Vanguard Reports Second Quarter Results

NASHVILLE, Tenn. – February 8, 2010 – Vanguard Health Systems, Inc. (“Vanguard”) today announced results for the second quarter ended December 31, 2009.

Total revenues for the quarter ended December 31, 2009 were $843.6 million, an increase of $51.0 million or 6.4% from the prior year quarter.  Patient service revenues and health plan premium revenues increased $16.9 million and $34.1 million, respectively, from the prior year quarter. The increase in patient service revenues was primarily attributable to a 2.9% increase in total adjusted discharges and a 0.3% decrease in patient revenue per total adjusted discharge during the current year quarter compared to the prior year quarter. The decrease in patient revenue per total adjusted discharge during the current year quarter was due to the implementation of an uninsured discount policy in our Phoenix and San Antonio hospitals effective July 1, 2009, similar to the program implemented in our Illinois hospitals on April 1, 2009, and a change to the Medicaid pending policy at these same hospitals as previously disclosed. Absent these policy changes, patient revenue per total adjusted discharge would have increased by 5.2% during the current year quarter compared to the prior year quarter. The increase in health plan premium revenues was primarily attributable to a 20.5% increase in average membership in Phoenix Health Plan (PHP) during the current year quarter compared to the prior year quarter. Economic conditions in Arizona have resulted in an increase in the number of individuals eligible for coverage under the Arizona Health Care Cost Containment System (AHCCCS) during the current year quarter resulting in more enrollees in PHP.

For the quarter ended December 31, 2008, Vanguard had a loss from continuing operations of $20.0 million compared to income from continuing operations of $10.9 million during the prior year quarter primarily resulting from the $43.1 million ($31.8 million, net of taxes) goodwill impairment loss related to our two Chicago hospitals during the current year quarter, as previously disclosed. Many comparisons of individual cost and expense items as a percentage of total revenues during the current year quarter were impacted by the significant growth in health plan premium revenues and the uninsured discount and Medicaid pending policy changes. A table describing the impact of adjustments to certain expenses and revenues and related ratios for our acute care services segment and to certain statistical measures is included in this press release in the attached Supplemental Operating Measures Adjusted for Comparative Analysis. Health planclaims expense as a percentage of health plan premium revenues increased to 80.5% during the current year quarter compared to 79.0% during the prior year quarter primarily due to changes to enrollee medical costs and enrollee demographic mix at PHP.

During the quarter ended December 31, 2009, net loss attributable to Vanguard Health Systems, Inc. stockholders was $20.7 million compared to $10.1 million net income attributable to Vanguard Health Systems, Inc. stockholders during the prior year quarter.

Adjusted EBITDA was $83.8 million for the quarter ended December 31, 2009, an increase of $5.3 million or 6.8% from the prior year quarter. A reconciliation of Adjusted EBITDA to net income (loss) attributable to Vanguard Health Systems, Inc. stockholders as determined in accordance with generally accepted accounting principles for the quarters ended December 31, 2008 and 2009 is included in the attached supplemental financial information.

The consolidated operating results for the quarter ended December 31, 2009 reflect a 1.0% increase in discharges and a 2.9% increase in total adjusted discharges compared to the prior year quarter. Outpatient surgeries and emergency room visits increased 0.6% and 9.2%, respectively, during the current year quarter compared to the prior year quarter. Inpatient surgeries during the current year quarter were flat compared to the prior year quarter.

Total revenues for the six months ended December 31, 2009 were $1,667.0 million, an increase of $155.4 million or 10.3% from the prior year period.  Patient service revenues and health plan premium revenues increased $37.7 million and $117.7 million, respectively, from the prior year period. Patient service revenues for the current year period were positively impacted by a 2.8% increase in total adjusted discharges and a 0.4% increase in patient revenue per adjusted total discharge compared to the prior year period. Absent the previously discussed uninsured discount and Medicaid pending policy changes, patient revenue per adjusted total discharge would have increased 5.6% during the current year period compared to the prior year period. Health plan premium revenues increased 39.4% during the current year period primarily due to the significant enrollment increase for PHP’s new contract with AHCCCS that went into effect on October 1, 2008, as previously discussed.

For the six months ended December 31, 2009, Vanguard had a loss from continuing operations of $17.4 million compared to income from continuing operations of $11.7 million during the prior year period, primarily resulting from the goodwill impairment loss recognized during the current year period as described above and as previously publicly disclosed. Many comparisons of individual cost and expense items as a percentage of total revenues during the current year period were impacted by the significant growth in health plan premium revenues and the uninsured discount and Medicaid pending policy changes previously discussed. The Supplemental Operating Measures Adjusted for Comparative Analysis table included later in this press release sets forth the impact of the uninsured discount and Medicaid pending policy changes to certain expenses and revenues and related ratios of our acute care services segment and to certain statistical measures. Health planclaims expense as a percentage of health plan premium revenues increased to 79.6% during the current year period compared to 76.2% during the prior year period as a result of changes to capitation rates, enrollee medical costs and enrollee demographic mix under PHP’s new contract with AHCCCS that went into effect on October 1, 2008.

During the six months ended December 31, 2009, net loss attributable to Vanguard Health Systems, Inc. stockholders was $19.2 million compared to $11.0 million net income attributable to Vanguard Health Systems, Inc. stockholders during the prior year period.

Adjusted EBITDA was $152.5 million for the six months ended December 31, 2009, an increase of $10.8 million or 7.6% from the prior year period.  A reconciliation of Adjusted EBITDA to income (loss) attributable to Vanguard Health Systems, Inc. stockholders as determined in accordance with generally accepted accounting principles for the six-month periods ended December 31, 2008 and 2009 is included in the attached supplemental financial information.

The consolidated operating results for the six months ended December 31, 2009 reflect a 2.8% increase in total adjusted discharges compared to the prior year period, while discharges were flat period over period. Inpatient surgeries and outpatient surgeries increased 0.1% and 1.4%, respectively, while emergency room visits increased 7.2% during the current year period compared to the prior year period.

Cash flows from operating activities were $149.6 million for the six months ended December 31, 2009, a $4.6 million decrease from the prior year period. Net days in accounts receivable was 46 days, 45 days and 50 days as of December 31, 2009, June 30, 2009 and December 31, 2008, respectively.

Vanguard will host a conference call for investors at 11:00 am EST on February 9, 2010. All interested investors are invited to access a live audio broadcast of the call, via webcast. The live webcast can be accessed on the home page of Vanguard’s Web site at www.vanguardhealth.com by clicking on “Second Quarter Webcast” or at http://visualwebcaster.com/event.asp?id=65311. If you are unable to participate during the live webcast, the call will be available on a replay basis on Vanguard’s Web site www.vanguardhealth.com. To access the replay, click on the Latest News link on the Investor Relations page of www.vanguardhealth.com. The replay will be available via this link for one year.

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

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

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

Three Months Ended December 31, 2008

Acute
Care
Services

% of
Revenues

Health
Plans

% of
Revenues

Eliminations

Consolidated

Patient service revenues⁽¹⁾

$

          622.2

       100.0%

$

                 –

          0.0 %

$

(7.8

)

$

614.4

Premium revenues

–

0.0 %

178.2

100.0 %

–

178.2

    Total revenues

622.2

100.0 %

178.2

100.0 %

(7.8

)

792.6

Salaries and benefits
    (excludes stock compensation)

294.6

47.4 %

7.3

4.1 %

–

301.9

Health plan expense

–

0.0 %

148.5

83.3 %

(7.8

)

140.7

Supplies

112.7

18.1 %

0.1

0.0 %

–

112.8

Provision for doubtful accounts

48.3

7.8 %

–

0.0 %

–

48.3

Other operating expenses

101.0

16.2 %

9.4

5.3 %

–

110.4

    Total operating expenses

556.6

89.5 %

165.3

92.7 %

(7.8

)

714.1

    Segment EBITDA⁽²⁾

65.6

10.5 %

12.9

7.3 %

–

78.5

Less:

  Interest, net

28.9

4.7 %

(0.3

)

(0.2)%

–

28.6

  Depreciation and amortization

31.1

5.0 %

1.0

0.6 %

–

32.1

  Equity method income

(0.3

)

(0.1)%

–

0.0 %

–

(0.3

)

  Stock compensation

0.8

0.1 %

–

0.0 %

–

0.8

  Monitoring fees and expenses

1.3

0.2 %

–

0.0 %

–

1.3

    Income from continuing operations
       before income taxes

$

3.8

0.6 %

$

12.2

6.9 %

$

–

$

16.0

____________________

(1)

Vanguard eliminates in consolidation those patient service revenues earned by its hospitals and related healthcare facilities attributable to services provided to enrollees in its health plans and also eliminates the corresponding medical claims expenses incurred by its health plans for those services.

(2)

Segment EBITDA is defined as income (loss) from continuing operations before income taxes les interest expense (net of interest income), depreciation and amortization, equity method income, stock compensation, gain or loss on disposal of assets, monitoring fees and expenses, realized holding loss on investments, impairment loss and debt extinguishment costs. 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 that 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, 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 similarly titled measures of other companies.

Three Months Ended December 31, 2009

Acute
Care
Services

% of
Revenues

Health
Plans

% of
Revenues

Eliminations

Consolidated

Patient service revenues⁽¹⁾

$

          641.7

       100.0%

$

                 –

          0.0 %

$

(10.4

)

$

631.3

Premium revenues

–

0.0 %

212.3

100.0 %

–

212.3

    Total revenues

641.7

100.0 %

212.3

100.0 %

(10.4

)

843.6

Salaries and benefits
    (excludes stock compensation)

315.2

49.1 %

8.3

3.9 %

–

323.5

Health plan claims expense

–

0.0 %

181.2

85.4 %

(10.4

)

170.8

Supplies

114.7

17.9 %

0.1

0.0 %

–

114.8

Provision for doubtful accounts

35.0

5.4 %

–

0.0 %

–

35.0

Other operating expenses

107.7

16.8 %

8.0

3.8 %

–

115.7

    Total operating expenses

572.6

89.2 %

197.6

93.1 %

(10.4

)

759.8

    Segment EBITDA⁽²⁾

69.1

10.8 %

14.7

6.9 %

–

83.8

Less: