updated 5/10/2010 5:15:26 PM ET 2010-05-10T21:15:26

Vanguard Health Systems, Inc. ("Vanguard") today announced results for the third quarter ended March 31, 2010 and reiterated it had completed a comprehensive refinancing plan (the "Refinancing") during the quarter. The Refinancing provides Vanguard with the capital flexibility to implement its long-term growth strategies and quality initiatives while extending maturities at favorable interest rates. Vanguard incurred $73.2 million ($45.4 million net of taxes) of debt extinguishment costs during the current year quarter to complete the Refinancing.

Total revenues for the quarter ended March 31, 2010 were $861.2 million, an increase of $3.2 million or 0.4% from the prior year quarter. Patient service revenues decreased $26.3 million and health plan premium revenues increased $29.5 million compared to the prior year quarter. The decrease in patient service revenues was primarily attributable to a 4.6% decrease in patient revenue per adjusted discharge during the current year quarter compared to the prior year quarter. This decrease in patient revenue per adjusted discharge primarily resulted from the implementation of an uninsured discount policy in our Phoenix and San Antonio hospitals effective July 1, 2009, similar to the program implemented in our Illinois hospitals on April 1, 2009, and a change to the Medicaid pending policy at these same hospitals as previously disclosed. In addition, revenues related to our receipt of retroactive payments under the Illinois Provider Tax Assessment program during the prior year quarter negatively impacted this ratio comparison during the current year quarter. The increase in health plan premium revenues was primarily attributable to a 22.9% increase in average membership in Phoenix Health Plan (PHP) during the current year quarter compared to the prior year quarter. Economic conditions in Arizona have resulted in an increase in the number of individuals eligible for coverage under the Arizona Health Care Cost Containment System (AHCCCS) during the current year quarter resulting in more enrollees in PHP.

For the quarter ended March 31, 2010, Vanguard had a loss from continuing operations of $32.6 million compared to income from continuing operations of $16.8 million during the prior year quarter primarily resulting from $73.2 million ($45.4 million, net of taxes) of debt extinguishment costs incurred during the current year quarter related to the Refinancing (as discussed elsewhere in this release). Many comparisons of individual cost and expense items as a percentage of total revenues during the current year quarter were impacted by the significant growth in health plan premium revenues and the uninsured discount and Medicaid pending policy changes. A table describing the impact of adjustments to certain expenses and revenues and related ratios for our acute care services segment and to certain statistical measures is included in this press release in the attached Supplemental Operating Measures Adjusted for Comparative Analysis.

During the quarter ended March 31, 2010, net loss attributable to Vanguard Health Systems, Inc. stockholders was $32.8 million compared to $15.8 million net income attributable to Vanguard Health Systems, Inc. stockholders during the prior year quarter.

Adjusted EBITDA was $90.1 million for the quarter ended March 31, 2010, an increase of $3.9 million or 4.5% from the prior year quarter. A reconciliation of Adjusted EBITDA to net income (loss) attributable to Vanguard Health Systems, Inc. stockholders as determined in accordance with generally accepted accounting principles for the quarters ended March 31, 2009 and 2010 is included in the attached supplemental financial information.

The consolidated operating results for the quarter ended March 31, 2010 reflect a 0.6% increase in adjusted discharges and a 0.7% decrease in discharges compared to the prior year quarter. Inpatient surgeries, outpatient surgeries and emergency room visits decreased 4.1%, 2.7% and 1.3%, respectively, during the current year quarter compared to the prior year quarter.

Total revenues for the nine months ended March 31, 2010 were $2,528.2 million, an increase of $158.6 million or 6.7% from the prior year period. Patient service revenues and health plan premium revenues increased $11.4 million and $147.2 million, respectively, compared to the prior year period. Patient service revenues for the current year period were positively impacted by a 2.0% increase in adjusted discharges but were negatively impacted by a 1.4% decrease in patient revenue per adjusted discharge compared to the prior year period. Absent the previously discussed uninsured discount and Medicaid pending policy changes, patient revenue per adjusted discharge would have increased 2.7% during the current year period compared to the prior year period. Health plan premium revenues increased 30.6% during the current year period primarily due to the significant enrollment increase for PHP's new contract with AHCCCS that went into effect on October 1, 2008, as previously discussed.

For the nine months ended March 31, 2010, Vanguard had a loss from continuing operations of $50.0 million compared to income from continuing operations of $28.5 million during the prior year period, primarily resulting from the goodwill impairment loss and debt extinguishment costs recognized during the current year period. Many comparisons of individual cost and expense items as a percentage of total revenues during the current year period were impacted by the significant growth in health plan premium revenues and the uninsured discount and Medicaid pending policy changes previously discussed. The Supplemental Operating Measures Adjusted for Comparative Analysis table included elsewhere in this release sets forth the impact of the uninsured discount and Medicaid pending policy changes to certain expenses and revenues and related ratios of our acute care services segment and to certain statistical measures. Health plan claims expense as a percentage of health plan premium revenues increased to 79.6% during the current year period compared to 77.1% during the prior year period primarily as a result of changes to capitation rates, enrollee medical costs and enrollee demographic mix under PHP's new contract with AHCCCS that went into effect on October 1, 2008.

During the nine months ended March 31, 2010, net loss attributable to Vanguard Health Systems, Inc. stockholders was $52.0 million compared to $26.8 million net income attributable to Vanguard Health Systems, Inc. stockholders during the prior year period.

Adjusted EBITDA was $242.6 million for the nine months ended March 31, 2010, an increase of $14.7 million or 6.5% from the prior year period. A reconciliation of Adjusted EBITDA to income (loss) attributable to Vanguard Health Systems, Inc. stockholders as determined in accordance with generally accepted accounting principles for the nine-month periods ended March 31, 2009 and 2010 is included in the attached supplemental financial information.

The consolidated operating results for the nine months ended March 31, 2010 reflect a 2.0% increase in adjusted discharges and a 0.2% decrease in discharges compared to the prior year period. Outpatient surgeries and emergency room visits increased 0.1% and 4.2%, respectively, while inpatient surgeries decreased 1.2% during the current year period compared to the prior year period.

Cash provided by operating activities decreased to $218.7 million during the current year period compared to $251.4 million during the prior year period. This decrease was primarily attributable to a slower enrollment growth rate at PHP and related slower buildup of accrued health plan claims during the current year period compared to the prior year period and the settlement and payment of a significant professional liability case during the current year period that was accrued in March 2009.

As previously disclosed, Vanguard completed its Refinancing during the current year quarter. Under the Refinancing, certain of Vanguard's subsidiaries issued $950.0 million of new 8.0% Senior Unsecured Notes due 2018, entered into an $815.0 million senior secured term loan maturing in 2016 and entered into a new $260.0 million revolving credit facility that expires in 2015. The proceeds from these new debt instruments were used to repay the outstanding principal and interest related to Vanguard's previous term loan facility, to retire its previously outstanding 9.0% senior subordinated notes and its 11.25% senior discount notes through redemption or tender offers/consent solicitations including accrued interest for such notes and to pay fees and expenses related to the Refinancing. In addition, Vanguard utilized a portion of the Refinancing proceeds, along with cash on hand, to purchase 446 shares held by certain former employees and to fund a $300.0 million distribution to repurchase a portion of the shares owned by the remaining shareholders.

Vanguard will host a conference call for investors at 11:00 am EDT on May 11, 2010. All interested investors are invited to access a live audio broadcast of the call, via webcast. The live webcast can be accessed on the home page of Vanguard's Web site at www.vanguardhealth.com by clicking on "Third Quarter Webcast" or at http://visualwebcaster.com/event.asp?id=68053. If you are unable to participate during the live webcast, the call will be available on a replay basis on Vanguard's Web site www.vanguardhealth.com. To access the replay, click on the Latest News link on the Investor Relations page of www.vanguardhealth.com. The replay will be available via this link for one year.

Vanguard owns and operates 15 acute care hospitals and complementary facilities and services in Chicago, Illinois; Phoenix, Arizona; San Antonio, Texas; and Massachusetts. Vanguard's strategy is to develop locally branded, comprehensive healthcare delivery networks in urban markets. Vanguard will pursue acquisitions where there are opportunities to partner with leading delivery systems in new urban markets. Upon acquiring a facility or network of facilities, Vanguard implements strategic and operational improvement initiatives including expanding services, strengthening relationships with physicians and managed care organizations, recruiting new physicians and upgrading information systems and other capital equipment. These strategies improve quality and network coverage in a cost effective and accessible manner for the communities we serve.

This press release contains forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. These forward-looking statements include all statements that are not historical statements of fact and those statements regarding Vanguard's intent, belief or expectations. Do not rely on any forward-looking statements as such statements are subject to numerous factors, risks and uncertainties that could cause Vanguard's actual outcomes, results, performance or achievements to be materially different from those projected. These factors, risks and uncertainties include, among others, Vanguard's high degree of leverage and interest rate risk; Vanguard's ability to incur substantially more debt; operating and financial restrictions in Vanguard's debt agreements; Vanguard's ability to generate cash to service its debt; potential liability related to disclosures of relationships between physicians and Vanguard's hospitals; Vanguard's ability to grow its business and successfully implement its business strategies; Vanguard's ability to successfully integrate any future acquisitions; the potential that acquisitions could be costly, unsuccessful or subject Vanguard to unexpected liabilities; post-payment claims reviews by governmental agencies that could result in additional costs to Vanguard; conflicts of interest that may arise as a result of Vanguard's control by a small number of stockholders; the highly competitive nature of the healthcare business; governmental regulation of the industry including Medicare and Medicaid reimbursement levels; changes in Federal, state or local regulation affecting the healthcare industry; the potential impact to us of the significant Federal healthcare reform enacted by Congress in March 2010 and potential additional Federal or state healthcare reform; pressures to contain costs by managed care organizations and other insurers and Vanguard's ability to negotiate acceptable terms with these third party payers; the ability to attract and retain qualified management and personnel, including physicians and nurses; claims and legal actions relating to professional liabilities or other matters; the impacts of weakened economic conditions and volatile capital markets on Vanguard's results of operations, financial position and cash flows; Vanguard's failure to adequately enhance its facilities with technologically advanced equipment could adversely affect its revenues and market position; Vanguard's exposure to the increased amounts of and collection risks associated with uninsured accounts and the co-pay and deductible portions of insured accounts; Vanguard's ability to maintain or increase patient membership and control costs of its managed healthcare plans; the geographic concentration of Vanguard's operations; the technological and pharmaceutical improvements that increase the cost of providing healthcare services or reduce the demand for such services; the timeliness of reimbursement payments received under government programs; the potential adverse impact of known and unknown government investigations; and those factors, risks and uncertainties detailed in Vanguard's filings from time to time with the Securities and Exchange Commission, including, among others, Vanguard's Annual Reports on Form 10-K and its Quarterly Reports on Form 10-Q.

Although Vanguard believes that the assumptions underlying the forward-looking statements contained in this press release are reasonable, any of these assumptions could prove to be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this press release will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, you should not regard the inclusion of such information as a representation by Vanguard that its objectives and plans anticipated by the forward-looking statements will occur or be achieved, or if any of them do, what impact they will have on Vanguard's results of operations and financial condition. Vanguard undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.


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