##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 OR
 o
    
    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: 333-71934
 
 
 VANGUARD HEALTH SYSTEMS, INC.
  Delaware
    
    62-1698183(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 20 Burton Hills Boulevard, Suite 100
Nashville, TN 37215
 (615) 665-6000
 o þ
 *
    
    (Note: The registrant was required to file all reports under Section 13 or 15(d) of the
Securities and Exchange Act of 1934 from April 1, 2010 through June 30, 2010, but as of July 1,
2010, the registrant is a voluntary filer not subject to these filing requirements. However, the
registrant filed all required reports under Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months, which would be required to be filed if the registrant were
required to file such reports.) o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



VANGUARD HEALTH SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 PagePART I     FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of June 30, 2010 and September 30, 2010
    
    
    3Condensed Consolidated Statements of Operations for the quarters ended September 30, 2009 and 2010
    
    
    4Condensed Consolidated Statement of Equity for the quarter ended September 30, 2010
    
    
    5Condensed Consolidated Statements of Cash Flows for the quarters ended September 30, 2009 and 2010
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    45PART II     OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    46Item 6. Exhibits
    
    
    46Signature
    
    
    47Exhibit Index
    
    
    48Exhibit 2.1Exhibit 4.1Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 VANGUARD HEALTH SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)June 30,
    
    
    September 30,2010
    
    
    2010(In millions, except share andper share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    257.6
    
    
    $
    471.8Restricted cash
    
    
    2.3
    
    
    
    2.5Accounts receivable, net of allowance for doubtful accounts of approximately
$75.6 and $83.8, respectively
    
    
    270.4
    
    
    
    292.9Inventories
    
    
    49.6
    
    
    
    53.6Deferred tax assets
    
    
    21.9
    
    
    
    13.7Prepaid expenses and other current assets
    
    
    119.2
    
    
    
    67.6Total current assets
    
    
    721.0
    
    
    
    902.1Property, plant and equipment, net of accumulated depreciation
    
    
    1,203.8
    
    
    
    1,221.6Goodwill
    
    
    649.1
    
    
    
    657.2Intangible assets, net of accumulated amortization
    
    
    66.0
    
    
    
    69.3Deferred tax assets, noncurrent
    
    
    50.0
    
    
    
    61.2Investments in auction rate securities
    
    
    19.8
    
    
    
    19.3Other assets
    
    
    19.9
    
    
    
    19.7Total assets
    
    $
    2,729.6
    
    
    $
    2,950.4LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    194.8
    
    
    $
    182.5Accrued salaries and benefits
    
    
    144.9
    
    
    
    140.7Accrued health plan claims and settlements
    
    
    149.8
    
    
    
    171.8Accrued interest
    
    
    41.4
    
    
    
    26.8Other accrued expenses and current liabilities
    
    
    76.9
    
    
    
    84.4Current maturities of long-term debt
    
    
    8.2
    
    
    
    8.2Total current liabilities
    
    
    616.0
    
    
    
    614.4Professional and general liability and workers compensation reserves
    
    
    83.6
    
    
    
    87.9Other liabilities
    
    
    31.6
    
    
    
    32.2Long-term debt, less current maturities
    
    
    1,743.8
    
    
    
    1,959.0Commitments and contingenciesEquity:Vanguard Health Systems, Inc. stockholders equity:Common Stock of $.01 par value; 1,000,000 shares authorized; 749,104
issued and outstanding at June 30, 2010 and September 30, 2010
    
    
    
    
    
    
    Additional paid-in capital
    
    
    354.9
    
    
    
    356.1Accumulated other comprehensive loss
    
    
    (2.5
    )
    
    
    (2.5
    )Retained deficit
    
    
    (105.9
    )
    
    
    (104.7
    )Total Vanguard Health Systems, Inc. stockholders equity
    
    
    246.5
    
    
    
    248.9Non-controlling interests
    
    
    8.1
    
    
    
    8.0Total equity
    
    
    254.6
    
    
    
    256.9Total liabilities and equity
    
    $
    2,729.6
    
    
    $
    2,950.4
   3




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Quarter ended September 30,2009
    
    
    2010(In millions)Patient service revenues
    
    $
    615.6
    
    
    $
    693.3Premium revenues
    
    
    204.3
    
    
    
    220.6Total revenues
    
    
    819.9
    
    
    
    913.9Costs and Expenses:Salaries and benefits (includes stock compensation
of $1.9 and $1.2, respectively)
    
    
    312.7
    
    
    
    354.8Health plan claims expense
    
    
    161.0
    
    
    
    174.1Supplies
    
    
    110.8
    
    
    
    121.0Provision for doubtful accounts
    
    
    37.2
    
    
    
    51.8Purchased services
    
    
    46.7
    
    
    
    51.0Non-income taxes
    
    
    14.2
    
    
    
    16.2Rents and leases
    
    
    10.9
    
    
    
    11.0Other operating expenses
    
    
    59.4
    
    
    
    57.5Depreciation and amortization
    
    
    33.6
    
    
    
    37.2Interest, net
    
    
    27.2
    
    
    
    34.8Other
    
    
    1.1
    
    
    
    4.8Income (loss) from continuing operations before income taxes
    
    
    5.1
    
    
    
    (0.3
    )Income tax benefit (expense)
    
    
    (2.1
    )
    
    
    2.4Income from continuing operations
    
    
    3.0
    
    
    
    2.1Income (loss) from discontinued operations, net of taxes
    
    
    (0.6
    )
    
    
    0.1Net income
    
    
    2.4
    
    
    
    2.2Less: Net income attributable to non-controlling interests
    
    
    (0.9
    )
    
    
    (1.0
    )Net income attributable to Vanguard Health Systems,
Inc. stockholders
    
    $
    1.5
    
    
    $
    1.2Amounts attributable to Vanguard Health Systems, Inc.
stockholders:Income from continuing operations, net of taxes
    
    $
    2.1
    
    
    $
    1.1Income (loss) from discontinued operations, net of taxes
    
    
    (0.6
    )
    
    
    0.1Net income attributable to Vanguard Health
Systems, Inc. stockholders
    
    $
    1.5
    
    
    $
    1.2
   4




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
 Quarter ended September 30, 2010
 (Unaudited)
 Vanguard Health Systems, Inc. StockholdersAccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    Non-Common Stock
    
    
    Paid-In
    
    
    Comprehensive
    
    
    Retained
    
    
    Controlling
    
    
    TotalShares
    
    
    Amount
    
    
    Capital
    
    
    Loss
    
    
    Deficit
    
    
    Interests
    
    
    Equity(In millions, except share amounts)Balance at June 30, 2010
    
    
    749,104
    
    
    $
    
    
    
    $
    354.9
    
    
    $
    (2.5
    )
    
    $
    (105.9
    )
    
    $
    8.1
    
    
    $
    254.6Stock compensation (non-cash)
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Distributions paid to
non-controlling interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.1
    )
    
    
    (1.1
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    1.0
    
    
    
    2.2Total comprehenive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    1.0
    
    
    
    2.2Balance at September 30, 2010
    
    
    749,104
    
    
    $
    
    
    
    $
    356.1
    
    
    $
    (2.5
    )
    
    $
    (104.7
    )
    
    $
    8.0
    
    
    $
    256.9
   5




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Quarter ended September 30,2009
    
    
    2010(In millions)Operating activities:Net income
    
    $
    2.4
    
    
    $
    2.2Adjustments to reconcile net income to net cash provided by
operating activities:Loss (income) from discontinued operations
    
    
    0.6
    
    
    
    (0.1
    )Depreciation and amortization
    
    
    33.6
    
    
    
    37.2Provision for doubtful accounts
    
    
    37.2
    
    
    
    51.8Amortization of loan costs
    
    
    1.4
    
    
    
    1.2Accretion of principal on notes
    
    
    5.7
    
    
    
    0.7Acquisition related expenses
    
    
    
    
    
    
    3.7Stock compensation
    
    
    1.9
    
    
    
    1.2Deferred income taxes
    
    
    1.7
    
    
    
    (3.1
    )Changes in operating assets and liabilities, net of the impact
of acquisitions:Accounts receivable
    
    
    (39.5
    )
    
    
    (59.7
    )Inventories
    
    
    (0.4
    )
    
    
    (0.3
    )Prepaid expenses and other current assets
    
    
    10.3
    
    
    
    53.1Accounts payable
    
    
    39.8
    
    
    
    (15.9
    )Accrued expenses and other liabilities
    
    
    27.1
    
    
    
    28.1Net cash provided by operating activities  continuing operations
    
    
    121.8
    
    
    
    100.1Net cash provided by (used in) operating activities  discontinued operations
    
    
    (0.1
    )
    
    
    0.1Net cash provided by operating activities
    
    
    121.7
    
    
    
    100.2Investing activities:Acquisitions and related expenses
    
    
    (1.5
    )
    
    
    (49.5
    )Capital expenditures
    
    
    (33.8
    )
    
    
    (44.6
    )Proceeds from asset dispositions
    
    
    0.1
    
    
    
    Sales of auction rate securities
    
    
    
    
    
    
    0.5Other
    
    
    0.3
    
    
    
    (0.4
    )Net cash used in investing activities  continuing operations
    
    
    (34.9
    )
    
    
    (94.0
    )Net cash used in investing activities  discontinued operations
    
    
    (0.2
    )
    
    
    Net cash used in investing activities
    
    
    (35.1
    )
    
    
    (94.0
    )Financing activities:Payments of long-term debt
    
    
    (1.9
    )
    
    
    (2.0
    )Proceeds from debt borrowings
    
    
    
    
    
    
    216.6Payments of refinancing costs and fees
    
    
    
    
    
    
    (5.5
    )Payments related to derivative instrument with financing element
    
    
    (2.7
    )
    
    
    Distributions paid to non-controlling interests and other
    
    
    (0.9
    )
    
    
    (1.1
    )Net cash provided by (used in) financing activities
    
    
    (5.5
    )
    
    
    208.0Net increase in cash and cash equivalents
    
    
    81.1
    
    
    
    214.2Cash and cash equivalents, beginning of period
    
    
    308.2
    
    
    
    257.6Cash and cash equivalents, end of period
    
    $
    389.3
    
    
    $
    471.8Supplemental cash flow information:Net cash paid for interest
    
    $
    7.7
    
    
    $
    48.4Net cash received for income taxes
    
    $
    
    
    
    $
    (0.5
    )
   6




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2010
 (Unaudited)
 1. BUSINESS AND BASIS OF PRESENTATION
 Business
  Basis of Presentation
   Use of Estimates
  2. BUSINESS COMBINATIONS
 Completed Acquisition
   7




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
   Accounts receivable
    
    $
    14.6Inventories
    
    
    3.7Prepaid expenses and other current assets
    
    
    2.4Property and equipment
    
    
    26.9Goodwill
    
    
    8.1Other assets
    
    
    1.0Total assets acquired
    
    
    56.7Accounts payable
    
    
    3.6Other current liabilities
    
    
    7.8Total liabilities assumed
    
    
    11.4Net assets acquired
    
    $
    45.3
  Pro Forma Information
  Quarter ended
    
    
    Quarter endedSeptember 30,
    
    
    September 30,2009
    
    
    2010Total revenues
    
    $
    891.2
    
    
    $
    936.8Loss from continuing operations, before
income taxes
    
    $
    (3.8
    )
    
    $
    (2.8
    )
 Probable Acquisition
   8




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  3. FAIR VALUE MEASUREMENTS
  Level 1
    
    Unadjusted quoted prices in active markets for identical assets and liabilities.Level 2
    
    Directly or indirectly observable inputs, other than quoted prices included in
Level 1. Level 2 inputs may include, among others, interest rates and yield
curves observable at commonly quoted intervals, volatilities, loss severities,
credit risks and other inputs that are derived principally from or corroborated
by observable market data by correlation or other means.Level 3
    
    Unobservable inputs used when there is little, if any, market activity for the
asset or liability at the measurement date. These inputs represent the entitys
own assumptions about the assumptions that market participants would use to
price the asset or liability developed using the best information available.
   Fair
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Value
    
    
    Inputs
    
    
    Inputs
    
    
    InputsAssets:Investments in auction rate securities
    
    $
    19.3
    
    
    $
    
    
    
    $
    
    
    
    $
    19.3
  9




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Balance at
    
    
    
    
    
    
    Balance atJune 30, 2010
    
    
    Redemptions
    
    
    September 30, 2010Investments in auction rate securities
    
    $
    19.8
    
    
    $
    0.5
    
    
    $
    19.3
  Auction Rate Securities
   Cash and Cash Equivalents and Restricted Cash
  Accounts Receivable and Accounts Payable
  Long-Term Debt
   10




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 4. STOCK BASED COMPENSATION
     5. GOODWILL AND INTANGIBLE ASSETS
  Gross Carrying Amount
    
    
    Accumulated AmortizationClass of Intangible Asset
    
    June 30, 2010
    
    
    September 30, 2010
    
    
    June 30, 2010
    
    
    September 30, 2010Amortized intangible assets:Deferred loan costs
    
    $
    39.1
    
    
    $
    44.5
    
    
    $
    1.9
    
    
    $
    3.1Contracts
    
    
    31.4
    
    
    
    31.4
    
    
    
    18.0
    
    
    
    18.8Physician income and
other guarantees
    
    
    31.1
    
    
    
    32.3
    
    
    
    25.0
    
    
    
    26.1Other
    
    
    8.8
    
    
    
    8.9
    
    
    
    2.7
    
    
    
    3.0Subtotal
    
    
    110.4
    
    
    
    117.1
    
    
    
    47.6
    
    
    
    51.0Indefinite-lived intangible assets:License and accreditation
    
    
    3.2
    
    
    
    3.2
    
    
    
    
    
    
    
    Total
    
    $
    113.6
    
    
    $
    120.3
    
    
    $
    47.6
    
    
    $
    51.0
    11




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  6. FINANCING ARRANGEMENTS
  June 30, 2010
    
    
    September 30, 20108.0% Senior Unsecured Notes
    
    $
    937.0
    
    
    $
    1,154.2Term loans payable under credit facility due 2016
    
    
    815.0
    
    
    
    813.01,752.0
    
    
    
    1,967.2Less: current maturities
    
    
    (8.2
    )
    
    
    (8.2
    )$
    1,743.8
    
    
    $
    1,959.0
 8.0% Notes
 pari passu
     12




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Credit Facility Debt
      Future Maturities
   13




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 7. INCOME TAXES
  Quarter ended September 30,2009
    
    
    2010Current:Federal
    
    $
    
    
    
    $
    0.2State
    
    
    0.4
    
    
    
    0.5Total current
    
    
    0.4
    
    
    
    0.7Deferred:Federal
    
    
    1.6
    
    
    
    (0.6
    )State
    
    
    (0.5
    )
    
    
    (1.0
    )Total deferred
    
    
    1.1
    
    
    
    (1.6
    )Change in valuation allowance
    
    
    0.6
    
    
    
    (1.5
    )Total income tax expense (benefit)
    
    $
    2.1
    
    
    $
    (2.4
    )
   8. COMPREHENSIVE INCOME
  Quarter ended September 30,2009
    
    
    2010Net income attributable to Vanguard Health
Systems, Inc. stockholders
    
    $
    1.5
    
    
    $
    1.2Change in fair value of interest rate swap
    
    
    1.7
    
    
    
    Change in income tax expense
    
    
    (0.6
    )
    
    
    Net income attributabe to non-controlling interests
    
    
    0.9
    
    
    
    1.0Comprehensive income
    
    $
    3.5
    
    
    $
    2.2
  14




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  June 30, 2010
    
    
    September 30, 2010Unrealized holding loss on investments in auction rate securities
    
    $
    (4.1
    )
    
    $
    (4.1
    )Income tax benefit
    
    
    1.6
    
    
    
    1.6Accumulated other comprehensive loss
    
    $
    (2.5
    )
    
    $
    (2.5
    )
 9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 Financial Services Insurance Accounting for Costs
Associated with Acquiring or Renewing Insurance Contracts
 Health Care Entities Measuring
Charity Care for Disclosure
 Health Care Entities Presentation of Insurance Claims and Related Insurance Recoveries
 10. SEGMENT INFORMATION
   15




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Quarter ended September 30, 2009Acute Care
    
    
    HealthServices
    
    
    Plans
    
    
    Eliminations
    
    
    ConsolidatedPatient service revenues (1)
    
    $
    615.6
    
    
    $
    
    
    
    $
    
    
    
    $
    615.6Premium revenues
    
    
    
    
    
    
    204.3
    
    
    
    
    
    
    
    204.3Intersegment revenues
    
    
    10.6
    
    
    
    
    
    
    
    (10.6
    )
    
    
    Total revenues
    
    
    626.2
    
    
    
    204.3
    
    
    
    (10.6
    )
    
    
    819.9Salaries and benefits
(excludes stock compensation)
    
    
    302.3
    
    
    
    8.5
    
    
    
    
    
    
    
    310.8Health plan claims expense (1)
    
    
    
    
    
    
    161.0
    
    
    
    
    
    
    
    161.0Supplies
    
    
    110.8
    
    
    
    
    
    
    
    
    
    
    
    110.8Provision for doubtful accounts
    
    
    37.2
    
    
    
    
    
    
    
    
    
    
    
    37.2Other operating expenses-external
    
    
    121.4
    
    
    
    9.8
    
    
    
    
    
    
    
    131.2Operating expenses-intersegment
    
    
    
    
    
    
    10.6
    
    
    
    (10.6
    )
    
    
    Total operating expenses
    
    
    571.7
    
    
    
    189.9
    
    
    
    (10.6
    )
    
    
    751.0Segment EBITDA (2)
    
    
    54.5
    
    
    
    14.4
    
    
    
    
    
    
    
    68.9Less:Interest, net
    
    
    27.4
    
    
    
    (0.2
    )
    
    
    
    
    
    
    27.2Depreciation and amortization
    
    
    32.6
    
    
    
    1.0
    
    
    
    
    
    
    
    33.6Equity method income
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Stock compensation
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    1.9Monitoring fees and expenses
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Income (loss) from continuing
operations before income taxes
    
    $
    (8.5
    )
    
    $
    13.6
    
    
    $
    
    
    
    $
    5.1Segment assets
    
    $
    2,607.9
    
    
    $
    182.6
    
    
    $
    
    
    
    $
    2,790.5Capital expenditures
    
    $
    33.8
    
    
    $
    
    
    
    $
    
    
    
    $
    33.8
 
 (1)
    
    Vanguard eliminates in consolidation those patient service revenues earned
by its healthcare facilities attributable to services provided to members in
its owned health plans and eliminates the corresponding medical claims expenses
incurred by the health plans for those services.(2)
    
    Segment EBITDA is defined as income (loss) from continuing operations
before income taxes less interest expense (net of interest income),
depreciation and amortization, equity method income, stock compensation, gain
or loss on disposal of assets, realized holding losses on investments,
monitoring fees and expenses, acquisition related expenses, debt extinguishment
costs, and impairment losses. Management uses Segment EBITDA to measure
performance for Vanguards segments and to develop strategic objectives and
operating plans for those segments. Segment EBITDA eliminates the uneven effect
of non-cash depreciation of tangible assets and amortization of intangible
assets, much of which results from acquisitions accounted for under the
purchase method of accounting. Segment EBITDA also eliminates the effects of
changes in interest rates which management believes relate to general trends in
global capital markets, but are not necessarily indicative of the operating
performance of Vanguards segments. Management believes that Segment EBITDA
provides useful information about the financial performance of Vanguards
segments to investors, lenders, financial analysts and rating agencies.
Additionally, management believes that investors and lenders view Segment
EBITDA as an important factor in making investment decisions and assessing the
value of Vanguard. Segment EBITDA is not a substitute for net income (loss),
operating cash flows or other cash flow statement data determined in accordance
with accounting principles generally accepted in the United States. Segment
EBITDA, as presented, may not be comparable to similar measures of other
companies.  16




---



##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Quarter ended September 30, 2010Acute Care
    
    
    HealthServices
    
    
    Plans
    
    
    Eliminations
    
    
    ConsolidatedPatient service revenues (1)
    
    $
    693.3
    
    
    $
    
    
    
    $
    
    
    
    $
    693.3Premium revenues
    
    
    
    
    
    
    220.6
    
    
    
    
    
    
    
    220.6Intersegment revenues
    
    
    10.8
    
    
    
    
    
    
    
    (10.8
    )
    
    
    Total revenues
    
    
    704.1
    
    
    
    220.6
    
    
    
    (10.8
    )
    
    
    913.9Salaries and benefits (excludes stock compensation)
    
    
    345.4
    
    
    
    8.2
    
    
    
    
    
    
    
    353.6Health plan claims expense (1)
    
    
    
    
    
    
    174.1
    
    
    
    
    
    
    
    174.1Supplies
    
    
    121.0
    
    
    
    
    
    
    
    
    
    
    
    121.0Provision for doubtful accounts
    
    
    51.8
    
    
    
    
    
    
    
    
    
    
    
    51.8Other operating expenses-external
    
    
    125.2
    
    
    
    10.5
    
    
    
    
    
    
    
    135.7Operating expenses-intersegment
    
    
    
    
    
    
    10.8
    
    
    
    (10.8
    )
    
    
    Total operating expenses
    
    
    643.4
    
    
    
    203.6
    
    
    
    (10.8
    )
    
    
    836.2Segment EBITDA (2)
    
    
    60.7
    
    
    
    17.0
    
    
    
    
    
    
    
    77.7Less:Interest, net
    
    
    35.1
    
    
    
    (0.3
    )
    
    
    
    
    
    
    34.8Depreciation and amortization
    
    
    36.1
    
    
    
    1.1
    
    
    
    
    
    
    
    37.2Equity method income
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Stock compensation
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    1.2Monitoring fees and expenses
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4Acquisition related expenses
    
    
    3.7
    
    
    
    
    
    
    
    
    
    
    
    3.7Income (loss) from continuing
operations before income taxes
    
    $
    (16.5
    )
    
    $
    16.2
    
    
    $
    
    
    
    $
    (0.3
    )Segment assets
    
    $
    2,754.7
    
    
    $
    195.7
    
    
    $
    
    
    
    $
    2,950.4Capital expenditures
    
    $
    44.6
    
    
    $
    
    
    
    $
    
    
    
    $
    44.6
 
 (1)
    
    Vanguard eliminates in consolidation those patient service revenues earned
by its healthcare facilities attributable to services provided to members in
its owned health plans and eliminates the corresponding medical claims expenses
incurred by the health plans for those services.(2)
    
    Segment EBITDA is defined as income (loss) from continuing operations
before income taxes less interest expense (net of interest income),
depreciation and amortization, equity method income, stock compensation, gain
or loss on disposal of assets, realized holding losses on investments,
monitoring fees and expenses, acquisition related expenses, debt extinguishment
costs and impairment losses. Management uses Segment EBITDA to measure
performance for Vanguards segments and to develop strategic objectives and
operating plans for those segments. Segment EBITDA eliminates the uneven effect
of non-cash depreciation of tangible assets and amortization of intangible
assets, much of which results from acquisitions accounted for under the
purchase method of accounting. Segment EBITDA also eliminates the effects of
changes in interest rates which management believes relate to general trends in
global capital markets, but are not necessarily indicative of the operating
performance of Vanguards segments. Management believes that Segment EBITDA
provides useful information about the financial performance of Vanguards
segments to investors, lenders, financial analysts and rating agencies.
Additionally, management believes that investors and lenders view Segment
EBITDA as an important factor in making investment decisions and assessing the
value of Vanguard. Segment EBITDA is not a substitute for net income (loss),
operating cash flows or other cash flow statement data determined in accordance
with accounting principles generally accepted in the United States. Segment
EBITDA, as presented, may not be comparable to similar measures of other
companies.  17




---



##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 11. CONTINGENCIES AND HEALTHCARE REGULATION
 Contingencies
  Capital Expenditure Commitments
  Professional and General Liability Insurance
  Patient Service Revenues
  Governmental Regulation
   18




---



##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Reimbursement
   Acquisitions
  Guarantees
 Physician Guarantees
  Other Guarantees
   19




---



##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR SUBSIDIARIES
   20




---



##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidating Balance Sheets
June 30, 2010
 Issuers of
    
    
    Issuers ofSenior
    
    
    Senior
    
    
    
    
    
    
    CombinedNotes and
    
    
    Discount
    
    
    Guarantor
    
    
    Non-
    
    
    
    
    
    
    TotalParent
    
    
    Term Debt
    
    
    Notes
    
    
    Subsidiaries
    
    
    Guarantors
    
    
    Eliminations
    
    
    Consolidated(In millions)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    198.6
    
    
    $
    59.0
    
    
    $
    
    
    
    $
    257.6Restricted cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    1.7
    
    
    
    
    
    
    
    2.3Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    249.4
    
    
    
    21.0
    
    
    
    
    
    
    
    270.4Inventories
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46.0
    
    
    
    3.6
    
    
    
    
    
    
    
    49.6Prepaid expenses and other
current assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62.5
    
    
    
    85.9
    
    
    
    (7.3
    )
    
    
    141.1Total current assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    557.1
    
    
    
    171.2
    
    
    
    (7.3
    )
    
    
    721.0Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,147.3
    
    
    
    56.5
    
    
    
    
    
    
    
    1,203.8Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    564.3
    
    
    
    84.8
    
    
    
    
    
    
    
    649.1Intangible assets, net
    
    
    
    
    
    
    37.2
    
    
    
    
    
    
    
    14.8
    
    
    
    14.0
    
    
    
    
    
    
    
    66.0Investments in consolidated
subsidiaries
    
    
    608.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (608.8
    )
    
    
    Investments in auction rate securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19.8
    
    
    
    
    
    
    
    19.8Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69.7
    
    
    
    0.2
    
    
    
    
    
    
    
    69.9Total assets
    
    $
    608.8
    
    
    $
    37.2
    
    
    $
    
    
    
    $
    2,353.2
    
    
    $
    346.5
    
    
    $
    (616.1
    )
    
    $
    2,729.6LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    158.2
    
    
    $
    36.6
    
    
    $
    
    
    
    $
    194.8Accrued expenses and other current
liabilities
    
    
    
    
    
    
    41.4
    
    
    
    
    
    
    
    212.9
    
    
    
    158.7
    
    
    
    
    
    
    
    413.0Current maturities of long-term debt
    
    
    
    
    
    
    8.2
    
    
    
    
    
    
    
    (0.2
    )
    
    
    0.2
    
    
    
    
    
    
    
    8.2Total current liabilities
    
    
    
    
    
    
    49.6
    
    
    
    
    
    
    
    370.9
    
    
    
    195.5
    
    
    
    
    
    
    
    616.0Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70.3
    
    
    
    52.2
    
    
    
    (7.3
    )
    
    
    115.2Long-term debt, less current maturities
    
    
    
    
    
    
    1,743.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,743.8Intercompany
    
    
    354.2
    
    
    
    (1,052.4
    )
    
    
    
    
    
    
    1,177.0
    
    
    
    (182.0
    )
    
    
    (296.8
    )
    
    
    Total equity (deficit)
    
    
    254.6
    
    
    
    (703.8
    )
    
    
    
    
    
    
    735.0
    
    
    
    280.8
    
    
    
    (312.0
    )
    
    
    254.6Total liabilities and equity
    
    $
    608.8
    
    
    $
    37.2
    
    
    $
    
    
    
    $
    2,353.2
    
    
    $
    346.5
    
    
    $
    (616.1
    )
    
    $
    2,729.6
  21




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidating Balance Sheets
September 30, 2010
 Issuers of
    
    
    Issuers ofSenior
    
    
    Senior
    
    
    
    
    
    
    CombinedNotes and
    
    
    Discount
    
    
    Guarantor
    
    
    Non-
    
    
    
    
    
    
    TotalParent
    
    
    Term Debt
    
    
    Notes
    
    
    Subsidiaries
    
    
    Guarantors
    
    
    Eliminations
    
    
    Consolidated(In millions)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    384.0
    
    
    $
    87.8
    
    
    $
    
    
    
    $
    471.8Restricted cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    1.7
    
    
    
    
    
    
    
    2.5Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    272.1
    
    
    
    20.8
    
    
    
    
    
    
    
    292.9Inventories
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49.7
    
    
    
    3.9
    
    
    
    
    
    
    
    53.6Prepaid expenses and other
current assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57.1
    
    
    
    29.6
    
    
    
    (5.4
    )
    
    
    81.3Total current assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    763.7
    
    
    
    143.8
    
    
    
    (5.4
    )
    
    
    902.1Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,166.2
    
    
    
    55.4
    
    
    
    
    
    
    
    1,221.6Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    572.4
    
    
    
    84.8
    
    
    
    
    
    
    
    657.2Intangible assets, net
    
    
    
    
    
    
    41.4
    
    
    
    
    
    
    
    14.7
    
    
    
    13.2
    
    
    
    
    
    
    
    69.3Investments in consolidated
subsidiaries
    
    
    608.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (608.8
    )
    
    
    Investments in auction rate securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19.3
    
    
    
    
    
    
    
    19.3Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.8
    
    
    
    0.1
    
    
    
    
    
    
    
    80.9Total assets
    
    $
    608.8
    
    
    $
    41.4
    
    
    $
    
    
    
    $
    2,597.8
    
    
    $
    316.6
    
    
    $
    (614.2
    )
    
    $
    2,950.4LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    157.0
    
    
    $
    25.5
    
    
    $
    
    
    
    $
    182.5Accrued expenses and other current
liabilities
    
    
    
    
    
    
    26.8
    
    
    
    
    
    
    
    216.9
    
    
    
    180.0
    
    
    
    
    
    
    
    423.7Current maturities of long-term debt
    
    
    
    
    
    
    8.2
    
    
    
    
    
    
    
    (0.2
    )
    
    
    0.2
    
    
    
    
    
    
    
    8.2Total current liabilities
    
    
    
    
    
    
    35.0
    
    
    
    
    
    
    
    373.7
    
    
    
    205.7
    
    
    
    
    
    
    
    614.4Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71.8
    
    
    
    53.7
    
    
    
    (5.4
    )
    
    
    120.1Long-term debt, less current maturities
    
    
    
    
    
    
    1,959.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,959.0Intercompany
    
    
    351.9
    
    
    
    (1,212.7
    )
    
    
    
    
    
    
    1,396.8
    
    
    
    (231.5
    )
    
    
    (304.5
    )
    
    
    Total equity (deficit)
    
    
    256.9
    
    
    
    (739.9
    )
    
    
    
    
    
    
    755.5
    
    
    
    288.7
    
    
    
    (304.3
    )
    
    
    256.9Total liabilities and equity
    
    $
    608.8
    
    
    $
    41.4
    
    
    $
    
    
    
    $
    2,597.8
    
    
    $
    316.6
    
    
    $
    (614.2
    )
    
    $
    2,950.4
  22




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidating Statements of Operations
For the quarter ended September 30, 2009
 Issuers of
    
    
    Issuers ofSenior
    
    
    Senior
    
    
    
    
    
    
    CombinedNotes and
    
    
    Discount
    
    
    Guarantor
    
    
    Non-
    
    
    
    
    
    
    TotalParent
    
    
    Term Debt
    
    
    Notes
    
    
    Subsidiaries
    
    
    Guarantors
    
    
    Eliminations
    
    
    Consolidated(In millions)Patient service revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    576.9
    
    
    $
    45.2
    
    
    $
    (6.5
    )
    
    $
    615.6Premium revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.4
    
    
    
    196.6
    
    
    
    (7.7
    )
    
    
    204.3Total revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    592.3
    
    
    
    241.8
    
    
    
    (14.2
    )
    
    
    819.9Salaries and benefits
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    286.7
    
    
    
    24.1
    
    
    
    
    
    
    
    312.7Health plan claims expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.1
    
    
    
    159.4
    
    
    
    (6.5
    )
    
    
    161.0Supplies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102.3
    
    
    
    8.5
    
    
    
    
    
    
    
    110.8Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34.8
    
    
    
    2.4
    
    
    
    
    
    
    
    37.2Purchased services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41.4
    
    
    
    5.3
    
    
    
    
    
    
    
    46.7Other operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63.8
    
    
    
    17.5
    
    
    
    (7.7
    )
    
    
    73.6Rents and leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.0
    
    
    
    1.9
    
    
    
    
    
    
    
    10.9Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29.9
    
    
    
    3.7
    
    
    
    
    
    
    
    33.6Interest, net
    
    
    
    
    
    
    22.3
    
    
    
    5.8
    
    
    
    (1.6
    )
    
    
    0.7
    
    
    
    
    
    
    
    27.2Management fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.3
    )
    
    
    4.3
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.1Total costs and expenses
    
    
    1.9
    
    
    
    22.3
    
    
    
    5.8
    
    
    
    571.2
    
    
    
    227.8
    
    
    
    (14.2
    )
    
    
    814.8Income (loss) from continuing operations
before income taxes
    
    
    (1.9
    )
    
    
    (22.3
    )
    
    
    (5.8
    )
    
    
    21.1
    
    
    
    14.0
    
    
    
    
    
    
    
    5.1Income tax benefit (expense)
    
    
    (2.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.3
    )
    
    
    4.3
    
    
    
    (2.1
    )Equity in earnings of subsidiaries
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.5
    )
    
    
    Income (loss) from continuing operations
    
    
    1.5
    
    
    
    (22.3
    )
    
    
    (5.8
    )
    
    
    21.1
    
    
    
    9.7
    
    
    
    (1.2
    )
    
    
    3.0Loss from
discontinued
operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Net income (loss)
    
    
    1.5
    
    
    
    (22.3
    )
    
    
    (5.8
    )
    
    
    20.5
    
    
    
    9.7
    
    
    
    (1.2
    )
    
    
    2.4Less: Net income attributable to non-
controlling interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.9
    )
    
    
    
    
    
    
    
    
    
    
    (0.9
    )Net income (loss) attributable to Vanguard
Health Systems, Inc. stockholders
    
    $
    1.5
    
    
    $
    (22.3
    )
    
    $
    (5.8
    )
    
    $
    19.6
    
    
    $
    9.7
    
    
    $
    (1.2
    )
    
    $
    1.5
  23




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidating Statements of Operations
For the quarter ended September 30, 2010
 Issuers of
    
    
    Issuers ofSenior
    
    
    Senior
    
    
    
    
    
    
    CombinedNotes and
    
    
    Discount
    
    
    Guarantor
    
    
    Non-
    
    
    
    
    
    
    TotalParent
    
    
    Term Debt
    
    
    Notes
    
    
    Subsidiaries
    
    
    Guarantors
    
    
    Eliminations
    
    
    Consolidated(In millions)Patient service revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    652.5
    
    
    $
    48.1
    
    
    $
    (7.3
    )
    
    $
    693.3Premium revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.8
    
    
    
    206.7
    
    
    
    (0.9
    )
    
    
    220.6Total revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    667.3
    
    
    
    254.8
    
    
    
    (8.2
    )
    
    
    913.9Salaries and benefits
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    328.4
    
    
    
    25.2
    
    
    
    
    
    
    
    354.8Health plan claims expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.9
    
    
    
    173.5
    
    
    
    (7.3
    )
    
    
    174.1Supplies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112.8
    
    
    
    8.2
    
    
    
    
    
    
    
    121.0Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49.7
    
    
    
    2.1
    
    
    
    
    
    
    
    51.8Purchased services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44.6
    
    
    
    6.4
    
    
    
    
    
    
    
    51.0Other operating expenses
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    61.7
    
    
    
    12.8
    
    
    
    (0.9
    )
    
    
    73.7Rents and leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.2
    
    
    
    1.8
    
    
    
    
    
    
    
    11.0Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34.3
    
    
    
    2.9
    
    
    
    
    
    
    
    37.2Interest, net
    
    
    
    
    
    
    36.2
    
    
    
    
    
    
    
    (2.4
    )
    
    
    1.0
    
    
    
    
    
    
    
    34.8Debt extinguishment costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Management fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.1
    )
    
    
    4.1
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.8
    
    
    
    
    
    
    
    
    
    
    
    4.8Total costs and expenses
    
    
    1.3
    
    
    
    36.2
    
    
    
    
    
    
    
    646.9
    
    
    
    238.0
    
    
    
    (8.2
    )
    
    
    914.2Income (loss) from continuing operations
before income taxes
    
    
    (1.3
    )
    
    
    (36.2
    )
    
    
    
    
    
    
    20.4
    
    
    
    16.8
    
    
    
    
    
    
    
    (0.3
    )Income tax benefit (expense)
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.5
    )
    
    
    5.5
    
    
    
    2.4Equity in earnings of subsidiaries
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Income (loss) from continuing operations
    
    
    1.2
    
    
    
    (36.2
    )
    
    
    
    
    
    
    20.4
    
    
    
    11.3
    
    
    
    5.4
    
    
    
    2.1Income from
discontinued
operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Net income (loss)
    
    
    1.2
    
    
    
    (36.2
    )
    
    
    
    
    
    
    20.5
    
    
    
    11.3
    
    
    
    5.4
    
    
    
    2.2Less: Net income attributable to non-
controlling interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Net income (loss) attributable to Vanguard
Health Systems, Inc. stockholders
    
    $
    1.2
    
    
    $
    (36.2
    )
    
    $
    
    
    
    $
    19.5
    
    
    $
    11.3
    
    
    $
    5.4
    
    
    $
    1.2
  24




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidating Statements of Cash Flows
For the quarter ended September 30, 2009
 Issuers of
    
    
    Issuers ofSenior
    
    
    Senior
    
    
    
    
    
    
    CombinedNotes and
    
    
    Discount
    
    
    Guarantor
    
    
    Non-
    
    
    
    
    
    
    TotalParent
    
    
    Term Debt
    
    
    Notes
    
    
    Subsidiaries
    
    
    Guarantors
    
    
    Eliminations
    
    
    Consolidated(In millions)Operating activities:Net income (loss)
    
    $
    1.5
    
    
    $
    (22.3
    )
    
    $
    (5.8
    )
    
    $
    20.5
    
    
    $
    9.7
    
    
    $
    (1.2
    )
    
    $
    2.4Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activitiesLoss from discontinued
operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.6Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29.9
    
    
    
    3.7
    
    
    
    
    
    
    
    33.6Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34.8
    
    
    
    2.4
    
    
    
    
    
    
    
    37.2Deferred income taxes
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.7Amortization of loan costs
    
    
    
    
    
    
    1.3
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4Accretion of principal on senior discount
notes
    
    
    
    
    
    
    
    
    
    
    5.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.7Stock compensation
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.9Changes in operating assets and liabilities,
net of effects of acquisitions:Equity in earnings of subsidiaries
    
    
    (5.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.5
    
    
    
    Accounts receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34.8
    )
    
    
    (4.7
    )
    
    
    
    
    
    
    (39.5
    )Inventories
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.4
    )Prepaid expenses and other current
assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    10.1
    
    
    
    
    
    
    
    10.3Accounts payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31.6
    
    
    
    8.2
    
    
    
    
    
    
    
    39.8Accrued expenses and other liabilities
    
    
    0.4
    
    
    
    11.2
    
    
    
    
    
    
    
    12.7
    
    
    
    7.1
    
    
    
    (4.3
    )
    
    
    27.1Net cash provided by (used in) operating
activities  continuing operations
    
    
    
    
    
    
    (9.8
    )
    
    
    
    
    
    
    95.2
    
    
    
    36.4
    
    
    
    
    
    
    
    121.8Net cash used in operating
activities  discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Net cash provided by (used in)
operating activities
    
    
    
    
    
    
    (9.8
    )
    
    
    
    
    
    
    95.1
    
    
    
    36.4
    
    
    
    
    
    
    
    121.7
  25




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidating Statements of Cash Flows
For the quarter ended September 30, 2009
(Continued)
 Issuers of
    
    
    Issuers ofSenior
    
    
    Senior
    
    
    
    
    
    
    CombinedNotes and
    
    
    Discount
    
    
    Guarantor
    
    
    Non-
    
    
    
    
    
    
    TotalParent
    
    
    Term Debt
    
    
    Notes
    
    
    Subsidiaries
    
    
    Gurantors
    
    
    Eliminations
    
    
    Consolidated(In millions)Investing activities:Capital expenditures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (31.8
    )
    
    $
    (2.0
    )
    
    $
    
    
    
    $
    (33.8
    )Acquisitions and related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    
    
    
    
    (1.5
    )Proceeds from asset dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Net cash used in investing activities 
continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33.1
    )
    
    
    (2.0
    )
    
    
    
    
    
    
    (35.1
    )Net cash used in investing activities 
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33.1
    )
    
    
    (2.0
    )
    
    
    
    
    
    
    (35.1
    )Financing activities:Payments of long-term debt
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.9
    )Financing portion of hedge interest
payments
    
    
    (2.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.7
    )Cash provided by (used in) intercompany
activity
    
    
    2.7
    
    
    
    11.7
    
    
    
    
    
    
    
    74.8
    
    
    
    (87.7
    )
    
    
    (1.5
    )
    
    
    Distributions paid to non-controlling
interests and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.4
    )
    
    
    1.5
    
    
    
    (0.9
    )Net cash provided by (used in) financing
activities
    
    
    
    
    
    
    9.8
    
    
    
    
    
    
    
    74.8
    
    
    
    (90.1
    )
    
    
    
    
    
    
    (5.5
    )Net increase (decrease) in cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136.8
    
    
    
    (55.7
    )
    
    
    
    
    
    
    81.1Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168.3
    
    
    
    139.9
    
    
    
    
    
    
    
    308.2Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    305.1
    
    
    $
    84.2
    
    
    $
    
    
    
    $
    389.3
  26




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidating Statements of Cash Flows
For the quarter ended September 30, 2010
 Issuers of
    
    
    Issuers ofSenior
    
    
    Senior
    
    
    
    
    
    
    CombinedNotes and
    
    
    Discount
    
    
    Guarantor
    
    
    Non-
    
    
    
    
    
    
    TotalParent
    
    
    Term Debt
    
    
    Notes
    
    
    Subsidiaries
    
    
    Guarantors
    
    
    Eliminations
    
    
    Consolidated(In millions)Operating activities:Net income (loss)
    
    $
    1.2
    
    
    $
    (36.2
    )
    
    $
    
    
    
    $
    20.5
    
    
    $
    11.3
    
    
    $
    5.4
    
    
    $
    2.2Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:Income from discontinued
operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34.3
    
    
    
    2.9
    
    
    
    
    
    
    
    37.2Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49.7
    
    
    
    2.1
    
    
    
    
    
    
    
    51.8Deferred income taxes
    
    
    (3.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.1
    )Amortization of loan costs
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Accretion of principal on senior discount
notes
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7Stock compensation
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Acquisition related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.7
    
    
    
    
    
    
    
    
    
    
    
    3.7Changes in operating assets and liabilities,
net of effects of acquisitions:Equity in earnings of subsidiaries
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Accounts receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57.9
    )
    
    
    (1.8
    )
    
    
    
    
    
    
    (59.7
    )Inventories
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.3
    )Prepaid expenses and other current
assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.1
    )
    
    
    56.2
    
    
    
    
    
    
    
    53.1Accounts payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.8
    )
    
    
    (11.1
    )
    
    
    
    
    
    
    (15.9
    )Accrued expenses and other liabilities
    
    
    0.8
    
    
    
    (14.5
    )
    
    
    
    
    
    
    39.0
    
    
    
    22.8
    
    
    
    (20.0
    )
    
    
    28.1Net cash provided by (used in) operating
activities  continuing operations
    
    
    
    
    
    
    (48.8
    )
    
    
    
    
    
    
    81.3
    
    
    
    82.1
    
    
    
    (14.5
    )
    
    
    100.1Net cash provided by operating
activities  discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Net cash provided by (used in)
operating activities
    
    
    
    
    
    
    (48.8
    )
    
    
    
    
    
    
    81.4
    
    
    
    82.1
    
    
    
    (14.5
    )
    
    
    100.2
  27




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidating Statements of Cash Flows
For the quarter ended September 30, 2010
(Continued)
 Issuers of
    
    
    Issuers ofSenior
    
    
    Senior
    
    
    
    
    
    
    CombinedNotes and
    
    
    Discount
    
    
    Guarantor
    
    
    Non-
    
    
    
    
    
    
    TotalParent
    
    
    Term Debt
    
    
    Notes
    
    
    Subsidiaries
    
    
    Gurantors
    
    
    Eliminations
    
    
    Consolidated(In millions)Investing activities:Capital expenditures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (43.7
    )
    
    $
    (0.9
    )
    
    $
    
    
    
    $
    (44.6
    )Acquisitions and related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49.5
    )
    
    
    
    
    
    
    
    
    
    
    (49.5
    )Sales of auction rate securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Net cash used in investing activities 
continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93.6
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    (94.0
    )Net cash used in investing activities 
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93.6
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    (94.0
    )Financing activities:Payments of long-term debt
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.0
    )Proceeds from debt borrowings
    
    
    
    
    
    
    216.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216.6Payments of refinancing costs and fees
    
    
    
    
    
    
    (5.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.5
    )Distributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.4
    )
    
    
    2.3
    
    
    
    (1.1
    )Cash provided by (used in) intercompany
activity
    
    
    
    
    
    
    (160.3
    )
    
    
    
    
    
    
    197.6
    
    
    
    (49.5
    )
    
    
    12.2
    
    
    
    Net cash provided by (used in) financing
activities
    
    
    
    
    
    
    48.8
    
    
    
    
    
    
    
    197.6
    
    
    
    (52.9
    )
    
    
    14.5
    
    
    
    208.0Net increase in cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185.4
    
    
    
    28.8
    
    
    
    
    
    
    
    214.2Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198.6
    
    
    
    59.0
    
    
    
    
    
    
    
    257.6Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    384.0
    
    
    $
    87.8
    
    
    $
    
    
    
    $
    471.8
  28




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##### Table of Contents



VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 13. SUBSEQUENT EVENT
   29




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward Looking Statements
   
    
    Our high degree of leverage and interest rate risk
    
    Our ability to incur substantially more debt
    
    Operating and financial restrictions in our debt agreements
    
    Our ability to generate cash necessary to service our debt
    
    Weakened economic conditions and volatile capital markets
    
    Potential liability related to disclosures of relationships between physicians and our
hospitals
    
    Post-payment claims reviews by governmental agencies could result in additional costs to
us
    
    Our ability to successfully implement our business strategies
    
    Our ability to grow our business and successfully integrate our recent acquisitions in
Illinois and Arizona, our pending acquisition of the Detroit Medical Center and other
future acquisitions
    
    Potential acquisitions could be costly, unsuccessful or subject us to unexpected
liabilities
    
    Conflicts of interest that may arise as a result of our control by a small number of
stockholders
    
    The highly competitive nature of the healthcare industry
    
    Governmental regulation of the industry, including Medicare and Medicaid reimbursement
levels
    
    Pressures to contain costs by managed care organizations and other insurers and our
ability to negotiate acceptable terms with these third party payers
    
    Our ability to attract and retain qualified management and healthcare professionals,
including physicians and nurses
    
    The currently unknown effect on us of the major federal healthcare reforms enacted by
Congress in March 2010 or other potential additional federal or state healthcare reforms
    
    Current or future governmental reviews and investigations
    
    Our failure to adequately enhance our facilities with technologically advanced equipment
could adversely affect our revenues and market position
    
    Potential lawsuits or other claims asserted against us
    
    The availability of capital to fund our corporate growth strategy
    
    Our ability to maintain or increase patient membership and control costs of our managed
healthcare plans
    
    Our exposure to the increased amounts of and collection risks associated with uninsured
accounts and the co-pay and deductible portions of insured accounts
    
    Dependence on our senior management team and local management personnel
    
    Volatility of professional and general liability insurance for us and the physicians who
practice at our hospitals and increases in the quantity and severity of professional
liability claims
    
    Our ability to maintain and increase patient volumes and control the costs of providing
services, including salaries and benefits, supplies and bad debts
    
    Increased costs from further government regulation of healthcare and our failure to
comply, or allegations of our failure to comply, with applicable laws and regulations
  30




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##### Table of Contents




    
    The geographic concentration of our operations
    
    Technological and pharmaceutical improvements that increase the cost of providing, or
reduce the demand for, healthcare services and shift demand for inpatient services to
outpatient settings
    
    A failure of our information systems would adversely impact our ability to manage our
operations
    
    Material non-cash charges to earnings from impairment of goodwill associated with
declines in the fair market values of our reporting units
    
    Volatility of materials and labor costs for, or state efforts to regulate, potential
construction projects that may be necessary for future growth
    
    Those risk factors set forth in Item 1A of our June 30,
2010 10-K.
  Executive Overview
  MembershipHealth Plan
    
    Location
    
    
    2009
    
    
    2010Phoenix Health Plan (PHP)  managed Medicaid
    
    Arizona
    
    
    192,800
    
    
    
    202,900Abrazo Advantage Health Plan (AAHP)  managed Medicare and Dual Eligible
    
    Arizona
    
    
    2,800
    
    
    
    2,700MacNeal Health Providers (MHP)  capitated outpatient and physician services
    
    Illinois
    
    
    39,000
    
    
    
    36,400234,600
    
    
    
    242,000
   Recent Acquisition Activity
   31




---



##### Table of Contents



Operating Environment
  Payer Mix Shifts
  Health Reform Law
   32




---



##### Table of Contents



Physician Alignment
  Cost pressures
 nd
 Implementation of our Clinical Quality Initiatives
  Sources of Revenues
  
    
    the federal government, primarily under the Medicare program;
    
    state Medicaid programs;
    
    health maintenance organizations, preferred provider organizations, managed Medicare
providers, managed Medicaid providers and other private insurers; and
    
    individual patients
  33




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##### Table of Contents



2009
    
    
    2010Medicare
    
    
    24.3
    %
    
    
    25.4
    %Medicaid
    
    
    7.7
    %
    
    
    7.4
    %Managed Medicare
    
    
    14.6
    %
    
    
    14.8
    %Managed Medicaid
    
    
    10.4
    %
    
    
    9.8
    %Managed care
    
    
    35.0
    %
    
    
    33.9
    %Self pay
    
    
    6.9
    %
    
    
    7.7
    %Other
    
    
    1.1
    %
    
    
    1.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Volumes by Payer
  2009
    
    
    2010Medicare
    
    
    11,107
    
    
    
    26.5
    %
    
    
    12,439
    
    
    
    27.7
    %Medicaid
    
    
    3,592
    
    
    
    8.6
    %
    
    
    4,605
    
    
    
    10.2
    %Managed Medicare
    
    
    6,686
    
    
    
    15.9
    %
    
    
    6,842
    
    
    
    15.2
    %Managed Medicaid
    
    
    6,401
    
    
    
    15.3
    %
    
    
    6,707
    
    
    
    14.9
    %Managed care
    
    
    11,642
    
    
    
    27.8
    %
    
    
    11,654
    
    
    
    25.9
    %Self pay
    
    
    2,264
    
    
    
    5.4
    %
    
    
    2,564
    
    
    
    5.7
    %Other
    
    
    189
    
    
    
    0.5
    %
    
    
    166
    
    
    
    0.4
    %Total
    
    
    41,881
    
    
    
    100.0
    %
    
    
    44,977
    
    
    
    100.0
    %
 Payer Reimbursement Trends
   34




---



##### Table of Contents



Accounts Receivable Collection Risks Leading to Increased Bad Debts
  June 30, 2010
    
    0-90 days
    
    
    91-180 days
    
    
    Over 180 days
    
    
    TotalMedicare
    
    
    17.7
    %
    
    
    0.4
    %
    
    
    0.3
    %
    
    
    18.4
    %Medicaid
    
    
    5.6
    %
    
    
    0.6
    %
    
    
    0.9
    %
    
    
    7.1
    %Managed Medicare
    
    
    11.3
    %
    
    
    0.7
    %
    
    
    0.6
    %
    
    
    12.6
    %Managed Medicaid
    
    
    7.4
    %
    
    
    0.4
    %
    
    
    0.3
    %
    
    
    8.1
    %Managed care
    
    
    27.1
    %
    
    
    1.9
    %
    
    
    1.1
    %
    
    
    30.1
    %Self pay(1)
    
    
    10.2
    %
    
    
    3.1
    %
    
    
    0.7
    %
    
    
    14.0
    %Self pay after primary(2)
    
    
    2.5
    %
    
    
    3.3
    %
    
    
    0.8
    %
    
    
    6.6
    %Other
    
    
    2.1
    %
    
    
    0.6
    %
    
    
    0.4
    %
    
    
    3.1
    %Total
    
    
    83.9
    %
    
    
    11.0
    %
    
    
    5.1
    %
    
    
    100.0
    %
 September 30, 2010
    
    0-90 days
    
    
    91-180 days
    
    
    Over 180 days
    
    
    TotalMedicare
    
    
    19.9
    %
    
    
    0.3
    %
    
    
    0.3
    %
    
    
    20.5
    %Medicaid
    
    
    7.5
    %
    
    
    0.5
    %
    
    
    0.6
    %
    
    
    8.6
    %Managed Medicare
    
    
    10.8
    %
    
    
    0.5
    %
    
    
    0.6
    %
    
    
    11.9
    %Managed Medicaid
    
    
    7.5
    %
    
    
    0.3
    %
    
    
    0.3
    %
    
    
    8.1
    %Managed care
    
    
    26.5
    %
    
    
    1.5
    %
    
    
    1.1
    %
    
    
    29.1
    %Self pay(1)
    
    
    10.1
    %
    
    
    2.8
    %
    
    
    0.8
    %
    
    
    13.7
    %Self pay after primary(2)
    
    
    2.1
    %
    
    
    2.7
    %
    
    
    0.7
    %
    
    
    5.5
    %Other
    
    
    1.7
    %
    
    
    0.5
    %
    
    
    0.4
    %
    
    
    2.6
    %Total
    
    
    86.1
    %
    
    
    9.1
    %
    
    
    4.8
    %
    
    
    100.0
    %
 
 (1)
    
    Includes uninsured patient accounts only.(2)
    
    Includes patient co-insurance and deductible amounts after payment has been received from the primary payer.   Governmental and Managed Care Payer Reimbursement
   35




---



##### Table of Contents



Premium Revenues
   Critical Accounting Policies
  
    
    Revenues and revenue deductions
    
    Allowance for doubtful accounts and provision for doubtful accounts
    
    Insurance reserves
    
    Health plan claims reserves and settlements
    
    Income taxes
    
    Long-lived assets and goodwill
   36




---



##### Table of Contents



Selected Operating Statistics
  Quarter endedSeptember 30,2009
    
    
    2010CONSOLIDATED:Number of hospitals at end of period
    
    
    15
    
    
    
    17Licensed beds at end of period
    
    
    4,135
    
    
    
    4,490Discharges (a)
    
    
    41,881
    
    
    
    44,977Adjusted discharges (a)
    
    
    73,950
    
    
    
    80,858Adjusted discharges  hospitals (a)
    
    
    70,123
    
    
    
    76,683Average length of stay (a)
    
    
    4.11
    
    
    
    4.15Patient days (a)
    
    
    171,972
    
    
    
    186,448Adjusted patient days (a)
    
    
    303,654
    
    
    
    335,188Adjusted patient days  hospitals (a)
    
    
    287,938
    
    
    
    317,881Patient revenue per adjusted discharge (a)
    
    $
    8,145
    
    
    $
    8,388Patient revenue per adjusted discharge  hospitals (a)
    
    $
    8,236
    
    
    $
    8,432Inpatient surgeries (a)
    
    
    9,508
    
    
    
    9,759Outpatient surgeries (a)
    
    
    19,317
    
    
    
    19,402Emergency room visits (a)
    
    
    154,909
    
    
    
    173,443Occupancy rate (a)
    
    
    45.2
    %
    
    
    45.1
    %Member lives (a)
    
    
    234,600
    
    
    
    242,000Health plan claims expense percentage (a)
    
    
    78.8
    %
    
    
    78.9
    %
 Quarter endedSeptember 30,2009
    
    
    2010SAME HOSPITAL:Number of hospitals at end of period
    
    
    15
    
    
    
    15Licensed beds at end of period
    
    
    4,135
    
    
    
    4,032Total revenues (in millions)
    
    $
    819.9
    
    
    $
    868.0Discharges
    
    
    41,881
    
    
    
    42,005Adjusted discharges
    
    
    73,950
    
    
    
    75,592Adjusted discharges  hospitals
    
    
    70,123
    
    
    
    71,572Average length of stay
    
    
    4.11
    
    
    
    4.12Patient days
    
    
    171,972
    
    
    
    172,976Adjusted patient days
    
    
    303,654
    
    
    
    311,288Adjusted patient days  hospitals
    
    
    287,938
    
    
    
    294,733Patient revenue per adjusted discharge
    
    $
    8,145
    
    
    $
    8,395Patient revenue per adjusted discharge  hospitals
    
    $
    8,236
    
    
    $
    8,452Inpatient surgeries
    
    
    9,508
    
    
    
    9,128Outpatient surgeries
    
    
    19,317
    
    
    
    18,343Emergency room visits
    
    
    154,909
    
    
    
    160,880Occupany rate
    
    
    45.2
    %
    
    
    46.6
    %
 
 (a)
    
    The definitions for the statistics included above are set forth in
Part 2, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, Selected Operating Statistics
in our June 30, 2010 10-K.  37




---



##### Table of Contents



Results of Operations
  2009
    
    
    2010Patient service revenues
    
    $
    615.6
    
    
    
    75.1
    %
    
    $
    693.3
    
    
    
    75.9
    %Premium revenues
    
    
    204.3
    
    
    
    24.9
    %
    
    
    220.6
    
    
    
    24.1
    %Total revenues
    
    
    819.9
    
    
    
    100.0
    %
    
    
    913.9
    
    
    
    100.0
    %Costs and expenses:Salaries and benefits (includes stock
compensation of $1.9 and $1.2,
respectively)
    
    
    312.7
    
    
    
    38.1
    %
    
    
    354.8
    
    
    
    38.8
    %Health plan claims expense
    
    
    161.0
    
    
    
    19.6
    %
    
    
    174.1
    
    
    
    19.1
    %Supplies
    
    
    110.8
    
    
    
    13.5
    %
    
    
    121.0
    
    
    
    13.2
    %Provision for doubtful accounts
    
    
    37.2
    
    
    
    4.5
    %
    
    
    51.8
    
    
    
    5.7
    %Other operating expenses
    
    
    131.2
    
    
    
    16.0
    %
    
    
    135.7
    
    
    
    14.8
    %Depreciation and amortization
    
    
    33.6
    
    
    
    4.2
    %
    
    
    37.2
    
    
    
    4.1
    %Interest, net
    
    
    27.2
    
    
    
    3.3
    %
    
    
    34.8
    
    
    
    3.8
    %Other
    
    
    1.1
    
    
    
    0.1
    %
    
    
    4.8
    
    
    
    0.5
    %Income (loss) from continuing operations
before income taxes
    
    
    5.1
    
    
    
    0.6
    %
    
    
    (0.3
    )
    
    
    (0.0
    )%Income tax benefit (expense)
    
    
    (2.1
    )
    
    
    (0.3
    )%
    
    
    2.4
    
    
    
    0.3
    %Income from continuing operations
    
    
    3.0
    
    
    
    0.4
    %
    
    
    2.1
    
    
    
    0.3
    %Income (loss) from discontinued operations
net of taxes
    
    
    (0.6
    )
    
    
    (0.1
    )%
    
    
    0.1
    
    
    
    0.0
    %Net income
    
    
    2.4
    
    
    
    0.3
    %
    
    
    2.2
    
    
    
    0.2
    %Less: Net income attributable to
non-controlling interests
    
    
    (0.9
    )
    
    
    (0.1
    )%
    
    
    (1.0
    )
    
    
    (0.1
    )%Net income attributable to Vanguard
Health Systems, Inc. stockholders
    
    $
    1.5
    
    
    
    0.3
    %
    
    $
    1.2
    
    
    
    0.2
    %
  38




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##### Table of Contents



Quarter ended September 30, 2010 compared to Quarter ended September 30, 2009
 Revenues
   Costs and expenses
 
    
    Salaries and benefits. Salaries and benefits as a percentage of
total revenues increased to 38.8% during the current year
quarter compared to 38.1% for the prior year quarter. We
continue to employ more physicians to support the communities
our hospitals serve and have made significant investments in
clinical quality initiatives that required additional human
resources during the quarter ended September 30, 2010 compared
to the prior year quarter. As of September 30, 2010, we had
approximately 22,400 full-time and part-time employees compared
to approximately 19,400 as of September 30, 2009. On a same
hospital basis, the number of full-time and part-time employees
increased 3.8% during the quarter ended September 30, 2010
compared to the prior year quarter. We have been successful in
limiting contract labor utilization as a result of our
investments in clinical quality and nurse leadership
initiatives. Our contract labor expense as a percentage of
patient service revenues continued its downward trend to 0.8%
for the quarter ended September 30, 2010 compared to 1.4% for
the prior year quarter.
    
    Health plan claims. Health plan claims expense as a percentage
of premium revenues was flat quarter over quarter. However, as
enrollment increases, this ratio becomes especially sensitive to
the mix of members, including covered groups based upon age and
gender and county of residence. We may experience negative
trending in this ratio if our membership mix becomes more acute
or AHCCCS implements further limits on profitability for certain
member groups during the remaining term of the AHCCCS contract.
Revenues and expenses between the health plans and our hospitals
and related outpatient service providers of approximately $10.8
million, or 5.8% of gross health plan claims expense, were
eliminated in consolidation during the current year quarter.
  39




---



##### Table of Contents




    
    Supplies. Supplies as a percentage of acute care services
segment revenues decreased to 17.2% during the current year
quarter compared to 17.7% during the prior year quarter. This
decrease was positively impacted by the lower surgery volumes
experienced during the current year quarter compared to the
prior year quarter. We also continued our focus on supply chain
efficiencies including reduction in physician commodity
variation and improved pharmacy formulary management during the
current year quarter. Our ability to reduce this ratio in future
years may be limited because our growth strategies include
expansion of higher acuity services and due to inflationary
pressures on medical supplies and pharmaceuticals.
 
    
    Provision for doubtful accounts. The provision for doubtful
accounts as a percentage of acute care services segment revenues
increased to 7.4% during the current year quarter from 5.9%
during the prior year quarter. On a combined basis, the
provision for doubtful accounts, charity care deductions and
uninsured discounts as a percentage of acute care services
segment revenues (prior to these revenue deductions) was 17.0%
and 17.5% for the quarters ended September 30, 2009 and 2010,
respectively. The quarter over quarter increases in these ratios
resulted from increases in self pay discharges as a percentage
of total discharges and price increases implemented during the
current year quarter compared to the prior year quarter.
 Other operating expenses
 Other
 Income taxes
 Net income attributable to Vanguard Health Systems, Inc. stockholders
 Liquidity and Capital Resources
 Operating Activities
   40




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Investing Activities
  Financing Activities
  The Refinancing
     41




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##### Table of Contents



Debt Covenants
  Debt
    
    
    ActualCovenant Ratio
    
    
    RatioInterest coverage ratio requirement
    
    
    2.00
    x
    
    
    2.89
    xTotal leverage ratio limit
    
    
    6.25
    x
    
    
    4.24
    x
  Credit Ratings
  Standard & Poors
    
    
    MoodysCorporate credit rating
    
    B
    
    
    B28.0% Notes
    
    B-
    
    
    B32010 credit facilities
    
    BB-
    
    
    Ba2
  Capital Resources
   42




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##### Table of Contents




    
    Completed acquisition of Westlake Hospital and West Suburban Medical CenterOn August
1, 2010, we acquired two acute care hospitals and associated outpatient facilities in
Illinois from Resurrection Health Care. Located in the western suburbs of Chicago, the
hospitals are 234-bed West Suburban Medical Center in Oak Park, Illinois and 225-bed
Westlake Hospital in Melrose Park, Illinois for a cash purchase price of approximately
$45.3 million.
    
    Completed acquisition of Arizona Heart Hospital and Arizona Heart Institute In
October 2010, we completed the purchase of certain assets and liabilities of the Arizona
Heart Hospital and of the Arizona Heart Institute, both located in Phoenix, Arizona, for an
aggregate purchase price of approximately $39.0 million. We expect these acquisitions to
provide us a base upon which to expand our cardiology service offerings in the metropolitan
Phoenix market.
    
    Pending acquisition of DMC On June 10, 2010, we entered into a definitive agreement
to purchase DMC, which owns and operates eight hospitals in and around Detroit, Michigan
with 1,734 licensed beds for an expected cash purchase price of approximately $391.0
million, as previously discussed.
  43




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##### Table of Contents



Obligations and Commitments
  Payments due by periodWithin
    
    
    During
    
    
    During
    
    
    After1 year
    
    
    Years 2-3
    
    
    Years 4-5
    
    
    5 Years
    
    
    Total(In millions)Contractual Cash Obligations:Long-term debt (1)
    
    $
    166.9
    
    
    $
    331.9
    
    
    $
    329.3
    
    
    $
    2,218.3
    
    
    $
    3,046.4Operating leases (2)
    
    
    29.7
    
    
    
    47.1
    
    
    
    32.0
    
    
    
    28.0
    
    
    
    136.8Purchase obligations (2)
    
    
    36.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36.8Health plan claims and settlements payable (3)
    
    
    171.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171.8Estimated self-insurance liabilities (4)
    
    
    42.7
    
    
    
    37.4
    
    
    
    24.3
    
    
    
    26.2
    
    
    
    130.6Subtotal
    
    $
    447.9
    
    
    $
    416.4
    
    
    $
    385.6
    
    
    $
    2,272.5
    
    
    $
    3,522.4
 Payments due by periodWithin
    
    
    During
    
    
    During
    
    
    After1 year
    
    
    Years 2-3
    
    
    Years 4-5
    
    
    5 Years
    
    
    Total(In millions)Other Commitments:Construction and capital improvements (5)
    
    $
    52.5
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    
    
    
    $
    52.6Guarantees of surety bonds (6)
    
    
    50.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50.0Letters of credit (7)
    
    
    
    
    
    
    
    
    
    
    28.3
    
    
    
    
    
    
    
    28.3Physician commitments (8)
    
    
    3.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.4Estimated liability for uncertain tax positions (9)
    
    
    11.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.9Subtotal
    
    $
    117.8
    
    
    $
    0.1
    
    
    $
    28.3
    
    
    $
    
    
    
    $
    146.2Total obligations and commitments
    
    $
    565.7
    
    
    $
    416.5
    
    
    $
    413.9
    
    
    $
    2,272.5
    
    
    $
    3,668.6
 
 (1)
    
    Includes both principal and interest payments. The interest portion of
our debt outstanding at September 30, 2010 assumes an average interest
rate of 8.0%.(2)
    
    These obligations are not reflected in our condensed consolidated balance sheets.(3)
    
    Represents health claims incurred by members of PHP, AAHP and MHP,
including incurred but not reported claims, and net amounts payable
for program settlements to AHCCCS and CMS for certain programs for
which profitability is limited. Accrued health plan claims and
settlements is separately stated on our condensed consolidated balance sheets.(4)
    
    Includes the current and long-term portions of our professional and
general liability, workers compensation and employee health reserves.(5)
    
    Represents our estimate of amounts we are committed to fund in future
periods through executed agreements to complete projects included as
construction in progress on our condensed consolidated balance sheets. The
construction and capital improvements obligations, adjusted to reflect
capital commitments under the executed DMC Purchase Agreement (as
previously discussed) would be increased by the following as of
September 30, 2010: $150.0 million committed within one year; $300.0
million committed within two to three years and $400.0 million
committed within four to five years.(6)
    
    Represents performance bonds we have purchased related to health
claims liabilities of PHP. The performance bonds were increasesd to
$55.0 million subsequent to September 30, 2010.(7)
    
    Amounts relate primarily to instances in which we have letters of
credit outstanding with the third party administrator of our
self-insured workers compensation program.(8)
    
    Includes physician guarantee liabilities recognized in our
condensed consolidated balance sheets under the guidance of accounting for
guarantees and liabilities for other fixed expenses under physician
relocation agreements not yet paid.(9)
    
    Represents expected future tax liabilities recognized in our
condensed consolidated balance sheets determined under the guidance of
accounting for income taxes.  44




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
      
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Control and Procedures
  Changes in Internal Control Over Financial Reporting
   45




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Self-Disclosure of Employment of Excluded Persons
  New DOJ Enforcement Initiative: Medicare Billing for Implantable Cardioverter Defibrillators
(ICDs)
    
 Item 6. Exhibits.
   46




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##### Table of Contents



SIGNATURE
  DATE: November 9, 2010
    VANGUARD HEALTH SYSTEMS, INC.By:
    /s/ Gary D. WillisGary D. WillisSenior Vice President, Controller and
Chief Accounting Officer
(Authorized Officer and
Chief Accounting Officer)  47




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description2.1
    
    
    Letter Agreement dated July 16, 2010, amending Section 5.2(b)
of that certain Purchase and Sale Agreement dated as of June
10, 2010, by and among The Detroit Medical Center,
Harper-Hutzel Hospital, Detroit Receiving Hospital and
University Health Center, Childrens Hospital of Michigan,
Rehabilitation Institute, Inc., Sinai Hospital of Greater
Detroit, Huron Valley Hospital, Inc., Detroit Medical Center
Cooperative Services, DMC Orthopedic Billing Associates, LLC,
Metro TPA Services, Inc. and Michigan Mobile PET CT, LLC
(collectively, as Seller) and VHS of Michigan, Inc., VHS
Harper-Hutzel Hospital, Inc., VHS Detroit Receiving Hospital,
Inc., VHS Childrens Hospital of Michigan, Inc., VHS
Rehabilitation Institute of Michigan, Inc., VHS Sinai-Grace
Hospital, Inc., VHS Huron Valley-Sinai Hospital, Inc., VHS
Detroit Businesses, Inc. and VHS Detroit Ventures, Inc.
(collectively, as Buyer) and Vanguard Health Systems, Inc.4.1
    
    
    Third Supplemental Indenture, dated as of August 18, 2010,
relating to the 8% Senior Notes due 2018, among VHS Westlake
Hospital, Inc., VHS West Suburban Medical Center, Inc., VHS
Acquisition Subsidiary Number 4, Inc., Midwest Pharmacies,
Inc., Vanguard Health Holding Company II, LLC, Vanguard
Holding Company II, Inc., Vanguard Health Systems, Inc., the
other guarantors named therein and U.S. Bank National
Association, as trustee10.1
    
    
    Contract Amendment Number 10, executed on September 9, 2010,
but effective as of October 1, 2010, to the Arizona Health
Care Cost Containment System Administration Contract No.
YH09-0001-07 between VHS Phoenix Health Plan, LLC and the
Arizona Health Care Cost Containment System31.1
    
    
    Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    
    Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    
    Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    
    Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
  48