This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the federal securities laws that are intended to be covered by safe harbors created thereby. Forward-looking statements are those statements that are based upon management’s plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. These statements are based upon estimates and assumptions made by our management that, although believed to be reasonable, are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. When used in this Annual Report on Form 10-K, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “continues,” or future or conditional verbs, such as “will,” “should,” “could” or “may,” and variations of such words or similar expressions are intended to identify forward-looking statements.
We recommend reading the following discussion together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K and the information set forth under “Item 6 - Selected Financial Data.” The discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.
We also continue to pursue the expansion of certain strategic health risk products, through either acquisition or partnership opportunities, to leverage the skill sets we have within our existing health plans. Further, in our existing markets, we are pursuing the acquisition or development of ambulatory care facilities, such as ambulatory surgery centers, home health agencies, cancer centers and imaging centers, in an attempt to create a more comprehensive network of health care services. Management believes that the added focus on ambulatory care, together with the addition of new risk-based initiatives, will enable us to take advantage of future opportunities in a fee-for-value era.
The development of professional and general liability reserve estimates includes multiple judgments and assumptions, including the significant amount of time between the occurrence giving rise to the claim and the ultimate resolution of the claim (the tail period), the severity of individual claims based upon circumstances specific to each claim, determinations of the appropriate weighting of Company-specific and industry data, projections of adverse developments on reported claims, and differences between actual and expected judicial outcomes. While we believe our rigorous and consistent risk management processes and industry knowledge, our extensive historical claims experience and actuarial reports enable us to reliably estimate our professional and general liability reserves, events may occur that could materially change our current estimates.
determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the estimated fair value of
Health plan claims. Health plan claims expense as a percentage of premium revenues was 78.3% during the current year compared to 76.4% during the prior year. As enrollment increases, this ratio becomes increasingly sensitive to the mix of members, including covered groups based upon age and gender and county of residence. The increase during the current year related primarily to PHP provider rate increases for certain services, most of which were implemented effective April 1, 2013, and changes in actuarial assumptions related to the acuity of certain member groups. Regulators also implemented limits on profitability for certain member groups during the prior contract year, the impact of which was fully recognized during the current year. Revenues and expenses between the health plans and our hospitals and related outpatient service providers of approximately $40.1 million, or 6.5% of gross health plan claims expense, were eliminated in consolidation during the current year compared to $42.4 million, or 6.8% of gross health plan claims expense, during the prior year.
Year ended June 30, 2012 compared to Year ended June 30, 2011
Health plan claims. Health plan claims expense as a percentage of premium revenues was 76.4% during the year ended June 30, 2012 compared to 78.9% during the prior year. Revenues and expenses between the health plans and our hospitals and related outpatient service providers of approximately $42.4 million, or 6.8% of gross health plan claims expense, were eliminated in consolidation during the year ended June 30, 2012 compared to $41.3 million, or 5.7% of gross health plan claims expense, during 2011.
As of June 30, 2013 we had working capital of $644.2 million, including cash and cash equivalents of $624.0 million, compared to $594.3 million, including cash and cash equivalents of $455.5 million, as of June 30, 2012. Cash flows from operating activities were $300.8 million during the year ended June 30, 2013 compared to $113.6 million during the year ended June 30, 2012. Net operating assets and liabilities, excluding the impact of acquisitions, negatively impacted operating cash flows by $64.8 million during the year ended June 30, 2013 compared to a negative impact of $292.8 million during year ended June 30, 2012. Cash flows from operations during the year ended June 30, 2013 were impacted by the following payments, receipts and other working capital changes:
Pending CMS's issuance of new SSI ratios for FFY 2006 forward, the Company had utilized the SSI ratios that were most recently provided by CMS in filing its hospital cost reports. The cumulative impact of this updated Medicare reimbursement estimate was an increase in revenues of approximately $9.1 million and an increase to net income attributable to Vanguard Health Systems, Inc. stockholders of $5.3 million ($0.07 per diluted share) for the year ended June 30, 2012. CMS issued further SSI updates for FFY 2011 during June 2013. This update did not have a significant impact on the Company's operating results for the year ended June 30, 2013.
A summary of the Company’s allowance for doubtful accounts activity, including those for discontinued operations, during the three most recent years follows (in millions).
The significant increase in the Company's allowance for doubtful accounts as of June 30, 2011 and 2012 was primarily due to the acquisitions of The Detroit Medical Center ("DMC"), effective January 1, 2011, and Valley Baptist Medical Center, effective September 1, 2011. In addition to these acquisitions, general market and economic conditions impacted the Company's payer mix and resulted in more services provided to patients who were uninsured, which increased the Company's allowance for doubtful accounts in the periods presented.
million net of taxes or $0.11 per diluted share) and $1.7 million ($1.0 million net of taxes or $0.01 per diluted share), respectively. Additional adjustments to prior year estimates may be necessary in future periods as more information becomes available.
The Company's redeemable noncontrolling interest (“RNCI”) resulted from this put option. The carrying value of the RNCI has been determined based upon the calculated fair value as of June 30, 2013 of the seller's interest in the partnership and the fair value of its put option amortized through the first available exercise date, each such fair value based upon Level 3 estimates of future operating results of the partnership. For each reporting period through the third anniversary of the acquisition, the Company accretes the carrying value of the RNCI up to the expected redemption value as of September 1, 2014. The RNCI balance increased from $53.1 million at June 30, 2012 to $61.8 million at June 30, 2013 by the amount of the accretion recognized during the year ended June 30, 2013. If the seller exercises its put option, the Company may purchase the non-controlling interest with cash or by issuing stock. It is the Company’s intent to settle the exercise of the put or call option in cash. If the put option were to be settled in shares, approximately 5,434,000 shares of the Company’s common stock would be required to be issued based upon the closing price of the Company’s common stock on June 28, 2013.
During the year ended June 30, 2011, the Company determined that a $0.9 million ($0.6 million net of taxes or $0.01 per diluted share) impairment charge was necessary to write-down the book value of real property associated with a hospital that was being replaced in the Texas market to estimated fair value based on significant unobservable inputs (Level 3). The remaining net impairment and restructuring charges for the year ended June 30, 2011 included approximately $5.1 million ($3.1 million net of taxes or $0.07 per diluted share) of restructuring charges related to employee severance and related costs incurred during 2011.
Any excess of the purchase price allocation over the fair values of the assets acquired, liabilities assumed and non-controlling interests is recorded as goodwill. The table below summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in millions):
As of June 30, 2013, the Company held $59.1 million in total available-for-sale investments in cash and cash equivalents, debt securities and equity securities, which are included in investments in securities on the accompanying consolidated balance sheets. The investments in securities are held by the Company's wholly-owned captive insurance subsidiary for the purpose of providing a potential funding source to pay professional liability claims covered by the captive insurance subsidiary. The Company may not be able to utilize these investments to fund its other operating or capital expenditure needs due to statutory limitations placed on the captive insurance subsidiary.
The Company has $79.4 million of goodwill related to PHP, which is included in the Company's health plan services segment. PHP's current contract with AHCCCS, expires September 30, 2013. On March 22, 2013, the Company was notified that PHP was not awarded an acute care program contract with AHCCCS for the three-year period commencing October 1, 2013. However, on April 1, 2013, PHP agreed with AHCCCS on the general terms of a capped contract for Maricopa County for the three-year period commencing October 1, 2013. Approximately 98,000 of PHP's members resided in Maricopa County as of June 30, 2013. Pursuant to the terms of PHP's agreement with AHCCCS, PHP will not file a protest of any of the AHCCCS decisions. In addition, PHP agreed that enrollment will be capped effective October 1, 2013 and the enrollment cap will not be lifted at any time during the total contracting period, unless AHCCCS deems additional plan capacity necessary based upon growth in covered lives or other reasons as outlined in a letter provided by AHCCCS that clarifies certain terms of the capped contract. AHCCCS has also indicated that it intends to hold an open enrollment for PHP members in Maricopa County sometime in calendar year 2014. The Company will continue to monitor the projections of future cash flows in the health plan reporting unit as impacted by this contractual change. The Company's calculations used to determine the fair value of the health plan reporting unit require significant judgment, assumptions, and estimation, the most significant of which is projected membership levels, and may be revised in the future as additional information becomes available. If these estimates and assumptions prove to be materially inaccurate, an impairment charge could be required in a future period.
As of June 30, 2012 and June 30, 2013, the Company had other non-current liabilities of $174.7 million and $117.2 million, respectively, in other liabilities on the accompanying consolidated balance sheets. During the year ended June 30, 2013, the Company paid resident FICA claims of $39.5 million using proceeds from a settlement with the Internal Revenue Service.
The restricted shares were issued by the Company as a result of the Holdings Merger in June 2011. The restricted shares vested in September 2012. The following table summarizes restricted share activity during the year ended June 30, 2013.
For the calendar year 2011 capital commitment, the $80.0 million specific projects capital commitment was not met; therefore, in February 2012, the Company deposited $41.8 million of cash into a restricted escrow account. During the 2012
On April 8, 2013, the Company was made aware of a civil action against it that was originally filed under seal on June 25, 2012 in the U.S. District Court for the District of Arizona. This action was brought by Shanna Woyak as a private party “qui tam relator” on behalf of the federal government.
This quarterly amount includes a charge of $38.9 million ($25.3 million or $0.32 per diluted share net of taxes) related to the debt extinguishment costs recognized in connection with the majority redemption of the Senior Discount Notes.