Many payers, including Medicare and several large managed care organizations, currently require providers to report certain quality measures in order to receive the full amount of payment increases that were awarded automatically in the past. For federal fiscal year 2009, Medicare expanded the number of quality measures to be reported to 42 compared to 30 during federal fiscal year 2008, 21 during federal fiscal year 2007 and 10 during
While self-pay accounts receivable as a percentage of total accounts receivable at June 30, 2008 decreased relative to the prior year period, self-pay accounts receivable dollars have remained flat compared to the prior year period and have become more difficult to collect. The volume of self-pay accounts receivable remains sensitive to a combination of factors including price increases, acuity of services, higher levels of patient deductibles and co-insurance under managed care plans, economic factors and the increased difficulties of uninsured patients who do not qualify for charity care programs to pay for escalating healthcare costs. We have implemented policies and procedures designed to expedite upfront cash collections and promote repayment plans from our patients. Our upfront cash collections from continuing operations increased 4.8% during fiscal 2008 compared to fiscal 2007. However, we believe bad debts will remain a significant risk for us and the rest of the hospital industry during the foreseeable future.
Effective July 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”). In connection with the adoption of FIN 48, we recorded a $0.4 million net liability for unrecognized tax benefits, accrued interest and penalties, which was comprised of the following (in millions).
Medical claims expense percentage is calculated by dividing medical claims expense by premium revenues.
At June 30, 2008, we had working capital of $217.8 million, including cash and cash equivalents of $141.6 million. Working capital at June 30, 2007 was $156.4 million. Cash provided by operating activities increased from $123.3 million during fiscal 2007 to $173.1 million during fiscal 2008. The significant increase was primarily due to improved operating results, improved collections of outstanding receivables and more efficient cash management processes.
As of June 30, 2008, Vanguard maintained self-insured medical and dental plans for a limited number of its employees. Claims are accrued under the self-insured plans as the incidents that give rise to them occur. Unpaid claims accruals are based on the estimated ultimate cost of settlement, including claim settlement expenses, in accordance with an average lag time and historical experience. The reserve for self-insured medical and dental plans was approximately $1.2 million and $1.5 million as of June 30, 2007 and 2008, respectively, and is included in accrued salaries and benefits in the accompanying consolidated balance sheets. Effective July 1, 2008, Vanguard began covering all of its employees under its self-insured medical and dental plans, which will subject it to higher risks and reserve levels. Vanguard mitigated this risk by purchasing stop-loss coverage for catastrophic claims at a $500,000 per enrollee annual limit.
Amortization expense for the contract-based intangibles, which represent PHP’s contract with AHCCCS and PHP’s various contracts with network providers, during each of the years ended June 30, 2006, 2007 and 2008 was approximately $3.2 million. Vanguard expects amortization expense for the contract intangible assets to approximate $3.2 million during each of the fiscal years ending June 30, 2009 through June 30, 2012. Amortization of deferred loan costs of $4.0 million, $4.4 million and $4.9 million during the years ended June 30, 2006, 2007 and 2008, respectively, is included in net interest. Amortization of physician income and other guarantees of $0.2 million, $5.1 million and $6.7 million during the years ended June 30, 2006, 2007 and 2008, respectively, is included in purchased services or other operating expenses. The useful lives over which intangible assets are amortized range from two years to eleven years. The following table presents the changes in the carrying amount of goodwill from June 30, 2006 through June 30, 2008 (in millions).
Prior to October 1, 2009, the Discount Issuers may redeem the 11.25% Notes, in whole or in part, at a price equal to 100% of the accreted value thereof, plus accrued and unpaid interest, plus a make-whole premium. On or after October 1, 2009, the Discount Issuers may redeem all or a part of the 11.25% Notes at various redemption prices given the date of redemption as set forth in the indenture governing the 11.25% Notes. The initial redemption price for the 11.25% Notes on October 1, 2009 is equal to 105.625% of their principal amount, plus accrued and unpaid interest. The redemption price declines each year after 2009. The redemption price will be 100% of the principal amount, plus accrued and unpaid interest, beginning on October 1, 2012.
The increases in the valuation allowance during all three years presented result from state net operating loss carryforwards that may not ultimately be utilized because of the uncertainty regarding Vanguard’s ability to generate taxable income in certain states. The effective income tax rate differed from the federal statutory rate for the years ended June 30, 2006, 2007 and 2008 as follows:
Net non-current deferred tax assets of $52.7 million and $42.4 million as of June 30, 2007 and 2008, respectively, are included in the accompanying consolidated balance sheets in other assets. Net current deferred tax assets were $8.9 million and $24.5 million as of June 30, 2007 and 2008, respectively.
Approximately $0.3 million of the $0.4 million of unrecognized tax benefits existing upon adoption of FIN 48, if recognized, would impact the effective tax rate, while the remaining $0.1 million of unrecognized tax benefits, if recognized, would increase goodwill. The unrecognized tax benefits increased by $0.2 million during the year ended June 30, 2008 to $0.6 million. Due to the insignificant changes in Vanguard’s unrecognized tax benefits during the year ended June 30, 2008, a tabular reconciliation is not warranted.
During the years ended June 30, 2006, 2007 and 2008, rent expense was approximately $33.9 million, $37.4 million and $41.8 million, respectively.