide a reconciliation between the measure and the most
directly comparable GAAP measure.

        1

    Form 10-Q for the Period
Ended September 30, 2008

    Notes to Condensed
Consolidated Financial Statements

    Note 2.  Summary
of Significant Accounting Policies

    Goodwill and Other
Intangible Assets, page 16

              2.

              We have reviewed your response
      to our prior comment seven noting your response did not fully address our
      comment, thus we are partially reissuing our comment. Per your disclosure
      on page 35 of your Form 10-Q for the quarter ended June 30, 2008, we note
      that there was substantial doubt about CompCare’s ability to continue as a
      going concern and CompCare’s board of directors were evaluating strategic
      alternatives including the sale of CompCare. As the value of your
      healthcare services segment’s value is dependent on the synergies created
      by using CompCare’s infrastructure to facilitate the use of PROMETA,
      please tell us how this decision did not trigger an impairment test. Refer
      to paragraph 28 of SFAS 142 for further
  guidance.

    RESPONSE: Because of the
continuing operating losses and negative cash flows in both healthcare services
and behavioral health managed care services reporting units, we evaluated
goodwill in healthcare services for impairment in each reporting period during
2008, including the quarter ended June 30, 2008; however, we inadvertently
omitted that disclosure in our June 30, 2008 10-Q.

    Pursuant
to step 1 of the SFAS 142 impairment test, the fair value of the healthcare
services reporting unit was estimated at $128.9 million at June 30, 2008 and
exceeded its carrying value of $30.1 million and step two of the SFAS 142
impairment test for goodwill was not necessary. We estimated the fair value
using the market approach, based primarily on the quoted market prices of the
company’s common stock with an adjustment to exclude the estimated fair value of
the behavioral health managed care reporting unit, which was estimated using
quoted market prices of CompCare’s common stock.

    In the
fourth quarter of 2008, the decline in fair value of the healthcare services
reporting unit caused a failure of step 1 of the SFAS 142 impairment test and it
was necessary to conduct step 2 of the impairment test. The decline in the value
of the reporting unit arose from the downward re-pricing of risk that occurred
broadly in the equity markets and affected the reporting unit in the quarter. As
part of step 2 of the impairment test, we concluded that the goodwill in
healthcare services had been impaired since we estimated the implied fair value
of the goodwill in this reporting unit to be $0.  Accordingly, we
wrote-off the $9.8 million carrying value and recorded as an impairment charge
in our Consolidated Statement of Operations for the year ended December 31,
2008. The implied fair value of the goodwill was determined after allocating the
estimated fair value of the reporting unit (estimated using the income approach)
to all the assets and liabilities of that unit in accordance with paragraph 21
of SFAS 142.

              3.

              In connection with the comment
      above, we note that you used the market and income approach to estimate
      the fair value of the healthcare services reporting unit. We note that the
      value of your healthcare services segment amounted to $67 million at
      September 30, 2008 while the post-acquisition fair value was $65.5
      million. Considering the healthcare services reporting unit generated net
      losses before income taxes of approximately $41 million in the year ended
      December 31, 2007 and $9 million, $10.2 million, and $6.4 million for the
      three months ended March 31, 2008, June 30, 2008, and September 30, 2008.
      Please provide us with a reasonably detailed summary of the analysis and
      identify and explain the basis for all significant assumptions. Please
      discuss the inputs used in the valuation models (observable,
      unobservable), the priority of those inputs in the fair value hierarchy of
      SFAS 157 (e.g. level 1, level 2, or level 3), and provide additional
      detail regarding how you weighted each of the valuation models and why the
      weight given was deemed to be appropriate (versus another
      percentage).

    RESPONSE: The two fair value
estimates noted above are not directly comparable with each other since they
were determined using different valuation approaches under different contexts.
The $67 million in fair value that we estimated at September 30, 2008 was done
in conjunction with step 1 of

        2

    the SFAS
142 goodwill impairment test and was based primarily on the quoted market prices
of the company’s common stock with an adjustment to exclude the estimated fair
value of the behavioral health managed care reporting unit, which was estimated
using quoted market prices of CompCare’s common stock. The $65.5 million in fair
value that we estimated at the time of the CompCare acquisition in January 2007
was done in conjunction with our purchase accounting process to support the
assignment of goodwill to the healthcare services reporting unit and the fair
value was estimated based on projected future cash flows, discounted at a rate
equal to our estimated cost of capital.

    Marketable Securities, page
14

              4.

              We have reviewed your response
      to our prior comment eight noting that because the ARS are owned by
      Hythiam (not CompCare) that you believe you have the intent and ability to
      hold these securities until June 30, 2010. Please tell us how you have the
      ability to hold these securities until June 30, 2010, considering (i) your
      cash on hand as of September 30, 2008 was $13.7 million, (ii) your
      healthcare services segments losses before income taxes, (iii) your
      negative cash flows from operations, and (iv) the loss of major customers
      for which you planned to use the behavioral health managed care segment
      infrastructure to facilitate the use of PROMETA in their treatment
      programs.

    RESPONSE: Our belief at
September 30, 2008 that we had the ability to hold the ARS until their market
value recovers was based on our expectation of improved cash flows from our
financial projections, which we estimated would enable us to maintain sufficient
cash and cash equivalents on hand to avoid liquidating the ARS before they
recovered in value. The most significant assumptions in our analyses and
projections included:

                ●

              Improved
      cash flow from our healthcare services operations over the next 18 months
      from:

              -

              New
      contracts in our managed care operations that were expected to be signed
      by the end of the fourth quarter of 2008 and generate an estimated $5
      million in annual revenue in 2009. The new contracts were projected to
      improve our net cash flows and results of operations by $2 million on an
      annual basis beginning January
2009.

              -

              A
      planned reduction in annual operating expenses totaling $10 million,
      compared to the third quarter 2008 run-rate. The planned reduction is part
      of our continued effort to streamline operations to increase our focus on
      managed care opportunities and is expected to reduce our annual operating
      expenses to $17 million in 2009.

              -

              Our
      plan to reduce cash operating expenses to $5.3 million during the fourth
      quarter of 2008, resulting in an improved expected net cash burn of
      approximately $3 million for the
quarter;

                ●

              Our
      ability to borrow an estimated $7.8 million, pursuant to the UBS margin
      loan facility that is collateralized by the ARS
  portfolio.

                ●

              Our
      expectation that the ARS portfolio would recover in value sometime during
      the first or second quarter of 2010, based on consultation with industry
      experts and the actions of several large banks to buy back large volumes
      of ARS in the market.

    With
respect to CompCare’s recent loss of major customers, we considered the actions
taken by CompCare’s management to mitigate these losses, such as reducing
operating expenses, planning to pursue rate increases from contracts in loss
positions, planning to obtain new contracts and pursuing strategic alternatives,
as sufficient to offset doubts about CompCare’s ability to continue as a going
concern and continue providing us with access to an infrastructure for our
planned managed care product offerings. Additionally,
we have identified cost effective alternatives to provide us with access to the
same level of infrastructure support in the case that CompCare is not able to
continue its operations.

        3

    When
performing our impairment assessment at December 31, 2008, we were no longer
able to conclude that we had the ability to hold the ARS until their market
value recovers, in light of current business circumstances, which included lower
than expected revenues from our licensees due to the weaker economy and
significant delays in signing the expected new contracts in our managed care
operations resulting from unforeseen circumstances that were out of our control.
The signing of such contracts is still anticipated, but is not expected to occur
until the second quarter of 2009. We were able to complete the actions necessary
to achieve the $10 million cost reductions discussed above in the fourth quarter
of 2008, as planned; however, the amount of projected future cash flows from our
healthcare services operations declined significantly relative to the estimates
at September 30, 2008 as a result of the factors mentioned above. Accordingly,
we determined that the loss in fair value of our ARS was “other-than-temporary”
and we recorded an impairment charge of approximately $1.4 million at December
31, 2008.

    Note 5. Debt Outstanding,
page 21

              5.

              We have reviewed your
      responses to our prior comments nine. Your responses did not fully address
      our comments; as a result we will partially reissue our comments. Based on
      the amended terms of your senior secured note, please tell us how you
      determined the present value of cash flows related to the amended debt
      compared to the original debt resulted in a $1.8 million gain. In your
      response, please identify and explain your basis for all significant
      assumptions used.

    RESPONSE: The fair value of
the amended senior secured note was determined by using the ‘step’ method
outlined in APB 14. The fair value was estimated to be $3.2 million, computed as
the difference between the $1.8 million incremental fair value of the amended
warrant and the $5 million proceeds received from issuing the note and warrants.
The difference between the fair value of the amended debt ($3.2 million) and the
carrying value of the original debt ($5 million) amounted to $1.8 million and
was recognized as a debt extinguishment gain. However, the $1.8 million
incremental fair value of the amended warrant was accounted for as a debt
extinguishment loss since the modification was accounted for in the same manner
as a debt extinguishment, in accordance with EITF 96-19. The gain and loss
offset and amounted to a zero net gain or loss on extinguishment. It’s
reasonable to expect that there would be no net extinguishment gain or loss on
the transaction when considering the old debt was due and payable at the time of
the transaction (not at some point in the future) and the company had the
wherewithal to repay it. The company essentially repaid debt that was
immediately due and borrowed new money from the same lender. There would have
been no reason for the lender to take value less than the face amount of the old
debt (causing a net gain) or for the company to pay value more than the face
amount (causing a net loss).

              6.

              We have reviewed your response
      to our prior comment ten, noting that you concluded the reclassification
      of warrants from additional-paid-in-capital to liability was not material
      to your previous financial statements. Tell us your consideration of the
      effects of prior year misstatements when quantifying misstatements in
      current year financial statements, see SAB Topic 1N. Considering your
      stock price decreased approximately 73% from the date of issuance of the
      original warrants to December 31, 2007, please tell us what qualitative
      and quantitative factors you examined in determining