See “Item 1. Business-Sources of Revenues” included elsewhere in this Annual Report on Form 10-K for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan (both for inpatient and outpatient services), managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In that section, we also discuss the unique reimbursement features of the traditional Medicare plan, including disproportionate share, outlier cases and direct graduate and indirect medical education, including the annual Medicare regulatory updates published by CMS in August 2012 that impact reimbursement rates under the plan for services provided during the FFY beginning October 1, 2012 and the impact of the Health Reform Law on these reimbursements.
Similar to the Arizona reimbursement cuts, in July 2011, the Texas Health and Human Services Commission (“HHSC”) issued a final rule implementing a statewide acute care hospital inpatient Standard Dollar Amount (“SDA”) rate along with an 8% reduction in Medicaid hospital outpatient reimbursement. The MS-DRG relative weights were also rebased concurrent with the SDA rate change. In June 2012, HHSC submitted a proposed regulation to transition from the use of MS-DRGs to the All
Our Texas hospitals participate in private supplemental Medicaid reimbursement programs that are structured to expand the community safety net by providing indigent healthcare services and result in additional revenues for participating hospitals. CMS approved a Medicaid waiver in December 2011 that allows Texas to continue receiving supplemental Medicaid reimbursement while expanding its managed Medicaid program. The Texas HHSC issued a final rule, effective July 1, 2012, which implements the provider eligibility requirements and payment methodologies approved by CMS under the waiver. The method by which the Bexar County, Texas supplemental Medicaid reimbursement programs will be administered, effective for periods subsequent to July 1, 2012, will be different from the historical method of administration. This change may result in decreased reimbursement to our San Antonio hospitals under these programs. For the year ended June 30, 2012, our San Antonio hospitals recognized approximately $26.1 million in net patient service revenues and incurred $3.6 million of expenses related to these programs. While we currently do not expect these changes to significantly impact these reimbursement programs for the counties served by our Valley Baptist hospitals, we cannot be certain that these reimbursements will not also be negatively impacted. From the date of acquisition (September 1, 2011) through June 30, 2012, we recognized $15.7 million of net patient service revenues and incurred $7.6 million of expenses related to these programs at our Valley Baptist hospitals.
Through the period ended June 30, 2010, we insured our excess professional and general liability coverage under a retrospectively rated policy, and premiums under this policy were recorded at the minimum premium. We self-insure our workers compensation claims ranging from $0.6 million to $1.0 million per claim and purchase excess insurance coverage for claims exceeding the self-insured limits.
Salaries and benefits. Salaries and benefits as a percentage of total revenues increased to 46.2% during the current year compared to 44.1% for the prior year primarily due to the decrease in health plan premium revenues for which salaries and benefits are not as significant as for acute care services. On a same store basis, salaries and benefits as a percentage of total revenues was 41.6% during the current year compared to 40.2% for the prior year. 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 current year. For the acute care services operating segment, salaries and benefits as a percentage of patient service revenues was 51.6% during the current year compared to 52.8% during the prior year. As of June 30, 2012, we had approximately 49,900 full-time and part-time employees compared to approximately 38,600 as of June 30, 2011. On a same store basis, including corporate and regional employees, the number of full-time and part-time employees remained flat when compared to the prior year. We have been successful in limiting contract labor utilization as a result of our investments in clinical quality and nurse leadership initiatives. On a same store basis, our contract labor expense as a percentage of net patient service revenues slightly declined to 0.8% for the current year compared to 0.9% for the prior year.
Cash flows used in investing activities decreased from $544.9 million during the fiscal year ended June 30, 2011 to $513.2 million during the fiscal year ended June 30, 2012, primarily as a result of less cash paid for acquisitions. We spent $464.9 million to complete the acquisitions of DMC in January 2011 (funded in December 2010), the Resurrection Facilities in August 2011 and Arizona Heart Hospital in October 2011 compared to $212.9 million spent during the fiscal year ended June 30, 2012 primarily for the acquisition of Valley Baptist in September 2011 (funded in August 2011). Capital expenditures increased $86.8 million during the current year compared to the prior year. We also recognized a net cash outflow of approximately $20.3 million for cash deposited into an escrow fund for the DMC specified project capital commitment related to calendar year 2011 of $41.8 million, net of $21.5 million released from escrow through June 30, 2012 related to capital expended for these commitments subsequent to December 2011. Through June 30, 2012 we have spent approximately $160.3 million toward our DMC five-year $850.0 million capital commitment, including approximately $74.2 million of the specified project commitment of $500.0 million.
The related litigation was settled in April 2012. As a result of the settlement, the Company received additional Medicare payments of approximately $40.6 million in May and June 2012. This amount was recorded as additional revenues during the fiscal year ended June 30, 2012. Estimated direct related expenses of approximately $7.8 million were recorded for the fiscal year ended June 30, 2012. Net income attributable to Vanguard Health Systems, Inc. stockholders was positively impacted from the rural floor provision by $21.7 million ($0.28 per diluted share) for the fiscal year ended June 30, 2012.
Any subsequent change to the estimated redemption will be recorded as an adjustment to equity. With respect to the calculation of earnings per share, in instances where the maximum redemption amount exceeds fair value, this excess would result in a decrease to net income available to common stockholders. Alternatively, in instances where the fair value exceeds maximum redemption amount, net income available to common stockholders would be increased only to the extent that decreases had been recognized in previous periods. Any changes in estimate from period to period would be accreted over the remaining quarters until the first put option measurement date (third anniversary of the acquisition) on a prospective basis.
The Company assesses the realization of its deferred tax assets to determine whether an income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, the Company determines whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The factors used in this determination include the following:
On January 29, 2010, the Company completed a comprehensive refinancing plan (the “Refinancing”). In connection with the Refinancing, on January 29, 2010, two of the Company’s wholly-owned subsidiaries, Vanguard Health Holding Company II, LLC and Vanguard Holding Company II, Inc. (collectively, the “Issuers”), completed a private placement of $950.0 million ($936.3 million cash proceeds) of 8.0% Senior Unsecured Notes due February 1, 2018 (“8.0% Notes”). Interest on the 8.0% Notes is payable semi-annually in August and February of each year. The 8.0% Notes are unsecured general obligations of the Issuers and rank pari passu in right of payment to all existing and future senior unsecured indebtedness of the Issuers. The $13.7 million discount is accreted to par over the term of the 8.0% Notes. All payments on the 8.0% Notes are guaranteed jointly and severally on a senior unsecured basis by the Company and its domestic subsidiaries, other than those subsidiaries that do not guarantee the obligations of the borrowers under the 2010 credit facilities (as defined below).
The effective income tax rate differed from the federal statutory rate for the periods presented as follows:
As of June 30, 2012, the restricted stock units had an aggregate intrinsic value of approximately $11.6 million. As of June 30, 2012, there was approximately $12.9 million of estimated unrecognized compensation cost related to restricted stock units. These costs are expected to be recognized over a weighted average period of approximately 3.3 years.
The action brought by Mr. Graber alleges civil violations of the FCA, namely, that the Company entered into arrangements with physicians that failed to meet certain statutory requirements of the Stark Law that compensation be at fair market value and that we retaliated against Mr. Graber. The action seeks damages provided for in the FCA.
In the normal course of its business, the Company enters into physician relocation agreements under which it guarantees minimum monthly income, revenues or collections or guarantees reimbursement of expenses up to maximum limits to physicians during a specified period of time (typically, 12 months to 24 months). In return for the guarantee payments, the physicians are required to practice in the community for a stated period of time (typically, 3 to 4 years) or else return the guarantee payments to the Company. The Company records a liability and offsetting intangible asset at estimated fair value for all guarantees by calculating an estimate of expected payments to be made over the guarantee period. The Company reduces the liability as it makes guarantee payments and amortizes the intangible asset over the term of the physicians’ relocation agreements. The Company also estimates the fair value of liabilities and offsetting intangible assets related to payment guarantees for physician service agreements for which no repayment provisions exist. As of June 30, 2012, the Company had a net intangible asset of $7.4 million and a remaining liability of $5.3 million related to these physician income and service guarantees. The maximum amount of the Company’s unpaid physician income and service guarantees as of June 30, 2012 was approximately $6.0 million.